The economists are at it again. Doing what they are good at i.e. building castles in the air.
The Prime Minister’s Economic Advisory Council (EAC) headed by Dr C Rangarajan released their review of the economy in 2012/13, yesterday. One of the things that the Council points out in this report is “If we (i.e. India) grow at 8 to 9 % per annum, we will graduate to the level of a middle income country by 2025.It is once again a faster rate of growth which will enable us to meet many of our important socio-economic objectives.”
While 8-9% economic growth is a noble thought, what is the chance of it happening given the current state of affairs in the country? The answer is that the situation doesn’t look very good.
The EAC expects an economic growth of 6.4% in 2013-2014 (the period between April 1, 2013 and March 31, 2014).
Sustained long term economic growth is very rare. As Ruchir Sharma points out in Breakout Nations – In Pursuit of the Next Economic Miracles “Very few nations achieve long-term rapid growth. My own research shows that over the course of any given decade since 1950, only one-third of emerging markets have been able to grow at an annual rate of 5% or more. Less than one-fourth have kept that pace up for two decades, and one tenth for three decades. Just six countries (Malaysia, Singapore, South Korea, Taiwan, Thailand, and Hong Kong) have maintained the rate of growth for four decades, and two (South Korea and Taiwan) have done so for five decades.”
In fact India and China which have been among the fastest growing countries over the last ten years are totally new to this class. “During the 1950s and the 1960s the biggest emerging markets – China and India – were struggling to grow at all. Nations like Iran, Iraq, and Yemen put together long strings of strong growth, but those strings came to a halt with the outbreak of war…In the 1960s, the Philippines, Sri Lanka, and Burma were billed as the next East Asian tigers, only to see their growth falter badly,” writes Sharma.
The point is that economic growth cannot be taken for granted. There is a lot that can go wrong and it does. In the Indian context that is already coming out to be true. The economic growth rate has fallen from 8-9% to the level of around 5% for the year 2012-2013 (the period between April 1, 2012 and March 31,2013). As the EAC report released yesterday points out “In August 2012, the EAC had projected a likely growth rate for the economy of 6.7 %…At the end of the fiscal year (i.e. as on March 31, 2013)…the actual growth rate at around 5% is much lower than what was projected.”
Different countries have followed different formulas for sustained economic growth at different points of time. But one thing that has almost always killed economic growth is the premature construction of a welfare state, which the Congress led United Progressive Alliance (UPA) government has at the top of its agenda.
As Sharma writes “It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period. Inspired by the popularity of the employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country’s economic boom.”
Countries that now run big welfare states have done so after many years of high economic growth. As Gurucharan Das points out in India Grows at Night “India’s leaders did not modernise or expand the capability of its institutions. They forgot that western democracies had taken more than hundred years of economic growth and capacity building to achieve the welfare state.”
While extending subsidies to the poor is a noble idea, the thing is it does not work over a period of time. A recent discussion paper put out by the Commission for Agricultural Costs and Prices (CACP), Ministry of Agriculture, seems to suggest the same. The paper finds that real farm wages (i.e. growth in wages adjusted for inflation) grew by 3.7% per year in the 1990s. This growth fell to 2.1% per year in 2000s. “The results (of the analysis) points to the fact that a ‘pull strategy’ is more desirable than a ‘push strategy’, meaning growth-oriented investments are likely to be a better bet for raising rural wages and lowering poverty than the welfare-oriented MGNREGS (Mahatma Gandhi National Rural Employment Guarantee Scheme),” the paper pointed out.
The paper also suggests that growth oriented “investments would have raised the growth rates in these sectors, and ‘pulled’ the real farm wages through a natural process of development, whereby wages increase broadly in line with rising labour productivity.” So it is very clear that the governments much touted rural employment guarantee scheme is not really working. The incomes of farmers would have grown much faster had the government simply stayed away.
The other thing all these subsidies (which include oil subsidies which form the bulk of the total subsidies) have done is that it has pushed up government borrowing. “The total public-debt to GDP ratio is now 70% – among the highest for any major developing country,” writes Sharma. “The development of this habit – deficit spending in good times as well as bad – was a major contributor to the current debt problems in the United States and Western Europe, and India can ill afford it.” This is something that the politicians who run India seem to have totally forgotten about.
Increased government borrowing has also led to high interest rates. This has a huge impact on consumption as well as business expansion and in turn pulled down economic growth. The investment by Indian businesses has fallen from 17% of GDP in 2008 to 13% in 2012.
The media has recently been reporting about the finance minister P Chidambaram travelling to different parts of the world soliciting investors to put money in India. And this is happening at a time when more and more Indian companies are setting up businesses abroad. “At a time when India needs its businessmen to reinvest more aggressively at home in order for the country to hit its growth target of 8 to 9 %, they are looking abroad. Overseas operations of Indian companies now account for more than 10% of overall corporate profitability, compared with 2% just five years ago. Given the potential of the Indian domestic market, Indian companies should not need to chase growth abroad,” writes Sharma.
This makes one wonder that if Indian companies are not ready to invest in India, why would foreigners want to do the same? It need not be said that doing business in India has become more and more difficult over the years.
Gurucharan Das in India Grows at Night recounts the experience of a businessman friend of his Navin Parikh. “’Not a week goes by,’ Navin said, ‘without an inspector from some department or the other coming for his hafta vasooli, “weekly bribe”. Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep them all happy. Otherwise, they make life hell. More than 10% of my costs are in “managing the system”.”
Given this it is not surprising that more and more Indian businesses are happy going abroad rather than investing in India. And if this continues to happen India’s economic growth will continue to flounder.
The Economic Survey points out that agriculture accounts for 58% of the employment in the country. But this 58% produces only 16% of the country’s GDP. So it is basically a no-brainer to suggest that India needs more industries and businesses, so that people can move out of agriculture. And that cannot happen without the government getting its act right. While a spate of economic reforms, from land to labour, are the need of the hour, but there is something which is more important than even that.
The government of India needs to limit its ambitions. As Sunil Khilnani writes in The idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant alien object into one that aspired to infiltrate the everyday life of Indians, proclaiming itself responsible for everything they could desire.”
This anomaly needs to be corrected. The idea of mai-baap sarkar needs to go. Unless that happens, continuous 8-9% economic growth will continue to remain an idea in the heads of economists and politicians.
The article originally appeared on www.firstpost.com on April 25, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
India Grows At Night
Rajat Gupta may never have got convicted in India
Rajat Gupta will be spending two years in prison, which will be followed by one year of supervised release (The supervised release starts after a person is released from prison. After the release the individual goes through a period of supervision in the community. You can read the complete definition here). Gupta will also have to pay a fine of $5million.
Gupta, a former managing director of management consultancy McKinsey & Company, who happened to marry the only girl in his IIT Delhi batch, and a member of the boards of Goldman Sachs and Proctor and Gamble, had been accused of passing on sensitive board room information to hedge fund manager Raj Rajaratnam. The information leaked by Gupta turned out to be enormously profitable stock tips for Rajaratnam. Rajaratnam is currently serving 11 years in jail for securities fraud.
The Securities and Exchange Commission (the stock market regulator in the United States) had filed an administrative civil complaint on March 1, 2011, against Gupta for insider trading with Rajaratnam who ran the Galleon Group of hedge funds. The case from start to finish lasted for a period of around twenty months. The dispensation of justice was fast and quick and it did not take a life time as it does in India.
Take the case of Lalit Narayan Mishra who was the Cabinet Minister for Railways. On January 2, 1975, Mishra was in Samastipur to declare open the broad gauge railway line between Samstipur and Muzaffarpur. A bomb exploded and he was seriously injured. He died the next day.
The case against the accused is still on, thirty seven years later. Eight people were accused in the case. One has of them has since died. As Gurcharan Das writes in India Grows At Night–A Liberal Case for a Strong State “The case against the accused dragged on for thirty-seven years…Meanwhile, thirty one of the thirty-nine witnesses for the defence had died gravely prejudging the case…No less than twenty-two different judges had heard the case over the years. The trial was still going in 2012.”
And there are other cases in which justice is delivered after a generation has passed in the meanwhile. In 1992, four teams of government officials landed up in the adivasi village of Vachathi in search of the sandalwood smuggler Veerapan. On not finding him there the government officials accused the villagers of harbouring Veerapan. The officials took 18 teenage girls from the village into the forest where they were stripped and raped. 133 villagers were arrested and put in jail as well.
Justice was delivered only 19 years later. As Das writes “On the sweltering afternoon of 29 September 2011, principal district judge S Kumarguru began to hand out sentences. There was a hushed silence in the packed courtroom in Dharmapuri, Tamil Nadu. He began at 3.30pm but could not finish until 4.40pm because he had to read aloud punishments awarded to 215 government officials. Among those convicted were 126 forest officials, 84 policemen and five revenue officials. Seventeen were convicted of rape and they received prison sentence from seven to seventeen years; others received from one to three years on counts of torture, unlawful restraint, looting and misuse of office.” Fifty four accused had died in the meanwhile.
Since delivery of justice takes so long, frivolous cases are filed to cut short promising careers. S Nambi Narayanan’s case is a very good example of the same. Narayanan was a senior official in charge of the cryogenics division of the Indian Space Research Organisation. In 1994, he was accused of espionage. The Central Bureau of Investigation (CBI) concluded as early as 1996 that the entire case was a fabrication. The National Human Rights Commission ordered an interim compensation of Rs 10 lakh for Narayanan in 2001. The Kerala government got a stay against this order. The stay was finally vacated by the high court on September 7, 2012. In the meanwhile a lifetime had passed. (You can read the complete details of the case here).
The system is also used to their advantage by those who do not like the idea of working. The famous case of Uttam Nakate a helper at Bharat Forge illustrates this point. Nakate was found sleeping at the workplace at 11.40am in the morning in early 1984. This was the fourth occasion this had happened. The company started proceedings against him under the Industrial Employment Act, 1946, found him guilty and dismissed him.
Nakate then appealed to the Maharashtra labour court and challenged his dismissal under the category of an unfair trade practice. The labour court directed that Nakate be taken back and at the same time also be given 50% of his wages. The company then appealed to an industrial tribunal which struck down the decision of the labour court. Nakate then went to the Bombay High Court which decided in his favour and also directed the company to pay him Rs 2.5 lakh. The case finally made its way to the Supreme Court which ruled in the company’s favour. The two judges on the case said “we cannot say the quantum of punishment imposed was wholly disproportionate to his act of misconduct”. If all this would have happened in a period of 20 months or so as it did in Gupta’s case in the US, things would have been fine. By the time the Supreme Court decision came in 2005, two decades had passed.
But the people who gain the most from the way our judicial system has evolved are the politicians. Take the case of former telecom minister Sukh Ram. In 1996, the CBI had seized Rs 3.6 crore from his official residence which he had collected as a bribe in awarding a telecom contract. The case dragged on for years and Sukh Ram was finally found guilty in late 2011, nearly a decade and a half later. By this time Sukh Ram was 85 years old and in hospital.
“If this happened in the case of Cabinet ministers, where was the hope of justice for an ordinary person? But former chief justice of the Supreme Court J.S.Verma had a different take. He claimed that although Article 21 of the Constitution guaranteed a speedy trial to every citizen, in reality the status of the person did matter. A powerful person with connections or money could speed up or delay the justice system to suit his needs,” writes Das.
Look at what happened to the Ruchika Girhotra case. The accused SPS Rathore got out of the courtroom smiling in December 2009, after a six months sentence was announced and he got bail immediately.
The late Harshad Mehta is another brilliant example of the system gone wrong. The scam he was running on the Bombay Stock Exchange was revealed in 1992. He died of a heart attack in a Thane jail on the last day of 2001. When he died Mehta was facing trial in 28 cases but had been convicted only in one case which involved the use of funds to the tune of Rs 30 crore belonging to the Maruti Udyog being used in the stock market. All the other cases were pending.
The economist Bibek Debroy carried out a project for the government in the 1990s and found out that nearly 2.5 crore cases were pending in Indian courts. This number has gone up to 3.2 crore since then. Debroy found that it takes up to twenty years to settle a dispute. And it would take nearly 324 years to settle all the cases. Debroy further suggested that a major reason for the huge number of cases was the fact that a large number of laws were simply obsolete. As Das writes “He also concluded that 500 out of the 3500 central laws were obsolete and needed to be scrapped, and half of the 30,000 state laws as well.”
But this was not a major reason for the large number of cases in the Indian court. “The main culprit of the judicial delay was the government, which appealed all judgements automatically and proceeded to lose them again in the higher courts. This crowded out the private individual. The problem lay in the fact that the decision to litigate was made at the lowest level in the bureaucracy but the decision not to litigate was made at the highest level. If this process were simply reversed, government litigation would come down,” writes Das. So for the burden on the Indian judicial system to come down, the tendency of the government to litigate left, right and centre, also needs to come down.
Now let’s get back to Rajat Gupta. What would have happened to Rajat Gupta if he was accused of a similar wrong doing in India? Being at the position that he is he could have easily influenced the judicial system. The case would have dragged on for 20 years. And by the time it would have reached the Supreme Court, Rajat Gupta, like Sukhram now, would have been 85 years old by then and more or less lived his life. Gupta is around 64 years old now.
Of course all this would have happened only assuming that Gupta would have been taken to court for what he did. Passing on stock tips to fund managers isn’t really a big deal in an Indian context. Harshad Mehta who carried out a far bigger scam than what Gupta has been accused of in the United States (actually it’s not even a comparison) got convicted in only one case between 1992 and 2001. And even that wasn’t one of the main cases. And what ever happened to Ketan Parekh and his scams? Look at Sahara and the excuses it keeps coming up with for not paying back the Rs 24,000 crore it owes to its 3 crore investors, the latest one being that 90% of its investors do not have bank accounts. This, despite being directed by the Supreme Court to payback its investors. Even their latest excuse doesn’t quite work. When the Sahara collected the money even then their investors mustn’t have had bank accounts? So if it could collect the money, it should also be able to return it.
What all this tell us is that India is a weak state which cannot enforce things. Das summarises it best when he writes “Weak enforcement is at the heart of a weak state in which the most vulnerable and the weakest are its chief victims.”
The article originally appeared on www.firstpost.com on October 26, 2012. http://www.firstpost.com/business/rajat-gupta-may-never-have-got-convicted-in-india-503668.html
(Vivek Kaul is a writer. He can be reached at [email protected])
‘India grows at night while the government sleeps’
Gurcharan Das is an author and a public intellectual. He is the author of The Difficulty of Being Good: On the Subtle Art of Dharma which interrogates the epic, Mahabharata. His international bestseller, India Unbound, is a narrative account of India from Independence to the turn of the century. His latest book India Grows At Night – A Liberal Case For a Strong State (Penguin Allen Lane)has just come out. He was also formerly the CEO of Proctor & Gamble India. In this interview he speaks to Vivek Kaul on why Gurgaon made it and Faridabad didn’t, how the actions of Indira Gandhi are still hurting us, why he cannot vote for anyone in the 2014 Lok Sabha elections and why democracy has to start in your own backyard if it has to succeed.
What do you mean when you say India grows at night?
Essentially the full expression is India grows at night while the government sleeps. I thought that would be insulting to put in the title. So I left it at India Grows at Night. And I subtitled it a liberal case for a strong state. The basic idea is that India has risen from below. We are a bottom up success, unlike China which is a top down success. And because our success is from below, it is more heroic and also more enduring. But we should also grow during the day meaning we should reform our institutions of the state, so that they contribute much more to the growth of the country. We cannot have a story of private success and public failure in India.
Could you explain this through an example?
I start chapter one of the book with a contrast between Faridabad and Gurgaon. If you were living in Delhi in the seventies and eighties, the big story, the place you were going to invest was Faridabad. It had an active municipality. The state government wanted to make it into a showcase for the future. It had a direct line to Delhi. It had host of industries coming in. It had a very rich agriculture. It was the success story. So if you were an investor you would have put your money in Faridabad.
And what about Gurgaon?
In contrast there was this village called Gurgaon not connected to Delhi. No industries. It had rocky soil, so the agriculture was poor. Even the goats did not want to go there. So it was wilderness. And yet 25 years later look at the story. Gurgaon has become an engine of international growth. It is called the millennium city. It has thirty two million square feet of commercial space. It is the residence of all the major multinationals that have come into the country. It has seven golf courses. Every brand name, from BMW to Mercedes Benz, they are all there. And look at Faridabad (laughs)…
Faridabad missed the bus?
Faridabad still hasn’t got the first wave of modernisation that came to India after 1991. It escaped Faridabad. Only now it’s kind of waking up. And Gurgaon did not have a municipality until 2009. This contrast really is in a way the story of India grows at night. And the fact is that the people of Gurgaon deserve a lot of credit because they didn’t sit and wait around. If the police didn’t show up they had private security guards. They even dug bore-wells to make up for the water. The state electricity board did not provide electricity, so they had generators and backup. They used couriers instead of the Post Office. Basically they rose on their own.
So what is the point you are trying to make?
My point is that neither Faridabad nor Gurgaon is India’s model. Faridabad is a model where you have an excessive bureaucracy. Why did Faridabad not succeed? Because the politician and bureaucrats tried to squeeze everything out in the form of licenses. And Gurgaon’s disadvantage turned out to be its advantage. It had no government. So there was nobody to bribe. But at the end of the day Gurgaon would be better off, people would have happier if they had good sanitation, if they had a working transportation system, they had good roads, parks, power etc.
All that is missing…
All the things that you take for granted that you would get in a city, you shouldn’t have to provide them for yourself. This is the point. Neither model is right. And we need to reform the institutions of our state. And we need to create what I call a strong liberal state.
What’s a strong liberal state?
A strong liberal state has three pillars. One an executive that is not paralysed like Delhi is right now, where you have push and drag to get any action done. Second that action of the executive is bounded by the rule of law and third that action is accountable to the people. When I mean a strong state? I am not talking about Soviet Russia or Maoist China. I am not even talking about a benign authoritarian state like Singapore which is very tempting because it has got such high levels of governance. I am talking about classical liberal state the same kind of state that our founding fathers had in mind or the American founding fathers had in mind when they thought about the state. And so that is not easy to achieve.
Why do you say that?
It is not easy to achieve because some elements in these three pillars fight with each other. In other words you have an excessive drive for accountability then the executive gets weakened. I mean right now the Anna Hazare movement has so scared the bureaucrats that they won’t put a signature on a piece of paper. The Anna Hazare movement is a good thing because it awakened the middle class but it also weakened the executive. So, today more important than even economic reforms are institutional reforms i.e. the reform of the bureaucracy. If a person is promoted after twenty years regardless of his performance there are repercussions. If it doesn’t matter whether he is a rascal or outstanding, and both are treated the same, you won’t get high performance. You will get a demoralised bureaucracy. Those are the kind of reforms we need.
What are other such reforms?
Take the case of the judiciary, why should it take us 12 years to get a case settled when it takes two or three years anywhere else? You go to a police station to register an FIR, do you think they will do it? Either you have to bribe somebody or lagao some influence. You have this rising India amidst a very very ineffective state.
One of the things you write about in your book is the fact that India got democracy before it got capitalism. World over it’s been the other way around. How has that impacted our evolution as a country?
That also explains some of our problems. By getting democracy before capitalism, you had a populist wave. The politicians when they thought about going to elections started realising ke bhai we will tell people that I’ll give you four rupee kilo rice and get elected. In Punjab the politicians said we will give free electricity to the farmers and got elected. So you killed your finances through this populism. The states which did this really went bankrupt. Punjab and Andhra Pradesh which did these two things couldn’t pay their salaries to their bureaucrats.
And this started with Nehru’s socialism?
Nehru’s socialism created the illusion of a limitless society, that the state would do everything. Jo kuch hai, which we used to do for ourselves, through our families etc, we now expected the state to do. That was the message given by the socialists. The fact is that the state did not have the capacity. In the courts judges knew their jobs. It was a good judiciary. Even the police was very good but suddenly you expanded the mandate so that half the cases today are government cases. You haven’t been paid a refund. Or the government is taking your land or something and so you go to court. So the guilty in many cases is the state.
What you are suggesting is that the mandate of the state was expanded so much that it couldn’t cope with it?
And they did not expand the capacity. Suddenly you needed a tenfold increase in judges and a tenfold increase in bureaucrats. This is because the jobs you expected this people to do were so much greater. And you told people, especially workers and government servants, that you have rights. So a school teacher suddenly realised that he did not have to attend school, he could get away with it. The person who was his boss or her boss was too scared because of the union of the teachers. So one out of four teachers is absent from our schools. And nothing happens to that person. I am answering your question about how embracing democracy before capitalism hurt us. We became more aware of our rights. We tried to distribute the pie before the pie was baked. Before the chapati was created we started dividing it.
In fact there is a saying in Punjabi ke pind vasiya nahi te mangte pehle aa gaye (the village is still being built and the beggars have already arrived)…
Bilkul. Perfect. That’s an even a better saying. This has been one of the problems. In 1991 we did start building the economy base to support a democracy like ours. But these people fettered away some of the gains. Just see how much subsidy is being given on petroleum products. It is around Rs 1,80,000 crore. I mean you could transform your school system with that kind of money.
And the health system…
Yes even the health system.
How much do you think the socialism of Nehru and Indira Gandhi is holding us back?
The damage that Indira Gandhi did was far greater. Her license raj combined with the mai baap sarkar, this double whammy gave the illusion to the people that the state would do everything. Nehru had never talked about a mai baap sarkar. The second was the damage she did to our political institutions. We owe Nehru a great debt because he built those institutions. Our modern political democracy we owe it to him. But she did a lot of damage to those institutions. Could you elaborate on that little?
During the period she was the Prime Minister, I think she dismissed fifty nine elected governments in states. Now we hardly hear of this. This is partly a reaction to what she had done. She tried to change India’s culture and change our political system. A lot has been written about the emergency and so on. But the enduring damage we don’t realise. Before her, Chief Ministers were a little afraid when a secretary said no sir you can’t do this. And if you tried to do it, the secretary wouldn’t bend very often. Now they just transfer. Look at what Mayawati did. Also after Indira Gandhi the police became a handmaiden of the executive. The police lost its independence. Even the judiciary was damaged. She wanted committed judges. Fortunately the Supreme Court did not succumb to that rot.
“It is tempting to compare crisis-ridden Hastinapur with today’s flailing Indian state,” you write. Could you explain that in some detail?
Before this I wrote this book called The Difficulty of Being Good. I interrogated the Mahabharata in a modern contemporary way. And I realised that the Mahabharata is us, still. The great scholar Sukthankar, the editor of the critical edition of the Mahabharata had once said that the Mahabharata is us. And I had always wondered what he had meant. I realised reading the book that really it’s a story of India. And why I preferred the Mahabharata to the Ramayana is because in the Ramayana, the hero is perfect. The brother of the hero is perfect. The wife of the hero is perfect. Even the villain is perfect. Luckily I had done Sanskrit in College and so I went back to my roots. I went to study in Chicago.
And what did you realise after studying the Mahabharata?
Essentially the Mahabharata is about the corruption of the kshatriya institutions of that time. The way the rulers, the nobles behaved, it clearly upset the author of the Mahabharata or we should say authors, because it was continuously evolved over 400-500years. They were very upset and enraged as today young Indians are enraged by the government. They were enraged by the institutions of these kshatriyas. The sort of the big chested behaviour. The idea that you went to heaven if you died fighting on the battle field. That sort of notion. So most people think Mahabharata is about war, but actually it’s an anti war epic.
So what is the point you are trying to make?
In Mahabharata, Hastinapur is the capital of the kingdom of the Kauravas. The Pandavas have created a new capital at Indraprastha. The point is crisis ridden Hastinapur is somewhat like our crisis ridden institutions of today. People were impatient and they were enraged by what was going on and so they had to wage a war at Kurushetra. And I just hope that we don’t have to do that. We can reform the institutions before we reach that point. That’s the comparison to Kurushetra and Hastinapur that I spoke about.
You were a socialist once?
I was a socialist like all of us when we were in the 20s and 30s. But then we could see that Nehru’s path was leading us to a dead end. Certainly a part of India Unbound is a story of the personal humiliations that I experienced, and on top of that Indira Gandhi’s failures really converted me. When the reforms came in 1991 I had become a libertarian. I really celebrated the reforms. For me that was Diwali and so I began to believe that the story of India rising without the state was a sustainable story. And I began to believe that this was a heroic thing and a laissez faire state was the best state. Back then, in my view the state was a second order phenomenon. Now writing this book partly and looking back over twenty years, I have concluded that state is a first order phenomenon. So I have gone from being a socialist to a libertarian to what I would go back and say is a classical liberal, who really doesn’t believe that laissez faire is the answer, and who does believe that you need the state.
Can you elaborate on that?
You need a limited state and not a minimalist state as Nozick(Robert Nozick, an American political philosopher) would have said. But that limited state must perform. So I have come to realise that the success after 1991 has partly been because there were regulators in those sectors, which rose. The election commissioner, the RBI, the Sebi, these have all contributed. Or even the first TRAI(Telecom Regulatory Authority of India, the telecom regulator) under Justice Sodhi and Zutshi. That first TRAI sent the right signals. If we had left it to the Department of Telecom (DOT) and did not have any regulator things might have been different. DOT wanted to crush the new private companies. So what I am saying is that you need good regulators. You need government as a good umpire. You don’t need government to own Air India. But you need a good civil aviation regulator who will ensure a level playing field for everyone in the market.
You explain in some depth in your book as to why Indian political parties treat voters as victims. One can see that happening all the time and everywhere…
And it also explains why I cannot vote for anybody in 2014. Really as an Indian citizen I have been thinking who will I vote for? Every party treats voters as a victim. They are all parties of grievance. We don’t realise that one third of India is now middle class. This new middle class are tigers. They have just made it. They don’t want to be reminded that they are victims. They are looking for the state to further their rise. And they are looking for good roads, good schools and these things.
But nobody talks about development in India…
Yeah. BJP if you scratch them you know they are talking about 1000 years of Muslim oppression. Congress says you are victim of globalisation and liberalisation. So we will give you free power, free this and free that, NREGA etc. Dalit parties say you are a victim of oppression. OBC parties say you are a victim of upper caste oppression. Nobody is talking about the reform of the institution. Even the Anna Hazare movement was talking about only one Lokpal, which is fine, but it had to be couched in a bigger story.
You critique the Anna movement by saying that they have further undermined politicians and political life. Could you explain that in detail?
They have undermined the politics and political life. It is very easy to do that. When you attack politicians then you are also unwittingly attacking the institution of elections. The good thing is that it has put a fear in the minds of politicians. Whether the Anna Hazare movement fails or succeeds is no longer important. What is important is the legacy that it has woken up the middle class. That won’t go away easily. The question then for a young person today is that the Anna movement may have gone, but what can I do? The answer is start with your neighbourhood. Start with your ward and see what can be done. And that is the local democracy I am talking about. That’s where politics begins and that’s where habits of the heart created. I am so in favour of grass-root democracy, the fact that we should put the power downwards. Also even in the rhetoric of the Anna Hazare movement they talked about the gram sabha, the mohalla sabha, that’s where we get the habits of the heart.
What about Arvind Kejriwal’s decision to enter politics? How do you view that?
Before I get to that let me discuss something that I talk about in my book. In this book I hope for a formation of a new political party along the lines of the erstwhile Swatantra Party. But the agenda of this party is not just economic reform but institutional reform. At the Delhi launch of my book Arivnd Kerjiwal was there. TN Ninan, Chairman of the Business Standard newspaper,was moderating the discussion and he said since both of you are advocating a political party, why don’t you join hands. I said, I admire Kejriwal, but he has got all kinds of crazy people around him, who still think that reforms were a bad India. Also, they never talk about institutional reform. So I am not sure that we could be together. But I said were we would be together is that both of us are tapping into the new middle class, which is impatient, confident, assured and which wants to get rid of corruption. But I feel that we need the hard work of institutional reforms and that street protest is not the answer. I also said I am so glad that Kejriwal is now looking at politics because that is the right route to go.
One of the things that one frequently comes across in your book is that you are hopeful that the politics of India will change in the next few years as more and more people become middle class.
But it doesn’t look like…
It doesn’t look like because politics has been left behind. But now they are realising. They have been shaken up because so many of them (the politicians) have gone to jail. Even the language is a little more cautious now.
So you see the kind of chaos that prevails right now will go away?
It is only out of chaos that something happens. As Nietzsche(Friedrich Wilhelm Nietzsche, a German philosopher) said that it is the chaos in the heart that gives birth to a dancing star. I see things positively even though we have been a weak state. But as they say, history is not destiny.
“The trickling down of power has made India more difficult to rule,” you write. Could you explain that in the context of the politics that is currently playing out?
It has made India more difficult to govern. But it remains a very important development because I am in favour of federalism. The best thing about FDI in multi brand retailing is that they have given the states the freedom to decide whether they want foreign investment or not. So imagine an FDI decision is now in the hands of the state. And I think that is wonderful because each state is like a country in India. The state of UP has 180 million people and I have no problem is with the trickling down of power. My problem is that we should be able to have an effective executive at the centre. Today we have a very weak Prime Minister. We need a stronger person in the role. We don’t want an Indira Gandhi, but we want a strong person who can be an institutional reformer.
You hope for the rise of a free market based party like the erstwhile Swatantra Party(a party formed by C Rajagopalachari and NG Ranga in 1959 to oppose the socialist policies of Nehru). Do you see really see that happening?
You have to be lucky to some extent and hope to get a young leader. I don’t know who it will be. But there will be somebody in their thirties and forties. Then the country will rally behind them. The way they rallied behind the Kejriwal, Anna Hazare movement. In one sense the last thing India needs is a another political party. But I also see that I cannot vote for any political party. I see that there is a wing of the Congress which does not like this free power and that entitlement culture and the corruption that is being bred in the Congress. There are people even in the BJP who have faith in the past, but they are not anti-Muslim necessarily. So I think they will come together for a secular political liberal party. Similarly there are people in the regional parties. And this is a good time for a liberal party. Swatantra Party was at the wrong time. They were too early. They were ahead of their time. So if we are lucky we will throw up a leader, but you can’t depend on that. But the hopeful thing is the rise of the middle class which will make the politics change.
(The interview originally appeared on www.firstpost.com. http://www.firstpost.com/india/how-india-grows-at-night-while-the-government-sleeps-469035.html)
Vivek Kaul is a writer. He can be reached at [email protected]
Why ‘reform’ is a bad word in India
The year was 1983 and as a six year old on my way to school I saw posters of this movie called Hip Hip Hurray. The movie had a special connection with the city of Ranchi, where I was born and brought up in. A major part of the movie had been shot in schools in Ranchi (not my school though) and to my knowledge it remains the only Hindi film to be shot in the city till date.
The story of the movie was set around a school football team and its inspiring coach (played by Raj Kiran, who has since disappeared). The script and the lyrics for the movie were written by Gulzar, with the songs being set to tune by Vanraj Bhatia. (This song from the movie, sung by Bhupendra and Asha Bhonsle is an absolute gem and so is this lovely Yesudas number).
The movie also happened to be the first directorial venture of Prakash Jha. Jha made a couple of art films more and disappeared from the scene, concentrating on documentaries instead. He returned to the Hindi film industry with Madhuri Dixit starrer Mrityudand in 1997. Since then he has directed movies like Gangaajal, Apharan, Raajneeti and Aarakakshan. As their names suggest all these movies had a lot political content in them. Given this Jha has never been far from controversies. His latest film Chakravyuh is set around the problem of naxalism. And given that controversy couldn’t have been far behind.
The movie has a song with the line: “Tata, Birla, Ambani aur Bata, sab ne hai desh ko kaata”. The song is a reflection of the deep hatred and mistrust Indians have towards big businesses and people who run them (though Bata can hardly be called a big business anymore. But it still remains one of India’s most recognisable business brands).
It is safe to say this mistrust of businesses started during the late sixties and early seventies once businessmen started to get too close to politicians. This was necessary for them if they wanted to survive in the era of “license permit quota raj” that Jawahar Lal Nehru had initiated and Indira Gandhi spread.
As Dilip Chitre wrote in the May-June 1972 edition of The Quest magazine “Mrs Gandhi…has suppressed the industrial private sector in the cruelest fashion. The suppression is in the form of controls which place in the hands of bureaucracy the power of tools of permits and licenses.” (Source: The Best of Quest, Tranquebar)
This meant that businessmen needed to be close to the Congress(Indira) which ruled the nation as well as the bureaucrats. As Chitre wrote “Since in India, today political power is directly transferrable into economic power, manipulative entrepreneurs in every sphere of activity are drawn towards the ruling party. This may not prevent Mrs Gandhi from pursuing a misadventurous economic policy. It only means that her policies will continue to benefit those corrupt entrepreneurs who regard politics as the only industry which offers the best monetary gains in India today.”
Thus emerged the unholy nexus between big business and politics in India. The other thing that happened was that the income tax rates went through the roof. This ensured that businessmen did not declare a major portion of the profits they made leading to a swelling black money economy in India.
This benefitted politicians as well because this black money helped finance their election campaigns. “Even election funds come from the swelling reservoirs of black money. It is black money which is the grease that makes every wheel in Indian public life move. The higher the taxes, the greater will be the incentives to avoid or evade them…The new class is here to stay and it will co-operate with capitalist speculators, feudal chiefs controlling the rural co-operatives, millionaire smugglers and corrupt top executives. These are the only beneficiaries of the parallel economy and they comprise, by and large, the Establishment,” wrote Chitre.
Due to the “license permit quota raj” was born a deep distrust for big-business in the minds of Indians. C Rajagopalachari, India’s second and last governor general, was the first to use the phrase license permit quota raj to describe the socialist economy that Nehru had created and Indira Gandhi spread.
As Gurucharan Das writes inIndia Grows At Night “Rajaji (C Rajagopalachari)…was the first to describe Nehru’s socialist economy as a ‘license permit quota raj’ in the late 1950s. When a reporter suggested that corruption had increased because Indians, not the British, were ruling, Rajaji had quickly retorted that corruption was less matter of culture and more about economic incentives. Socialist controls sent out the wrong signals to human beings on how to behave. Yes, culture mattered but culture would quickly change if the incentives changed.”
Things finally started to change around in 1991 once the Indian economy started to be opened up and the license permit quota raj was gradually done away with. It unleashed big business from the web of socialist control and economic growth followed. But the reputation of big business other than the likes of the Infosys, Wipro and TCS, still remained shady in the minds of the average Indian. As big businesses benefitted, reforms came to be associated more with them. This made reforms a perpetual hard-sell to the average Indian.
As Pratap Bhanu Mehta recently wrote in theIndian Express “One reason reform does not have as large a social base is that reform has come to be associated with reform for the big boys. We can debate the merits of FDI in retail. Even if its net benefits are uncertain, the fears it ignites are highly exaggerated. Making that a priority over other reforms may send out sound signals to other investors. But it reinforces the idea that you have to be big and organised to get a hearing. Despite two decades of reform rhetoric, small and medium business in India still feels trapped in the clutches of the state.” (you can read the complete piece here)
This is something that Das backs up with examples in his book. As he writes “Here was another irony. While the speed of trucks had risen 50 per cent thanks to four and six-lane highways, truckers were still mired in the old inefficiencies…Many municipalities in India continued to levy octroi because this medieval tax was their only source of revenue.”
And wherever there is a government check post there is also an opportunity to demand a bribe. Das describes one such experience when he ran into a line of trucks. “There was an interminable line of unhappy trucks parked on one side of the road…I pulled across up alongside an idle truck driver, and asked him what was going on. He had been waiting at the revenue check naka for four hours, he said. He was afraid that the bribe on this occasion was going to be double because the Check Sahib’s daughter was getting married. There would be more than half a dozen check posts like this on his journey from Delhi to Mumbai. There would also be police posts to bribe, and a journey of twenty-four hour would take forty-four, half the time lost in queues and in negotiating bribes.”
Indeed, as Das writes, Transparency International reported that in 2005 India’s trucking industry had paid bribes amounting to Rs 22,000 crore. This was roughly equal to what the truck drivers earn annually by the way of salary.
Also the end of license quota permit raj has been replaced by the rise of the inspector raj. Das recounts the story of an entrepreneur friend Navin Parikh who runs a factory near Ajmer, which makes sophisticated parts and equipments for the suppliers to the world’s defence industries. This is how Das recounts Navin’s experience. “‘Not a week goes by,’ Navin said, without an inspector from some department or the other coming for his hafta vasooli, “weekly bribe”. Labour, excise, fire, police, octroi, sales tax, boilers and more – we have to keep all of them happy. Otherwise, they make life hell. More than 10 per cent of my costs are in “managing the system”.” Navin has to deal with on an average seventeen inspectors who have the power to close down his business on one pretext or another.
So reforms have come to be associated with the big boys of business simply because things haven’t changed at all at the lower levels. As per a World Bank study in 2011, India ranked 134 out of 180 countries when it came to the ease of doing business.
What has also not helped is the fact that the reputation of businessmen and politicians has taken a nose dive in the recent past as wave of scams with allegations of crony capitalism has come to light. “The corruption story has also become part of the reform story. Open loot at the top lends credence to the idea that anyone should grab anything from the state that they can,” writes Mehta.
Given these reasons any attempt at economic reform in India doesn’t go down well with the average Indian. This impression of reforms benefitting big business is unlikely to go away in a hurry. Whether the current UPA government is serious about the “few” reforms that it has initiated remains to be seen. Or is just a diversionary tactic to get the attention away from coal-gate.
The only way out is transparency. As Mehta puts it “But more importantly, the real intent behind reform will become more apparent if the state can go towards a rules-based working in its inner core. But as state institutions are being decimated one after the other, it is hard to inspire confidence that we are moving to a transparent rules-based system. This is still a system where, on everything from CBI investigations to company law cases, deals seem possible. When the government says things like environmental clearances will speed up, it is not clear what exactly that means. Is it a harbinger of a new transparent and effective regime or simply more deals? The idea that the state is fundamentally about negotiated quick-fixes has not disappeared.”}
Another reason for reforms being a difficult sell is what economist Vivek Dehejia calls the original sin of 1991. “What makes that more difficult now is what I call the original sin of 1991. I am not the only one who has observed this. What happened from 1991 and thereon was reform by stealth. Reform by the stroke of the pen reform and reform in a mode of crisis, where there was never an attempt made to sort of articulate to the Indian voter why are we doing this? What is the sort of the intellectual or the real rationale for this? Why is it that we must open up? It wasn’t good enough to say that look we are in a crisis,” he told me in an interview I did for the Daily News and Analysis (DNA) sometime back. (You read the complete interview here).
Manmohan Singh’s speech to the nation the other day tried to explain the few steps of economic reform the government has initiated over the last ten days. But what he was basically saying like he did in 1991 was that, look we are in a crisis and there is no way out.
Given these reasons, when it comes to serious economic reforms that will benefit India in the years to come, I remain pessimistic.
(The article originally appeared on www.firstpost.com on September 24, 2012. http://www.firstpost.com/business/why-reform-is-a-bad-word-in-india-466243.html)
(Vivek Kaul is a writer. He can be reached at [email protected])
Sonianomics will put India on the path to disaster
Sonia Gandhi must be having the last laugh, at least when it comes to economic reforms and their salability among Indian politicians. “Maine kaha tha, Mamata nahi manegi(I had told you Mamata will not agree),” she must be telling the Prime Minister Manmohan Singh these days. “Par aap zidd par add gaye(But you became rather obstinate about the entire thing),” she must have added.
Whether this government survives or not remains to be seen but economic reforms will now be put on the backburner, that’s for sure. Also, the Congress party led United Progressive Alliance(UPA) will start preparing for elections (early or not that doesn’t really matter). And given that Sonia Gandhi’s form of “giveaway everything for free” economics will come to the forefront again now.
The various Congress led governments, since India attained independence from the British in 1947, have always followed this form of economics. As Sunil Khilnani writes in The Idea of India “The state was enlarged, its ambitions inflated, and it was transformed from a distant, alien object into one that aspired to infiltrate the everyday lives of Indians, proclaiming itself responsible for everything they could desire: jobs, ration cards, educational places, security, cultural recognition.”
When someone is responsible for everything, the way it usually turns out is that he is not responsible for anything. A major reason for the economic and social mess that India is in today is because of the various Congress led government trying to be responsible for everything.
This is going to increase in the days to come with Sonia Gandhi’s pet projects of the right to food and universal health insurance being initiated. It need not be said that the projects will help spruce up the chances of the Congress party in the next Lok Sabha election.
These are populist giveaways which have existed all through history. As Gurucharan Das writes in his new book India Grows at Night “Populist giveaways have always been a great temptation. Roman politicians devised a plan in 140BCE to win votes of the poor by offering cheap food and entertainment – they called it ‘bread and circuses.’”
But even with that, the idea of right to food and health for all, are very noble measures and difficult to oppose for anybody who has his heart in the right place. Nevertheless, the larger question is where will the government get the money to finance these schemes from? As P J O’Rourke, an American political satirist, writes in Don’t Vote! It Just Encourages the Bastards “We’re giving until it hurts. That is, we’re giving until it hurts other people, since we’re giving more than we’ve got.”
The fiscal deficit target of Rs 5,13,590 crore or 5.1% of the gross domestic product(GDP), for 2012-2013 will be breached by a huge amount. Fiscal deficit is the difference between what the government earns and what it spends. This will happen primarily because of the subsidy bill going through the roof (as the following table shows).
|Subsides||Apr-July 2012||Apr-July 2011||Increase over last year||budget estimate||% of budget estimate|
|Source: Controller General of Accounts, Deutsche Bank. In rupees crore|
As is clear from the table the subsidies on oil, fertilizer and food for the first four months of this have been much higher than the previous year. Also four months into the year the subsidies are already more than 50% of the amount targeted for the year. Like the food subsidy for the year has been targeted at Rs 75,000 crore. During the first four months subsidies worth Rs 46,400 crore have already been offered. Unless the government controls this, the spending over the remaining eight months of the year will definitely cross the targeted Rs 75,000 crore. This will increase the overall spending of the government and thus the overall fiscal deficit, which is in the process of reaching dangerous proportions.
As I have stated in the past at the current rate the fiscal deficit of the Indian government could easily surpass Rs 700,000 crore or 7% of the GDP. (you can read the complete argument here). Now add the right to food and universal health insurance to it and just imagine where the fiscal deficit will go. And that means the scenario of high interest rates and high inflation will continue in the days to come.
But that’s just one part of the argument. Those in favour of subsidies and a welfare state have often given the example of the greatest western democracies (particularly in Europe) which have run huge welfare states with the government taking care of its citizens from cradle to grave. An extreme example of such a welfare state is Greece.
Greece categorises certain jobs as arduous. For such jobs the retirement age is 55 for men and 50 for women. “As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians…” write John Mauldin and Jonathan Tepper write in Endgame – The End of the Debt Supercycle and How it Changes Everything.
But the Western democracies became welfare states only after almost 100 years of economic growth. “Western democracies had taken more than a hundred years of economic growth and capacity building to achieve the welfare state,” writes Das. And given this India is indulging in “premature welfarism”. “A nation with a per capita income of $1500 cannot protect its people from life’s risks as a nation with a per capita income of $15,000 could. It came at a cost of investment in infrastructure, governance and longer-term prosperity,” adds Das.
That’s one part of the argument. In order to finance these programmes the government will have to run huge fiscal deficits. This means that the government will have to borrow. Once it does that it will crowd out borrowing by the private sector and thus bring down the investment in infrastructure and hence longer term prosperity.
There is no example of a premature welfare state in the history of mankind rising its way to economic prosperity. An excellent example of a country that tried and failed is Brazil. India is making the same mistakes now that Brazil did in the late 1970s.
As Ruchir Sharma writes in Breakout Nations “Inspired by the popularity of employment guarantees, the government now plans to spend the same amount extending food subsidies to the poor. If the government continues down this path, India might meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crossed out private investment, ending the country’s economic boom…the hyperinflation that started in the early 1980s and peaked in 1994, at the vertiginous annual rate of 2,100 percent. Prices rose so fast that cheques would lose 30 percent of their value by the time businesses could deposit them, and so inconsistently that at one point a small bottle of sunscreen lotion cost as much as a luxury hotel.”
Inflation in such a scenario happens on two accounts. First it happens because people have more money in their hands. And with this they chase the same number of goods, thus driving up prices. The second level of inflation sets in once the government starts printing money to finance all their fancy welfare schemes.
As far inflation is concerned things have already started heating up in India. As Das writes “The Reserve Bank warned that wages, which were indexed against inflation in the employment scheme (the national rural employment guarantee scheme), had already pushed rural wage inflation by 15 per cent in 2011. As a result, India might not gain manufacturing jobs when China moves up the income ladder.”
Other than inflation, giving away things for free has other kinds of problems as well. With states giving away power for free or rock bottom rates, the state electricity boards are virtually bankrupt. As Abheek Barman wrote in a recent column in the Economic Times “Most of the power is bought by state governments, through state electricity boards (SEBs). These boards are bankrupt. In 2007, all SEBs put together made losses of Rs 26,000 crore; by March last year, this jumped to a staggering Rs 93,000 crore. Just two SEBs, Uttar Pradesh and Jammu & Kashmir, account for nearly half this amount. To cover power purchase costs, the SEBs borrow money. Today, the total short-term debt of all the SEBs has soared to a mind-boggling 2,00,000 crore. Many states would buy as little electricity as possible, to avoid going deeper into the red.” (You can read the compete piece here). So the farmer has free electricity but then there is no electricity available most of the time.
Das writes something similar in India Grows at Night. “Punjab’s politicians gave away free electricity and water to farmers, and destroyed state’s finances as well as the soil (as farmers overpumped water); hence, Haryana supplanted Punjab as the national’s leader in per capita income.”
Other than this a lot of things given away for free by the government are siphoned off and do not reach those they are intended to. It would be foolish on my part to assume the politicians in this country (including Sonia Gandhi and of course Manmohan Singh) do not understand these things. But as Das writes “But neither the ‘do-gooders’ nor the Congress party was deterred by the massive corruption in the supply of diesel, kerosene, electricity and cooking gas as well as in ‘make work’ schemes and food distribution. Politicians felt there were still plenty of votes there.”
But these votes will come at the cost of economic progress. No country in history has got its citizens out of poverty by giving away things for free. Countries have progressed when they have created enough jobs for its citizens. And that has only happened when the right investments have been made over the years to build infrastructure, industry and human skill.
So the votes for the Congress will come at the cost of economic prosperity for the country. In the end let me quote a couplet written by Allama Iqbal: “Na samjhoge to mit jaoge ae hindustan waalo, tumhari daastan bhi na hogi daastano main” ( “If you don’t wake up, O Indians, you will be ruined and razed, Your very name shall vanish from the chroniclers’ page” – Translation by K C Kanda in Masterpieces of Patriotic Urdu Poetry: Text, Translation, and Transliteration).
The Prime Minister Manmohan Singh’s love for urdu poetry is well known. It is time he went back to this couplet of Allama Iqbal and tried to understand it in the terms of all the problems that will come along with the premature welfare state that his party has created and is now trying to spread it further.
The article originally appeared on September 20, 2012 on www.firstpost.com. http://www.firstpost.com/politics/sonianomics-will-put-india-on-the-path-to-disaster-462163.html
(Vivek Kaul is a writer. He can be reached at [email protected])