core sector communique

Are these reforms?

Reform, according to the Oxford Advanced Learner’s Dictionary, is a “change that is made to a social system, an organisation, etc. in order to improve or correct it”. Going by this definition, much of what the Manmohan Singh government announced last week cannot really be called reform. Yes, they are decisions by a government that had long ceased to take decisions, which in itself brings some relief. But are they reforms?

Take, for instance, the decision to raise the price of diesel by Rs 5 a litre. Before the price was raised, the under-recovery – or the difference between the regulated price and what ought to have been the market price – had risen to an unsustainably high level of Rs 17 a litre. So, did the government decision reduce the oil marketing companies’ total under-recovery by 30 per cent? Not really. This is because along with the price increase, the government also raised excise duty on diesel from Rs 2 to Rs 3.50 a litre. The gain for the oil marketing companies was much less and the combination of duty rejig and price increase brought the government’s subsidy burden on account of diesel down marginally to Rs 1 lakh crore in the current year. What reform was there in such tinkering with diesel duty and prices?

Note that the government continues to maintain its tight control over diesel prices. The oil marketing companies are not free to raise them and will have to depend on government dole to meet their losses. There is no indication so far from anyone in the government that it is even contemplating giving such pricing freedom to the oil marketing companies. Remember that the process for dismantling the administered pricing regime for the oil sector had begun in 2002, which had led to the oil marketing companies gaining freedom to fix prices for several petroleum products including petrol and diesel. That was reform (which, unfortunately, got rolled back). But not what happened last week.

What about the decision allowing disinvestment of the government’s equity stake in nine public sector companies? The idea of disinvestment, when it was started in 1991-92, was to initiate the gradual process of the government divesting its control by dilution of its equity to below 51 per cent in a public sector company. With a few exceptions during the six-year-long regime of the National Democratic Alliance, when some public sector units were privatised through strategic sale of equity, all that has happened in the last 20 years is disinvestment. The Manmohan Singh government, too, has only sold its shares in a clutch of public sector companies without losing control. The only purpose the entire disinvestment exercise has served in the last eight years is to reduce the government’s fiscal deficit. Clearly, that is no reform.

Allowing foreign direct investment in multi-brand retail or permitting foreign airlines to invest in the civil aviation sector could be seen as reform. But these are incremental changes in a policy reform on allowing foreign investment that was started more than 20 years ago. One could argue that what the government did last week was something that should have been done long ago in keeping with the overall spirit of the policy on foreign direct investment. And overcoming the opposition of political parties on allowing foreign capital in retail is more about political management and less about reform.

It is only in respect of the decision to cap supply of subsidised cooking gas to customers at six cylinders a month that the government can claim to have introduced significant reforms. Not only has the government capped subsidies on cooking gas, but it has also given partial freedom to oil marketing companies to revise prices of cooking gas. This is reform, since it lays the foundation for cleaning up the messy subsidies system over a period of time. But to describe the diesel price increase or disinvestment of government equity in public sector companies as reform is to misunderstand the idea of reform.

It would perhaps be naïve to expect reforms from the Manmohan Singh government, given the current political troubles it is faced with. The introduction of the goods and services tax is unlikely in the near future. If the government could get the states to sign on this major change in the indirect taxes regime, it would have been hailed as a major tax reform. Similarly, the introduction of the General Anti-Avoidance Rules for taxation would have been a significant reform, but that too has been postponed by about three years.

The Manmohan Singh government may still come up with a fresh agenda for what would qualify as genuine economic reform. But so far the government seems to be busy taking only those decisions that have a limited objective — to shore up investors’ confidence in the economy and help the government limit the slippage in the fiscal deficit target of 5.1 per cent of gross domestic product. This is, of course, needed. If the business mood lifts as a result, investment might pick up and then the government may look at reforms. So, you may still have an opportunity to celebrate India’s new reforms initiative. But for that you may have to wait a little longer.

- Umesh Shanmugam