India

by Shashi Tharoor

  Even Rajiv Gandhi, the first (and so far only) prime minister from the generation that grew up frustrated by, and impatient with, the sclerotic socialism practiced in India, did little to tinker with the economic system. In 1985 he introduced a “new economic policy,” which (rather like the Holy Roman Empire) was neither new nor economic nor a policy; it amounted to little more than a relaxation of the old license-permit-quota regulatory system, without actually abolishing it. The regulations themselves remained largely untouched; their philosophical underpinnings were not contested; the rules were just as oppressive, but a larger number of exceptions were now permitted to them. This had the effect, simply, of enhancing the discretionary powers of the government, so that its stranglehold on the economy actually grew while it was able to point to the changes as evidence of reform. Aside from a minor boom in consumer goods (a pale parallel of what was occurring in the Western world at the same time), the Rajiv years left India’s fundamental economic problems essentially unaltered.

  So, for most of its existence, the government of independent India was proudly self-sufficient, independent of the dominance of world capital, rhetorically devoted to using the state to better the lot of the poor, and politically disinclined to debate the self-evident virtue of these propositions. By mid-1991, it was also virtually broke.

  Back, then, to the national humiliation of the pawning of the gold reserves, which occurred just before the General Elections of 1991, the elections in which the assassination of Rajiv Gandhi swung enough sympathy votes to the Congress to permit it to form a minority government. As the election results were streaming in, inflation was galloping at 14 percent (unofficial estimates placed it higher), the rupee was trading in the black market at 25 percent lower than its official rate, foreign exchange reserves had dwindled to nothing, and India had become yet another debt-ridden developing country, the third-largest debtor in fact, its dues of $71 billion exceeded only by those Latin American paragons, Brazil and Mexico. (The internal debt was just as bad: interest payments on the government’s borrowings within the country stood at 20 percent of the government’s budget.) India’s four-decade-old economic policy had never looked more thoroughly discredited. It was clearly time to let sweeping dogmas die.

  In a symbol of his departure from politics as usual (and from the usual politicians), the new Congress prime minister, P. V. Narasimha Rao, appointed a nonpolitical figure, the economist Manmohan Singh, as his finance minister. Together they embarked on an immediate series of dramatic reforms. Gone was the old phobia about external capital: foreign investment was now permitted in thirty-four major areas from which non-Indian capital had been excluded in the past (ranging from food processing to power generation); the private sector was allowed entry into areas hitherto reserved for the state, such as aviation and roadbuilding; foreign investors were granted the right to acquire majority shareholdings in Indian companies; tariffs were slashed (in phases, down from 300 percent in 1991 to 50 percent by 1995) and external competition welcomed; and the rupee was made convertible on the trade account. Strikingly, there followed the dramatic devaluation of the rupee by 22 percent, in defiance of the conventional political wisdom; a 5 percent devaluation in 1967 had almost brought the government down, but now everyone seemed to accept there was no choice. In place of the old mantra of self-sufficiency, India was to become more closely integrated into the world economic system.

  The immediate impact of the Rao-Singh reforms was positive. Capital began to flow in from abroad, into productive investments as well as into the stock exchanges, some $4 billion in the first four years of the reforms. The list of areas into which it was welcomed lengthened, to cover power, telecommunications, and even that bugbear of the economic nationalists, oil exploration. The foreign exchange reserves rose from $ 1 billion to $20 billion in two years (and somewhat more slowly to $22 billion in mid-1996). The budget deficit was reduced, as were tariffs; quotas were eliminated or liberalized. If my Calcutta friend’s father hadn’t already retired he might have lost his job, because the restrictions on private-sector expansion were quickly dissolved.

  Despite this, overall growth was relatively slow, and not generally better than in the pre-liberalization 1980s. (With the population still increasing by about 2 percent a year, per capita growth is decidedly unimpressive.) Yet there were a number of individual success stories, like that of the Madras automotive components manufacturers Sundram Fasteners, who took advantage of both the lifting of restrictions on the import of machinery and the devaluation of the rupee to become the principal maker and supplier of General Motors radiator caps around the world. General Electric, whose total investments in India now exceed $300 million, meets a third of its worldwide software manufacturing requirements from its Indian operations.

  The figures are impressive. In 1995 industrial production rose by nearly 11 percent, and some 7.2 million new jobs were created, a 50 percent improvement on the average annual rate of increase in the 1980s. Direct foreign investment in 1996 was expected to reach $2 billion (more than the grand total of all foreign capital invested in India between 1947 and 1991, which added up to $1.5 billion); in addition, foreign institutional investments in Indian portfolios rose to over $5 billion. Exports rose by 21 percent (April 1995-February 1996), and the gross domestic product grew 6.2 percent, five times more than it had done in that seminal year of 1991. In its annual economic survey in 1996, the Finance Ministry was able to claim “strong economic growth, rapid expansion of productive employment, a reduction of poverty, a substantial boom in exports, and a marked decline in inflation.” Overall, however, the growth rate was half that of China (and foreign investment only a fraction of that country’s), the export figures lower than Malaysia’s, the job creation statistics not as good as in Indonesia. India had not yet joined the ranks of the Asian Tigers.

  And, inevitably in a highly politicized society, the economic reforms raised vociferous, and sometimes thoughtful, objections across the country The first major revolt was that of the workers in the public sector, who for the preceding four decades had been all but unfireable. The days of overmanning and underproductivity seemed numbered, and from their point of view that was not necessarily a good thing. More surprisingly, many Indian capitalists were also anxious about the impact of liberalization on their well-being; after decades of sheltering behind high tariffs, generous subsidies, and secure licenses, several got together to complain that foreign capital would drive them out of business. (A sophisticated variation of this argument came from the director of the Confederation of Indian Industry, a business lobby group, in a startling attack in April 1996 on the role of multinational corporations in India. He accused them of not being committed to India in the long term, of not bringing in state-of-the-art technology, and of an overreliance on imported components rather than Indian-made ones.) And then there were the vast numbers of Indians, particularly in the rural areas, who were largely untouched by the changes and saw little benefit in them — but who could be swayed by rhetoric declaiming that the government was providing Pepsi-Cola for the rich while it had failed to provide drinking water for the poor. The two were hardly incompatible, but the Indian voter might not see it that way.

  Politically, Prime Minister Rao took care not to seem to go too far, too fast. Before announcing any new reform in the contentious areas of taxation, financial services, and the public sector, he appointed committees to explore each issue and to make recommendations; though these were not far removed from the prescriptions of the World Bank and the International Monetary Fund, they emerged from an Indian body as recommendations debated and agreed by Indians. The prime minister was also highly sensitive to the impact of reform on India’s voters; his instincts were driven by politics, not economics. Ever since the “delinking” in 1971 of state assembly polls from those to the national Parliament, some state or the other is constantly going to the polls and Indian governments face, in effect, constant judgments at the tribunal of public opinion. Rao felt that a
n electoral setback even in one state could be interpreted as a verdict against the economic reforms nationwide; he therefore downplayed them as much as possible, and avoided making reforms that might have been politically costly in the short term, such as laying off public-sector workers, privatizing or closing down inefficient factories, reducing subsidies, or taxing agricultural income. Despite this, when electoral defeats came in states like Karnataka and Andhra Pradesh, political stalwarts were quick to ascribe them to the reforms, alleging that the masses at large had derived no benefit from them.

  This is all the more ironic because a chronic problem of the Indian economy remains the desire of Indian governments, whether in New Delhi or in the states, to spend more than they earn, mainly on keeping alive inefficient state-sector industries and in subsidies to farmers (who remain untaxed). Deficit financing had become a routine method of running the government before the reforms; bringing the annual deficit down was supposed to be one of the objectives of the new economic policies. After a couple of austere budgets that were aimed at having that effect, Rao and Singh abandoned the objective, and deficits rose again (In early 1996 they stood at 10.5 percent of the gross domestic product, no better than in 1991.) This in turn meant higher interest payments on the borrowed money: interest on India’s public debt consumes some 47 percent of all the government’s revenues. Farmers were paid higher prices for their crops than market conditions would justify, especially given the availability of a large buffer stock of food grains (28 million tons in mid-1996). Public-sector companies running at a loss were kept running at an even greater loss. The government has been unable to break out of the vicious circle of overexpenditure, leading to high deficits, which require higher interest rates and prevent lower taxes.

  No government responsive to public opinion, and accountable to the mass of voters at the polls, can easily break out of this vicious circle. The reforms for which Prime Minister Rao receives full marks — those that liberalized the regimes governing industry, investment regulation, and trade and exchange rates — arguably hurt only overprotected businessmen and their corrupt partners in the bureaucracy, and so were not politically risky to undertake. Cutting off life support to the public sector and ending agricultural subsidies are another matter altogether. On issues like privatizing the nationalized banks —whose workers, entrenched in their ways, would resist and could bring the economy to a standstill — or taking on the public-sector unions, the government gingerly felt its way forward, came up against bumps in the road, and hastily reversed course.

  There is no doubt that economic reform faces serious political obstacles in democratic India. Resources have to be generated, investment privileged above consumption, higher prices paid for many goods, sacrifices endured in the hope of later rewards, and all this while some segments of society reap the immediate benefits. In India the combination of liberalization and inflation has meant that a small group of businessmen and merchants, and their less savory cousins the hoarders, blackmarketeers, and speculators, have visibly profited while the woman in the street has found she can no longer afford her favorite foods at the bazaar. As one trenchant critic, Sundeep Waslekar, put it:

  [A] few million urbanites, white collar workers, trade union leaders, large farmers, blackmarketeers, politicians, police officers, journalists, scholars, stockbrokers, bureaucrats, exporters and tourists can now drink Coke, watch Sony television, operate Hewlett Packard personal computers, drive Suzukis and use Parisian perfumes, while the rest of the people live in anguish.

  The social consequences of exclusion — of the growth of feelings of deprivation on the part of those newly unable to share in the conspicuous consumption of imported or foreign-brand-name goods — have yet to be measured, but no government can afford to be unaware of them. A former member of the country’s Planning Commission, L. C. Jain, declared in August 1996 that liberalization had not yet helped the 88 percent of the economy that lay in the “unorganized sector.” At the same time, the threat to the public sector makes politically powerful enemies of the large and well-organized labor unions attached to the country’s leading political parties; the competition engendered by foreign investment hurts some protected Indian capitalists who have previously bankrolled the ruling party; the deregulation of interest rates removes one of the few advantages that small businessmen had over big industry (in 1994, 2.8 million “small-scale enterprises” launched a noncooperation movement against the government); the shift to market pricing for agricultural procurement (if it ever happens) would end major subsidies to farmers; and so on. It is easy to see that various segments of Indian society would have reason to be apprehensive of, and sometimes downright hostile to, the process of economic reforms.

  Prime Minister Rao’s strategy was to take all this into account, and to undertake only those reforms that would be politically acceptable to the public at large: as The Economist put it, he appears to have “reckoned that shock therapy would create losers straightaway, while creating winners only in the medium turn, and decided to leave some reforms to later, when winners had emerged.” As a result, for instance, while deregulating the economy, Rao and Singh were careful to control the administered prices of essential commodities, notably oil and petroleum products, in order to avoid hurting the ordinary voter and provoking inflation. This cautious approach has had its critics, notably among foreign economists, but it had the merit of avoiding the massive job losses, inflation, and human suffering that came to be associated with the early stages of economic liberalization in many countries in Africa and Latin America.

  It is an approach that has been understood with greater sympathy by governments in the West than by international business. Former Clinton Administration official Jeffrey Garten recalled a visit to India with the late U.S. commerce secretary Ron Brown:

  [When he met Prime Minister Narasimha Rao,] Brown had a thick briefing book filled with all the usual American trade and investment complaints. But from the moment the two men finished shaking hands, it was clear that Rao wanted to talk about something else. “Mr. Secretary,” he said, “tell me what I should say to millions of countrymen who experience no discernible benefit from all the painful economic reforms we have undertaken these past few years, and who are convinced that they are being hurt as we remove subsidies and let in foreign competition.” Later in the trip, Brown addressed a group of students in a town hall meeting. . . . Almost all the questions were variants of what the prime minister had asked.

  Brown understood that there were no easy answers; Rao knew that the mere questions carried a political price. There is also the larger philosophical question — particularly relevant in a country that got used to calling itself “socialist” (a term Prime Minister Indira Gandhi even wrote into the Constitution in 1976) — about distributive justice. Whenever economic growth has occurred, it has benefited some more than others. The fabled “Green Revolution,” for instance, when miracle seeds transformed the harvests in India’s agrarian northwest, was of course good for the country as a whole (it produced more food generally, and better yields for most farmers). But it helped Punjab more than other states, helped wheat farmers more than rice farmers, helped those with larger holdings more than those with smaller ones (ironically, where land reform had been effective and large holdings broken up, the economic benefits of the Green Revolution were reduced), and helped those in areas of better infrastructure (especially cheap water and electricity) above those reliant on traditional methods of farming. Yet there was no political backlash to the Green Revolution; farmers everywhere in India have sought to emulate their Punjabi compatriots, and agricultural extension officers in villages across the country find receptive audiences for their seeds, fertilizer, and pesticides, as well as for the technical advice that goes with them. What economic liberalization needs, if it is to succeed, is something similar: a general acceptance that the reforms are for the general good, that they might seem to help some more than others, but that in the long run everyone will benefit
from them. Such an attitude is far from being realized.

  Instead, Indian democracy is the arena for a brand of populist politics rarely practiced with comparable chutzpah elsewhere. A striking example of this came in the Andhra Pradesh state elections of November 1994. These were politically crucial for Prime Minister Rao, since Andhra is his home state; but he was facing a comeback attempt by the film star (and former chief minister) N. T. Rama Rao (no relation), whose principal campaign promise was that his Telugu Desam Party would offer rice to poor Andhraites for two rupees a kilo (about three U.S. cents a pound). Combined with pledges to increase the subsidy on electricity for farmers and to give up liquor-tax revenues by introducing prohibition (a major vote-winner with women voters in many Indian states, since Indian peasants have a not-undeserved reputation for gurgling away their monthly pay packet on drink before their wives get to see any of it), the Telegu Desam’s promises would have done away with 15 percent of the state’s annual revenues, some 15 billion rupees ($440 million). Not to be outdone, the Congress Party all but matched those campaign promises, and made others that were almost equally spendthrift: their plans would have cost the exchequer twelve billion rupees a year. The voters, faced with two alternative programs of fiscal irresponsibility, chose the more irresponsible: they voted for Rama Rao. Not only did the improvident Telugu Desam win handily, but the Congress’s defeat was then promptly interpreted as a vote against Narasimha Rao’s brand of economic reform.