Why ‘reform’ is a bad word in India

Vivek Kaul
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 magazineMrs 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])

Reform by stealth, the original sin of 1991, has come back to haunt us

India badly needs a second generation of economic reforms in the days and months to come. But that doesn’t seem to be happening. “What makes reforms more difficult now is what I call the original sin of 1991. What happened from 1991 and thereon was reform by stealth. 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?” says Vivek Dehejia an economics professor at Carleton University in Ottawa,Canada. He is also a regular economic commentator on India for the New York Times India Ink. In this interview he speaks to Vivek Kaul.
How do you see overall Indian economy right now?
The way I would put it Vivek is, if I take a long term view, a generational view, I am pretty optimistic. The fundamentals of savings and investments are strong.
What about a more short term view?
If you take a shorter view of between six months to a year or even two years ahead, then everything that we have been reading about in the news is worrisome. The foreign direct investment is drying up. The savings rate seems to have been dropping. The economic growth we know has dropped. The next fiscal year we would lucky if we get 6.5% economic growth.
How do we account for the failure of this particular government to deliver sort of crucially needed second generation economic reforms?
The India story is a glass half empty or a glass half full. If you look at the media’s treatment of the India story, particularly international media they tend to overshoot. So two years ago we were being overhyped. I remember that the Economist had a famous cover where they said that India will overtake China’s growth rate in the next couple of years. They made that bold prediction. And then about a year later they were saying that India is a disaster. What has happened to the India story? The international media tends to overshoot. And then they overdo it in the negative direction as well. A balanced view would say that original hype was excessive. We cannot do nor would we want to do what China is doing. With our democratic system, our pluralistic democracy, the India that we have, we cannot marshal resources like the way the Chinese do, or like the way Singapore did.
Could you discuss that in detail?
If you take a step back, historically, many of the East Asian growth miracles, the Latin American growth miracles, were done under brutal dictatorial regimes. I mean whether it was Pinochet’s Chile, whether it was Taiwan or Singapore or Hong Kong, they all did it under authoritarian regimes. So the India story is unique. We are the only large emerging economy to have emerged as a fully fledged democracy the moment we were born as a post colonial state and that is an incredibly daring thing to do. At the time when the Constituent Assembly was figuring out what are we going to do now post independence a lot of conservative voices were saying don’t go in for full fledged democracy where every person man or a woman gets a vote because you will descend down into pluralism and identity based politics and so on. Of course to some extent it’s true. A country with a large number of poor people which is a fully fledged democracy, the centre of gravity politically is going to be towards redistribution and not towards growth. So any government has to reckon with the fact that where are your votes. In other words the market for votes and the market for economic reform do not always correlate.
You talk about authoritarian regimes and growth going together…
This is one of the oldest debates in social sciences. It is a very unsettled and a very controversial one. For any theory you can give on one side of it there is an equally compelling argument on the other side. So the orthodox view in political science particularly more than economics was put forward by Samuel Huntington. The view was that you need to have some sort of political control, you cannot have a free for all, and get marshalling of resources and savings rate and investment rate, that high growth demands.
So Huntington was supportive of the Chinese model of growth?
Yes. Huntington famously was supportive of the Chinese model and suggested that was what you had to do at an early stage of economic development. But there are equally compelling arguments on the other side as well. The idea is that democracy gives a safety valve for a discontent or unhappiness or for popular expression to disapproval of whatever the government or the regime in power is doing. We read about the growing number of mysterious incidents in China where you can infer that people are rioting. But we are not exactly sure because the Chinese system also does not allow for a free media. Also let’s not forget that China has had growing inequalities of income and growth, and massive corruption scandals. The point being that China too for its much wanted economic efficiency also has kinds of problems which are not much different from the once we face.
That’s an interesting point you make…
Here again another theory or another idea which can help us interpret what is going on. When you have a period of rapid economic growth and structural transformation of an economy, you are almost invariably going to have massive corruption. It is almost impossible to imagine that you have this huge amount of growth taking place in a relatively weak regulatory environment where there isn’t going to be an opportunity for corruption. It doesn’t mean that it is okay or it doesn’t mean that one condones it, but if you look throughout history it’s always been the case that in the first phase of rapid growth and rapid transformation there has been corruption, rising inequalities and so on.
Can you give us an example?
The famous example is the so called American gilded age. In the United States after the end of the Civil War (in the 1860s) came the era of the Robber Barons. These people who are now household names the Vanderbilts, the Rockefellers, the Carnegies, the Mellons, were basically Robber Barons. They were called that of course because how they operated was pretty shady even according to the rules of that time.
Why are the second generation of reforms not happening?
What makes reforms more difficult now is what I call the original sin of 1991. We had a first phase of the economic reforms in 1991 where we swept away the worst excesses of the license permit raj. We opened up the product markets. But 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. Our gold reserves have been mortgaged. Our foreign exchange reserves are dwindling. Again India’s is hardly unique on this. Wherever you look whether it is Latin America or Eastern Europe, it generally takes an economic crisis to usher in a period of major economic reform.
So the original sin is still haunting us?
The original sin has come back to haunt us because the intellectual basis of further reform is not even on anyone’s agenda. Discussions and debates on reform are more focused on issues like the FDI is falling, the rupee is falling, the current account deficit is going up etc. Those are all symptoms of a problem. The two bursts of reform that we had first were first under Rao/Manmohan Singh and then under NDA. If a case had been made to build a constituency for economic reform, then I think we would have been in a different political economy than we are now. But the fact that didn’t happen and things were going well, the economy was growing, that led to a situation where everybody said let’s carry on. But now we don’t have that luxury. Now whichever government whoever comes to power in 2014 is going to have to make some tough decisions that their electoral base, isn’t going to like necessarily. So how are they going to make their case?
So are you suggesting that the next generation of reforms in India will happen only if there is an economic crisis?
I don’t want to say that. Again that could be one interpretation from the arguments I am making of the history. It will require a change in the political equilibrium and certainly a crisis is one thing that can do that. But a more benign way the same thing can happen that without a crisis is the realization of the political actors that look I can make economic reform and economic growth electorally a winning policy for me. But India is a land of so many paradoxes. A norm of the democratic political theory in the rich countries i.e. the US, Canada, Great Britain etc, is that other things being equal, the richer you are, the more educated you are, the more likely you are to vote. In India it is the opposite. The urban middle class is the more disengaged politically. They feel cynical. They feel powerless. Until they become more politically engaged that change in the equilibrium cannot happen.
What about the rural voter?
The rural voter at least in the short run might benefit from a NREGA and will say that you are giving me money and I will keep voting for you. We have all heard people say they are uneducated and they are ignorant, no it’s not like that. He is in a very liquidity constrained situation. He is looking to the next crop, the next harvest, the next I got to pay my bills. If someone gave him 100 days of employment and gives him a subsidy, he will take it.
How do explain the dichotomy between Manmohan Singh’s so called reformist credentials and his failure to carry out economic reforms?
One of the misconceptions that crops up when we look at poor economic performance or failure to carry out economic reform is what cognitive psychologists call fundamental attribution bias. Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions we look more at the situational factors and less at the idiosyncratic individual subjective factors. So what am I trying to say? What I am saying is that it has become almost a refrain to say that Dr Manmohan Singh should be an economic reformer. He was at least the instrument if not the architect of the 1991 reforms. There are speculations being in made in what you can call the Delhi and Mumbai cocktail party circuit, about whether he is really a reformer? Was it Narsimha Rao who was really the real architect of the reform? Is he a frustrated reformer? What does he really want to do? What’s going on his head? That in my view is a fundamental attribution bias because we are attributing to him or whoever is around him a subjective basis for the inaction and the policy paralysis of the government.
So the government more than the individual at the helm of it is to be blamed?
Traditionally the electoral base of the Congress party has been the rural voter, the minority voters and so on, people who are at the lower end of the economic spectrum. So they are the beneficiaries just roughly speaking of the redistributive policies. Political scientists have a fancy name for it. They call it the median voter theorem. What does it mean? It means that all political parties will tend to gravitate towards the preferred policy of the guy in the middle, the median voter.
Was Narsimha Rao who was really the real architect of the reform?
Narsimha Rao must be given a lot of credit for taking what was then a very bold decision. He was at the top of a very weak government as you know. And he gave the political backing to Manmohan Singh to push this first wave of reforms more than that would have been necessary just to avert a foreign exchange crisis. And then he paid a price for it electorally in the next election. This again the intangible element in the political economy that short of a crisis it often takes someone of stature to really take that long term generation view. IT means that you are not just looking at narrow electoral calculus but you are looking beyond the next election. That’s what seems to be missing right now. Among all the political parties right now, one doesn’t seem to see that vision of look at this is where we want to be in a generation and here is our roadmap of how we are going to get there.
Going back to Manmohan Singh you called him an overachiever recently, after the Time magazine called him an “underachiever”. What was the logic there?
The traditional view and certainly that was widely in the West at least till very recently has been that it was Manmohan Singh who was the architect of the India’s economic reforms. But then how do you explain the inaction in the last five, six, seven years? The revisionist perspective would say no in fact the real reformer was Narsimha Rao to begin with. The real political weight behind the reform was his. And Manmohan Singh that any good technocratic economist should have been able to do which is to implement a series of reforms that we all knew about. My teacher Jagdish Bhagwati had been writing about it for years. In that sense maybe Manmohan Singh was given too much credit in the first instance for implementing a set of reforms. If you look at his career since then he has never really been a politically savvy actor. We have this peculiar situation in India since 2004 where the Prime Minister sits in the Rajya Sabha, the upper house. That kind of thing is not barred by our constitution but I don’t think that the framers of the constitution envisaged this would be a long term situation. It is a little like the British prime minister sitting in the House of Lords. I mean that practice disappeared in the nineteenth century. He has not shown from the evidence that we can see any ability to get a political base of his own to be a counterweight to the more redistributive tendencies of the Nehru Gandhi dynasty. And that’s the sense that in somewhat cheeky way I was using the term overachiever.
Do you think he is just keeping the seat warm for Rahul Gandhi?
It increasingly appears to be that way. If that is true then it suggests that we shouldn’t really expect much to happen in the next two years.
Does the fiscal deficit of India worry you?
If you look at some shorter to medium term challenges, then things like fiscal deficit and the current account deficit are things to worry about. Again other things like the weak rupee, the weak FDI data, things that people tend to fixate at, but those at best are symptoms of a deeper structural problem. The deeper concern is the kind of reform that will require a major legislative agenda such as labour law reform for example to unlock our manufacturing sector. And managing the huge demographic dividend that we are going to get in the form of 300-400 million young people. They will have to be educated.
But is there a demographic dividend?
That’s the question. Will it become a demographic nightmare? Can you imagine the social chaos if you have all these kids just wandering around, not educated enough to get a job, what are they going to do? It’s a recipe for social disaster. That according to me is going to be real litmus test. If we are able to navigate that then I don’t see why we won’t be on track to again go back to 8- 9% economic growth. I want to remain optimistic at the end of the day.
(The interview originally appeared in the Daily News and Analysis on August 6,2012. http://www.dnaindia.com/money/interview_reform-by-stealth-the-originalsin-of-1991-has-come-back-to-haunt-us_1724348)
(Interviewer Kaul is a writer and can be reached at [email protected])