Government policy: Threats don't always work

"When in doubt, attack the private sector." This is a well-thumbed guideline for most socialists - irrespective of the school of socialism to which they belong - but it is surprising that Finance Minister Ramaswami Venkataraman, who should know better, should also resort to such gimmicks.At the annual general meeting of the Associated Chambers of Commerce and Industry, (ASSOCHAM) held in New Delhi last fortnight, Venkataraman warned businessmen that if the private sector did not increase industrial production "despite liberal incentives offered to it" he would revert to the earlier policy of restrictive demand management, without apparently realising that the cure would be worse than the disease. Plugging demand would almost certainly deflate the economy to the point where buyers would be so thin on the ground that there would not be much point in producing for them. This is what Margaret Thatcher is now finding in Britain, but then Mrs Thatcher is a Tory, not a socialist, and it is surprising to find Venkataraman emulating - or threatening to emulate - her example.Most finance ministers suffer from the 'press-button' syndrome: press a button marked 'industrial production' and up goes industrial output; press another button marked 'prices' and down goes inflation. Venkataraman really thought that with the kind of gimmicky budget that he had presented, the economy would begin to hum in no time and would be headed towards recovery. It pains him to see that virtually every assumption that he made in the budget has turned out to be totally misplaced - prices have not come down, industrial output has not gone up to two-digit level, and investment has not picked up. In fact, between end-February, when the budget was presented, and end-April, the only signs of revival are in public sector output, mainly in the so-called infrastructure facilities. But the pick-up in this sector has little to do with budgetary policies. Output in this sector has picked up primarily because of higher prices, and once the effect of the price rise begins to wear off, the output curve will also level off.Deceptive Performance: However, neither the increase in coal output nor the step-up in electricity supplies is much to write home about. Coal production has increased from 104 million tonnes in 1979-80 to 114 million tonnes in the year ended March 1981, which gives a growth rate of slightly less than 10 per cent. Between 1972-73 and 1975-76, coal production had gone up from 71 million tonnes to 100 million tonnes: a 40 per cent increase in three years, or over 13 per cent a year. Since then (until 1979-80) there was only a marginal increase of 4 per cent in four years or 1 per cent a year and all that has now happened is that this four-year slack has been made up. No wonder then that the man in the street is reacting casually to this so-called extraordinary spurt in public sector performance, because it is not much of a spurt. Even on a month-by-month analysis, there is not much to show, as the coal production in January 1981 (11.3 million tonnes) was only slightly higher (by 100.000 tonnes) than the production in March 1979, that is two years earlier.As regards electricity, there has been an increase of 5 billion KWh (kilowatt-hours) in 1980-81, which is less than marginal compared with the kind of increases registered in some previous years. For instance, during the second Janata year (1978-79), power output went up from 92 billion KWh to 103 billion KWh, an increase of 11 billion KWh - more than double the increase registered last year. If a swallow doesn't make a spring, an extra million units here and an extra thousand tonnes of coal there does not usher in an industrial revolution either.Spiralling Prices: Where, however, the finance minister's calculations have gone completely haywire is in respect of prices. For reasons which have never been clearly spelt out, Venkataraman maintains that inflation is under control and is levelling off, but the facts are otherwise. In fact, the price situation is threatening to altogether slip out of control and the inflationary spiral seems to have received another vicious twist in the last three weeks. Even on point-to-point basis, 1980-81 was worse than 1979-80, with a rise in the wholesale price index of 18.4 per cent as against 16.6 per cent in the previous year. In fact, during the last decade, there have been only two years worse than 1980-81: 1973-74 (when the wholesale price index went up by 20.7 per cent) and 1974-75 (when it went up by 25 per cent). But those were the years of the oil price rise shock from which, however, the economy quickly recovered with a fall in index in 1975-76. There is little evidence that prices are likely to taper off in the coming year.There has been no respite from rising prices from January 1980 onwards except for a very brief period in November and December when the wholesale price index fell slightly, only to rebound later with renewed vigour. The successive increases in prices are occurring in a year of bumper harvest, which is unusual. What is also unusual is that the sharp rise in the price level cannot be attributed to oil prices or even to sugar. Almost all commodities have gone up - some more than the others - and even cereal prices have shared in the boom. The inflationary sweep seems to be much more widespread and, if unchecked, will play havoc with the economy.Inflation is in fact a key to most other developments in the economy. It is also a key, to a certain extent, to the spectacle of stagnant industrial production accompanied by the boom on the stock exchange. Since only private sector companies feature on the stock exchange, poor industrial output should be reflected in poor share prices. In fact, the stock prices reached a record high on April 16, 1981, a day or so before the finance minister was castigating the captains of industry for not pulling their weight. The reason why share prices are soaring at a time of apparently near-stagnant industrial production is very simple: because there is no real evidence of shortages in the market, except perhaps in such items as cement and some special kinds of steel.Almost everything is available - at a price - which means that not all production figures are genuine. According to knowledgeable sources in Bombay, there is deliberate under-recording of production to the extent of 20 to 25 per cent, depending on the item. If this is true, the actual industrial growth rate must be nearer 6 per cent than 5 per cent. In fact, there have been cases when factories have been discovered consuming 'illegal' electricity through unauthorised connections - to the extent of 10 to 15 per cent of their requirements. Neither the consumption nor the industrial output - goes through the books and finds its way into the black market.Inflation is thriving because it benefits everyone in the organised sector: the factory owner because it increases his paper profits, the worker as he bargains for higher wages and other production incentives, and the Government as it affords a buoyancy to its revenues. The boom in the share market is also a part of this phenomenon as most investors - or speculators - are also drawn from the organised sector. It is a world within a world, feeding upon itself, with enough muscle, political and economic, to straighten out the angularities and distortions. It is futile to single out the private sector or any other sector for blame, for the private sector is as much as a part of the organised set-up as the trade unions or for that matter, the public sector.Idle Capacity: Venkataraman and other government spokesmen are astonished to find that the so-called incentives for investment have not resulted in higher investment. Actually there is so much unutilised capacity that is doubtful whether investment incentives are really called for. There is vast idle capacity in many large industries, both in the private and public sectors. The worst hit is perhaps the aluminium industry which produces only half its installed capacity. Nitrogenous fertilisers, steel, basic chemicals, pharmaceuticals and man-made fibres have enormous unutilised capacity. In almost all these fields, production has tended to decline, often, as in the case of fertiliser, by as much as 10 per cent.Yet, it is precisely in these fields that large fresh capacities are being planned. In fertilisers, the ministry is thinking in terms of 12 brand new plants. In steel, while the Steel Authority of India (SAIL) is not able to cope with its own plants, it is being given the additional responsibility for negotiating the contract for the new steel plant in Orissa. As many as six new licences have recently been issued for new man-made fibre plants, some to companies who have never operated one in their lives. In West Bengal, the Marxist Government is not able to run a single power station efficiently but every time Chief Minister Jyoti Basu comes to Delhi his main - though not the only - grouse seems to be that his state is not being given industrial licences for new projects.Productive Approach: The difference between West Bengal - a one-time No 1 industrial state, now reduced to No 3 or 4 - and Gujarat, which will soon be among the top three, is the difference in the efficiencies with which resources are utilised in those states. This is also the reason why Tata and Birla are where they are and why old groups like Walchand Hirachand have sunk so low in the growth stakes. This is also the difference between the private sector and the public sector and also, to drive home the point, between a multinational company like Hindustan Lever or Union Carbide and its closest counterpart in the private sector. What ultimately counts is neither the incentives for investment nor tax holidays but productivity consciousness and policies which encourage productivity and penalise waste. It simply does not stand to reason that a company like SAIL with its poor record should waste time and energy in negotiating yet another giant steel plant while its own plants run below par while a company like Tata Steel should be palmed off with a paltry modernisation programme worth a few hundred crores. Tatas would make a much bigger success of Paradip than all the public sector steel plants.As long as Venkataraman and Co do not have a policy to penalise waste and stimulate productivity, they have nothing really that can be called an economic policy. It is of course easy to play with figures - a percentage point down here, another percentage point up there - but figures can be cooked up or at least manipulated. But lack of productivity cannot be manipulated and will ultimately show up in the bottom line. The difference between Britain and Japan, between West Bengal and Gujarat, between Tata Steel and SAIL is the same: it is the difference between a country, or a state or an organisation that is too casual about efficiency and productivity and tries to make up for it through rhetoric, and another which can squeeze the last drop out of stone, and does.Published By: AtMigration Published On: Feb 25, 2014 09:53 IST--- ENDS ---

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Government policy: Threats don't always work

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