India

by Shashi Tharoor

  Indian politicians have not yet accepted that public-sector companies are essentially holding hostage more than half the industrial capital at India’s disposal. Subsidies to public-sector workers come at the expense of India’s poor — they amount to five times what the government spends on health — yet their continuation is sought to be justified in the name of socialism. But one should not underestimate the popular support for the public sector: a public opinion poll in 1996 established that opposition to the privatization of the public sector vastly outstripped support for it among all sections of society. The irony is that where a governmental monopoly has ended, as with the deregulation of India’s domestic airline services, the consumer has tangibly and visibly benefited, in better service, improved availability, and wider choice; yet the lesson is not being applied to other sectors. Divestment is not a word that has enteted the official eco nomic vocabulary, even though the government of India is still engaged in a number of businesses it has no business to be in — from running five-star hotels to manufacturing wristwatches.

  At the same time, if the reform policy is not to suffocate from hesitancy, progress is clearly required in a number of areas. Not all the strangulating regulations have been taken off the books: the Companies Act still restricts mergers, takeovers, and intercorporate investments, and there are some fifty laws that apply to the treatment of the workforce and the settlement of labor disputes. Rules on privatization of ailing public-sector units, or of the telecommunications industry, have yet to be issued. Many clearances are still required, and oblige investors to run to more than one regulatory agency. Even though the government has fitfully pursued the privatization of loss-making public-sector industries, the fierce resistance of vested interests has slowed disinvestment to a trickle, and the Congress Government has shut down the Privatization Ministry.

  It is odd, too, that tariffs remain on trade in agricultural goods and consumer items — both to protect the domestic producers. (“It defies any economic logic and runs counter to the whole idea of an open internationally competitive economy,” wrote the economists Vijay Joshi and I. M. D. Little recently. “If Mahalanobis had not been a Hindu [and therefore cremated when he died] he would be turning in his grave knowing that soft drinks are more protected than heavy machinery.”) It would make more sense to help, for instance, the domestic handloom industry by subsidizing it directly, rather than restricting cotton exports as an indirect means of protecting the cottage industry in handlooms. It is a measure of the challenge facing India’s reformers that though tariff relief is one of the successes of the new economic policy, the current tariffs, after five years of reductions, are still higher than in all the viable economies of the world. They will have to come down.

  As for resource allocation, Indian planners from Nehru on down may have erred, to borrow a metaphor from Indian-American communications wunderkind Satyen “Sam” Pitroda, in putting greater emphasis on the “hardware” (the factories, dams, and steel mills that Nehru called the “new temples” of modern India) than on the operative “software” (education, health, communications). Subsidies to the inefficient private sector amount to five times the national expenditure on health; and the literacy rate of 52 percent stands in stark contrast to Sri Lanka’s 93 percent and China’s 77 percent. The economists Amartya Sen and Jean Dreze have pointed out that it is also far short of the 71 percent South Korea already had when it embarked upon its rise to industrialization in 1960; a literate workforce is far better able to meet the demands of high-technology companies than uneducated and unskilled labor, and the correlation between literacy and productivity needs no explanation. Lester C. Thurow, in his 1996 book The Future of Capitalism, has argued that we live in “an era dominated by man-made brain-power industries,” in which natural resources and financial strength are less important than human skills, “the only source of long-run sustainable competitive advantage.” The software engineers of Bangalore, sitting in offices in India’s Silicon Plateau and beaming their software to Texas and California by satellite, are in the vanguard of a revolution in human skills that could take India ahead of many developing countries in the race to economic well-being in the twenty-first century.

  Provided, of course, that resources are allocated to developing such skills. It could be argued that maintaining the world’s third-largest standing army — entirely justified, no doubt, by the state of tensions with two well-armed neighbors, China and Pakistan — has come at the expense of other national developmental priorities. There can, of course, be no development without national security; but without development, the army would have little worth protecting.

  The same concern about priorities applies to some national expenditures that seem difficult to justify in purely economic terms. To take a favorite example of some of India’s critics, the 1982 Asian Games in Delhi cost, according to unofficial estimates, 6 to 10 billion rupees; official figures admitted to 3.6 billion rupees, at a time when the national governments total budget receipts were Rs 140 billion (against expenditures of Rs 150 billion, the difference being made up by deficit financing). By way of comparison, the total investment in village development during the same fiscal year stood at Rs 2.7 billion. On the face of it, this seems spendthrift, even feckless; but I am not so sure. I do not wholly subscribe to the defense that the presence of competitors and dignitaries from fifty-two states, with their media and their television cameras, instilled a pride in the nation and in its capital that cannot be quantified; I think that pride was felt by too small a minority of Indians to be worth citing. More important to me were the practical consequences of the lavish expenditure. The Games left the capital with a legacy of development — highway overpasses, stadiums, housing complexes, hotels, restaurants, and roads — that have been of immeasurable value to the city. Yet there is little doubt that the political will, the financial resources, and the sheer energy required to construct these in record time simply would not have been found without the incentive and the deadline that the Games imposed. Sometimes seemingly mistaken priorities, executed in haste for short-term ends, can produce results that far-seeing planners might not have been able to ensure.

  The Asian Games improved New Delhi’s infrastructure, but the country’s remains appalling. The infrastructural problems I described earlier are the result both of woefully inadequate investment in such sectors as communications and power generation, and the usual habit of controlling prices artificially for political purposes. The scale of the problem is now such that it is literally beyond the government’s capacity to solve. India needs some 170,000 megawatts of additional powergeneration capacity by the year 2010, a 200 percent increase in current generating capacity; an indication of the cost is that Enron will have to invest over $3 billion to produce just 2,400 megawatts in its newly restored project. India needs to upgrade its congested ports and create new ones along its magnificent coastline, but just meeting existing and foreseeable needs would, according to the Confederation of Indian Industry, cost some $137 billion in new investment over the next five years (and this is essential: port delays and high cargo-handling charges reduce and sometimes eliminate the cost advantage Indian exporters enjoy over their foreign competitors). In communications, it would cost some $150 billion to $175 billion to bring India up to the current developing-country average of six telephones for every hundred people (from its current figure of 0.8 telephones per hundred people); but a growing economy will need to do better than the average developing country, and economist Prem Shankar Jha suggests India will need another 40 million to 50 million telephone connections at a cost of a further $30 billion. (India’s dramatic progress in the manufacture and distribution of cell phones, which now outnumber landlines, has gone some way to addressing the communications challenge.) To improve India’s road system and create a network of highways, current estimates require $35 billion for 14,000 kilometers of roads. The kind of money required to upgrade the country’s infrastructure —Jha puts it at $15 billion a year for the n
ext ten years; Western economists have spoken of $500 billion by the year 2000 — simply cannot be found in the public treasury.

  It will therefore have to come from the private sector. The 1996 budget recognizes this, though little has yet been done to frame the rules governing private-sector entry. The government has proceeded in fits and starts in areas like telecommunications, more as a result of ineptitude than of political hesitation; it has to do better, drawing up clear, investor-friendly rules and promulgating them quickly, if the clarion call by Finance Minister Chidambaram is to be heeded by private capital. But there will be a downside: if the private sector comes in, it will charge for its services, so that uneconomically cheap electricity or toll-free roads may no longer be feasible. And while the private sector may well be enthusiastic about building major new highways, it is not much interested in the rural roads government must develop and maintain but has no money for.

  Agriculture cannot indefinitely remain exempt from the reform process either, especially considering that much of India’s urban poverty is a direct overflow from rural poverty, as peasants unable to make a living from the land migrate to the sidewalks and shanties of the cities. At the moment farmers are not taxed, and their inputs (power, water, seeds, fertilizer) are uneconomically subsidized; but, equally, the prices of their produce are kept artificially low and farmers are still obliged to sell a fixed portion of their produce to the government at government-established rates. Since the government simply cannot afford to subsidize them forever, it may be worth exploring whether free trade in agricultural produce might not make up for a reduction in (if not an elimination of) subsidies. (The Common Minimum Program, or CMP, agreed upon by the United Front declares that “all controls and regulations that stand in the way of increasing the incomes of farmers will be reviewed immediately and abolished wherever found necessary.” But it is less bold in giving up the subsidies and other benefits farmers have enjoyed for decades.) The nationalized banks are still being obliged to make unviable loans at artificially low interest rates to “priority sectors”; this practice represents yet another subsidy that the government cannot indefinitely afford to keep paying. The continuing habit of writing off agricultural loans wins votes but undermines the rural credit system. (Reforms in the banking and credit sectors require political will, which clearly does not exist now and may take some time to form.)

  “No strategy of economic reforms and regeneration,” the CMP declared, “can succeed without sustained and broad-based agricultural development.” In a country where two-thirds of the population still derives its livelihood from agriculture, which is therefore still the single largest sector of the economy, this may seem a self-evident proposition. Agricultural output must grow as part of the country’s overall economic growth, and farmers must feel better off if the reforms are to acquire and retain the support of India’s rural majority. For most farmers, though, the reforms mean little if they do not improve the availability of water and electricity, and reduce the cost of inputs; fertilizer prices, for instance, have tripled over the last three years while the wheat grown with it earns the farmer only 8 percent more. Can the government reduce subsidies on the former and remove price controls on the latter without causing enormous social disruption? On the other hand, can it afford not to?

  It is striking how dependent Indian agriculture remains on good monsoons; we have had eight since 1988, the quantity and distribution of rainfall contributing directly to better-than-expected agricultural production. But our luck with the weather cannot last indefinitely; structural reforms to improve per-worker agricultural productivity are essential. These do not necessarily have to be “liberal”; in Communist-ruled West Bengal, land reforms and decentralized development have improved efficiency and generated agricultural growth above the national average, and there may be lessons here for other states. The proportion of India’s Gross Domestic Product derived from agriculture has declined from 55 percent to 30 percent as a result of the economic reforms, but there has not been a parallel decline in the percentage of Indians dependent for their livelihoods on farming. Economist L. C. Jain, a critic of the reforms, has argued that though 70 percent of Indian workers are in agriculture, only 5 percent of the new investment is being channeled to them. Paradoxically, of course, an increase in investment will happen only if the very reforms he opposes succeed.

  On the other hand, if economic reforms are to be fully accepted in a country where change has always come slowly, perhaps it is just as well that no sudden shocks are inflicted on the voters. Any Indian government will have to ensure that the short-term negative consequences of liberalization are kept at bay by efficient economic management. Effective measures must include curbing inflation (since price rises are what many tend to see as the most directly visible consequence of economic reform); maintaining adequate and dependable supplies of food and other essentials (including buffer stocks for the inevitable bad monsoon); and guaranteeing that liberalization is not accompanied by short-term catastrophes for the more vulnerable sections of the population, because any Latin American-style disaster for the rural or urban poor and lower middle class would make reform politically impossible for a generation.

  Controlling prices is the biggest challenge: the 1996 budget was preceded by a steep 25 percent rise in the price of gas and petro leum products (cut back, following protests, on diesel) and a less steep, but not inconsiderable, increase in railway fares and freight charges. These are costs that hit everybody’s pocket; at least, they hurt everybody who has a pocket. As the inevitable inflationary consequences are predicted, an immediate political clamor has gone up within the ruling coalition for increased subsidies, particularly for the poorest of the poor: Indian politicians congenitally prefer to manage poverty rather than to create a system that enables poor people to break free of their poverty. Full employment is going to be a chimera for a long time, even if population control makes more progress than it has done so far, because the young people entering the job market of the twenty-first century have already been born. According to Mr. Chidambaram, India needs to create 8 million new jobs a year to keep its burgeoning population adequately employed. More must be done to generate revenue, either by increased taxation (on real-estate transactions, on speculative trading, on the incomes of the super-rich, or on undertaxed corporations; the ratio of tax revenues to GDP has fallen by 1 percent in the last five years) or by a more aggressive attempt to soak the underground economy, which by some estimates runs at 30 percent of GDP. When he was finance minister under Rajiv Gandhi, V. P. Singh used a shrewd combination of amnesty, incentives, and enforcement to bring significant sums of undeclared assets into the tax system. Something similar has to be tried again.

  Equally important, much more needs to be done to persuade the public at large of the purpose and benefits of the reforms. “While Prime Minister Narasimha Rao speaks nine languages,” commented Time’s Rahul Jacob acidly just before Rao’s electoral defeat, “he has not made a loud enough case in any of them for the liberalization that is his government’s most notable achievement.” The result of this sort of silence is that though the case is known to (and largely accepted by) the country’s political establishment, the general population has not been given any corrective to decades of socialist rhetoric, which continues to be echoed by critics of the reforms alleging that India is being opened up to foreign exploitation and that westerners will profit “on the backs of India’s poor.” When the director of the Davos World Economic Forum told the New Delhi press in October 1996 that “India is becoming a key player in the region and more and more it will become a key player in the world,” she felt obliged to add that “India’s two major weaknesses . . . are that it has no clear agenda and that there is a lack of transparency.” With weaknesses like that, strengths don’t look as strong anymore.

  Nonetheless, as Manmohan Singh put it in a 1996 speech, “there has been a sea change in the minds of Indians in the past four years . . . there is a new India in the ma
king.” Indeed, India’s governmental track record for managing change is rather impressive, and its experience in preventing disastrous economic failures has become even better in recent years. In 1987 the monsoon failed and India reeled under one of the worst droughts it had suffered in a century. Two decades earlier, a similar meteorological catastrophe had led to a tragic famine, with the skeletal bodies of women and children littering the parched earth of states like Bihar. Nothing of the sort occurred this time. India had learned its lessons: the government had built up an impressive system of storage and distribution to tide its people through the consequences of the inevitable bad harvest. The Famine That Wasn’t was the great unwritten news story of the 1980s. The same thing happened in 2002. The grim Latur earthquake of 1994 and that of Gujarat in 2001 also witnessed an exemplary and effective response by the authorities. Thanks to the government’s efforts, the Indian people have come to believe they will not be left helpless in the great changes that are slowly sweeping the country. Even if nature or human error bring about setbacks in the progress of economic reform, there is reason to hope that the disaster stories won’t need to be written.

  For now, the signs are modestly hopeful that the economic reforms are taking root in Indian minds and hearts. In late 1996 the magazine India Today published the findings of an extensive public opinion poll conducted by the Delhi-based Center for the Study of Developing Societies, together with the Indian Council of Social Science Research; interestingly, the findings were compared with those of a similar poll conducted in 1971. Twenty-five years ago, in response to the question “Are you satisfied with your current financial condition?” 60 percent had replied in the negative, 29 percent were “somewhat satisfied,” and only 11 percent answered with an unqualified yes. Today, 28 percent were satisfied, 42 percent somewhat satisfied, and only 30 percent, half the percentage of 1971, expressed themselves as dissatisfied with their lot. Asked what their expectations were for the future, 48 percent thought their financial condition would improve (up from 39 percent in 1971), 27 percent thought it would remain the same (against 21 percent in 1971), and only 9 percent forecast that they would fare worse (compared with 19 percent in 1971). Here was proof that the reforms have engendered some optimism among the Indian people.