I
wrote previously about the reform process in China
[1] in the context of impending trouble for the
banking systems of China and India [2]. In those
articles, I categorized Chinese reforms as the dog
that did not bark. In this article, I will discuss
why Indian reforms have been all bark and no bite,
with an outlook that is even more dire than in the
case of China. Once again, the focus is on
economic rather than political reforms.
I
don't think that an extensive case needs to be
made about Indian reforms having failed to deliver
any punch since the mid-1990s. Barely any
loss-making Indian government-owned companies have
been sold. The process of privatization is central
to any reforms in India given the massive budget
deficit at more than 10% of gross domestic product
per annum. In absolute terms, the state sector
eats up some US$5 billion directly every
year; indirect costs such as
pilferage in coal mines easily account for another
$1 billion every year.
The effect of
significant deficits is to increase inflation
pressure, even as deflation threatens many product
categories thanks to rampant price competition
with Asian manufacturers. As the government pays
for uneconomic activity through borrowings in the
local market, the result is also to reduce the
availability of funds for deserving companies,
thereby increasing their cost of funds. Structural
reforms, such as in the financial and power
sectors, are even more critical to the long-term
success of the Indian economy, but are notable
only in their absence.
The key reasons for
the lack of meaningful reforms can be divided into
three broad categories: players, process, and the
people.
The players If the
devil's greatest illusion was to convince everyone
that he did not exist, the greatest illusion
pulled off by the current government is that
reform-minded politicians head it. Prime Minister
Manmohan Singh has an undeserved reputation for
forward thinking; instead he is a mere lackey to
broader political interests in the Congress party.
From his days as an economics lecturer in
an elite college, Manmohan has always sung a
socialist economic tune. He does not appear to
believe in the free market, and certainly did
nothing to argue for it in parliament over the
past few months. His record of reforms, which his
fans celebrate, was in the early '90s when the
government was in essence acting on the
instructions of the International Monetary Fund.
Ironically, at the time he only secured the job of
finance minister because no politician wanted the
hot-potato job as it was seen as selling out
India.
If Manmohan is not reform-minded,
his finance minister is even less so. P
Chidambaram has the job of appearing
market-friendly while kowtowing to political
interests. Lacking a popular base and being from
the south (while the Congress party posts are held
largely by people from the north and west), his
ability to push through reforms was meager from
the start. The rest of the cabinet, which is
composed mainly of regional chieftains from
coalition members, has disallowed even the most
cosmetic reforms. Regional political parties, much
like the Congress itself, won on populist
platforms that are likely to saddle India with
more debts in future. Some ideas, such as the
Rural Employment Guarantee, are downright stupid
in economic terms, putting forth silly notions of
localizing jobs rather than urbanizing the
workforce.
Congress party president Sonia
Gandhi would like nothing better than for her
children to succeed her. Heir-apparent Rahul
Gandhi is a member of parliament who has not made
a single policy speech in the House for the past
two years. In the few interviews on record, he has
come across as neither cogent nor intelligent.
Blatant incompetence aside, dynastic politics make
it impossible for India to confront its demons.
For example, to argue in favor of privatizing
banks would be to contradict Indira Gandhi, who
nationalized them in the 1960s in an attempt to
live up to her father's socialist legacy. Looking
at today's most promising young politicians does
not cause me any optimism - all are children of
mediocre politicians.
Process Compounding the problems
of poor players, reforms in India are challenged
by overly complicated processes. A simple example
can be found in the power sector.
The
government needs to increase the total electricity
output by some 250-300% in the next 10 years, just
to keep pace with the current economic trajectory.
This is not a simple matter of commissioning more
power plants and linking them to the grid. State
governments, rather than the federal government,
control the sector, with some disastrous results.
In Haryana state, for example, agricultural users
are not charged for electricity because of
promises made by the local government to secure
its own election.
Meanwhile, more
industrial states such as Maharashtra have
encountered corruption in expanding their power
sector. Ironically, that state's then chief
minister, who was widely pilloried for inking a
deal bad for the state's finances allegedly
because of corruption, is now a federal cabinet
minister. Leeway provided to states to charge
differentially for power has led to many
exceptions. This creates some strange anomalies,
such as a cement factory that is in mountainous
Himachal state.
Thus an entire industrial
sector that is needed to deliver economic growth
is stuck in miles of red tape, with projects
bouncing back and forth between New Delhi and the
various states. This has caused the private sector
to create its own generating capacity, as the
information-technology sector has done in
Bangalore. Of course, that is at unacceptable cost
if you are a manufacturer.
As if all this
weren't enough, India's judicial system affords
another layer of complication. While the country
can be justifiably proud of its independent
judicial system, things do take very long. Delays
in settling commercial disputes are measured in
years, not months. Don't even think of the few
weeks it would take to settle a case in Singapore,
for example. Thus an investor without strong
paperwork from multiple levels would find the
likelihood of legal challenges quite unappetizing
even if the opportunity does appear significant.
The people There is a simple
failure to discern the benefits of reforms among
taxpayers and, more important, among poorer
sections of society. A simple example is the
status quo in the power sector wherein low prices
promulgated by populist states allow extraordinary
inefficiency to persist. Making it a federal
matter and rationalizing the tariff structure is
wildly unpopular, as many people believe that
electricity prices would increase.
The
benefits of such an arrangement, namely greater
power generation that could then be used to
generate more meaningful employment, is simply not
understood by a vast majority of the people. The
attendant benefit of more reliable power supply is
also not a major factor in shaping popular
opinion. Similarly, the most obvious benefits of
privatization, which would be a reduction in
government deficits that could reduce the debt
load for future generations of Indians and also
decrease inflation pressure among the wider
population now, is simply not even discussed in
Indian colleges. Instead, the discussion is
usually framed in terms of the key beneficiaries,
with geriatric communists always scoring points by
alleging that foreign investors would end up
owning India. This is a ridiculous argument, and
yet one that always carries the day.
You
can't entirely blame a people who are still taught
Nehruvian socialism in their schools, but the lack
of debate is breathtaking in a country that
otherwise debates everything from the latest
Middle East crisis to the benefits of solar power.
A democratic society would need an educated base
for effecting any changes; India simply doesn't
have this essential ingredient in place.
The lack of any appropriate players to
push reforms' benefits is central to the mess
described above. India simply lacks the leadership
and the urgency to achieve any meaningful reforms
for years if not decades to come.
