Reform is a long-playing record

In a strange way, you know Special Economic Zones will be part of our lives for some time to come when the issue gets to be as heatedly debated as the composition of the Indian Cricket team. To that extent it has probably taken its place with some of the most famous economic debates India has dealt with after reforms were initiated in 1991. Politicians claim that such arguments are essential to build a consensus for reforms in the economy. But as the Deputy Chairman of the Planning Commission Montek Singh Ahluwalia remarked, “The process can be aptly described as creating a strong consensus for weak reforms.”

That has actually been the case with a few celebrated episodes, post-1991. After the NDA Government at the Centre decided to nudge states towards value added tax (VAT) to replace sales tax and other levies, Congress-ruled states decided to give the inaugural date of April 1, 2004 a miss. The deadline had to be relaxed, the fifth time in ten years. Disappointed, West Bengal Finance Minister Asim Dasgupta, chairman of the empowered committee of chief ministers, also commented on it. The streets of Delhi and other north Indian cities saw bandhs and protest marches; and for some time many were convinced that the step was just a ruse to wipe out retail traders.

So the next year, when the current UPA government decided to back the VAT model, the BJP-ruled states paid back the compliment. There wasn’t any dispute over the necessity of moving to the new taxation system, though the entire debate was clothed in economic terms. But off camera, state ministers candidly acknowledged that it was a political issue.

And yes, the weak reform sub-text continues. In the current year, the revenue of 30 VAT implementing states and Union territories has registered a growth rate of over 26 per cent till the end of December, over the corresponding period of the previous year. Despite this, the states still cannot agree on phasing out the central sales tax, the next step forward.

The same round of posturing held up the introduction of FDI in insurance. Even now LIC continues to gain an increasing percentage of market share. In new premium, LIC’s market share is about 80 per cent this year, with the 15 private players, most of whom are joint ventures with multinationals, sharing the remaining 20 per cent. Insurance is now spreading out to rural India as companies access fresh segments. Yet when successive governments, including one with the current finance minister, P. Chidambaram, in 1997, tried to pass the FDI hike through Parliament, those arguing to save the domestic insurance sector were far less sanguine about LIC’s ability to hold up against foreign competition. And yes, despite the point having been proved, the weak reform plot continues till today, with the familiar opposition rearing up against pushing the FDI cap up to a more liberalised 49 per cent.

... contd.

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