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Comments by Dr.

Tarun Das, Economic Adviser,


Ministry of Finance

On the World Bank Report on


"INDIA DEVELOPMENT POLICY REVIEW"

A. General Comments

1. World Bank must be congratulated for producing an excellent report on assessment of


India's development policies and development prospects. The report is very
comprehensive and well researched.

2. However, the report needs to devote more attention to the political economy, in
certain aspects, particularly on matters relating to land and labour reforms and
interests of the poorer and weaker sections of the community. It is generally agreed
that government policies cannot be decided mainly on economic grounds and no
reforms can succeed unless the government is able to take the people along with
reforms particularly in a country as big and complex as India.

3. India has a multi-party democracy, well-developed judiciary and free and


independent press. Therefore, India's reforms program is based on general political
consensus and acceptance by people at large. This is also the reason for slow
progress of reforms, which are characterised by a step-by-step and gradual approach,
and not a big bang or shock therapy approach. Therefore, all the suggestions for
future reforms agenda (such as dismantling of the existing PDS or fertiliser, power
and food subsidies, reservation of items for the SSI etc) must have a phasing plan
over a period of time.

4. Emphasis on fiscal sustainability and fiscal discipline by both the Centre and State
governments is welcome. However, there is no analytical study as regards the optimal
size of fiscal deficit. In our view, the present level of overall fiscal deficit per se may
not be too large for a developing country like India. The report also recognises the
fact that the rising trend of fiscal deficit has not led to rising inflation or rising interest
rates or precarious balance of payments problems. On contrary, India has moved on
higher growth profile with reduction of inflation, unemployment and poverty. But the
composition of the fiscal deficit and the size of the revenue deficit are worrisome and
need to be corrected over time. As many of the items on revenue expenditure are
committed, government needs to pay more attention for enhancing revenue elasticity
and buoyancy through taxation reforms and widening of tax base.

5. The report needs to focus on the need of second generation reforms in local bodies
(municipalities and corporations). Central government has done significant reforms in
production markets and investment environment. But private infrastructure
investment has not increased as expected due to lack of reforms in municipalities and
corporations, which generally deal with public utilities and urban infrastructure.

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B. Specific Comments

1. Para 7 Executive Summary (page ii): "On the surface, these fiscal indicators are
worse than India faced in 1991- and worse than in many other countries that actually
suffered a macroeconomic crisis. However, the risk of crisis in India today is offset by
the country's strong external position".

Comment:

(a) The first statement on international comparisons is not supported by facts. The second
statement implies that the large fiscal deficit may not necessarily spill over to the
current account in the balance of payments. In fact, cautious approach with
convertibility of rupee on the capital account and the liberalisation of the non-debt
creating financial flows in the external account have helped India to build up
impressive foreign exchange reserves.
(b) The report should also give due credit to the domestic sector policies. Deregulation,
delicensing, continual reduction and rationalisation of customs duties, domestic taxes
and interest rates and liberalisation of other domestic policies have also helped to
accelerate the export growth, to encourage inflows of invisibles and so to build up
foreign exchange reserves.

2. Para 14 Executive Summary page-v "Beyond the fiscal burden, these high salary
awards are questionable since the average central government wage as a multiple of per
capita GDP is higher in India than virtually any other country in Asia."

Comments:

(a) One needs to have a hard look at the primary source of data. As regards the salaries of
the central government employees in India, the position is indicated below:

Year Unit 2001-02 2002-03 2003-04

Employment Number 3421202 3513367 3486935


Salaries Rs. Lakh 2992525 3161913 3303780
Per capita Rupees 87470 89997 94747

GDP at mp Rs. Crore 2296049 2451038 2720652


Population Million 1037 1055 1072
GDP per cap Rupees 22141 23233 25379

PC salaries/ 3.95 3.87 3.73


PC GDP
Source: Expenditure Budget: 2003-04 Volume-II, Central Government

At the face value, the ratio of the per capita salaries to per capita GDP in the range of 3.7
to 3.9 times donot appear to be too large on considering the fact that the organised
employment constitutes only 8 per cent of total employment and the central government

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employs only 3.3 million people compared with total employment of about 350 million.
Government also recruits people who satisfy minimum educational qualifications on the
basis of strict recruitment procedures and through open competition.

(b) The NSSO data on private and public sector salaries also need strict scrutiny. The
private sector may include unorganised sector, which naturally gets lower salaries
because of low skill and lack of bargaining power by the employees.

(c) Disparities in the salaries of organised and unorganised sectors are matters of
concern. But this cannot be solved by lowering government salaries, freezing
dearness allowance etc. as recommended by the World Bank. This would lead to
reduction of quality of civil service, dampen public sector productivity and encourage
corruption and therefore would be counter productive.

(d) The real solution lies in improving the working conditions of the unorganised labour
force and to improve productivity through better corporate governance.

3. Para 26 Executive Summary (third bullet) page-ix Problems with the use and
transfer of land.

Comments:

We fully agree with the comments. In fact, non-availability or delay in the acquisition of
land is the most important factor for the cost and time overruns of the both public and
private sector projects on infrastructure. Simplification and amendments of urban land
ceilings and rent control acts alongwith significant reduction and rationalisation of
property taxes stamp duties and registration fees should be the priority agenda for the
second-generation reforms. But most these reforms fall under the purview of the state
governments and local bodies (municipalities and corporations), which need suitable
incentives for conducting these reforms.

6. Para 32 of the Executive Summary page-xi An alternative long-term vision for the
foodgrain sector could be an unfettered system where foodgrains are readily
available at affordable prices in the open markets.

Comment

(a) Although the suggested measure is desirable in the long run, we need to calibrate a
feasible alternative framework for the short and medium term with proper phasing out
of the existing system. (b) Although we agree with the view that instead of the present
system of food, power and fertiliser subsidies, the same amount can be better utilised
and would be more productive for building rural infrastructure and improving rural
extension services, all subsidies cannot be withdrawn overnight.