In Pakistan we do not appreciate the fact that we have lived beyond our means’ for far too long at our own peril. Ways and means as well as the room to manoeuvre do not exist anymore.
Secondly, the people have to be prepared to be ready for the pain. If the matter of living beyond our means is analysed then it shows that Pakistan has a history worse than India’s.
Nevertheless, there is always a terminal point which incidentally has arrived in Pakistan in 2023. Dr Manmohan Singh was and still is a politician. But his vision was different.
Principles of Reform
The principles of the reform agenda are well prescribed as under:
Macroeconomic stabilisation and fiscal adjustment alone cannot suffice.
“The thrust of the reform process would be to increase the efficiency and international competitiveness of industrial production…to utilise for this purpose foreign investment and foreign technology to a much greater degree than we have done in the past, to increase the productivity of investment, to ensure that India’s financial sector is rapidly modernised, and to improve the performance of the public sector, so that the key sectors of our economy are enabled to attain an adequate technological and competitive edge in a fast changing global economy.”
This is the most important part of his speech. It has been clarified that macroeconomic stabilisation is always a temporary phase. If fundamentals are wrong then any temporary repair cannot produce the desired results. If a country has to stand firm in this integrated world then it would have to:
a. increase the efficiency and international competitiveness of industrial production;
b. utilise foreign investment and foreign technology to increase the productivity of investment,
c. and to improve the performance of the public sector to attain an adequate technological and competitive edge in a fast changing global economy.
Pakistan’s industrial sector has failed to achieve this aim in all the segments. We have not used foreign investment and foreign technology to increase the productivity of investment.
Deregulation
This was, perhaps, the most important subject for India as it was a heavily regulated society with a huge public sector or State-Owned Enterprises.
“We have developed a well-diversified industrial structure. This constitutes a great asset as we begin to implement various structural reforms.
However, barriers to entry and limits on growth in the size of firms have often led to a proliferation of licensing and an increase in the degree of monopoly.
This has put shackles on segments of Indian industry and made them serve the interests of producers but not pay adequate attention to the interests of consumers.
There has been inadequate emphasis on reduction of costs, upgradation of technology and improvement of quality standards. It is essential to increase the degree of competition between firms in the domestic market so that there are adequate incentives for raising productivity, improving efficiency and reducing costs.
For example, at present, Non Resident Indians (NRIs) of foreign nationality are required to obtain specific permission under section 31 of the Foreign Exchange Regulation Act (FERA) to acquire residential property. It is now proposed to provide general exemption from this provision to such persons. However, rental income and proceeds from the sale of such housing will be non-repatriable”.
This is the biggest difference between India and Pakistan. In the first forty years after independence, India had developed a reasonable industrial base with a highly protective environment which only required deregulation and modernization.
Insofar as Pakistan is concerned, there is no industrial base except for a few sectors; therefore, the question of reform is effectively irrelevant. Furthermore, whatever industrial we have, it operates in a protected environment and is not capable of facing competition.
Protection to domestic industry/competition/basis of FDI
The policy objective to reforms and their interconnectivity is explained as under:
“The policies for industrial development are intimately related to policies for trade. There can be no doubt that protection was essential in the initial phase of our industrial development, so that we could go through the learning period without disruption. The past four decades have witnessed import substitution which has not always been efficient and has sometimes been indiscriminate.
“The time has come to expose Indian industry to competition from abroad in a phased manner.
“…the Government has introduced changes in import export policy, aimed at a reduction of import licensing, vigorous export promotion and optimal import compression.
“After four decades of planning for industrialisation, we have now reached a stage of development where we should welcome, rather than fear, foreign investment. Our entrepreneurs are second to none. Our industry has come of age.
Direct foreign investment would provide access to capital, technology and markets. It would expose our industrial sector to competition from abroad in a phased manner.
“Cost, efficiency, and quality would begin to receive the attention they deserve. We have, therefore, decided to liberalise the policy regime for direct foreign investment in the following manner.
“First, direct foreign investment in specified high priority industries, with a raised limit for foreign equity at 51 per cent, would be given prompt approval, if equity inflows are sufficient to finance the import of capital goods at the stage of investment and if dividends are balanced by export earnings over a period of time.
“Second, foreign equity up to 51 percent would be allowed for trading companies primarily engaged in export activities.
“Third, a special board would be constituted to negotiate with a number of large international firms and approve direct foreign investment in selected areas; this would be a special regime to attract substantial investment that would provide access to high technology and to world markets”.
There are two aspects to this part. Firstly, it has been acknowledged that the country is ready to remove protectionism. Not under the pressure of the WTO (World Trade Organisation) but as a sensible economic decision. Allowing foreign investment in various sectors is the other aspect.
Unfortunately, however, Pakistan, in both the cases or areas, acted in a hasty and an imprudent manner. There is compliance to the WTO without looking at the status of the national industrial base and its competitiveness.
Foreign Direct Investment (FDI) policies constitute the biggest disaster. We allow 100 percent foreign ownership in companies making ordinary FMCG products whereas India does not allow even 50 percent ownership in these sectors. They allow foreign investment only for the purpose of industrial growth. In short, it is a consideration of economic stability in India, whereas in Pakistan we consider purchase of already existing shares of listed companies as FDI.
Public sector in business:
“The public sector has made an important contribution to the diversification of our industrial economy.…the portfolio of public sector investments would be reviewed so as to concentrate the future operations of the public sector in areas that are strategic for the nation, require high technology for the economy, and are essential for the infrastructure.
“Public enterprises which are chronically sick and which cannot be turned around, will be referred to the Board for Industrial and Financial Reconstruction (BIFR), or to a similar high-powered body to be set up, for the formulation of revival or rehabilitation schemes; a social security mechanism will be created to fully protect the interests of the workers likely to be affected by the rehabilitation packages of the BIFR.
“Autonomy in management, and corresponding accountability, would be provided through a system of memorandums of understanding between the Government and public sector enterprises”.
The policies were more or less identical during the 2002-2020 period; however, the number of industries privatized in India in various modes was substantially higher than in Pakistan.
Importance of economic planning:
“The most important thing that comes out clearly is that we cannot realise our goal of establishing a just society, if we abandon the planning process. …future development depends crucially on how well the planning process is adapted to the needs of a fast changing situation.
“…without an intelligent and systematic coordinated resource use in some major sectors of our economy, development will be lopsided. It will violate deeply cherished values of equity and it will keep India well below its social, intellectual and moral potential.
“But our planning processes must be sensitive to the needs of a dynamic economy. Over-centralisation and excessive bureaucratisation of economic processes have proved to be counter-productive”.
(To be continued)
Copyright Business Recorder, 2023
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