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Friday, November 25, 2011

SLEEP WALKING - Economic reform is meaningless without intellectual revolution

By Swapan Dasgupta

In these troubled times for the global economy, it may be worth narrating a story about the mentality of Indian politicians.

When the Congress returned to power in the summer of 1991 after the Janata Dal interregnum, the cabinet of Prime Minister P.V. Narasimha Rao was presented a note by the ministry of finance advocating dramatic reforms that included the deregulation of the economy. The note was greeted with predictable scepticism, if not outright hostility by the cabinet.

Looking for a way out of the logjam, Rao despatched a young aide to one of Indira Gandhi’s trusted confidants for advice. The hard-nosed veteran read the finance ministry note and then offered his suggestion. Wouldn’t it be more advisable, he asked, to preface the document with appropriate passages from Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi? It would, he suggested, definitely enhance the comfort level of the cabinet to know that the proposed measures were in conformity with the scriptures.

The wily Rao didn’t hesitate to accept the sage advice. A reworked cabinet note was circulated and this time, the opposition melted away, giving the prime minister the mandate to pursue liberalization as the highest stage of Nehru and Indira’s socialism.

This delightful story may well be true, partially true or plain apocryphal. What is remarkable, however, is not the revelation that the Congress party is made up of dinosaurs, but the extent to which orthodoxy takes hold of the political imagination to resist change. This is, of course, true of India but it is also a global phenomenon.

In her autobiography, The Path to Power, Margaret Thatcher spelt out the insidious hold of the post-War consensus on the British political imagination: “By 1964 British society had entered a sick phase of liberal conformism passing as individual self-expression. Only progressive ideas and people were worthy of respect by an increasingly self-conscious and self-confident media class.” Thatcher may well have been talking of India.

Nominally, India may have travelled a long way from the days when inefficiency and sloth were regarded as economic virtues and when personal rates of taxation for the highest slab touched 97 per cent. What is significant, however, about the massive economic shifts that were first brought in by Manmohan Singh’s 1991 budget is the remarkable extent to which change has been ushered without fanfare and, more often than not, by stealth.

It required the 1991 balance of payments crisis and the emotional trauma of the physical mortgaging of some of India’s gold reserves to begin the assault on the licence-permit-quota raj. Likewise, it required the Western sanctions against India in the aftermath of the 1998 Pokhran-II blasts to lift many of the curbs on foreign capital and rid Atal Bihari Vajpayee of his party’s accumulated swadeshi baggage.

As 2011 draws to a close, India is at a similar crossroads. The economic downturn in the United States of America and the Eurozone crisis has left no economy untouched. Complemented by what is called the ‘governance deficit’, India’s economic indicators have moved southwards. The gross domestic product projections are down from nine per cent to seven per cent; the already-large fiscal deficit is expected to breach the budgeted five per cent level and touch more than six per cent of the GDP; inflation has been hovering around 10 per cent for nearly a year and shows little sign of coming down despite 13 interest rate hikes since March 2009; the sensex has lost 22 per cent since January and foreign direct investment inflows have virtually ceased after touching a record $29 billion in 2010; in the preceding quarter, the profitability of Indian companies fell by an average of 30 per cent; and the Indian rupee, now blessed with a distinctive symbol, has lost some 15 per cent of its value in barely three months, thereby making imports prohibitive and adding to the inflationary spiral.

Middle India’s overall comfort level with Prime Minister Manmohan Singh rested on two beliefs: first, that he was a man of integrity and innate decency and, second, that he had the requisite skills to manage the economy. On both these counts, Singh’s reputation is in tatters. No one accuses the prime minister of being personally dishonest, but the sheer scale of the corruption charges before the courts have put question marks on his ability and willingness to tame his roguish colleagues. Worse still, there is complete consternation at the prime minister’s inability to ‘fix’ the economy. That he doesn’t possess the proverbial ‘magic wand’ is conceded by all reasonable Indians. What strikes them as odd is that the senses of urgency and purpose that should have accompanied the economic slide are missing. The government appears to have simply given up. Particularly disturbing is the extent to which a beleaguered political class seems ready to fall back on the ideological shibboleths that many imagined had been steadily discarded since 1991. The approach to the fiscal deficit is a classic example of a government that seems unconcerned.

There is a stalemate in the US over the failure of the White House and the Republican-controlled senate to agree on measures to reduce a trillion dollar deficit, and in both Britain and the Eurozone, the deficit is at the root of a political and diplomatic stand-off. Yet in India, fiscal consolidation has been deleted from the vocabulary of the ruling party and its allies. The hugely expensive and inefficient Centre-sponsored welfare schemes are not merely regarded as holy cows but there are moves to expand the net. So whimsical is the sop culture that last week the commerce ministry announced a Rs 3,844 crore ‘package’ for weavers in eastern Uttar Pradesh because Rahul Gandhi demanded it. No wonder Mamata Banerjee believes that handouts are her birthright too. In Europe, it is said that ‘austerity is the new normal’. In an economically fragile India, fiscal profligacy is the norm — the preferred Rahul alternative to beggary. India is living beyond its means but no one seems to care.

In most of the countries gripped by the downturn, the trend is towards removing as many obstacles to growth as possible. In Britain, for example, stringent planning norms have been relaxed to facilitate a growth in housing. In Italy, the new ‘technocrat’ prime minister has announced a series of measures that include fiscal prudence, welfare cuts and the dismantling of restrictive practices. In India on the other hand, there are moves to add a statutory premium on land acquisition for housing, industry and public utilities. Additionally, limited progress has been made in enlarging the scope of foreign investment in insurance and retail because of the government’s failure to secure agreement within the ruling coalition.

India, it would seem, is sleepwalking its way into an economic disaster zone. Yet, there are two remarkable features of this death march. First, there is no widespread realization that the troubles aren’t confined to inflation and price rise but affect the nerve centres of economic growth. Second, there is the presumption that statist intervention and a more rigid regulatory regime (that deters private sector corruption) is the way out.

Nehru, it must be said, did a remarkably good job in turning progressivism into common sense. Even two decades after liberalization transformed India and heralded far wider levels of prosperity, India has not yet turned its back on the belief structures of the bad old days. Economic reforms, it would seem, become meaningful only when accompanied by an intellectual revolution.

The Telegraph, November 25, 2011


अखिलेश शर्मा said...

Wonderful piece on the state of Indian economy. But are you suggesting that the present govt should go ahead allowing fdi in insurance and retail sectors? Because across the political spectrum there is opposition. Even the most vocal supporter of economic reforms-BJP is opposed fdi in retail. Surely with decreased foreign exchange reserve and growing fiscal deficit india would well be advised to attract more fdi in the sectors that have remained untouched in the past 20 years of liberalization. Thanks

seadog4227 said...

The government has all the channels at its'disposal: DD, Lok Sabha Channel, Rajya Sabha Channel and the Internet. Yet, there has never been any discourse or opinion seeking on any matter. Disastrous policies and their consequences are never discussed and there is never any attempt to explain what a govt. is trying to do. eg. There is no explanation as to why Air India and Indian Airlines were merged and why the purchase order for aircraft went up so spectacularly.
The creature called the IAS officer has very little specific knowledge or expertise.

Anonymous said...

Read the article with interest but can not agree with all the points you are making.
Comparison with EU-US on fiscal issue is misleading as India is on a different trajectory in terms of growth and demography. Moreover in terms of welfare while we are concerned about ensuring food security and fighting malnutrition they are on a different level altogether. I think your analysis would have been better if you attacked the inefficiencies in the welfare system rather than a generalized critique of leftist ideas.
Additionally you are partial in your criticism, just look at the statement of Uma Bharati and Shekhar Gupta's 'National Interest' today to understand what I mean.

Jitendra Desai said...

Not only the govt but the entire political class is sleep walking.
Look at the opposition to organised retail.No one wants to tell us why a farmer in Gurudaspur gets Rs 2/- per kg of the carrots he grows, and why a housewife in Delhi,located less than 200kms away pays Rs 20/- per kg for the same carrots.But every one wants to oppose the system, that seeks to shorten the supply chain.
No one is opposed to bailing out Air India.Why? Only 5% of Indians use air travel.Why worry? Why not worry about our railways, used by remaining 95%?
Governors appointed in the states have two qualifications [a] Failed politician [b] Aged 80+.Why continue with such an institution with their raj bhavans and staff? Why not to have a retired HC judge instead?
Entire political class has betrayed the nation.
There is a silver line though.We have always been like this! India in last 10000 years has prospered not so much because of her kings but inspite of them.
Wealth of 1 lakh crores was bestowed upon lord Padmanabha, when we were ruled by the outsiders.
Another silver line is the slap registered on the cheeks of Mr Sharad Pawar.That was the 12th such instance directed at our elite in less than 12 months.People are no longer in awe of our kings and queens.Get ready for more sleepers,slaps and slapsticks.