8:51 AM Oct 24, 1995

INDIA: FOURS YEARS OF STRUCTURAL ADJUSTMENT

New Delhi, September 27 (TWN/Mahesh Prasad): The World Bank has recently sought to absolve itself, perhaps justifiably, of the responsibility for cuts in social sector expenditure by governments undergoing a programme of structural adjustment.

The Bank has attributed the cuts to wrong policies being pursued by the developing country governments and to faulty targeting of the subsidies. A statement to this effect was made by World Bank representatives at a meeting with women NGOs at Beijing.

The Bank's annual report claims that in the outgoing Fiscal 1995 (year ending September 1995) its lending for social sectors had gone up.

But whatever the precise nature of policy prescription by the Bank to developing country government's undergoing structural adjustment programme (SAP), one thing can't be denied: the Bank has advocated that the fiscal deficit in these countries had to be brought down.

And while there could be no quarrel in principle with this policy prescription, it inevitably leads to a cut in social sector expenditure, since this is found to be an easy target as against other expenditure, most of which happened to be already committed.

India has been implementing a programme of structural adjustment on the advice of the World Bank for the last four years, i.e. ever since the present government, headed by Mr. P.V. Narasimha Rao took over the reins of office. The term of the present government would be ending in another six months.

Structural adjustment programme have no doubt helped India bring down its fiscal deficit to 5.7 per cent of GDP in 1992-93 from 8.3 per cent in 1990-91. But the deficit has risen sharply again in 1993-94 to 7.4 per cent, since the government had no option but to raise the allocations for social sectors in the wake of public uproar over the policy.

The gains of SAP were summed up by Finance Minister, Dr Manmohan Singh at a recent meeting in these words: "The economy is now growing at an annual rate of 5.6 per cent. Industrial production is growing at an annual rate of over 8 per cent. The deficit in the balance of payments on current account is less than one percent. Exports have grown at an impressive rate of nearly 20 per cent in dollar value terms. The employment growth has greatly accelerated since 1991-92."

India's foreign exchange reserves now total U.S.$20 billion.

The turnaround has to be seen in the context of the situation faced by India in June 1991, when it had to mortgage gold (since redeemed) to prevent default on its external payments obligations.

Also, at that time industrial production had turned near negative in the wake of import cuts.

But as against these achievements, inflation is still a cause of major concern. Although the Finance Minister has expressed his confidence of bringing it down to 7% from a current 8.5%, the Reserve Bank of India (India's central bank) has expressed serious concern over inflationary pressures in view of escalating government expenditure.

A noted economist, Dr. Brahmananda has warned that prices may go up to any thing between 15 and 18 per cent in the current financial year (April-March). He had come to this conclusion in view of excess liquidity created in the first half of the year as a result of the issue of ad hoc treasury bills of the order of Rs.180,000 million in the first half of the current financial year (April-September).

Already in the last four years, inflation, as measured by the Wholesale Price Index (WPI) has risen by 52 per cent -- wIth WPI (Provisional) going up to 295.5 on September 9, 1995 from 195 in June 1991 when the structural adjustment programme was launched under Bank's advice.

Even when measured in terms of consumer price index, to which wages in the organised sector are linked, inflation during the four-year period has gone up by 46 per cent. This has hit hard workers in the unorganised and informal sectors, whose wages are not indexed and who constitute a major portion of India's workforce.

Further, as measured by the WPI the growth in the prices of foodgrains and pulses, the staple diet of the poor, has gone up by 64 per cent since the reform process was launched in 1991. Thus those living at the subsistence level, particularly in the rural areas, have to cut down even on their basic nutrition.

This only shows the skewed pattern of income distribution in the post-reform period with wealth passing on from the poor to the rich. It is for this reason that some economists and politicians have opposed the entry into the country of consumer items, like Pepsi Cola and Coca Cola and Kentucky Fried Chicken -- and the life-styles that come with it. The country, they contend, needs investment in the more vital and labour-intensive areas of infrastructure development.

The Reserve Bank of India has warned of inflationary pressures as a result of excess liquidity creation this year. A similar situation last year, when excess liquidity was generated by the large inflow of foreign exchange, had led to inflation escalating to 11.5 per cent in the last quarter of the previous financial year.

The Finance Minister recently said that the only solution to the problem of fiscal adjustment is higher level of disinvestment in public sector enterprises. During the current year the government has targeted a disinvestment of Rs.70,000 million. The government has so far made use of disinvestment proceeds only for balancing its budget, which means making use of capital receipts for the day to day expenditure of the government.

Unless disinvestment proceeds are used to bring down public debt, which in turn would bring down the burden of future interest payments, it is not going to be of much help in fiscal adjustment.

As the Finance Minister has said political consensus in the country in favour of heavy public sector disinvestments has so far been lacking, and decisions like these can't be forced in a democracy.

Sensing the mood of the country, the government has long given up plans for privatisation of public sector units, which is hardly regarded as feasible in India's case as it is likely to aggravate the unemployment problem. Moreover, it is even being doubted whether much good could come out of privatisation. Even World Bank studies have not provided conclusive evidence to show that privatisation leads to higher efficiency.

Thus, four year's of India's experience of implementing the structural adjustment programme under the Bank's advice shows that while the country's granaries are overflowing, with foodstocks exceeding 36 million tonnes, the poor can't afford two square meals.

The World Bank is realising now, although late, that mere marketisation and globalisation is not going to solve the problem of poverty in developing countries. It is now saying that subsidies are necessary, although with better targeting.

Nevertheless the success of the policy would remain under cloud till the income distribution pattern in the country, i.e. wealth passing on to the rich from the poor in the context of high inflation rate, is not reversed.