by Vivek Kaul
All these areas of Big Government, along with other major deficiencies, like that of physical infrastructure, essentially put a programme like Make in India, launched with great fanfare by the Narendra Modiled government in September 2014, at risk. It puts at risk the ability of the nation to create jobs for the one million individuals entering the workforce every month. This is discussed in detail in Chapter 6.
If India has to progress and pull up its multitudes from poverty, all these areas need to be reformed. The levels of Big Government in these areas need to come down. The trouble with most reforms in India has been that they have never been explained to people. It has always been the case of reform by stealth. And given this, politicians do not find reforms feasible, i.e., that reforms don’t turn into votes is their general belief. Also, India’s economic reforms have at best been very patchy. But, in the days to come, this is not going to be enough.
The trouble is that there is almost no track record of any country (except China) growing at a rapid rate of 7 per cent per year for a very long period of time, which is what India needs to achieve if it has to be prosperous and pull its millions out of poverty.
When it comes to superfast growth, China grew by 8.1 per cent per year between 1977 and 2010. Only two other countries came anywhere near. As Lant Pritchett and Lawrence H Summers write in a research paper titled ‘Asiaphoria Meets Regression to the Mean’:15
There are essentially only two countries with episodes even close to China’s current duration. Taiwan had a growth episode from 1962 to 1994 of 6.8 per cent (decelerating to growth of 3.5 per cent from 1994 to 2010). Korea had an episode from 1962 to 1982, followed by another acceleration in 1982 until 1991, when growth decelerated to 4.48 per cent—a total of 29 years of super-rapid growth (> 6 per cent)—followed by still rapid (> 4 per cent) growth. So, China’s experience from 1977 to 2010 already holds the distinction of being the only instance, quite possibly in the history of mankind, but certainly in the data, with a sustained episode of super-rapid (> 6 per cent per annum) growth for more than 32 years.
Hence, the odds are stacked against India. And it will mean the government doing many things right in the years to come if the country has to get anywhere near a sustained growth rate of 7 per cent or more for a longish period of time. Big Government simply needs to end in many areas. At the same time, the government has to get its act together in other areas, like education, physical infrastructure, agriculture, healthcare, etc., which it has ignored over the years.
The sad fact is that countries don’t reform unless they face a crisis. The question is: Can India really afford to wait for something like that?
In July 2016, I got talking to an economist close to the current Narendra Modi government. My question to him was very simple: Does the current government realise what it is staring at?
It took him a while to realise what I was asking. My point was fairly straightforward. There are various estimates which suggest that nearly a million (10 lakh) individuals are entering the Indian workforce every month. And this is likely to continue over the next two decades.
Over and above this, there is huge disguised unemployment in agriculture, where nearly 50 per cent of the country’s workforce produces only around 18 per cent of its Gross Domestic Product (GDP). Hence, it is clear that people need to be moved from agriculture into more productive enterprises. The only way this can be handled is by creating more and more low-skilled jobs, because that is where India’s competitive advantage lies.
Over the years, it has become more or less clear that the government cannot offer jobs beyond a point. It simply doesn’t have enough money going around to do that. And, more than that, it remains a very inefficient way of employing people. Government employment of various forms (state governments, union government, central public sector enterprises, etc.) has either stagnated or come down.
So, the only solution is to create an environment wherein entrepreneurship flourishes and India’s small and medium enterprises grow bigger and, in the process, create more jobs. For that to happen, the government needs to carry out reforms in its labour laws, education, ease of doing business and land acquisition.
India’s convoluted labour laws have not allowed many a firm to grow bigger than it currently is. There is enough evidence going around to show this. India’s education standards have fallen after the Right to Education Act came into force in April 2010. As mentioned earlier, the learning outcomes have come down dramatically. The ability of children to read basic text and do basic maths has come down. This is something that needs to be addressed urgently.
Almost no manufacturing entrepreneurship is possible without land. The land acquisition process continues to remain in a mess. If India has to create jobs, these basic things need to be set right. And in order to set these basic things right, India needs big-bang economic reforms. This isn’t exactly rocket science! To be fair, the Modi government tried to address the land acquisition issue in mid-2015, but, given the resistance of the other parties, it failed.
While the Modi government has done a lot of good things on several fronts, from banking to power and physical infrastructure, it has largely stayed away from any economic reforms which would get it into a confrontation with the existing order.
Any labour law reforms would involve a run in with the trade unions. Any education reforms would involve a run in with the teachers’ unions all over the country and state governments as well. Any ease of doing business reforms would involve a run in with the lower level bureaucracy, which is responsible for delivering much of what any government has to offer.
This was my basic point put to the economist close to the Modi government when we got talking. He responded nonchalantly by saying: ‘The so-called big-bang reforms only happen when a country is facing an economic crisis.’ He further told me that there was enough research in economics going around to back his claim. He offered this as a justification for the Modi government not attempting any big-bang economic reforms.
And what he was saying is true. As Ruchir Sharma writes in The Rise and Fall of Nations—Ten Rules of Change in the Post-Crisis World: “Nations are most likely to change for the better when they are struggling to recover from a crisis. When the country’s back is against the wall, the general public and the political elites are most likely to accept economic reform.”16
An excellent example of this is the first wave of economic reforms that India initiated in 1991, when it was on the brink of an economic crisis, or probably was even facing one. The first wave of economic reforms happened only because India was facing an economic crisis and not because the political leaders of the day suddenly had a change of heart after all the years of batting for socialism.
As Michelle Wucker writes in The Gray Rhino—How to Recognize and Act on the Obvious Dangers We Ignore: “Human nature as well as organisational and social systems are set up to reinforce the status quo and a rose-colored view of what is to come…. Denial is a deep-seated element in the lead-up to… many crises.”17
If we look at things from this perspective, then there clearly is a reason for the Modi government in not pursuing big-bang economic reforms. But can this reason become a justification for the Modi government not pursuing economic reforms? Not really.
India needs jobs, and it needs way too many of them. The fact of the matter is that not enough jobs are being created. And those that are being created are in the informal sector, which has its own set of problems. As the Economic Survey of 2015-2016 points out: “The informal sector should… be credited with creating jobs and keeping unemployment low. Yet, by most measures, informal sector jobs are much worse than formal sector ones—wages are, on average, more than 20 times higher in the formal sector.”
Formal jobs also allow workers to build an employment history, which, among other things, allows them access to cheaper credit. Hence, what India needs are formal sector jobs. As the Economic Survey points out: “Thus the challenge of creating ‘good jobs’ in India cou
ld be seen as the challenge of creating more formal sector jobs.”
Make in India envisages the creation of 10 crore additional jobs in manufacturing by 2022. In order to get anywhere near this number, the Modi government needs to initiate reforms which bring down the Big Government that India faces at this point of time. And time is clearly running out on that front.
As Sharma writes: “The political honeymoon phase—the early years of an administration—is the period when an emerging-world leader is most likely to push through reform with a positive impact on the economy.”18 Half of the Modi government’s term of five years is more or less over, and the cycle for the next Lok Sabha elections in 2019 is well and truly underway.
In this scenario, can we expect any meaningful reforms from the Modi government during the remaining half of its term? This is something worth thinking about.
Mumbai Vivek Kaul
November 27, 2016
Postscript: One question that I was asked by a friend who read the book as it was being written was: Who is this book for? ‘Is it an account of the current Indian economy? Is it a guide to the economists and the government about what is going wrong and what can be done? Is it for laymen and students to know the current and historical facts?’ my friend had asked during the course of reading and reviewing the book.
While as a writer I want anyone and everyone to read the book, it is important that I make one thing clear here. This book is not a guide for economists, the government and the economists in the government on what is going wrong and what can be done. In fact, the government has access to a lot of reports and analyses which can answer a major number of questions with regard to the Indian economy.
When the PV Narasimha Rao government carried out its big-bang economic reforms in July 1991, it did not take months to prepare for it. It already had access to most of the ideas that were implemented during the course of opening up the Indian economy. As Rao would later put it: “The political leadership had access to these ideas. The challenge was not in making announcements and implementing their recommendations. It was in creating the political climate in which they could get implemented.”19
The point being that the government already has access to many of the problems, ideas and potential solutions discussed in this book. The challenge it has, as always, is in implementing them.
Also, given the times that we live in, another point needs to be made clear here. Any criticism that I make of the current Narendra Modi government in the book shouldn’t be seen as a commendation of the previous Congress governments which have governed the country since Independence. Most of the criticism of Modi is because he has more or less backtracked on the minimum government that he promised the nation during the run-up to the Lok Sabha elections of 2014.
Furthermore, the mess that currently prevails is because of all the Congress governments that governed the country since Independence, and it will take a lot of time, effort and energy to untangle it. After all, Big Government is not going to go away overnight.
Finally, the book has been written over a period of 9 months, hence, the period of analysis might differ by a few months across sections. I have tried to update the data as much as I could depending on its availability and taking the publication deadline into account as well.
1. THOSE WERE THE DAYS, MY FRIEND!
Nations stumble upon establishments, which are indeed the result of human action but not the result of human design.
– ADAM FERGUSSON
In early 2016, a wonderful book called When Breath Becomes Air, written by Paul Kalanithi, was published. Kalanithi was an Indian American doctor who, one fine day, realised he had lung cancer and wrote a book documenting his life and how he went about fighting the disease. In the end, he could not complete the book. His wife wrote the last chapter.
During a particular stage of his disease, when Kalanithi was going through a really tough time, a pantheon of specialists (gastroenterologists, endocrinologists, infectious disease specialists, oncologists, neurosurgeons, etc.) got involved in treating him.
And this created a major problem. As Kalanithi writes:20
During lucid moments, I was acutely aware that with this [sic] many voices, cacophony results. In medicine, this is known as the WICOS problem: Who Is the Captain of the Ship? The nephrologists disagreed with the ICU doctors, who disagreed with the oncologists, who disagreed with the gastroenterologists.
WICOS is not a problem which is limited to medicine. It plagues many institutions, including governments, with different people trying to lead the institution in different directions. In September 2013, when the Bhartiya Janata Party (BJP) chose Narendra Modi to lead it in the 2014 Lok Sabha elections, one thing that became immediately clear was that, if Modi won, the government he would form would not have a WICOS problem.
He would be the true leader of the government, unlike the Manmohan Singh government, which was basically run from the backseat by the Congress Party President Sonia Gandhi and her team of advisers.
This belief came from the way Modi had administered the state of Gujarat for more than a decade, with three terms as Chief Minister. The state was run largely out of the chief minister’s office by bureaucrats, with Modi himself holding most of the important ministerial portfolios.
During the course of campaigning for the 2014 Lok Sabha elections, Modi had also said: “I believe that government has no business to do business. The focus should be on Minimum Government but Maximum Governance.”21
Given that there was no WICOS problem associated with Modi, people believed what he said. They thought that, finally, they would, for the first time, see the Indian government get out of business and concentrate on areas that it should.
But, nearly two and a half years later, that hasn’t turned out to be the case, even though Prime Minister Modi is now talking about the turnaround success of the public sector enterprises.
The government continues to run Mahanagar Telephone Nigam Ltd. (MTNL), a telephone company. The company had incurred losses of close to Rs. 5,000 crore between April 1, 2014 and March 2016.
The government continues to run Air India. The airline has incurred losses of thousands of crores over the years. In 2014-2015 alone, the airline lost close to Rs. 6,000 crore. In 2015-2016, the losses came down to Rs. 2,636 crore, primarily on account of the aviation turbine fuel prices crashing.
The government even runs a hotel chain called ITDC. It runs a company which manufactures scooters (Hindustan Scooters Ltd.). And close to where I live in central Mumbai, there is the Bicycle Corporation of India. Oh, and if all that isn’t enough, the Indian government even makes condoms (through HLL Lifecare, formerly Hindustan Latex Ltd.).
In fact, the losses of these companies are borne by the government, which ultimately means the taxpayer. The Economic Survey of 2015-2016 estimates that the accumulated losses of the public sector enterprises until 2013-2014 had stood at Rs. 1.04 lakh crore. As per the Public Sector Enterprises Survey for 2014-2015, the total losses of the loss-incurring public sector enterprises for the financial year ending on March 31, 2015 amounted to Rs. 27,360 crore.
In fact, the losses of the top ten loss-incurring CPSEs amounted to Rs. 23,380 crore (see Table 1.1). The losses of these enterprises made up for more than 85 per cent of the total losses, as can be seen from the same table. The likes of Bharat Sanchar Nigam Ltd. (BSNL), Air India and MTNL make for a major part of the losses.
The total number of loss-incurring firms in 2014-2015 was 77, up from 70 in 2013-2014. The number of profit-making firms decreased from 164 to 157. This basically means that one-third of public sector enterprises are loss incurring.
Hence, the overall accumulated losses of the public sector enterprises stand at more than Rs. 1,31,000 crore if we add the figure put out by the Economic Survey of 2014-2015 with that available in the Public Sector Enterprises Survey for 2014-2015. It is worthwhile noting here that the losses during 2014-2015 were around 26 per cent of the total accumulated losses before
that.
Table 1.1: The top ten loss-incurring CPSEs during 2014-2015.
Source: Public Sector Enterprises Survey, 2014-2015.
The interesting bit here is that not all of the losses are accounted for in the annual budget of the central government. As the economist Jaimini Bhagwati puts it: “Funds will be provided to support continued losses in public sector undertakings… some of which are not part of the Budget.”22
Hence, the government spends thousands of crores of rupees every year to keep running the loss-incurring companies, presumably in order to sustain the livelihood of around 2.5 lakh people, who work in these loss making companies.
Why is the government mollycoddling 0.02 per cent of the nation’s population when the money going towards sustaining the losses of these companies could easily go somewhere else?
This is basically a crime in a country as poor as India. As Bill Bonner writes in Hormegeddon—How Too Much of a Good Thing Leads to Disaster: “As a society grows richer it can afford more illusions, more entertainments, more re-distribution of wealth, more regulation, higher taxes, and more unproductive people.”23 Which, right now, India clearly can’t.
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It is important to explain here that Big Government does not really mean that the central government based out of New Delhi, which governs India, employs a large number of people. While the general feeling is that the central government employs a lot of people, this is incorrect.
In the Indian context, government employees across all hierarchies tend to be referred to as babus. So who is a babu? More than coming up with an exact definition, it is easier to just visualise him, in a cynical sort of way. He is the quintessential government employee, who does not reach office before 11 am. After he reaches office, he sits in his chair and does not do any work, but takes regular breaks to have cups of tea under the banyan tree outside his office, with a constant eye on his watch so that he can leave office the moment it strikes 5 pm (or maybe even 4 pm in some cases). Oh, and of course, to do any work the babu needs to be paid a bribe. (How could I have missed out on that?)