Vivek Kaul
The India growth story as it was originally envisaged to be, is more or less over. Days when 8-9% growth was taken for a given are gone. The gross domestic product (GDP) for the period July 1 to September 30, 2012, grew by 5.3%. GDP growth is a measure of economic growth.
Further, what is true about India, is also true about China. As Ruchir Sharma head of Emerging Market Equities and Global Macro at Morgan Stanley Investment Management told me in a recent interaction “As far as China was concerned the growth expectations were too high out of China. People kept expecting China to grow at 9-10%. But there has been a reset of expectations. This year the growth rate is going to be 7.5% officially. Some suggestions have been made that the actual number would be lower than that if you look at the corresponding data.”
As was the case in the past, expectations are that China will continue to grow at a much faster rate than India. To me this raises the question whether countries with authoritarian governments, or countries with lower levels of democracy or even countries run by dictators, do better during the initial few decades of economic growth than countries which are democracies?
Or to put it simply is India’s democratic form of government slowing down its economic growth? This is a question that makes for engaging discussion in the business circles of Mumbai and the power circles of Delhi. Would have done better if we were more like China or Singapore, than the way we actually are, is a question which is often asked?
Vivek Dehejia and Rupa Subramanya discuss this question in some detail in their new book Indianomix – Making Sense of Modern India(Random House India, Rs 399).
As they write “When you look back on the history of the twentieth century – in fact through human history – you notice periods of very high economic growth are associated with autocratic, not democratic regimes. Just think of Chile under the dictatorship of Augusto Pinochet or the ‘miracle’ economies of East Asia – Hong Kong, Singapore, South Korea, and Taiwan. Starting in the 1960s these four economies went from being poor to being rich in just over a generation. The first one was a British colony, the second an oligarchy, and the latter two essentially one-party states. It’s true that Chile, Taiwan and South Korea democratised – but that was after they’d experienced a generation of rapid growth, not before.”
As Dehejia told me in an earlier interview “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.” And this is more possible in an authoritarian regime than in a democracy.
The same stands true for China now. It has had a generation of fast economic growth without any democracy. The country is ruled by one party, the Chinese Communist Party (CCP). As Richard McGregor, the author of The Party: The Secret World of China’s Communist Rulers told me in an earlier interview “The CCP is basically a political machine, as well as being a permanent governing party. As a political machine, it does not consider that its internal mechanisms should be open to public view. The top leaders are unveiled to the country at the end of five years and very little is revealed in the process. After the 2007 Congress, the nine men – and they are all men – walk out onto the stage, all wearing dark suits and all but one wearing a red tie; they all displayed slick, jet-black pompadours (a style of haircut), a product of the uniform addiction to regular hair dyeing of senior Chinese politicians; and they had all worked their up through the same system for all their lives.” Conformity is the name of the game.
The Western nations which grew at a very fast rate towards the end of the nineteenth century and early twentieth century also had very little democracy back then. As Dehejia and Subramanya point out “All of the rich countries of the West achieved rapid growth and economic development when they weren’t democracies. Just think of Britain during the Industrial Revolution. While it’s true that Britain was a parliamentary democracy it came with one catch, the fact that most people couldn’t vote. Franchise restrictions based on property ownership meant that the poor and the lower middle class were prevented from voting.”
The same stands true about the United States of America as well, the biggest economy in the world right now. “Britain was really an oligarchy, not a democracy, and so too was the US and every other Western country that industrialised and got rich.. The US, for example, legally enfranchised the African-Americans after their emancipation from slavery, but this was ‘offset’ by franchise restrictions that meant most Southern blacks couldn’t participate in the political process until the civil write movement of the 1960s. And let’s not forget that women didn’t get the vote in all of these Western countries till very late – well into the twentieth century in many cases,” the authors point out.
India on the other hand was a unique case. As Dehejia told me in an earlier interview “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.”
This despite the fact that the Constituent Assembly which drafted the Indian Constitution had been elected under a very limited franchise by 5 to 10% of the Indians at the top of social and the So has Indian economic growth suffered because we are a democracy? Dehejia and Subramanya point out the research of William Easterly, an economics professor at the New York University. “The historical data on growth over time in many different countries that Easterly has analysed show that if you’re a fast growing country then there’s a 90 per cent chance that you’re an autocracy. The problem is that you should be asking the reverse question: if you’re an autocracy, what’s the chance that you’ll be a growth success? The answer to that question is an underwhelming 10 per cent?”
What that means is that fast growing countries are almost inevitably autocracies but not all autocracies are fast growing countries. An excellent recent example is Zimbabwe under Robert Mugabe who now functions like a dictator. “What was once a break basket has now become a basket case,” write the authors. The continent of Africa is full of authoritarian regimes which have made a mess of their respective economies.
Closer to home under General Zia-Ul-Haq, Pakistan first turned into an Islamic state and now has turned into a full fledged terrorist state. The horrors that Pol Pot perpetuated as the dictator of Cambodia are well known.
And the biggest example of an authoritarian regime gone wrong was Adolf Hitler. Hitler first rode to power on popular discontent and then used a lot of Keynesian economics ( which John Maynard Keynes was still in the process of formulating) to create economic growth by building roads and then lead his country into a disastrous World War.
So yes, fast growing countries are authoritarian regimes but as explained above things can go terribly wrong as well under these regimes. Hence, we really don’t know which way will the authoritarian regimes go, towards economic growth or towards social disaster.
But then why does the myth of authoritarian regimes always creating economic growth prevail? This is because of what is known as the ‘availability heuristic’. “This refers to the fact that human beings tend to attach too high a probability to an event that’s very vivid in our minds. A classic example is natural disasters like earthquakes and tornadoes. Because they’re splashed all over the news on the rare occasions they do occur, people always think they’re far more likely than they really are,” write the authors. “Compiling data from news stories in the New York Times from 1960 to 2008, Easterly shows that successful autocracies are heavily over-reported compared to failed autocracies. Compared to a little under 6,000 stories on failed autocracies and about 15,000 on those in the middle, there were a staggering number of stories – more than 40,000 on autocratic successes. So if China has been on your mind rather than Zimbabwe you’re not entirely to blame,” they add.
Hence, India’s democratic form of government may impact its economic growth to some extent but it saves us from other problems as well. “What the data do show is that autocracies have many more highs and lows than democracies: they tend to be spectacularly successful or unmitigated disasters. Democracies generally are found somewhere in the middle. India, for example, hasn’t yet achieved Chinese-style double digit growth rates, but nor has it ever had negative double-digit growth as in Zimbabwe,” write Dehejia and Subramanya.
The article originally appeared on www.firstpost.com on December 3, 2012.
(Vivek Kaul is a writer. He can be reached at [email protected])
Vivek Dehejia
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 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])