By Nirupam Bajpai and Jeffrey Sachs

SIGNIFICANT reduction of fiscal deficit is the first order of business. Unless substantial fiscal consolidation is achieved, in our view,

continued fiscal deficits pose India’s greatest risk to future destabilisation. Despite several years of fiscal consolidation effort, large and persistent fiscal deficits remain.

India’s overall government spending, currently around 33 per cent of GDP (Centre and States to- gether), will need to be brought down substantially as a proportion of national product to achieve its reform goals of macroeconomic stability and long- term rapid growth.

Government dis-savings at the federal and State levels need to be reduced through cuts in, and re- focusing of, explicit and implicit subsidies, stricter control of non-developmental expenditure, impro- vement in the tax ratio through deepening reform of the indirect tax regime and stronger tax enfor- cement.

Lower fiscal deficits will help move towards a regime of low interest rates, which, with efficient financial intermediation, can give a boost to private sector investment.

Privatisation of India’s state-owned enterprises (SOEs) is critical. Many of the SOEs are inefficient and loss-making firms. These firms tend to be pro- tected by grants of state monopoly, especially in areas of finance, such as commercial banking and insurance, and infrastructure, in areas such as tele- communications, port facilities, and road building.

An end to the state monopolisation of these sectors is crucial to permit new, privately owned firms to

introduce competition and higher productivity into these sectors.

Privatisation of these enterprises is also desirable in most cases, since the government has no par- ticular comparative advantages in running these enterprises, and may have severe disadvantages, especially the politicisation of key investment and employment decisions of the enterprises.

Reforms to further opening up of the economy to trade and FDI are crucial if India is to sustain high rates of economic growth. India’s average tariff rate of 27 per cent vastly exceeds the average tariff rates of the other economies.

India also displays continuing high barriers to fo- reign direct investment in contrast to most of the fast-growing Asian economies.

While it is true that not all of East Asia relied heavily on FDI to achieve rapid growth (Japan and Korea are the two main exceptions), most of the region, especially South-East Asia, has relied heavily on FDI, and the East Asian countries tend to have much simpler rules for FDI approvals than are now in place in India.

If India has to become an attractive destination for FDI and a major platform for labour-intensive ma- nufacturing exports, reforms in India’s labour laws and exit policies are very essential. China’s expe- rience suggests that while workers in the Chinese state sector are accorded generous job guarantees, workers in the non-state sector do not receive gua- ranteed employment.

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