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INDIA SHINING (1984 – 2004), RIP?

Submitted by admin on Tue, 07/13/2004 - 13:22

It is no use pretending. While the last general election brought some good news--especially, a well deserved slap to Narendra Modi's fascist face—it also brought bad news. The hugely positive global sentiment in favour of India that had prevailed until mid May has received a setback. The clearest example is the dramatic slowdown in the growth in the nation's reserves. Until the week ended May 7, reserves had been growing at the rate of US $750 million a week. This accretion to reserves had diminished to less than US $100 million a week. The rupee has also reversed its appreciating trend. Although this may, in fact, be good for exports, but the currency trend combined with the stock market crash demonstrates that sentiment has changed, and if this is not reversed quickly it will hurt new private investment in the economy, and longer term growth, competitiveness, and jobs.    

Sentiments are fragile and often irrational, but they do matter. Entrepreneurs invest when they are feeling good and stop investing when doubts creep in. This is what has happened in India. Doubts have crept in, and the self-confidence that had fuelled investment during the past nine months has largely evaporated. Both Indian and foreign investors have once again begun to have doubts about India as a worthy destination for investment. Thus P. Chidambaram faces a heroic task. For no matter how much you tell investors that the fundamentals of the economy have not changed—that it is still the same sound economy as it was two months ago—market sentiments have a life of their own, and they do not always listen to reason.  

Although the left tends to dismiss it, national confidence is a good thing. Ask any CEO and he will tell you that a sustained positive feeling among employees often separates success from failure. Ask a historian of Rome, and he will testify to its amazing power. Or of 19th century Britain, or Japan between 1960-1990, or even current day China—they will all bear witness to the clout of self-belief, which makes ordinary people do extraordinary things. This confidence has been jolted by this election.  

Before relegating “India Shining” to history's dustbin it is well to remember that it did succeed in one space, and there it succeeded spectacularly. The business class both in India and abroad bought the idea that India had become a serious player in the world economy and was poised to make a leap forward. This had generated tremendous excitement in the corporate world, both in India and abroad, and for almost a year I could feel a palpable optimism in my interactions with investors and business people. The offshoring controversy in America may also have fuelled it, and the foreign press certainly reinforced it. From a land of snake charmers India had suddenly become a serious competitor for the white-collar jobs of the developed world. I was abroad in February and March this year and never have I seen such a spate of positive views expressed by foreign commentators about India.  

Right through the nineties, China had been the big success story. Quietly over the past couple years, however, India had somehow crept onto the radar of global media. Hence, during the past year every time China was mentioned India's name was attached to it. Earlier this year the New York Times wrote in a front page story that China and India were going to write the script for the 21st century. But the more cautious rendition was usually “China and to lesser extent, India” as the Economist put it. This positive perception of India has diminished, if not ceased entirely, ever since the stock market crash. The Indian left may have contempt for markets, but investors watch markets, and since we are part of the global economy, investor sentiment will determine investment, growth, and jobs.  

I ask myself, why has this sentiment suddenly changed when the fundamentals about our economy are the same? In part, I think it is because the Indian whining story has also affected the business community, which has concluded that India's economic prospects were perhaps never as rosy as they had been led to believe. And the defeat of the BJP has reinforced this perception. In the process of trashing the BJP's tall claims, the opposition unintentionally ended in trashing India, the country. Investors began to wonder if the story of India's prospects were a bunch of tall claims, when the reality may have been that it was still the same “under-achiever” which the Economist has been portraying for years. I don't think that Congress meant to trash the country, but this is how it ended, and our country became the victim of competitive democratic politics. Self-confidence has always been lacking in our society, especially in the business community. I don't know what and how long it will take to rebuild it. We certainly have an outstanding economic team in place today, but as I said before, sentiment is irrational and elusive.  

The well intentioned Common Minimum Program (CMP) of the new government probably did more to kill this spirit than anything else. The idea of reservations in the private sector, when the prospect of labour reform had died--this frightened managers who were engaged in the hard day to day work of running companies. As it is, they had to put up with a sub-optimal work culture with endemic absenteeism, and now this burden of reservations. It is a future just too awful to contemplate!  

Businessmen have repeatedly expressed the view that they would happily pay to lift the poor if they had the slightest faith that the money would reach the poor. They agreed that the best way to lift the poor was through good primary schools and primary health care. Hence, they didn't mind the proposed education cess. But they worried about the condition of our municipal schools: 93 percent of Bengali primary schoolchildren can't write their names in Bangla; 30 percent of teachers are absent in Bimaru states, 50 percent don't teach and most beat their pupils. Unless we first reform our schools (by giving parents' associations a voice, for example, in the teacher's pay) we would only be wasting the nation's hard earned money. As it is, India spends around Rs 1 lakh crores on education (which is higher than most countries as a percent of GDP), but because of teacher absence and other inefficiencies, a third is perhaps wasted. That is a waste of Rs 30,000 crores!

“India shining” is a nice expression and it's a pity that it got mixed up with politics. Since it is synonymous with India's economic success, not surprisingly both the BJP and the Congress wanted to take the credit. The BJP claimed that its policies were responsible for the past year's fine performance and the changed mood; the Congress argued that the economy grew faster under their man, Narasimha Rao. Both were right (and wrong). The truth is that India's economy has been shining for two decades, growing around 6 percent a year, making it the fifth fastest major economy in the world.

After stagnating for centuries, our economy did finally pick up after Independence. It grew 3.5 percent a year between 1950 and 1980; but our population also grew 2.2 percent; hence the net affect was 1.3 percent per capita income growth (3.5 minus 2.2)—this is what we mournfully called “the Hindu rate of growth.” Things began to change with modest liberalisation in the eighties when annual GDP growth rose to 5.8 percent while population growth remained at 2.1 percent; thus, income per capita moved up to a more respectable 3.7 percent. This happy trend continued in the reforms decade of the nineties when growth averaged 6.2 percent a year, and population, in fact, slowed to 1.8 percent average; thus, per capita income rose by a decent 4.4 percent a year.

What these numbers mean is that if our per capita GDP had continued growing at the pre-1980 level, then Indian incomes would have reached current American per capita income levels only by 2250. But if our economy continues to grow at the present 6 percent rate, and if population grows at 1.5 percent, then we will reach American income levels by 2066. This is a gain of 216 years, and this is what “India shining” really means. And it is worth dying for! It means that it is finally possible to believe that we shall soon be able to conquer India's age-old worry over want and hunger.

It is easier to explain why India was shining in the nineties. The brave reforms of Narasimha Rao's government opened our economy, dismantled controls, lowered tariffs and taxes and broke public sector monopolies. And the economy responded magnificently. But how does one explain the pick-up in the 1980s? And here I think we don't give enough credit to Rajiv Gandhi. He too opened the economy, albeit reticently and modestly—lowering marginal taxes and tariffs, removing the most irritating import restrictions, and liberalised industrial licensing through “broadbanding”. Although modest, these efforts seem to have had a bigger impact that even the sweeping reforms of the 1990s.   Bradford Delong, an American economist, wrestles with this puzzle in In Search of Prosperity: Analtytic Narratives on Economic Growth, edited by Dani Rodrik of Harvard. The real miracle, however, is that all the governments after Rao surprisingly continued the reforms, albeit in a frustratingly slow way. Yet this elephant-like pace has made India one of the fastest growing major economies in the world. So, the lesson is that if you consistently reform in one direction in a democracy, it adds up. Since we haven't had strong reformers at the top, like Thatcher or Deng, is it possible that the reform process has become institutionalised?

This “adding up” over time has enhanced our national confidence, and which to my mind is central to the notion of “India shining”. Thus, it is the Indian people who are shining as they have overcome all the obstacles put in their way by self-serving bureaucrats, politicians, monopolistic industrialists, left intellectuals and labour leaders—in short, all the vested interests of the Licence Raj. But for all Indians to shine, we must begin to seriously reform agriculture and education. This ought to be the agenda of this government.

This election has reminded us that left's historic role is to make the right sensitive to the needs of the poor and to humanize capitalism in the process. Unfortunately, our left is bankrupt in terms of ideas, and thinks that throwing good money at old problems will solve them. Moreover, the left has not ditched its naïve faith in state control when our nation is groaning under the weight of red tape. This statism makes the left look stupid. In the end, the problems of India's poor will not be solved by ideology but by good implementation. And this needs mental application. We have to focus on the “how”, not the “what”. It is easier to abuse the India's bourgeoisie, but more difficult to come up with real answers to real problems.

Dear Prime Minister,

Like it or not, India's general elections have become municipal elections. What matters to the rickshawala is that the cops not take away a sixth of his daily earnings. The farmer wants a clear title to his land without having to bribe the patwari. The sick villager wants the doctor to be there when she visits the primary health center. The housewife doesn't want the water tap to go dry while she is washing. This is how government touches ordinary people's lives, and in successful societies people take these things for granted. You might say that these are state and local subjects, but to ordinary citizens you are the face of the government and they expect this from you. Moreover, the Congress controls many states, municipalities and panchayats. You can, at least, hold them accountable.

Where does the illness of governance lie? Why don't employees of the central, state, and local governments do their jobs?   In the Far East, for example, citizens get far better service. Is it because we protect labour excessively in India, to the point that they no longer feel accountable? This was my experience in the private sector, at least--our labour laws have taken away accountability and diminished our companies' competitiveness. Thus, you may have to tackle labour laws despite your partners.  

If you buy my argument about governance then your focus will shift from policy to implementation. Hold your finance minister accountable for the behaviour of income tax officers, excise and custom inspectors. Judge you home minister, for example, for eliminating harassment of honest NGOs who get foreign donations. Reward your economic ministers for eliminating red tape--foreign investors repeatedly tell us that they prefer China over India because of our red tape. In the end, even if you make a small but perceivable difference, you will break the “anti-incumbency factor”, which is a code word for poor governance. If you do not, then you will be asking for the return of the BJP in 2009.