The government’s seriousness in meeting budget targets will become apparent very soon. The numbers suit our needs on paper, but achieving them is another matter altogether, especially if seen in historical context of this administration’s ability of meeting its own objectives.
While medium to long term goals will take some time to set in motion, there is ample room for initiating immediate reforms that will complement the long term outlook. By announcing initiatives aimed at checking unnecessary leakages and facilitating investment, the government will not only turn popular sentiment towards anticipating further change, but also lay necessary groundwork for sustained growth.
At the risk of repetition, the most profound step will be signaling privatisation of public sector enterprises. It is imperative to fix this constant drain of national finances since it savagely limits the government’s allocation capability. Relevant authorities are well aware of what needs to be done and at what pace.
The finance minister himself assured of a turnaround in 2010, to follow with further claims earlier this year, yet credible steps have yet to be made public. Unless this leak is fixed, no amount of planning or programs will set the economic engine towards structural growth, since the government will never have enough fiscal space to finance public sector works programs.
I do not support long-term reliance on the IMF but considering our present situation and how our arrangement has been derailed, it is important to sort out the off-and-on relationship with our donor of last resort. Not only is the public in the dark about how the assistance contract will finally evolve, the impasse also negatively impacts negotiations with other bilateral and multilateral institutions.
In the short term, there is an urgent need to sort out our differences with the IMF. Otherwise, the government’s addiction with central bank borrowing will not break, inflation will not be controlled and private sector crowding out will continue while the interest rate regime further chokes growth.
Therefore, efforts that reflect serious top-level commitment with seeing the Fund program through will resonate loudly with not just the electorate, but also donors whose largesse is essential if the growth trajectory is to be improved. So far though, no such signs are visible.
The main rationale for these initiatives is our serious need for credit, without which industry growth will not attain respectable levels. That, of course, raises one of the most contentious issues plaguing industry and households alike, the chronic power crisis.
Relevant authorities have still not been able to explain this serious shortage. Our present capacity, in excess of 19000MW, is comfortably above the 15000MW requirement, yet production lingers below 10000MW, a shortfall which is neither properly explained nor checked.
The problem touches upon issues of good governance and management. IPP payments have not been settled. The circular debt is still not resolved. Unless energy problems are handled, growth will remain a distant dream. And even once this problem is overcome, immediate priority must be accorded to the manufacturing sector in terms of gas, electricity, etc.
There are also other measures the government needs to adopt immediately, or risk losing public confidence indefinitely.
It needs to incorporate financial prudence and signal high-level austerity as an indication of its seriousness in cutting needless expenditure. One-third civil budget cuts will not free significant fiscal space, but it will be an important symbolic gesture.
The time has also come for the provinces to play a greater role. The 18th amendment and NFC award has increased their resources. Now its time for them to assume greater responsibility. They need to build consensus regarding revenue generation. So far their contribution to the overall pool is at an unacceptably low level. Of the nine-and-a-half percent tax-to-GDP ratio, nine per cent comes from the federation and only half a per cent from the provinces. In India, the 18 per cent figure is broken down into 12 per cent from the union and six per cent from the states.
The provinces can signal their seriousness by taking credible and visible steps aimed at enhancing their revenue generating capacity. They will encounter friction on issues like the agriculture tax, but these can no longer be put aside. If these bold decisions are not taken, the government cannot associate much hopes with the next election.
Also, perhaps most importantly, the PSDP must not be touched.
It has become a habit for the government to finance its irrational exuberance by slicing the development budget. Unfortunately, this chunk already depends almost entirely on external flows, which are under considerable strain already.
Therefore, the government is clearly wrong-footed, approaching reforms without laying necessary foundations. It must immediately reorient its posture, and take steps that will reflect seriousness to turn the economy. Failing that, the public will prepare for another vote-out election.
The writer is a former Commerce Minister
