Realism and Reform: Re-Balancing Optimism and Pessimism

Introduction

When I read what politicians are saying and reportedly thinking, I am afraid that, as in 2009-10 they will once more become too complacent and ignore the need for continuing reforms over the next three years (not just this year), and permanently loose the opportunity of restoring growth  to its medium-long term potential of 8% to 8.5%.  When I talk to people from the World of Business and Private Equity (the long term investors) I often find a deep despair about a host of government actions and inactions that have stymied growth of output and investment in the recent past.  I fear that their pessimism will slow the pace of recovery even if the political system produces genuine reforms of the “permit-inspector raj”.  Both the over-optimism among politicians and the excessive-pessimism among business and industry can be bad for economic recovery.  We need a realistic balance between the two, if we are to get both a reasonably quick and a sustained recovery.

Reasons For Pessimism

Two numbers from the Economic survey, encapsulate the negative story for 2012-13:  One is the Current Account Deficit (CAD) of 4.6 per cent of GDP and the other is the growth rate of Gross Domestic Product at constant market prices (GDPMP) of 3.3 per cent.  These are both unprecedented and unsustainable numbers.  The growth projection of 5 per cent for GDPFC that shocked many observers, is 1.8 per cent point higher than the number for GDPMP.  We last had such a low growth rate for GDPMP during the BOP crises of 1991-2 when it plummeted to 1 per cent.  The CAD of 4.6 per cent has no historical precedent; the worst historical CAD was 3% of GDP in 1990-91 when the BOP crises started.  The high inflation rate, best captured by a five year average 9% rise in the implicit GDP deflator for private consumption, is another symptom of macro-economic imbalance. However, it is still lower than the nine year average of 9.9% from 1990-91 to 1998-99.

Parallels With BOP Crisis of 1991

Despite underlying imbalances that are arguably worse than in late 1980s, there has been no crisis this time.  The reason is the foreign exchange, trade and capital account reforms of the 1990s, which have allowed the economy to adjust without blowing up into a full-fledged crisis.  But the underlying problems still need to and must be addressed if they are not to act as drag on the economy or lead a BOP crisis a decade later.  Fortunately, because of the 1990s reforms, we now have more time to address them.  These reforms proved that a combination of “macro rebalancing” and “structural reform” could correct the macro imbalances and bring us on to a higher growth path than the 1980s. The former involved a classic (fiscal) expenditure reduction cum expenditure switching policy of real depreciation, which got us out of the 1990 BOP crises.  Intelligently adapted to current economic conditions, including a much more open economy, it can still bring results. In this context, policy actions to facilitate short term external financing of high CADs and increase nominal appreciation, are misdirected.

Reasons For Optimism

The Indian economy looks better from a medium term global perspective.  India is currently one of only seven countries (out of around 250) in the World with an average decadal per capita GDP growth rate of over 6% (2003-2012).  The ratio of India’s GDP growth to the growth of World GDP shows virtually no trend since 1994 (figure).  In other words India has maintained its growth performance relative to the World economy since 1994, even though in any given year it may have performed better or worse (as in 2012).  Similarly the ratio of the Indian Economy’s growth rate to that of China’s has been on a rising trend since 1994, as China’s growth slowed relative to the World economy.  This trend rise in India’s growth rate relative to China’s is very modest, from about 60% of China’s rate in 1994-1995 to about 80% in 2011-2012.  From this global medium term perspective, 2012 is a bad but not unprecedented setback, from which we can still recover if we take the necessary corrective steps over the next three years.

Policy, Regulations And Institutions

There is need for policy, regulatory and institutional reforms.  Part of the extreme business pessimism stems from the fact that one of our most cherished beliefs, since the 1991 reforms, has lost its credibility.  When reforms slowed after the initial burst in 1990s, we (in the MOF) used to tell foreign investors that the pace of reforms and the sector preference may vary with every government, but no government including the left front, had reversed any reform.  Gradually at first, then more rapidly, negative practices of the old “license-permit-inspector raj” have returned, in sectors/areas still under the control of the government.  Whether this happened inadvertently or deliberately, it has affected both domestic and foreign investors in the real economy and is a factor in the investment collapse.  It needs to be corrected through regulatory and institutional reforms.  Don’t be misled by the FIIs lack of concern on this score, as short term investors are quite happy to profit from the high interest rates relative to US, Europe and Japan and finance the high CAD for now.

Realism And Reform

In conclusion the Indian economy is not in as bad shape as investors in the real economy think nor is it as good as many politicians and political advisors think.  The government must not abandon (at the first sign of recovery), its efforts to correct the imbalances and bottlenecks that have arisen.  The real economy investors must shed their pessimism, as government makes genuine efforts to restore growth, and start investing. More realism on the part of both can return the economy to the long term growth trend more quickly.
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A version of this article appeared on the editorial page of, The Indian Express on Wednesday, 13^th March, 2013, under the banner, “Two Stories of The Economy,”  at,

  http://www.indianexpress.com/news/two-stories-of-the-economy/1087095/
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Middle Class Values and Political Economy: The New Middle Class

Introduction

The reforms of the 1990s, accelerated the growth of income and poverty reduction, demonstrating the virtues of a competitive market economy powered by Indian Entrepreneurship.  Consequently India has moved over the last decade from low income to lower middle income.  The stirrings observed in Delhi during the past two years are a precursor of the emerging middle class and political demands for better governance are likely to follow. The middle class has historically grown in every country along with income and has demanded and got better governance in every (now) developed country. This process has been accelerated in India by the early establishment of democracy and a flourishing media.

Stirrings

 The anti-corruption agitation of 2011 and the public outpouring of support for it was perhaps the first indication of the emergence of this "new middle class.".  The common Delhi resident’s passionate outrage was less about the specific scam allegations relating to CWG and Telecom and more about the basic mistreatment of citizens by the government service providers (water, power, police, MCD).  The new middle class, which has had a taste of freedom and equality in the market place, was fed up with the arrogance of local government functionaries and the humiliating treatment meted out by corrupt and self-serving officials, while their bureaucratic and political bosses hypocritically claimed to be ‘servants of the people.’  The protests were an expression of outrage against the inequality between the government as service provider on one side and the general public on the other side of the counter.  Though both events would have been damp squibs without media attention, underlying these is a cry for attention to citizen’s personal security and equal treatment to all female and male, political rulers and the ruled.

Twenty three year old "Nirbhay" and her parents reportedly migrated to Delhi from a village in Ballia district in Eastern UP, a region that is often equated with Bihar.  She was training to be a physiotherapist, acquiring a skill that would earn her a decent income.  She represented the dream, of numerous families, including those who protested on the streets: women of all ages, income classes, castes and professional-work categories, who saw something of themselves in her.  She was the child of the new era of economic opportunity.

The Middle Class

Definition

                From the many definitions of middle class I would emphasize the two most common shared elements: A level of income that is above the level needed for survival  (including savings for emergencies) and a level of education and skills necessary to earn the posited level of income.  The education has to be at a quality-level to make the individual aware of the world beyond his/hers immediate day to day environment.  This awareness is essential for making an empathetic connection between one’s own selfish concerns and the concerns of other similarly placed individuals.  Thus the third element is usually a set of shared values that to varying degrees are common to the ‘middle class.’   

However, 'educated' does not necessarily mean intellectual: To be a part of the (lower) middle class you have to have sufficient education to be aware of issues and elements that are outside the ambit of the skills needed for your job and to navigate the space that you inhabit, but not necessarily educated to a level that makes one capable of participating in debates about these issue or deriving solutions to social or economic problems.  That is a criterion for classification into the middle class intelligentsia.

Values

Is there a key “middle class value?’ In my view there are two values that support each other.   One, that as a human being one has a fundamental right to, “life liberty and the pursuit of happiness.”  Second is an understanding and appreciation of true equality, that it is universal and indivisible. That is, if I have this right, then all individuals must have this right and that the only way I can truly have and preserve this right is for all others to have the same right.  Practically this translates into a demand for equality of opportunity and equality of treatment.  The competitive market economy embodies these ideals to a much greater degree than the hierarchical and segmented Indian society or the self-centered politico-bureaucratic system that now constitutes the ruling class.  The fast growth unleashed by the 1991 reforms has created demand for education and skills with which to earn income.  It has also shown the current and potential members of the middle class that a market economy cares primarily about skills and competence when it is seeking to get a job done and about the money you want to spend on its products as a consumer, and much less if at all about your caste, class or family background.  Therefore this demand for equal treatment is focused on the services that government provides, both the public goods and services such as personal security, that only Government can provide, as well as private goods and services that it has deliberately chosen to monopolize or control such as higher education and electricity.

Political Economy of Welfare

Simple welfare theory teaches that there are three elements of Social Welfare.  (1) Private income and consumption, (2) Public Goods and Services (legal, police, roads, public transport, public health-sewage, sanitation)  (3) The distribution of income, poverty, inclusion.   Taxes and transfers can be used to change, within limits, the distribution of income and thus improve social welfare. To the extent there is a gap between the claims and reality (wastage, corruption) these are rightly called populist measures.  Much of Indian political discourse since the sixties has focused on this third element.  India under Mrs. Indira Gandhi was the first country in the world to raise “poverty alleviation” to a national objective under the rubric of “Garibi Hatao.” 

The economic reforms of the 1990s raised public awareness of the role of faster growth in raising the incomes and Welfare of the people (item (1)), but the balance shifted back to (3) from 2004.  The dramatic fall in the national growth rate and the threat of junk status coupled with the recent prominence of the ‘Gujarat model’  have restored some of the importance of income growth.  The maintenance of a sufficiently high average per capita growth - between 6%  and 7% ( about  8% GDP), which generates income opportunity for the emerging middle class will soon become de rigor.  The rise of the middle class also promises to bring Public goods and services (item 2) along with governance into the public discourse within this decade. This will for the first time establish a balance between the three elements of Social Welfare that should be part of the political debate.

Conclusion

Though this new middle class is still relatively small and concentrated in the Urban and semi-urban areas, it is projected to grow rapidly in the next two decades if our average per capita GDP grows at its full potential of  7% (~ 8.25% GDP).  The political party that finds the right policy balance between these three objectives, and convinces both the emerging middle class and the lower income groups, will be the winners. 
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A shorter version of this post appeared as an article in the Indian Express Op ed on Monday 28th January 2013, under the banner, "What the Middle Class Wants,"  http://www.indianexpress.com/news/what-the-middle-class-wants/1065442/ 

It’s the economy stupid

Though we are not in the business of forecasting elections, what this article attempts to do is to relate standard economic analysis of consumer utility to voting behavior. It goes on to authenticate (not test) the results against the results of recent elections but at this stage, it remains a hypothesis, perhaps a useful starting point for more refined and perhaps even much better models of voter behaviour.
A short article is not the place to give detailed specifications of the model (for the full text, visit icrier.res.in/wp138.pdf), but broadly speaking, the model assumes an improvement/worsening of economic conditions can increase/decrease the probability of voting for the party perceived to be responsible for the change, that voters vote for the incumbent if they are happy with the quality/supply of public goods, that they tend to vote in favour of parties that lower tax rates, among others.

Since income taxes or transfers (like subsidies) received by the voter are generally a very small fraction of a voter’s total income, the change in income growth will usually have a far more significant impact on voter behaviour. While voting behaviour is influenced by the quality of public services like electricity, but when these are privatised and still continue to remain poor, voters tend to blame the private firms and not the government.
While the economy grew at 5.6 per cent annually during the National Democratic Alliance’s (NDA) tenure, this was lower than the 6.7 per cent in the previous five years. In terms of per capita income, the NDA clocked 3.8 per cent versus 4.7 per cent of the previous five years. Not only was the NDA’s economic performance poorer than the United Front’s, the India Shining campaign served to highlight to the voter the gap between what was being projected and what had actually been achieved. Not surprisingly, the NDA was voted out in the elections.
Election results in Rajasthan, Madhya Pradesh, and Punjab are all in keeping with what the model suggests. Economic growth during Digvijay Singh’s last tenure fell to around 60 per cent of the 5.4 per cent achieved during the 1994-95 to 1998-99 period (per capita income growth fell from 3.1 per cent to 0.5 per cent per year), and so Singh lost the assembly elections. Since GDP performance slowed in Rajasthan (per capita collapsed from 6.7 per cent in 1994-95 to 1998-99 to 0.5 per cent between 1999-00 to 2003-04), the government there fell as well.
What of Bihar? Surprise, Surprise! Bihar’s economic performance has actually improved under Lalu Prasad Yadav’s last tenure. While GDP grew by 4.8 per cent per annum during the 1994-95 to 1998-99 period it grew by 7.7 per cent during the 1999-00 to 2003-04 period and per capita income galloped from 1.9 per cent to 5.4 per cent. Indeed, even agricultural growth in Lalu’s last tenure in Bihar was much higher than in the previous five years, and this was a reason for why voters voted for him once again.
While the ‘simple’ economic analysis fails in Delhi since Sheila Dikshit won the election despite economic growth falling (per capita growth fell from 5.5 per cent to 4.2 per cent)? A more ‘complicated’ analysis could be that growth in Delhi was still among the highest in India and comparable to the best in the world and that ‘the relatively better educated/informed electorate in Delhi were also convinced that the incumbent (Dikshit) was sincerely trying to improve governance, including through privatisation of electricity distribution.
While there was only a marginal fall in Andhra’s GDP growth, and none in per capita income growth during the two periods, Chandrababu Naidu’s defeat is explained by the high expectations that Chandrababu had aroused. Naveen Patnaik’s win in Orissa despite virtually no change in growth, on the other hand, can be explained away by the argument that his low key style lowered expectations and so he came out smelling of roses. The Godhra riots, helped the BJP win the Gujarat assembly elections despite the sharp slowdown in economic growth (GDP growth fell from 7.4 per cent per annum to 3.1 per cent between the two periods), but within a year of Narendra Modi coming back to power the NDA lost the election at the centre since people realized the impact of Godhra on investment and so in the general elections the growth factor seems to have re-asserted itself.
The purpose of the paper is not to do forecasting in the manner that psephologists do, but to explain the role played by economic factors.

The Simple Economics of General Election 2004

The voting in an election depends on a host of economic and social factors (e.g. caste, feudal state machinery, informal terror), as well as political alliances. Many fascinating explanations have been advanced for the surprising results but few based on publicly available data. This article presents a simple explaination: An improvement/worsening of economic conditions can increase/decrease the probability of voting for the party perceived to be responsible for the change.
In a set of papers done at ICRIER we have analysed the linkages between policy, reforms and economic growth (WP #121, #122 & #131), and poverty (forthcoming). Based on these facts we can shed some light on election results.
Before the election it was widely believed that the economy was growing at a rate of 6 to 8%. The media buzz was about 8% growth take-off and India overtaking China. The facts are quite different. The Indian economy grew at a rate of 5.6% per annum during the past five years, a rate, which is not only below the benchmark rate (the average for 24 years) but much less than the 6.1% per year average during 1992-3 to 2003-4. Thus the reality experienced by the average citizen was a GDP growth rate of 5.6% during 1999-2000 to 2003-4 compared to an average growth rate of 6.7% per year in the previous five years (1994-5 to 1998-9).
Campaign slogans tended to raise the benchmark towards the 7-8% range. The educated elite may have convinced themselves of the take-off of the Indian economy, but the reality that the average voter knew from personal experience was a significant slow-down in the growth of the Indian economy since 1996-97. He/she could clearly see the big gap between the “verbal” and the actual growth rate and would be more inclined (i.e. other things equal) to vote against the party in power during these five years (in the Centre or the State).
Incidentally the slower growth rate does not represent the failure of reform. The “verbal reforms” during the five years have been far in excess of the actual reforms. The main areas of real reform have been in Telecom (price reduction and market growth), Insurance (26% FDI), Highways (institutional reform but not policy reform) and the Electricity Act 2003. The first three have been successful sector reforms, while the last is too recent to judge its effect. Though half a dozen companies were privatised (for the first time), the program came to a halt about two years before the election. In other areas new ‘verbal reform’ initiatives have not been followed up by ‘actual reform.’ The question of success or failure of these reforms is therefore moot.
The election results from Rajasthan and Madhya Pradesh, including the preceding State elections, are consistent with our hypothesis. Economic growth in MP declined from an average 5.4% per year during 1994-95 to 1998-99 to an estimated 60% of this level during 1999-2000 to 2003-4. Economic growth in Rajasthan had declined even more sharply from 9.5% per year to an estimated 45% of this rate during the tenure of the incumbent party (Congress). The average voter in each state was therefore more likely to vote against the Congress party in these States. Neither the global reputation of the MP CM as social sector innovator and leader in decentralisation, nor last year efforts of the Rajasthan CM to project good governance could counter the impact of the sharp slow-down in growth.
The conventional wisdom on Bihar’s growth performance under Shri Lalu Yadav is that it has been performing very poorly. The average rate of growth of Bihar’s GDP during the last five years (1999-2000 to 2003-4) is about 60% higher than it was in the previous five years (4.8% per annum). The average Bihar voter would therefore be more likely to vote for the ruling party in election 2004 than in the previous general election. That is why contrary to all forecasts the RJD improved its performance.
What about Andhra Pradesh and Orissa? Everyone thought that Andhra has been shining under Shri Naidu while Mr Patnaik had botched the electricity privatisation in Orissa! In both these States the growth rate during the past five years is approximately the same as in the previous five years. The high profile Mr. Naidu raised the benchmark against which Andhra voters judged him, while the low key Mr Patnaik lowered the benchmark against which Orissa voters judged him. Another difference was that Mr Naidu had served two terms as CM while Mr Patnaik had served only one. As a consequence the former was found by the average voter to be under-performing while the latter was perceived to be performing at an acceptable level.
These results have little to do with rich-poor divide or the India-Bharat divide. There is no data to determine (a) whether the change in poor citizens voting behaviour was different from the change in middle class voter behaviour, (b) That any group (poor, middle-class, rural, urban) voted for or against reforms.
Available data does, however, allow us to delve a little deeper into a sector on which rural voters are relatively more (but not solely) dependent, the agricultural sector. The average agriculture growth declined sharply from 3.5% per year during 1994-5 to 1998-9 to 2.3% per year during 1999-2000 to 2003-4. This is however the average national situation and rainfall variations have a strong regional dimension. States such as Andhra Pradesh have been particularly affected by poor rainfall and drought conditions in the last 3-5 years and the data for Andhra Pradesh confirms the slowdown. Thus the average person/voter (nationally & in AP) dependent primarily on agriculture income is likely to have concluded that progress has slowed and would be more likely, ipso facto to vote against the party in power at the State level responsible for the poorer agricultural growth performance.
The second important explanatory factor is the widening gap between individual income and the private goods purchased with this income (e.g. food, clothing durable goods) and the public & quasi-public goods provided by the government. While the former has increased in line with GDP, this is not necessarily true of the latter (police protection, roads, drinking water, sanitation & sewerage, public health, primary education, agriculture R&D and extension). The ICRIER working papers have shown that there has been a slow but steady decline (over the past 4 decades) in the quality and efficiency of government institutions. The quality and average quantity of public services provided by the government to its citizens has therefore deteriorated. Deterioration in the quality of private goods supplied by government monopolies such as electricity boards has accentuated the citizens’ negative experience of government performance (as private purchase from a competitor is not allowed). This deterioration in governance is an important underlying economic factor underlying the so-called ‘anti-incumbency’ vote observed by political analysts over the last 3&1/2 decades. It has also been argued (Virmani, EPW, June 2002) that the deterioration in governance has ‘reduced the ability of the government to do good relative to its ability to do harm to the economy/its citizens.’ Unless an incumbent government takes an active interest in improving the supply of public services, benign neglect will inevitably lead to a gradual deterioration.
Though we do not have detailed information on the quality and quantity of public goods and services provided by States, there is wide agreement among analysts that the Ms. Dixit’s government in Delhi has beaten the anti-incumbency factor through better governance and sincerity of purpose. Mr Naidu and Mr Digvijay Singh seem to have done it in their first re-election bid 4-5 years ago but could not sustain it in the second re-election bid in 2003/2004. Mr Patnaik has also managed it in his first re-election bid. The voters are perhaps more willing to give credit for good intentions and sincere effort in the first re-election bid, than they are in the second and subsequent re-election bids (when they judge by actual improvement). The credibility of the challenger is clearly important when the voters’ judgement is based not on actual performance but on potential.
Only Mr Lalu Yadav in Bihar and the Left front in W. Bengal have beaten the anti-incumbency/governance twice to win a third consecutive term. Out migration from Bihar and remittances from these migrants seem to have played a role in accelerating the growth of the Bihar economy. Such migrants may also incidentally have voted with their feet (because of caste/party bias in terms of jobs, personal safety etc.) and therefore reduce the anti-incumbency vote. The deterioration in personal safety (kidnapping, dacoty) can be directed at groups who do not vote for the ruling party. The rents can be extracted from such opponent groups and channelled to supporting groups to ensure re-election (as against self-aggrandisement). Thus any deterioration in the former’s economic well being has no effect on the ruling party vote. Shekhar Gupta has written that the use of coercion and fear (in both Bihar and W Bengal) also helps keep the ruling party vote bank intact during elections. This is a possible explanation for Bihar and W Bengal beating anti-incumbency in the second re-election bid.
Our analysis of available data shows that the change in the economic growth rate during the tenure of the incumbent, the governance factor and the benchmark set by the incumbent provide a good explanation for a change in the likelihood (swing) of voting for the incumbent.

Elections 2004 And Economic Reforms

The PM designate (of India) has in his statement outlined the objectives of his government. At the risk of simplification we can say that there are two objectives. One is the emphasis on the income and welfare of the poor, the farmers and workers. The other is to make this to make India a prominent power so as the 21st century is an “Indian century.” To put it in economics lingo, the objective is to accelerate Growth, employment generation and poverty reduction. The PM designate has also emphasised that neither he nor his party have an ideological approach to meeting these objectives. In other words the method adopted for achieving these objectives will be pragmatic. Whatever works (policy, programs) to achieve these objectives will be adopted, whatever is ineffective or inefficient in meeting these objectives will be abandoned. In a way this can be read as the common mans definition of reforms.
The markets have been worried about what will happen to economic reforms generally and in particular to “Privatisation” and “ Labour reforms” under a Congress led government. Let us start with the facts. On privatisation the Congress party manifesto is quite explicit about not privatising profit making PSUs. It is pertinent to ask how many such units were privatised in the past 5 years. The answer is about five. About two years ago it looked like privatisation of PSUs was about to take off. Within a couple of months thereafter the exercise had crashed under the determined opposition of Shri Ram Naik, the SJM, the RSS and others. In the most negative scenario in which no profit making PSUs are privatised in the next five years a change from five to zero is not earth shaking. Further, won’t privatisation of 6-10 loss-making PSUs be as good for the economy as that of 5 profit making ones? In any case much of the action in the last few months of 2003-4, which had enthused the equity market, was in terms of sale of shares of profit making companies to the public. There does not seem to be any convincing reason why the public should not hold more shares in public sector units managed by the government.
A few years ago the Finance Minister’s budget speech talked about reforming the labour laws to impart greater flexibility to the labour market. Despite sporadic discussion and a number of GOMs on the issue no central laws, rule or regulation has been changed pursuant to this announcement. Thus even in the most negative scenario in which no further action is taken for labour reform, the actual policy change will be ‘no less than’ it was during the last 5 years.
What about reforms more generally? With Dr. Manmohan Singh as the (likely) Finance Minister, the quality of reforms is likely to improve. What do we mean by the quality of reform? As shown in a recent ICRIER paper (WP #121) on the link between policy reform and institutional reform successful policy reform requires good analysis to identify the critical bottlenecks to higher growth and poverty reduction, innovative design of policy taking account of socio-political constraints and supportive institutional changes. These steps improve the efficiency and sustainability of reforms. This is what one would expect to happen under the experienced economic leadership of Dr Manmohan Singh fully supported by the Prime Minister. The experience of a breakthrough in the growth of manufacturing sector during 1994-5 to 1996-7 (ICRIER WP #122) also gives room for optimism that it can both be recreated and sustained given the accumulated experience.
Expectations play a very important role in the modern economy. This situation is quite different from what it was twenty years ago and is radically different from what it was 50 years ago. By the nature of capital (stream of output for many years in the future) investment has to be forward looking. Therefore an entrepreneur or investor has to gaze into the future and form expectations about what will happen to the market for its product etc. As the financial sector intermediates between savers and investors it is the fulcrum around which these expectations operate. With the widening of markets for saving, investment and the growth of the financial sector, and the increasing diversity of markets and products, the importance of expectations has increased over time. Both domestic and global politics influence expectations about the economy. There is therefore a link between political developments and financial markets through expectations. In a period of transition from one government to another, such as the present, when hard facts about the new government are scarce, speculation plays a much greater role than at normal times. Thus great care needs to be exercised in making statements about policy and programs that will effect investment decisions. These speculative elements will gradually die down as the new government ministers take charge and the policy of the new government gets defined. Reform actions will then have a greater role in determining expectations and financial market developments. I have no doubt that reforms will continue (at least) at a pace that maintains the 5.8% per annum growth rate that has prevailed for the last 24 years, the 8th highest in the World (ICRIER WP #122). This has reduced the poverty rate from about 55% of the population (end-1970s) to 26% (1999-2000). Faster growth and poverty reduction may, however, require accelerated reform.