7
The Hindu Rate of Growth, and Other Agnostic Legacies
For most of the five decades since independence, India has pursued an economic policy of subsidizing unproductivity, regulating stagnation, and distributing poverty. We called this socialism.
The moment of truth about Indian economic policy — the moment when even its guardians had to accept that the old ways had not worked and could be sustained no longer — came in early 1991 when a large part of the nation’s gold reserves had to be flown out to London as collateral for a $2.2-billion emergency IMF loan. Without the loan, India would have had to default on its international debt, and the economy would, for all practical purposes, have collapsed.
The country’s foreign exchange reserves, which stood at just under a billion dollars in January 1991, would have covered just two weeks of imports; the Gulf War increased India’s oil bills at precisely the time that Indian workers were fleeing the area and depriving Indian banks of their remittances. This left the government no choice but to raise money to service its debts — against the country’s gold reserves.
One cannot imagine a greater psychological shock to the average Indian. We have, for millennia, placed our trust in gold as the ultimate security. In Indian culture, the woman of the house — the embodiment of the family’s honor — treasures her gold jewelry both as her soundest asset and as the symbol of her status. The notion that the country was, in effect, pawning its collective jewelry abroad in order to keep paying the rent sent shock waves through the polity.
Experts had long said it would take a real crisis to crystallize the growing impetus for economic reform. The gold crisis did it. This event — more than any abstract figures in budgetary calculations — drove home the indispensability of serious change in economic policy. Things simply couldn’t go on as they had.
The road to disaster was, as usual, paved with good, even noble, intentions. In 1954, Prime Minister Nehru, moved by the desperate plight of the Indian masses, got the Congress Party to agree to work toward the creation of a “socialist pattern of society.” Within a year his principal economic adviser, the Strangelovian P. C. Mahalanobis, came up with the Second Five-Year Plan. This enshrined industrial self-sufficiency as the goal, to be attained by a state-controlled public sector that would dominate the “commanding heights” of the economy. This public sector would be financed by higher income, wealth, and sales taxes on India’s citizenry. India would industrialize, Indians would pay for it, and the Indian government would run the show.
The logic behind this approach, and for the dominance of the public sector, was a compound of nationalism and idealism: the conviction that items vital for the economic well-being of Indians must remain in Indian hands — not the hands of Indians seeking to profit from such activity, but the disinterested hands of the state, that father-and-mother to all Indians. It was sustained by the assumption that the public sector was a good in itself; that, even if it was not efficient or productive or competitive, it employed large numbers of Indians, gave them a stake in worshiping at Nehru’s “new temples of modern India,” and kept the country free from the depredations of profit-oriented capitalists who would enslave the country in the process of selling it what it needed. In this kind of thinking, performance was not a relevant criterion for judging the utility of the public sector: its inefficiencies were masked by generous subsidies from the national exchequer, and a combination of vested interests — socialist ideologues, bureaucratic management, self-protective trade unions, and captive markets — kept it beyond political criticism.
But since the public sector was involved in economic activity, it was difficult for it to be entirely exempt from economic yardsticks. Yet, in 1992-93, of the 237 public-sector companies in existence, 104 had losses, amounting to some 40 billion rupees of the Indian taxpayers’ money. (Most of the remaining 133 companies made only a marginal profit. The figures have undoubtedly worsened: according to a report in Time magazine in March 1996, the country’s public-sector electric utilities alone lost $2.2 billion in the preceding twelve months, or 70 billion rupees a year. Other public-sector industries that experienced losses were not far behind.) Several of the state-owned companies are kept running merely to provide jobs — or, less positively, to prevent the “social costs” (job losses, poverty, political fallout) that would result from closing them down. In 1994, one British journalist, Stefan Wagstyl of the Financial Times, reported in disbelief from the government-owned Hindustan Fertilizer factory in Haldia, West Bengal, which employs 1,550 workmen but has produced no fertilizer since it was set up at a cost of $1.2 billion (and after seven years of construction) in 1986:
There is a canteen, a personnel department, and an accounts department. There are promotions, job changes, pay rises, audits, and in-house trade unions. Engineers, electricians, plumbers and painters maintain the equipment with a care that is almost surreal. . . .
In a series of newspaper articles a decade earlier, right-of-center congressman Vasant Sathe had pointed out that the public-sector steel industry in India employed ten times as many people to produce half as much steel as the South Koreans (according to 1986 figures not yet available to Sathe, the facts were even worse: the Steel Authority of India paid 247,000 people to produce some 6 million tons of finished steel, whereas 10,000 South Korean workers employed by the Pohan Steel Company produced 14 million tons that same year). The homegrown product that emerged from this labor-intensive process was uneconomically expensive: India’s finished steel cost $650 a ton, so it found few buyers abroad, since world prices were between $500 and $550 a ton. Ironically, India’s raw material — iron ore — was cheap enough to be imported by foreign steel manufacturers, who used Indian iron ore to manufacture their own finished steel cheaper than India could. Sathe pointed out that if India had been able to make steel efficiently to world standards and at the world price, it would be earning four thousand rupees a ton in profit from exporting finished steel, whereas it was now exporting iron ore and making just seventy-five rupees a ton. This was, ironically, what had happened under colonialism — India being used as a source of raw material by countries that did their own manufacturing abroad. Now the same thing was being done in a spirit of anticolonialism: we were doing it to ourselves.
Sathe was an influential political figure and such views were increasingly common among thinking Indians, but governmental attitudes were slow to change. The rooting of economic policy in political atavism made change difficult; wary of opening the economy to foreign business for fear of repeating the experience of the East India Company, whose merchants had become rulers, India relied on economic self-sufficiency as the only possible guarantee of political independence. The result was extreme protectionism, high tariff barriers (import duties of 350 percent were not uncommon, and the top rate as recently as 1991 was 300 percent), severe restrictions on the entry of foreign goods, capital, and technology, and great pride in the manufacture within India of goods that were obsolete, inefficient, and shoddy but recognizably Indian (like the clunky Ambassador automobile, a revamped 1948 Morris Oxford produced by a Birla quasi-monopoly, which had a steering mechanism with the subtlety of an oxcart, guzzled gas like a sheik, and shook like a guzzler, and yet enjoyed waiting lists of several years at all the dealers till well into the 1980s).
The mantra of self-sufficiency might have made some sense if, behind these protectionist walls, Indian business had been encouraged to thrive. Despite the difficulties placed in their way by the British Raj, Indian corporate houses like those of the Birlas, Tatas, and Kirloskars had built impressive business establishments by the time of independence, and could conceivably have taken on the world. Instead they found themselves being hobbled by regulations and restrictions, inspired by socialist mistrust of the profit motive, on every conceivable aspect of economic activity: whether they could invest in a new product or a new capacity; where they could invest; how many people they could hire, whether they could fire them; what sort of new product lines they could develop; whether they could import any raw materials; where they could sell what, and for how much. Initiative was stifled, government permission was mandatory before any expansion or diversification, and a mind-boggling array of permits and licenses was required before the slightest new undertaking. And if a business employing more than a hundred people failed, it could not be closed without government permission, which was usually not forthcoming.
“What’s your father doing these days ?” I asked a Calcutta friend whose family had moved to Delhi in 1971. “Oh, he’s very busy,” replied the friend. “His job is to figure out ways by which his company can invest its profits at home without falling afoul of the various rules and regulations of the government preventing private-sector companies from expanding.” That such a job existed in a country that was crying out for productive investment was horrifying enough, but worse was the fact that the government justified its restrictions in the name of socialism, as if socialism had nothing to do with the members of society who could have gained productive employment and food in their bellies from the investments the capitalists were not allowed to make. It is sadly impossible to quantify the economic losses inflicted on India over four decades of entrepreneurs frittering away their energies in queuing for licenses rather than manufacturing products, paying bribes instead of hiring workers, wooing politicians instead of understanding consumers, “getting things done” through bureaucrats rather than doing things for themselves.
The patriarch of the Kirloskar family, not without bitterness, compared his situation with that of Japan’s Toyota. In 1947 S. L. Kirloskar, despite the obstacles thrown in his way by the British Raj, was already a manufacturer of some consequence, with a couple of factories, using imported machinery, and a market whose potential seemed limitless. According to Kirloskar, Kiichiro Toyoda, at that time, ran a Ford dealership in Tokyo. Within three decades Toyota had become one of the world’s largest and commercially most successful automobile makers, with a brand name recognized around the world, while Kirloskar, struggling to grow under the stifling constraints imposed upon his like by the Indian government, had held his place as one of India’s leading industrialists but had no claim to being mentioned in the same breath as his Japanese contemporary. Toyota had been helped, encouraged, and abetted by the government of Japan and its Ministry of International Trade and Industry; Kirloskar had had to fight his government all the way to expand. Ironically, Mahatma Gandhi’s links with Indian businessmen during the nationalist movement suggest that a similar partnership between business and government, as in Japan, could have been possible, indeed might have been encouraged by a Vallabhbhai Patel (the pragmatic deputy prime minister who died within three years of independence). Nehru, who regarded capitalists with distaste and admired the great achievements of the socialist Soviet state, headed in another direction, and Mr. Kirloskar and his ilk had to run hard to stay in the same place. In an ironic footnote to the story, Kirloskar’s heirs announced in August 1996 that they would participate in a joint venture to manufacture a subcompact car in India; their partner in the venture was Toyota.
Regulations and socialist-inspired restrictions on capital were only part of the problem. India taxed its businesses into starvation, and its citizens into submission; at one point the cumulative taxes on some Indians totaled more than 100 percent of their income. Taxation was meant to finance government overspending, but its yield — especially as extortionate rates drove more and more individuals and companies into tax evasion — could not keep pace with the voraciousness of the government’s appetite. When it could not tax any more, the government borrowed money, piling up higher and higher deficits. Concomitantly, it tried to control more and more of the economy. Prime Minister Indira Gandhi nationalized the country’s banks and insurance companies in 1969, and briefly even tried to take over the wholesale trade in food grains (though this proved disastrous and was quickly shelved).
Bank nationalization achieved the political objective of burnishing Mrs. Gandhi’s socialist credentials and giving the government a ready source of money for essentially political purposes, with few questions asked; but it failed to fulfill either of the objectives it was ostensibly about, namely to serve the Indian masses better and to channel their savings efficiently into socially productive investments. Instead the government obliged the nationalized banks to make bad loan after bad loan to “priority sectors” designated for political purposes, reducing most nationalized banks to near insolvency, while basic services were provided in a manner that would be unacceptable anywhere in the democratic world.
The Janata Party government that briefly replaced Mrs. Gandhi between 1977 and 1980 proved no better, mainly because their dominant ethos was a combination of the Congress’s Nehruvian old guard and the fiery (if wholly impractical) idealism of the former Socialist Party. Janata rule saw no changes in the basic patterns of the Indian economy, and was best known for the departures from India of IBM and Coca-Cola (the latter because the government insisted that the company reveal its secret formula). Heedless of the signal these exits sent to the rest of the world — whose brief hopes that a change of government might have led to a more welcoming investment climate were poured down the same drain as the Coke — the Janata ministers chose to celebrate the departures of these multinational corporations as a further triumph for socialism and anti-imperialist self-reliance. (One good thing, though, about the departure of Coca-Cola was the development of two competing Indian brands, Thumbs Up and Campa-Cola. I am not alone in believing that both were better than the “Real Thing,” and when Coke returned to the country in 1995, it bought the Thumbs Up brand and kept it going for a loyal and discriminating Indian clientele.)
The combination of internal controls and international protectionism gave India a distorted economy, underproductive and grossly inefficient, making too few goods, of too low a quality, at too high a price. The resultant stagnation led to snide comments about what Indian economist Raj Krishna called the “Hindu rate of growth,” which averaged some 3.5 percent in the first three decades after independence (or, to be more exact, between 1950 and 1980) when other countries in Southeast Asia were growing at 8 to 15 percent or even more. Exports of manufactured goods grew at an annual rate of 0.1 percent until 1985; India’s share of world trade fell by four-fifths. Per capita income, with a burgeoning population and a modest increase in GDP, anchored India firmly to the bottom third of the world rankings. The public sector, however, grew in size though not in production, to become the largest in the world outside the Communist bloc.
Some economists argued that by protecting public-sector industry, the government actually damaged rural India, since the Mahalanobis plans completely neglected the agricultural sector, and the higher cost of manufactured goods in effect reduced the purchasing power of agricultural incomes. But these sins were compounded by a policy of generous subsidies to farmers, and an exemption from taxation on agricultural incomes, that gave the country’s agrarian elites the same sort of vested interest in economic policy as the public-sector workers whose jobs would disappear if common sense dawned on the government. Meanwhile, income disparities persisted, the poor remained mired in a poverty all the more wretched for the lack of means of escape from it in a controlled economy, the public sector sat entrenched on the “commanding heights” and looked down upon the toiling, overtaxed middle class, and only bureaucrats, politicians, and a small elite of protected businessmen flourished from the management of scarcity.
As handouts drained the budget and restrictions hampered growth, there was an almost culpable lack of attention to the country’s infrastructure (with the solitary exception of the railways, whose development has been a rare triumph). The country’s overcongested roads, ports, bridges, and canals have fallen into disrepair, and few have been upgraded beyond the standards of the 1940s; goods sit (and sometimes rust or rot) at the docks because the harbors can no longer cope with the volume of cargo they need to handle; irrigation and power generation have made little or no progress (and power has actually taken several steps back, as demand has long since outstripped capacity, and ubiquitous power cuts have made the euphemism “load-shedding” a familiar cliche.) Communications was the worst of the list; the woeful state of India’s telephones right up to the 1990s, with only 8 million connections and a further 20 million on waiting lists, would have been a joke if it wasn’t also a tragedy — and a man-made one at that. The government’s indifferent attitude to the need to improve India’s communications infrastructure was epitomized by Prime Minister Indira Gandhi’s communications minister, C. M. Stephen, who declared in Parliament, in response to questions decrying the rampant telephone breakdowns in the country, that telephones were a luxury, not a right, and that any Indian who was not satisfied with his telephone service could return his phone — since there was an eight-year waiting list of people seeking this supposedly inadequate product.
Mr. Stephen’s statement captured perfectly everything that was wrong about the government’s attitude. It was ignorant (he clearly had no idea of the colossal socioeconomic losses caused by poor communications), wrong-headed (he saw a practical problem only as an opportunity to score a political point), unconstructive (responding to complaints by seeking a solution apparently did not occur to him), self-righteous (the socialist cant about telephones being a luxury, not a right), complacent (taking pride in a waiting list the existence of which should have been a source of shame, since it pointed to the poor performance of his own ministry in putting up telephone lines and manufacturing equipment), unresponsive (feeling no obligation to provide a service in return for the patience, and the fees, of the country’s telephone subscribers), and insulting (asking long-suffering telephone subscribers to return their instruments instead of doing something about their complaints). It was altogether typical of an approach to governance in the economic arena that assumed that the government knew what was good for the country, felt no obligation to prove it by actual performance, and didn’t, in any case, care what anyone else thought.
This is not merely a gratuitous attack on one minister, who was by no means the worst of his breed. Rather, it is intended to raise the question of attitude as an issue in itself, in understanding India’s disastrous persistence in an economic policy that was misconceived from the start and had clearly outlived its usefulness by the mid-1960s. The governmental attitudes of a C. M. Stephen underlay an approach that shackled the creative energies of the Indian people. One of the commonly asked questions of the 1970s and 1980s was how it was that India plodded along under its “Hindu rate of growth” when Indians thrived so spectacularly wherever they were given a chance abroad. The astonishing successes of the “Non-Resident Indians” or NRIs — the émigrés who, arriving penniless, soon broke into the ranks of the millionaires in Britain, and constituted the ethnic group with the highest per capita income in the United States — point to the Indian capacity for enterprise and hard work, a capacity that was stunted and frustrated at home, but flourished under systems that rewarded effort. Of course, some would argue that, merely by virtue of their expatriation, India’s NRIs were already more ambitious and hardworking than their compatriots back home, but I have seen too much evidence of toil and striving being obstructed or unrewarded in India to accept that argument. The only real difference between Indians in India and Indians abroad is that abroad their energies are not extinguished by the system. Instead they are tangibly rewarded. Once, after a particularly nationalistic column in an Indian magazine in which I poured contempt on the India-bashing of ignorant NRIs, I received a flurry of letters from Indian emigrants. One that particularly moved me contained the painfully honest words of a Mr. Bal Krishan Sood of Ilford, Essex:
Over 90 per cent of us left India with “third division” matriculation [a barely passing grade] and no training whatsoever in any profession. When we arrived in other countries we could not find the other people around us, whether it was Europe or America, any better than us, yet [they were] living a better, cleaner and happier life than us in India. . . . We observe that we Indians outside, within a reasonable period, find ourselves owning a house, a car and many other luxuries of life, whereas the likes of us in India are left to live without ordinary necessities and amenities. And we on our visits fail to find a better life for those who were far better educated and trained [than us]. We ask, why? Do you know, why?
Another, equally pointed, was from a clerk in Bristol: “In India I worked hard, did overtime, lived honestly and could not make ends meet. Here, with much less effort, I have a good salary, a car and a house and my children have a future to look forward to. And I do not have to ask anyone for favors or pay any bribes. How do you expect me not to be angry when I think of India?”
This was a healthy anger, the anger of one who knew it did not have to be that way. Senator Daniel Patrick Moynihan, known for his outspoken candor when he was the U.S. ambassador in New Delhi in the mid-1970s, used to enjoy comparing the port cities of Singapore, Rangoon, and Calcutta. In the late 1940s they were much alike: bustling, thriving ports, with the usual Third World combination of prosperity, poverty, and political agitation. By the 1970s, Singapore was a gleaming, modern city, the second largest port in the world, a haven of social peace and economic development; Calcutta was rundown, the port corrupt and failing, the city paralyzed by political violence,’ the homeless begging in the streets; and Rangoon was a forgotten, isolated backwater. I assume Moynihan’s point was to compare economic systems and choices, not political ones. But though his image is evocative comparisons of India with countries like Singapore, Taiwan, and South’ Korea are, on the face of it, invidious. There are obvious differences in the scale of the problems confronted, the size of the population, and the political systems adopted (autocracy drove economic growth in all three cases, but at a price that pluralist India could not pay). Nonetheless, Indians should not deflect the comparison. Our problems may have been larger in scale, but large problems could have been tackled as aggregates of small problems (by greater decentralization of economic decision-making to the states, for instance); and in any case, countries like Malaysia and Indonesia also grappled with comparable problems of overpopulation, ethnic diversity, and political conflict, while managing to spur economic growth. And Malaysia, in particular, did so with a democratic political system not significantly different from that which India enjoyed during the decades of Congress Party dominance. There is no getting away from the conclusion that the main difference with all these countries is not size, scale, or system, but substance — the substance of the economic policy that we chose, or that our elected rulers chose for us, self-righteously convinced that they were right.
Even Rajiv Gandhi, the first (and so far only) prime minister from the generation that grew up frustrated by, and impatient with, the sclerotic socialism practiced in India, did little to tinker with the economic system. In 1985 he introduced a “new economic policy,” which (rather like the Holy Roman Empire) was neither new nor economic nor a policy; it amounted to little more than a relaxation of the old license-permit-quota regulatory system, without actually abolishing it. The regulations themselves remained largely untouched; their philosophical underpinnings were not contested; the rules were just as oppressive, but a larger number of exceptions were now permitted to them. This had the effect, simply, of enhancing the discretionary powers of the government, so that its stranglehold on the economy actually grew while it was able to point to the changes as evidence of reform. Aside from a minor boom in consumer goods (a pale parallel of what was occurring in the Western world at the same time), the Rajiv years left India’s fundamental economic problems essentially unaltered.
So, for most of its existence, the government of independent India was proudly self-sufficient, independent of the dominance of world capital, rhetorically devoted to using the state to better the lot of the poor, and politically disinclined to debate the self-evident virtue of these propositions. By mid-1991, it was also virtually broke.
Back, then, to the national humiliation of the pawning of the gold reserves, which occurred just before the General Elections of 1991, the elections in which the assassination of Rajiv Gandhi swung enough sympathy votes to the Congress to permit it to form a minority government. As the election results were streaming in, inflation was galloping at 14 percent (unofficial estimates placed it higher), the rupee was trading in the black market at 25 percent lower than its official rate, foreign exchange reserves had dwindled to nothing, and India had become yet another debt-ridden developing country, the third-largest debtor in fact, its dues of $71 billion exceeded only by those Latin American paragons, Brazil and Mexico. (The internal debt was just as bad: interest payments on the government’s borrowings within the country stood at 20 percent of the government’s budget.) India’s four-decade-old economic policy had never looked more thoroughly discredited. It was clearly time to let sweeping dogmas die.
In a symbol of his departure from politics as usual (and from the usual politicians), the new Congress prime minister, P. V. Narasimha Rao, appointed a nonpolitical figure, the economist Manmohan Singh, as his finance minister. Together they embarked on an immediate series of dramatic reforms. Gone was the old phobia about external capital: foreign investment was now permitted in thirty-four major areas from which non-Indian capital had been excluded in the past (ranging from food processing to power generation); the private sector was allowed entry into areas hitherto reserved for the state, such as aviation and roadbuilding; foreign investors were granted the right to acquire majority shareholdings in Indian companies; tariffs were slashed (in phases, down from 300 percent in 1991 to 50 percent by 1995) and external competition welcomed; and the rupee was made convertible on the trade account. Strikingly, there followed the dramatic devaluation of the rupee by 22 percent, in defiance of the conventional political wisdom; a 5 percent devaluation in 1967 had almost brought the government down, but now everyone seemed to accept there was no choice. In place of the old mantra of self-sufficiency, India was to become more closely integrated into the world economic system.
The immediate impact of the Rao-Singh reforms was positive. Capital began to flow in from abroad, into productive investments as well as into the stock exchanges, some $4 billion in the first four years of the reforms. The list of areas into which it was welcomed lengthened, to cover power, telecommunications, and even that bugbear of the economic nationalists, oil exploration. The foreign exchange reserves rose from $ 1 billion to $20 billion in two years (and somewhat more slowly to $22 billion in mid-1996). The budget deficit was reduced, as were tariffs; quotas were eliminated or liberalized. If my Calcutta friend’s father hadn’t already retired he might have lost his job, because the restrictions on private-sector expansion were quickly dissolved.
Despite this, overall growth was relatively slow, and not generally better than in the pre-liberalization 1980s. (With the population still increasing by about 2 percent a year, per capita growth is decidedly unimpressive.) Yet there were a number of individual success stories, like that of the Madras automotive components manufacturers Sundram Fasteners, who took advantage of both the lifting of restrictions on the import of machinery and the devaluation of the rupee to become the principal maker and supplier of General Motors radiator caps around the world. General Electric, whose total investments in India now exceed $300 million, meets a third of its worldwide software manufacturing requirements from its Indian operations.
The figures are impressive. In 1995 industrial production rose by nearly 11 percent, and some 7.2 million new jobs were created, a 50 percent improvement on the average annual rate of increase in the 1980s. Direct foreign investment in 1996 was expected to reach $2 billion (more than the grand total of all foreign capital invested in India between 1947 and 1991, which added up to $1.5 billion); in addition, foreign institutional investments in Indian portfolios rose to over $5 billion. Exports rose by 21 percent (April 1995-February 1996), and the gross domestic product grew 6.2 percent, five times more than it had done in that seminal year of 1991. In its annual economic survey in 1996, the Finance Ministry was able to claim “strong economic growth, rapid expansion of productive employment, a reduction of poverty, a substantial boom in exports, and a marked decline in inflation.” Overall, however, the growth rate was half that of China (and foreign investment only a fraction of that country’s), the export figures lower than Malaysia’s, the job creation statistics not as good as in Indonesia. India had not yet joined the ranks of the Asian Tigers.
And, inevitably in a highly politicized society, the economic reforms raised vociferous, and sometimes thoughtful, objections across the country The first major revolt was that of the workers in the public sector, who for the preceding four decades had been all but unfireable. The days of overmanning and underproductivity seemed numbered, and from their point of view that was not necessarily a good thing. More surprisingly, many Indian capitalists were also anxious about the impact of liberalization on their well-being; after decades of sheltering behind high tariffs, generous subsidies, and secure licenses, several got together to complain that foreign capital would drive them out of business. (A sophisticated variation of this argument came from the director of the Confederation of Indian Industry, a business lobby group, in a startling attack in April 1996 on the role of multinational corporations in India. He accused them of not being committed to India in the long term, of not bringing in state-of-the-art technology, and of an overreliance on imported components rather than Indian-made ones.) And then there were the vast numbers of Indians, particularly in the rural areas, who were largely untouched by the changes and saw little benefit in them — but who could be swayed by rhetoric declaiming that the government was providing Pepsi-Cola for the rich while it had failed to provide drinking water for the poor. The two were hardly incompatible, but the Indian voter might not see it that way.
Politically, Prime Minister Rao took care not to seem to go too far, too fast. Before announcing any new reform in the contentious areas of taxation, financial services, and the public sector, he appointed committees to explore each issue and to make recommendations; though these were not far removed from the prescriptions of the World Bank and the International Monetary Fund, they emerged from an Indian body as recommendations debated and agreed by Indians. The prime minister was also highly sensitive to the impact of reform on India’s voters; his instincts were driven by politics, not economics. Ever since the “delinking” in 1971 of state assembly polls from those to the national Parliament, some state or the other is constantly going to the polls and Indian governments face, in effect, constant judgments at the tribunal of public opinion. Rao felt that an electoral setback even in one state could be interpreted as a verdict against the economic reforms nationwide; he therefore downplayed them as much as possible, and avoided making reforms that might have been politically costly in the short term, such as laying off public-sector workers, privatizing or closing down inefficient factories, reducing subsidies, or taxing agricultural income. Despite this, when electoral defeats came in states like Karnataka and Andhra Pradesh, political stalwarts were quick to ascribe them to the reforms, alleging that the masses at large had derived no benefit from them.
This is all the more ironic because a chronic problem of the Indian economy remains the desire of Indian governments, whether in New Delhi or in the states, to spend more than they earn, mainly on keeping alive inefficient state-sector industries and in subsidies to farmers (who remain untaxed). Deficit financing had become a routine method of running the government before the reforms; bringing the annual deficit down was supposed to be one of the objectives of the new economic policies. After a couple of austere budgets that were aimed at having that effect, Rao and Singh abandoned the objective, and deficits rose again (In early 1996 they stood at 10.5 percent of the gross domestic product, no better than in 1991.) This in turn meant higher interest payments on the borrowed money: interest on India’s public debt consumes some 47 percent of all the government’s revenues. Farmers were paid higher prices for their crops than market conditions would justify, especially given the availability of a large buffer stock of food grains (28 million tons in mid-1996). Public-sector companies running at a loss were kept running at an even greater loss. The government has been unable to break out of the vicious circle of overexpenditure, leading to high deficits, which require higher interest rates and prevent lower taxes.
No government responsive to public opinion, and accountable to the mass of voters at the polls, can easily break out of this vicious circle. The reforms for which Prime Minister Rao receives full marks — those that liberalized the regimes governing industry, investment regulation, and trade and exchange rates — arguably hurt only overprotected businessmen and their corrupt partners in the bureaucracy, and so were not politically risky to undertake. Cutting off life support to the public sector and ending agricultural subsidies are another matter altogether. On issues like privatizing the nationalized banks —whose workers, entrenched in their ways, would resist and could bring the economy to a standstill — or taking on the public-sector unions, the government gingerly felt its way forward, came up against bumps in the road, and hastily reversed course.
There is no doubt that economic reform faces serious political obstacles in democratic India. Resources have to be generated, investment privileged above consumption, higher prices paid for many goods, sacrifices endured in the hope of later rewards, and all this while some segments of society reap the immediate benefits. In India the combination of liberalization and inflation has meant that a small group of businessmen and merchants, and their less savory cousins the hoarders, blackmarketeers, and speculators, have visibly profited while the woman in the street has found she can no longer afford her favorite foods at the bazaar. As one trenchant critic, Sundeep Waslekar, put it:
[A] few million urbanites, white collar workers, trade union leaders, large farmers, blackmarketeers, politicians, police officers, journalists, scholars, stockbrokers, bureaucrats, exporters and tourists can now drink Coke, watch Sony television, operate Hewlett Packard personal computers, drive Suzukis and use Parisian perfumes, while the rest of the people live in anguish.
The social consequences of exclusion — of the growth of feelings of deprivation on the part of those newly unable to share in the conspicuous consumption of imported or foreign-brand-name goods — have yet to be measured, but no government can afford to be unaware of them. A former member of the country’s Planning Commission, L. C. Jain, declared in August 1996 that liberalization had not yet helped the 88 percent of the economy that lay in the “unorganized sector.” At the same time, the threat to the public sector makes politically powerful enemies of the large and well-organized labor unions attached to the country’s leading political parties; the competition engendered by foreign investment hurts some protected Indian capitalists who have previously bankrolled the ruling party; the deregulation of interest rates removes one of the few advantages that small businessmen had over big industry (in 1994, 2.8 million “small-scale enterprises” launched a noncooperation movement against the government); the shift to market pricing for agricultural procurement (if it ever happens) would end major subsidies to farmers; and so on. It is easy to see that various segments of Indian society would have reason to be apprehensive of, and sometimes downright hostile to, the process of economic reforms.
Prime Minister Rao’s strategy was to take all this into account, and to undertake only those reforms that would be politically acceptable to the public at large: as The Economist put it, he appears to have “reckoned that shock therapy would create losers straightaway, while creating winners only in the medium turn, and decided to leave some reforms to later, when winners had emerged.” As a result, for instance, while deregulating the economy, Rao and Singh were careful to control the administered prices of essential commodities, notably oil and petroleum products, in order to avoid hurting the ordinary voter and provoking inflation. This cautious approach has had its critics, notably among foreign economists, but it had the merit of avoiding the massive job losses, inflation, and human suffering that came to be associated with the early stages of economic liberalization in many countries in Africa and Latin America.
It is an approach that has been understood with greater sympathy by governments in the West than by international business. Former Clinton Administration official Jeffrey Garten recalled a visit to India with the late U.S. commerce secretary Ron Brown:
[When he met Prime Minister Narasimha Rao,] Brown had a thick briefing book filled with all the usual American trade and investment complaints. But from the moment the two men finished shaking hands, it was clear that Rao wanted to talk about something else. “Mr. Secretary,” he said, “tell me what I should say to millions of countrymen who experience no discernible benefit from all the painful economic reforms we have undertaken these past few years, and who are convinced that they are being hurt as we remove subsidies and let in foreign competition.” Later in the trip, Brown addressed a group of students in a town hall meeting. . . . Almost all the questions were variants of what the prime minister had asked.
Brown understood that there were no easy answers; Rao knew that the mere questions carried a political price. There is also the larger philosophical question — particularly relevant in a country that got used to calling itself “socialist” (a term Prime Minister Indira Gandhi even wrote into the Constitution in 1976) — about distributive justice. Whenever economic growth has occurred, it has benefited some more than others. The fabled “Green Revolution,” for instance, when miracle seeds transformed the harvests in India’s agrarian northwest, was of course good for the country as a whole (it produced more food generally, and better yields for most farmers). But it helped Punjab more than other states, helped wheat farmers more than rice farmers, helped those with larger holdings more than those with smaller ones (ironically, where land reform had been effective and large holdings broken up, the economic benefits of the Green Revolution were reduced), and helped those in areas of better infrastructure (especially cheap water and electricity) above those reliant on traditional methods of farming. Yet there was no political backlash to the Green Revolution; farmers everywhere in India have sought to emulate their Punjabi compatriots, and agricultural extension officers in villages across the country find receptive audiences for their seeds, fertilizer, and pesticides, as well as for the technical advice that goes with them. What economic liberalization needs, if it is to succeed, is something similar: a general acceptance that the reforms are for the general good, that they might seem to help some more than others, but that in the long run everyone will benefit from them. Such an attitude is far from being realized.
Instead, Indian democracy is the arena for a brand of populist politics rarely practiced with comparable chutzpah elsewhere. A striking example of this came in the Andhra Pradesh state elections of November 1994. These were politically crucial for Prime Minister Rao, since Andhra is his home state; but he was facing a comeback attempt by the film star (and former chief minister) N. T. Rama Rao (no relation), whose principal campaign promise was that his Telugu Desam Party would offer rice to poor Andhraites for two rupees a kilo (about three U.S. cents a pound). Combined with pledges to increase the subsidy on electricity for farmers and to give up liquor-tax revenues by introducing prohibition (a major vote-winner with women voters in many Indian states, since Indian peasants have a not-undeserved reputation for gurgling away their monthly pay packet on drink before their wives get to see any of it), the Telegu Desam’s promises would have done away with 15 percent of the state’s annual revenues, some 15 billion rupees ($440 million). Not to be outdone, the Congress Party all but matched those campaign promises, and made others that were almost equally spendthrift: their plans would have cost the exchequer twelve billion rupees a year. The voters, faced with two alternative programs of fiscal irresponsibility, chose the more irresponsible: they voted for Rama Rao. Not only did the improvident Telugu Desam win handily, but the Congress’s defeat was then promptly interpreted as a vote against Narasimha Rao’s brand of economic reform.
Of course voters will vote for rice at two rupees a kilo if politicians do not explain to them what the other costs of such a giveaway are; but the Andhra elections were a sober reminder to Prime Minister Rao, and to anyone else watching, of the dangerous short-termism that dominates Indian political calculations. The risk of this kind of populist Micawberism is that it could fuel inflation, drive the government to bankruptcy, or both. Parties regularly campaign on pledges to forgive agricultural debt, lower the already highly subsidized costs of water and electricity for farmers, and provide rice (or school meals) to the poor. They have no idea how they are going to pay for their promises, but they make — and even keep — them anyway.
At least for a while. In July 1996 the Telugu Desam government, which had meanwhile become a constituent of the new United Front coalition ruling in Delhi, raised the price of rice from two rupees a kilo to three and a half, quintupled the subsidized electricity rates for farmers, and instituted a new water tax on agriculture. These politically unpopular steps had become unavoidable because the party’s election-winning measures had drained the state’s exchequer. Now it was the Congress opposition’s turn to decry the Andhra Pradesh government’s “anti-people” policies (short-term opportunism knows no political boundaries).
For now, the danger is that economic reforms will be supported only by those who stand to gain immediately and directly from it, which by definition is bound to be only a minority of the nation’s population. Many Indian capitalists who feared foreign competition have made their peace with the devil, entering into foreign collaborations and joint ventures that marry their expertise in local market conditions with the entrepreneurial thrust, high technology, management skills, and brand-name recognition of the international firm. (Sometimes the pact is almost Faustian: after a bitter battle with Pepsi-Cola, in which he deployed every conceivable political argument and tool against the entry of multinationals into the soft-drink business in India, Ramesh Chauhan, owner of India’s largest soft-drink company, sold his business lock, stock, and bottle cap, to Coca-Cola.) The graduates of India’s excellent management schools now command salaries their parents would not have dreamed of; service industries catering to the newly affluent elite have created legions of prosperous restaurateurs, bankers, computer technicians, beer-parlor owners, and clothing and interior designers. But all these add up to a pretty small slice of Indian society, and their votes wouldn’t, to coin a phrase, capture a booth in the polls.
Arrayed against them are the impressive forces of reaction, grouped largely under the banner of economic nationalism. During the years of the Rao government, the right-wing, pro-trader BJP party joined forces with the Communists and socialists to attack the economic reforms on a nativist platform. The slogans of swadeshi self-reliance suited both the right and left parties. Foreign companies, they argued, should not be allowed to make profits by manufacturing goods that Indian companies were already making. Foreign consumer goods, especially such symbols of Western decadence as McDonald’s, Kentucky Fried Chicken, and Coca-Cola, should not be allowed in, they averred, both because they weren’t “needed” by most Indians and because they represented an assault on the values and lifestyle of the nation. Finally, and most potently, they argued that the reforms had also weakened India’s political independence because it had mortgaged the country’s economic policy to the World Bank and the International Monetary Fund — both headquartered, of course, in that arch neo-imperialist city, Washington. (Ironically, the collapse of the Soviet Union and the penury of Cuba has left socialism as a truly authentic Indian ideology, owing no credible allegiance to exemplars abroad.)
The opportunism of these arguments was manifest in that they were being made by opposition parties who had the least reason to be wedded to the license-permit-quota-subsidy-tariff system entrenched by successive Congress governments. But because the government had seen the light, and taken steps that in the short term were bound to be politically unpopular, the opposition parties saw an opportunity to score short-term political points on the cheap, while sounding self-righteously nationalist in the bargain. Ironically, they were in effect lending aid and comfort to the vested interests maintaining the failures and iniquities of the system, including the nexus between bureaucrats, politicians, and businessmen who paid, patronized, and profited from each other’s ability to manipulate the system for personal ends. (Even more ironically, their position enabled a Congress cabinet minister, Manmohan Singh, to attack the policies his own party had pursued for four decades. “Those who oppose foreign consumer goods companies are enemies of Indian consumers,” he told a press conference during the election campaign in May 1996. “They want people to be content with shoddy goods as for the last forty-five years, and only help smugglers to thrive.”)
The problem with economic nationalism of this variety is that it is neither good economics nor true nationalism. Its advocates claim to be speaking for India, and in particular for the Indian poor, but the policies they hark back to reduced India’s standing in the world economy since 1947, and did far less to alleviate poverty or to increase the purchasing power of the poor than the liberal-internationalist economics of, say, Indonesia or Malaysia. The stark reality is that rules and restrictions ostensibly designed to protect the poor in fact protected the prosperous and the influential, whereas an open economy that brought in investment and created productive employment (as South Korea, Taiwan, and later China demonstrated) would have brought more people out of poverty than did the “socialist” economic policies followed before 1991.
A sounder critique of the Rao-Singh reforms, voiced by reasonable left-wing economists (even if that sounds like a contradiction in terms), is that they have not produced the growth they were supposed to, did little to improve the country’s international credit rating, failed to upgrade the technological levels of Indian industry, did not make the huge dents in the unemployment figures that would be their principal social justification, and did not have an immediate discernible impact on the country’s mass poverty. The only answer to such criticism is “give it time,” but Indian politicians, dominated by the expedient and the short-term, and in all too many cases anxious to preserve their deniability should the reforms misfire, have not been saying this with either conviction or consistency.
At the same time the potency of economic nationalism as a force in India should not be underestimated, as became apparent once again in the hue and cry that erupted over the Uruguay round negotiations of the General Agreement on Tariffs and Trade (GATT), which culminated in the establishment of the World Trade Organization (WTO). Indians fearful that free trade would involve surrender to foreign imperialist interests made common cause with protected industries anxious about new patent rules (notably the pharmaceutical industry, which would no longer be able to copy a Western drug by patenting an alternative process of making it — the product itself could not be patented in India) and were supported by idealists dreading the effects of GATT on the common man (for instance, the end of affordable medication for the Indian poor). Of course many of the fears were exaggerated, but the calls for India to pull out of the treaty were genuine, even if ill-informed (and would have been calamitous for the country, since it would have cost India the Most Favored Nation trading status it enjoys with all WTO members).
The politically generated controversy over the “Enron deal,” India’s single largest foreign investment to date, illustrates both the opportunism and futility of economic nationalism in operation. The agreement between the Indian state of Maharashtra and a consortium led by the Houston-based Enron Corporation power company to construct India’s largest power project was signed by a Congress government and therefore bitterly opposed by the Hindu-nationalist Shiv Sena and Bharatiya Janata parties, who decried it as a sellout to Western interests. They argued that Enron had received unduly favorable terms from a government that had obtained kickbacks, while Indian consumers would have to pay extortionate rates for their power. Though these charges were unsupported by any evidence and denied by all concerned, the nationalists promptly abrogated the agreement when they swept into power in the state, inviting a lawsuit from Enron and much headshaking from the international economic community, which began muttering about the unreliability of investing too many eggs in such a volatile political basket. Indian attitudes were hardly encouraging: a critic in the Times of India suggested that “India’s status will be enhanced, not lowered, if it tells the world that it is no pushover, no banana republic ready to accept an atrocious deal.” After much chest- and table-thumping, the agreement was quietly restored, with some largely cosmetic changes to enable the new government to claim it had negotiated a better deal than the old one. In the meantime, precious months, and millions of dollars, were wasted; India’s reputation as the next great place to invest in was severely dented (reports said that, as a direct result of the Enron imbroglio, two American negotiations collapsed, and several other Western companies exploring investments in India pulled out); and much-needed power generation for India’s largest industrial state was needlessly delayed, in a country where work-hours lost because of inadequate power generation remains the biggest single drag on productivity. The subsequent collapse of Enron in the US was, of course, seized upon by the domestic left as vindication of their original hostility to the company, even though it occurred for reasons completely unrelated to the project.
Economic and cultural nationalism combined in the Kentucky Fried Chicken drama, in which the first two Indian outlets of the fast-food chain came under political and physical assault from a coalition of right-wing chauvinists and left-wing farmers. The KFC store in Bangalore, capital of India’s new high-tech software industry (the city and its environs have been dubbed “Silicon Plateau” by ex-Californians), was trashed by a farmers’ mob, which burst in after well-publicized protests and ransacked the premises. Subtler techniques were used in Delhi, where, in response to a legal complaint, the outlet was closed by a magistrate because two flies were found buzzing around the kitchen (many Indians thought an award should be given to KFC for having only two, far below the national average for restaurants). Eventually the police and the courts were needed in both Bangalore and Delhi to overcome such efforts to close the KFC outlets, and both are flourishing, albeit to a limited affluent clientele.
On the face of it the protests are puzzling, because it is not clear whom KFC hurts: they pay Indian poultry farmers good prices for Indian chickens, cook them in India with Indian accompaniments, and employ Indian chefs and waiters. They will also make a very modest dent in the Indian fast-food market (chicken was already the most expensive nonvegetarian fare, and only a tiny minority of Indians will be able to afford KFC’s menu). The hostility to KFC is less, therefore, about real economic damage to Indians than it is about politics. An American fast-food store is, to the likes of the farmers’ leader Nanjundaswamy, a symbol of surrender to forces he fears: foreign penetration of the Indian economy made literal by foreign penetration of the Indian alimentary canal. The enemies of Kentucky Fried Chicken are decrying not their sales but the sellout, by the Indian government, to Western influences. That is the real reason they need to be taken seriously. But not too seriously, for no Indian government wanting to welcome foreign investment can afford to let its economic policy be wrecked by the excesses of a misguided mob.
Political caution and nationalist backlash are not the only impediments to effective economic reform. Bureaucratic inertia and some old-fashioned inefficiency have also played their part in the shambolic process of privatizing India’s telecommunications sector, the lack of guidelines on the privatization of infrastructure (especially roadbuilding and power transmission and distribution), the failure to inject speed into bankruptcy proceedings (three bankruptcy cases recently marked their fiftieth anniversaries in court, a golden jubilee for the law firms concerned, but a disgrace to the legal system), and avoidable delays in clearing new projects for investment. Legal reform, and an Indian equivalent of U.S. vice president Gore’s regulation-slashing program of “reinventing government,” are essential if the reform policy is to succeed.
The new telecommunications saga was worthy of the C. M. Stephen days. The government learned little from its attempts in 1992 to privatize cellular-phone service in four major cities, which had ended in court after controversies over the process for selecting the private operators who would provide the service. In 1995, tenders were issued for privatizing basic telephone service in twenty zones across the country; after the bids were opened, the rules were changed, limiting the number of zones each company could have, and then highly unrealistic minimum price levels were set, which took a number of major firms out of the bidding (in eight of the twenty zones, no bids were received at all). A friend representing a German telecommunications company in Delhi was in despair about the unpredictability and irrationality of the process: decisions about telecoms privatization were being made by officials who, he said, didn’t have a clue either about telecoms or about privatization. Parliament erupted in an uproar about alleged corruption involving the then minister of communications, Sukh Ram; in August 1996, when he was out of office following the Congress Party’s defeat in the elections, the police found a million dollars in Indian rupee notes in two of his residences, and Sukh Ram himself, appropriately enough, went out of communication range by disappearing abroad. Meanwhile, the telephone system remained unreliable and out of date, and more potential investors packed their bags and decided to look elsewhere.
* * *
The United Front government that replaced the Congress in 1996 (after an eleven-day interregnum while the Hindu-oriented BJP party unsuccessfully sought coalition partners) surprised many, given the dominance of the thirteen-party coalition by socialist and other left parties (including two Communist parties), when it did not repudiate the economic reforms. The Congress party had pledged, in Manmohan Singh’s words, to “expand liberalization, involve the private sector in infrastructure development, cut the fiscal deficit, reform the insurance sector and the tax structure, and cut government expenditure,” a program staunchly opposed in the platforms of the parties constituting the United Front. This suggests that the liberalization of economic policy is indeed, as Prime Minister Narasimha Rao used to aver without conviction, irreversible. Indeed, the fact that practically every Indian political party of any consequence has run or is running a state government somewhere has injected a harsh dose of economic realism into the thinking of the national political establishment. In Delhi, their role was to oppose; in the states, their task was to govern. So they all know, from direct experience, that private investment, both domestic and foreign, is essential because both national and state governments are broke and cannot afford to go back to the bad old ways. (Indeed, the hospitability of the Communist state government in West Bengal to foreign private capital is now a byword, though the annual trips of its aging Marxist chief minister, Jyoti Basu, to England and the United States “to promote foreign investment in West Bengal” may have more to do with his wish to escape the heat of the Calcutta summer than the persistence of neo-imperialist interest in his states investment climate.)
Nonetheless, the indications from Finance Minister P. Chidambaram’s carefully balanced first budget are that the economy will be opened only slowly, and that the political costs will be carefully measured in doing so. There were several positive signs that cheered the reformers, including tax cuts (in capital gains, as well as in import and excise duties) aimed at generating economic growth of 7 percent and attracting five times the level of foreign capital than ever before — an estimated $10 billion. If this seemed unduly ambitious, the government struck an encouraging note by clearing $1.7 billion worth of foreign investment proposals just before the budget was declated. Due emphasis was, for the first time, placed on infrastructure development; agriculture and the basic services were also declared to be priorities. But that was the extent of the good news. A new minimum tax on companies previously exempt (a tax largely justified both by the government’s revenue needs and by the fact that legal loopholes had brought corporate taxes as a proportion of pre-tax profits down to a record low of 14 percent in 1995-96 from nearly 30 percent three years earlier) rocked the stock market; a surcharge applied on all imports offset the impact of some tariff cuts and effectively raised the maximum tariff rate to 52 percent when it had been expected to be lowered below 50 percent; and total public-sector borrowing remained above 10 percent of GDP. With new subsidies to state governments, the budget deficit remained high and the treasury seemed likely to have to meet interest payments to the tune of 47 percent of all government revenue (the figure had stood at 39 percent when the last government took office in 1991).
The new national consensus on economic reform is beset with what some see as compromise and hesitation, and others judge as political wisdom: liberalization yes, politically painful dismissals and cuts no. The much-touted “exit policy” of the early reform period — the intention of closing down unprofitable public-sector firms and laying off unproductive personnel — shows no signs of being implemented; the “entry policy” — letting in more foreign investment and increasing imports while lowering tariff barriers — continues, but more warily. Populist subsidies will continue, which means that budget deficits will not be reduced. (The wisecrack about deficits in New Delhi’s political circles is that “any government that lives within its means lacks imagination.”) The real problem with deficits is not the external balance of payments (which, through sensible exchange-rate management and a modicum of fiscal discipline, does not appear likely to become critical in the foreseeable future), but the domestic expenditures arising from internal political constraints. When Mr. Chidambaram briefly suggested that public-sector firms would have to justify their existence by contributing a minimum dividend to the national exchequer, he was forced to back down by howls of protest from his coalition partners.
Indian politicians have not yet accepted that public-sector companies are essentially holding hostage more than half the industrial capital at India’s disposal. Subsidies to public-sector workers come at the expense of India’s poor — they amount to five times what the government spends on health — yet their continuation is sought to be justified in the name of socialism. But one should not underestimate the popular support for the public sector: a public opinion poll in 1996 established that opposition to the privatization of the public sector vastly outstripped support for it among all sections of society. The irony is that where a governmental monopoly has ended, as with the deregulation of India’s domestic airline services, the consumer has tangibly and visibly benefited, in better service, improved availability, and wider choice; yet the lesson is not being applied to other sectors. Divestment is not a word that has enteted the official eco nomic vocabulary, even though the government of India is still engaged in a number of businesses it has no business to be in — from running five-star hotels to manufacturing wristwatches.
At the same time, if the reform policy is not to suffocate from hesitancy, progress is clearly required in a number of areas. Not all the strangulating regulations have been taken off the books: the Companies Act still restricts mergers, takeovers, and intercorporate investments, and there are some fifty laws that apply to the treatment of the workforce and the settlement of labor disputes. Rules on privatization of ailing public-sector units, or of the telecommunications industry, have yet to be issued. Many clearances are still required, and oblige investors to run to more than one regulatory agency. Even though the government has fitfully pursued the privatization of loss-making public-sector industries, the fierce resistance of vested interests has slowed disinvestment to a trickle, and the Congress Government has shut down the Privatization Ministry.
It is odd, too, that tariffs remain on trade in agricultural goods and consumer items — both to protect the domestic producers. (“It defies any economic logic and runs counter to the whole idea of an open internationally competitive economy,” wrote the economists Vijay Joshi and I. M. D. Little recently. “If Mahalanobis had not been a Hindu [and therefore cremated when he died] he would be turning in his grave knowing that soft drinks are more protected than heavy machinery.”) It would make more sense to help, for instance, the domestic handloom industry by subsidizing it directly, rather than restricting cotton exports as an indirect means of protecting the cottage industry in handlooms. It is a measure of the challenge facing India’s reformers that though tariff relief is one of the successes of the new economic policy, the current tariffs, after five years of reductions, are still higher than in all the viable economies of the world. They will have to come down.
As for resource allocation, Indian planners from Nehru on down may have erred, to borrow a metaphor from Indian-American communications wunderkind Satyen “Sam” Pitroda, in putting greater emphasis on the “hardware” (the factories, dams, and steel mills that Nehru called the “new temples” of modern India) than on the operative “software” (education, health, communications). Subsidies to the inefficient private sector amount to five times the national expenditure on health; and the literacy rate of 52 percent stands in stark contrast to Sri Lanka’s 93 percent and China’s 77 percent. The economists Amartya Sen and Jean Dreze have pointed out that it is also far short of the 71 percent South Korea already had when it embarked upon its rise to industrialization in 1960; a literate workforce is far better able to meet the demands of high-technology companies than uneducated and unskilled labor, and the correlation between literacy and productivity needs no explanation. Lester C. Thurow, in his 1996 book The Future of Capitalism, has argued that we live in “an era dominated by man-made brain-power industries,” in which natural resources and financial strength are less important than human skills, “the only source of long-run sustainable competitive advantage.” The software engineers of Bangalore, sitting in offices in India’s Silicon Plateau and beaming their software to Texas and California by satellite, are in the vanguard of a revolution in human skills that could take India ahead of many developing countries in the race to economic well-being in the twenty-first century.
Provided, of course, that resources are allocated to developing such skills. It could be argued that maintaining the world’s third-largest standing army — entirely justified, no doubt, by the state of tensions with two well-armed neighbors, China and Pakistan — has come at the expense of other national developmental priorities. There can, of course, be no development without national security; but without development, the army would have little worth protecting.
The same concern about priorities applies to some national expenditures that seem difficult to justify in purely economic terms. To take a favorite example of some of India’s critics, the 1982 Asian Games in Delhi cost, according to unofficial estimates, 6 to 10 billion rupees; official figures admitted to 3.6 billion rupees, at a time when the national governments total budget receipts were Rs 140 billion (against expenditures of Rs 150 billion, the difference being made up by deficit financing). By way of comparison, the total investment in village development during the same fiscal year stood at Rs 2.7 billion. On the face of it, this seems spendthrift, even feckless; but I am not so sure. I do not wholly subscribe to the defense that the presence of competitors and dignitaries from fifty-two states, with their media and their television cameras, instilled a pride in the nation and in its capital that cannot be quantified; I think that pride was felt by too small a minority of Indians to be worth citing. More important to me were the practical consequences of the lavish expenditure. The Games left the capital with a legacy of development — highway overpasses, stadiums, housing complexes, hotels, restaurants, and roads — that have been of immeasurable value to the city. Yet there is little doubt that the political will, the financial resources, and the sheer energy required to construct these in record time simply would not have been found without the incentive and the deadline that the Games imposed. Sometimes seemingly mistaken priorities, executed in haste for short-term ends, can produce results that far-seeing planners might not have been able to ensure.
The Asian Games improved New Delhi’s infrastructure, but the country’s remains appalling. The infrastructural problems I described earlier are the result both of woefully inadequate investment in such sectors as communications and power generation, and the usual habit of controlling prices artificially for political purposes. The scale of the problem is now such that it is literally beyond the government’s capacity to solve. India needs some 170,000 megawatts of additional powergeneration capacity by the year 2010, a 200 percent increase in current generating capacity; an indication of the cost is that Enron will have to invest over $3 billion to produce just 2,400 megawatts in its newly restored project. India needs to upgrade its congested ports and create new ones along its magnificent coastline, but just meeting existing and foreseeable needs would, according to the Confederation of Indian Industry, cost some $137 billion in new investment over the next five years (and this is essential: port delays and high cargo-handling charges reduce and sometimes eliminate the cost advantage Indian exporters enjoy over their foreign competitors). In communications, it would cost some $150 billion to $175 billion to bring India up to the current developing-country average of six telephones for every hundred people (from its current figure of 0.8 telephones per hundred people); but a growing economy will need to do better than the average developing country, and economist Prem Shankar Jha suggests India will need another 40 million to 50 million telephone connections at a cost of a further $30 billion. (India’s dramatic progress in the manufacture and distribution of cell phones, which now outnumber landlines, has gone some way to addressing the communications challenge.) To improve India’s road system and create a network of highways, current estimates require $35 billion for 14,000 kilometers of roads. The kind of money required to upgrade the country’s infrastructure —Jha puts it at $15 billion a year for the next ten years; Western economists have spoken of $500 billion by the year 2000 — simply cannot be found in the public treasury.
It will therefore have to come from the private sector. The 1996 budget recognizes this, though little has yet been done to frame the rules governing private-sector entry. The government has proceeded in fits and starts in areas like telecommunications, more as a result of ineptitude than of political hesitation; it has to do better, drawing up clear, investor-friendly rules and promulgating them quickly, if the clarion call by Finance Minister Chidambaram is to be heeded by private capital. But there will be a downside: if the private sector comes in, it will charge for its services, so that uneconomically cheap electricity or toll-free roads may no longer be feasible. And while the private sector may well be enthusiastic about building major new highways, it is not much interested in the rural roads government must develop and maintain but has no money for.
Agriculture cannot indefinitely remain exempt from the reform process either, especially considering that much of India’s urban poverty is a direct overflow from rural poverty, as peasants unable to make a living from the land migrate to the sidewalks and shanties of the cities. At the moment farmers are not taxed, and their inputs (power, water, seeds, fertilizer) are uneconomically subsidized; but, equally, the prices of their produce are kept artificially low and farmers are still obliged to sell a fixed portion of their produce to the government at government-established rates. Since the government simply cannot afford to subsidize them forever, it may be worth exploring whether free trade in agricultural produce might not make up for a reduction in (if not an elimination of) subsidies. (The Common Minimum Program, or CMP, agreed upon by the United Front declares that “all controls and regulations that stand in the way of increasing the incomes of farmers will be reviewed immediately and abolished wherever found necessary.” But it is less bold in giving up the subsidies and other benefits farmers have enjoyed for decades.) The nationalized banks are still being obliged to make unviable loans at artificially low interest rates to “priority sectors”; this practice represents yet another subsidy that the government cannot indefinitely afford to keep paying. The continuing habit of writing off agricultural loans wins votes but undermines the rural credit system. (Reforms in the banking and credit sectors require political will, which clearly does not exist now and may take some time to form.)
“No strategy of economic reforms and regeneration,” the CMP declared, “can succeed without sustained and broad-based agricultural development.” In a country where two-thirds of the population still derives its livelihood from agriculture, which is therefore still the single largest sector of the economy, this may seem a self-evident proposition. Agricultural output must grow as part of the country’s overall economic growth, and farmers must feel better off if the reforms are to acquire and retain the support of India’s rural majority. For most farmers, though, the reforms mean little if they do not improve the availability of water and electricity, and reduce the cost of inputs; fertilizer prices, for instance, have tripled over the last three years while the wheat grown with it earns the farmer only 8 percent more. Can the government reduce subsidies on the former and remove price controls on the latter without causing enormous social disruption? On the other hand, can it afford not to?
It is striking how dependent Indian agriculture remains on good monsoons; we have had eight since 1988, the quantity and distribution of rainfall contributing directly to better-than-expected agricultural production. But our luck with the weather cannot last indefinitely; structural reforms to improve per-worker agricultural productivity are essential. These do not necessarily have to be “liberal”; in Communist-ruled West Bengal, land reforms and decentralized development have improved efficiency and generated agricultural growth above the national average, and there may be lessons here for other states. The proportion of India’s Gross Domestic Product derived from agriculture has declined from 55 percent to 30 percent as a result of the economic reforms, but there has not been a parallel decline in the percentage of Indians dependent for their livelihoods on farming. Economist L. C. Jain, a critic of the reforms, has argued that though 70 percent of Indian workers are in agriculture, only 5 percent of the new investment is being channeled to them. Paradoxically, of course, an increase in investment will happen only if the very reforms he opposes succeed.
On the other hand, if economic reforms are to be fully accepted in a country where change has always come slowly, perhaps it is just as well that no sudden shocks are inflicted on the voters. Any Indian government will have to ensure that the short-term negative consequences of liberalization are kept at bay by efficient economic management. Effective measures must include curbing inflation (since price rises are what many tend to see as the most directly visible consequence of economic reform); maintaining adequate and dependable supplies of food and other essentials (including buffer stocks for the inevitable bad monsoon); and guaranteeing that liberalization is not accompanied by short-term catastrophes for the more vulnerable sections of the population, because any Latin American-style disaster for the rural or urban poor and lower middle class would make reform politically impossible for a generation.
Controlling prices is the biggest challenge: the 1996 budget was preceded by a steep 25 percent rise in the price of gas and petro leum products (cut back, following protests, on diesel) and a less steep, but not inconsiderable, increase in railway fares and freight charges. These are costs that hit everybody’s pocket; at least, they hurt everybody who has a pocket. As the inevitable inflationary consequences are predicted, an immediate political clamor has gone up within the ruling coalition for increased subsidies, particularly for the poorest of the poor: Indian politicians congenitally prefer to manage poverty rather than to create a system that enables poor people to break free of their poverty. Full employment is going to be a chimera for a long time, even if population control makes more progress than it has done so far, because the young people entering the job market of the twenty-first century have already been born. According to Mr. Chidambaram, India needs to create 8 million new jobs a year to keep its burgeoning population adequately employed. More must be done to generate revenue, either by increased taxation (on real-estate transactions, on speculative trading, on the incomes of the super-rich, or on undertaxed corporations; the ratio of tax revenues to GDP has fallen by 1 percent in the last five years) or by a more aggressive attempt to soak the underground economy, which by some estimates runs at 30 percent of GDP. When he was finance minister under Rajiv Gandhi, V. P. Singh used a shrewd combination of amnesty, incentives, and enforcement to bring significant sums of undeclared assets into the tax system. Something similar has to be tried again.
Equally important, much more needs to be done to persuade the public at large of the purpose and benefits of the reforms. “While Prime Minister Narasimha Rao speaks nine languages,” commented Time’s Rahul Jacob acidly just before Rao’s electoral defeat, “he has not made a loud enough case in any of them for the liberalization that is his government’s most notable achievement.” The result of this sort of silence is that though the case is known to (and largely accepted by) the country’s political establishment, the general population has not been given any corrective to decades of socialist rhetoric, which continues to be echoed by critics of the reforms alleging that India is being opened up to foreign exploitation and that westerners will profit “on the backs of India’s poor.” When the director of the Davos World Economic Forum told the New Delhi press in October 1996 that “India is becoming a key player in the region and more and more it will become a key player in the world,” she felt obliged to add that “India’s two major weaknesses . . . are that it has no clear agenda and that there is a lack of transparency.” With weaknesses like that, strengths don’t look as strong anymore.
Nonetheless, as Manmohan Singh put it in a 1996 speech, “there has been a sea change in the minds of Indians in the past four years . . . there is a new India in the making.” Indeed, India’s governmental track record for managing change is rather impressive, and its experience in preventing disastrous economic failures has become even better in recent years. In 1987 the monsoon failed and India reeled under one of the worst droughts it had suffered in a century. Two decades earlier, a similar meteorological catastrophe had led to a tragic famine, with the skeletal bodies of women and children littering the parched earth of states like Bihar. Nothing of the sort occurred this time. India had learned its lessons: the government had built up an impressive system of storage and distribution to tide its people through the consequences of the inevitable bad harvest. The Famine That Wasn’t was the great unwritten news story of the 1980s. The same thing happened in 2002. The grim Latur earthquake of 1994 and that of Gujarat in 2001 also witnessed an exemplary and effective response by the authorities. Thanks to the government’s efforts, the Indian people have come to believe they will not be left helpless in the great changes that are slowly sweeping the country. Even if nature or human error bring about setbacks in the progress of economic reform, there is reason to hope that the disaster stories won’t need to be written.
For now, the signs are modestly hopeful that the economic reforms are taking root in Indian minds and hearts. In late 1996 the magazine India Today published the findings of an extensive public opinion poll conducted by the Delhi-based Center for the Study of Developing Societies, together with the Indian Council of Social Science Research; interestingly, the findings were compared with those of a similar poll conducted in 1971. Twenty-five years ago, in response to the question “Are you satisfied with your current financial condition?” 60 percent had replied in the negative, 29 percent were “somewhat satisfied,” and only 11 percent answered with an unqualified yes. Today, 28 percent were satisfied, 42 percent somewhat satisfied, and only 30 percent, half the percentage of 1971, expressed themselves as dissatisfied with their lot. Asked what their expectations were for the future, 48 percent thought their financial condition would improve (up from 39 percent in 1971), 27 percent thought it would remain the same (against 21 percent in 1971), and only 9 percent forecast that they would fare worse (compared with 19 percent in 1971). Here was proof that the reforms have engendered some optimism among the Indian people.
Whatever headway India makes in reforming its economy, however, the biggest enemy of the country’s economic progress — corruption — must be tackled. It is important to stress that the sight of a small minority in positions of privilege conspicuously consuming undeclared assets — even though this is a phenomenon that precedes liberalization — is not a good advertisement for the policy of economic reform; indeed, it is likely to create a sense of alienation from the market among people who feel they are denied access to it. Indian economists have estimated that only 15 percent of governmental expenditure actually reaches the intended target beneficiaries. It is impossible to overstate the importance of eradicating, with all the ruthlessness of the law, governmental corruption if the economic reforms are to succeed, because only people who are convinced that they hold within their own hands the capacity for self-advancement will create the saving and production that the reforms aim to generate. And as long as the ordinary citizen of India believes that only those who know how to cheat and deceive, who have the means to bribe and suborn, and who have bureaucratic access or political clout, can succeed, that faith will never take root in the mass of the population.
It is in this context that the issue of globalization arises; and globalization is, at the risk of sounding tautological, a worldwide phenomenon. Whereas not very long ago, 90 percent of the developing nations — members of the “Group of 77” that went on to comprise over a hundred United Nations member states — ran closed economies, today only Burma (and that, too, not entirely) resists the siren call of the global marketplace. In every country around the world, trade barriers are being lowered, imports and exports increased, foreign capital avidly sought; legal systems are being brought into line with the needs of international business, tax and property laws are being reexamined against foreign standards, and restrictive rules and regulations are being scrapped. More and more economies are being “plugged in” to the global system in what is a self-reinforcing process.
At the same time, as the economic journalist Prem Shankar Jha has pointed out, India has little choice regarding globalization. India needs to export an additional $2 billion to $3 billion worth of goods each year to service the $15 billion of foreign investment it needs in infrastructure; these exports would have to come out of the increased production made possible by infrastructure development. Export orientation requires openness to the global economy. Questioning the economic nationalism of Atal Behari Vajpayee’s BJP, Jha asks, “With a full 65 percent of all global trade being undertaken between various branches and affiliates of multinationals (and a far higher percentage of all trade in sophisticated manufactures), just how far does Mr. Vajpayee think India will be able to go if it does not become part of the net?”
This is not to agree with those advocates of globalization who blithely suggest that we have moved from a world dominated by superpowers to a world dominated by supermarkets (a formulation attributed to The New York Times’s foreign affairs columnist, Thomas L. Friedman). That is a rather Occidental view of the world. Most Indians are still far removed from the supermarket shelves of the American globalizes, groaning under their cheery packages of overprocessed food and offering five Western brands for every imagined need. Though Friedman no doubt meant to include stock markets in his aphorism, it is true that globalization, to its most ardent exegetes, often seems to mean little more than the dominance of Western brand-name consumer products over territories abroad. The archetypal image was spelled out by the British magazine The Economist in a futuristic portrait of China published in early 1996:
In 2006 the better-off Chinese consumer will get up, wash her hair with Procter & Gamble shampoo, brush her teeth with Colgate toothpaste and apply a little Revlon lipstick. As her Toyota grinds to [a] halt in yet another traffic jam, she will light up a Marlboro, glance at a copy of the Chinese edition of Elle magazine on the passenger seat and try to find her Motorola phone to call her secretary. At work she will put down her can of Pepsi by her Compaq computer and load up Windows 06.
The Economist, as an inveterate advocate of liberal competition, was quick to explain that foreign consumer-goods companies would do well because “the quality of their products is usually much higher, and their marketing far more professional, than their local rivals’.” But whatever the reason, this portrait of “Coca-colonization” — of a country so taken over by foreign consumer products that it no longer has any national economic identity to call its own — is not one that any self-respecting Indian wants to see painted of his country. The difference with China, though, is that India already has excellent, affordable equivalents of all these products, some made with foreign collaboration and many not, and for the most part, given the advantages of culture, habit, and cost, these should be able to hold their own against their more expensive foreign competitors. The Economist’s portrait, if rewritten for India today rather than for the China of 2006, might read like this:
The better-off Indian consumer gets up, puts Swastik hair oil on her head, brushes her teeth with Vicco Vajradanti toothpaste (which describes itself as ‘Ayurvedic medicine for teeth and gums” and uses ingredients recommended by the sages for three thousand years) and applies a little Lakmé lipstick. As her Maruti grinds to a halt in yet another traffic jam, she will light up an India Kings, glance at a copy of India Today magazine (or Femina, or Stardust, or Society, or another of the dozens of glossy magazines that offer a relevance no Elle or Cosmopolitan can provide) on the passenger seat. At work she will put down her bottle of Thums Up by her HCL computer; and when she goes to lunch, she will walk past the local Kentucky Fried Chicken oudet and instead stop at her favorite snack bar for a masala dosa.
So what does globalization mean in the Indian contex? Not, I believe, an inundation of foreign goods driving out Indian ones, but principally more choice for a few, and more jobs for the many. As Harvard economist Jeffrey Sachs has suggested, the main reason developing countries have not caught up more rapidly with developed ones is that they were closed to the world economy and therefore to the benefits of increased trade and foreign investment. This was understandable in the postcolonial context, because India’s closed and statist economic policies were principally a political and cultural reaction to imperialism. Indian self-reliance combined a Nehruvian concern for distributive social justice with a profound mistrust of the international economic forces that had enslaved the country for two hundred years; as citizens of a newly independent nation, Indians pursued economic autarchy out of both pride (“We can do it too”) and suspicion (“We cannot rely on others to supply what we need when we need it, so we must make everything ourselves”). Economic self-reliance thus became an axiomatic corollary of independence itself, and became seen as synonymous with it. The most significant proof of India’s maturity as an independent country is the willingness of its leadership to realize, at long last, that economic interdependence is not incompatible with political independence.