India and America Trading compliments
Prof K.V. Rao ((no email))
Thu, 11 Sep 1997 15:06:42 -0400 (EDT)
Date: Fri, 3 Feb 1995 22:20:39 +1100
From: S Pavithran <pavitra@wave.maths.monash.edu.au>
The Economist
January 21, 1995
HEADLINE: India and America;
Trading compliments
THE visits to Delhi this month of the American defence secretary, William
Perry, and the commerce secretary, Ronald Brown, pointed up a shift in America'sdealings with India: attention has moved from security to trade. Elsewhere inAsia, trade often means conflict. But India's exports are too small to wo
America much. Security, on the other hand, inevitably raises uncomfortable
questions of nuclear bombs and Kashmiri human rights. So the shift in the
balance has made relations easier between the two.
A year ago America was pressing India to fall into line against nuclear andmissile proliferation; pushing for a regional summit on nuclear disarmament that India did not want; and complaining about the alleged brutality of the Indi
security forces in Kashmir. At the same time America was complaining about
India's slowness to protect intellectual property rights.
Last week Messrs Perry and Brown played down such concerns. Mr Perry did notask India to sign the Nuclear Non-Proliferation Treaty, and merely emphasised the need to avoid escalating nuclear and missile competition on the
subcontinent. He did not want India to deploy its indigenous short-range
missile, Prithvi, even if production had started. Nor did he want further
development of Agni, India's medium-range ballistic missile. Narasimha Rao,
the prime minister, gave no such commitment, but India has not yet deployed
Prithvi or started a new series of tests for Agni. For now, then, there is
harmony, though India has kept its options open.
Mr Perry said he brought with him no solution for the Kashmiri dispute. Thatwas a relief to the Indians: they want to be left to sort out Kashmir
themselves. Mr Perry said America was happy with the improvement in human
rights in Kashmir: some Kashmiri politicians have been released from jail and
given permission to travel abroad. He signed an agreement providing for two
bilateral groups, one to discuss strategic issues and the other to discuss
co-operation in arms technology and production. They will not achieve much,
since neither country is keen on transferring defence technology in a big way.
Still, the gesture at least is nice.
Mr Brown's visit to New Delhi and several state capitals was a more ambitiousoperation. He brought with him a team of American businessmen who signed
memoranda for new projects worth $ 4 billion. These were mainly in telecoms,
power generation and oil refineries, though there was also interest in marrying American technology to cheap Indian labour to flood the world's markets with
women's underwear. Not all these memoranda will become actual investments; and most are projects that have long been under negotiation. Their bunching
reflects delays on the Indian side rather than sudden American interest. Still,Mr Brown signed what is grandly termed the Indo-us Commercial Alliance,
providing for various sorts of American help for private business deals.
Mr Brown asked for greater access to India's financial markets, while the
Indian side wanted better access to American markets for its textiles. The
talks were warmer than previous wrangles over GATT, largely because India's
government is increasingly aware of the advantages to be gained from more open
trade. It also sees, observing the growing influence of countries like China
and Malaysia, that trade and investment can lead to foreign-policy clout.
Still, not everybody approves. An Indian politician, familiar with the storyof America's prizing open of Japan in the 19th century, remarked that America
was sending a second Commodore Perry to Asia, this time to open up India.
HIGHLIGHT:
Economic reform has helped, but India's government is still frustrating its
people's ambitions, writes our Asia editor, Emma Duncan
BODY:
" INDIA, " chant the world's brokers and bankers like a mantra, "has a middleclass of 250m people." If this is intended to convey something about a decent
house with a garden, a car, plenty of gadgets and a holiday a year, it is
rubbish.
The claims being made for India these days are a reflection of fashion, notfact. India is in vogue, for three reasons: the discovery of emerging market
by the West's financial institutions at the beginning of this decade, economic
reforms that started in India in 1991, and a growing fear that China, the
moneymen's first choice, is spinning out of control. With democracy, English
and a decent legal system, India looks more manageable.
India has an economy slightly smaller than Belgium's. Its GDP per head is $ 310. Fewer than half of its 95Om people can read. Between them, they have
only just over 6m telephones and 35m television sets. Some 14% of the
population has access to clean sanitation -- a lower proportion than anywhere
else except for a handful of Sudans and Burkina Fasos. According to the World
Bank, 63% of India's underfive-year-olds are malnourished. Perhaps 40% of theworld's desperately poor live in India. Apart from a tiny elite in Delhi and Bombay, India's rich are poor by anybody else's standards: according to the
National Council for Applied Economic Research, only 2.3% of the population has a household income of more than 78,0OO rupees ($ 2,484).
Until recently, to attribute any of this to mismanagement was to invite
hostility. There would be mutterings about the "Hindu rate of growth", as
though the country were somehow predestined for sloth; there would be claims
that, after all, much had been achieved because India no longer had the
famines it once had; and there would be recourse, at the smartest of dinners, tohomilies about the importance of Gandhian asceticism and the unimportance of
economic growth. To suggest that borders should be opened to trade, or that
foreigners should be allowed to own companies in India, was to threaten
recolonisation by multinationals.
This defensiveness was probably a post-colonial hangover. The Gandhian
belief in self-reliance that informed the fight for independence had
deteriorated into isolationism; that, combined with a chauvinist pride in the
system that the heroes of independence had built, prevented Indians from seeing how badly it had served them. Besides, too many of the people in a position to do something about that system were doing too well out of it.
Seen it on the box
Attitudes have changed over the past few years. No doubt the openness that has come with economic reform has hastened the change; but a new atmosphere also
helped to make those changes more acceptable. Maybe enough time has passed
since India got rid of the British for its people to see the rest of the worldas an opportunity, not as a threat. Whatever the reason, India is now
perceptibly more open to the outside world. The insecurity that manifested
itself as arrogance is going. The insularity of the past has been replaced by
an enlivening consciousness of how badly the country has done; and of how much
it has to do to start to catch up with the rest of the world.
Some of the change may also be the result of another recent revolution, aboutwhich the government could do nothing but fume: the advent of proper television.Until 1992, Indians were condemned to Doordarshan, the state-owned television,
still the country's only terrestrial broadcaster. The most exciting programme
it ever produced was a 98-part dramatisation of a religious epic, the
Mahabharata. Then Star-TV, a Hong Kong-based satellite network, arrived, along with Zee TV, a Hindi channel. In 1991, 330,000 homes in India received
satellite or cable channels; by September 1994, 12m did. Multiply that by the
average household size of 5.2, and a great many Indians are getting to see the
outside world for the first time.
Rightly or wrongly, television gets the blame (or the credit) for all sorts
of changes in India over the past few years: for the fact that so many teenagegirls in towns now wearwestern, not Indian, clothes; for the fact that some
advanced, cosmopolitan couples have started living together before they are
married ("it's easier to explain it to a mother who has seen "The Bold and The
Beautiful'," says a young woman, referring to an American soap screened on
Star-w); for the breasts that have appeared on the covers of magazines; and for the fact that many Indians perceive their society as increasingly consumerist
and materialistic.
Consumerism is a troublesome idea for a country whose hero liberated his
country wearing a loincloth, and spent his leisure hours toiling at a
spinning-wheel. Not that Gandhi invented asceticism: Hinduism preaches
self-purification through the denial of desires. The cultural habit of not
displaying wealth was reinforced by high tax rates and a large black economy:
anybody who looked too wealthy was liable to a visit from the tax inspectors.
But now Indians have started showing off a bit. The standard cramped, grubby
office from which million-dollar businesses were run is being replaced by
something more in tune with international taste. Bombay businessmen are castingaside their horribly-cut casual clothes in favour of suits and ties. Cars are
getting flashier, parties more ostentatious: a businessman recently hired an
airliner for his daughter's wedding. Salaries in the private sector have
rocketed in the past couple of years as Indian companies compete for talent withforeign interlopers.
Money-making has replaced revolution as the chief preoccupation of the young."Even the students of Calcutta," says T.N. Ninan, editor of the Business
Standard, in mock-astonishment at the revolution that has taken place in
India's most revolutionary city, "don't talk about politics any more."
Politicians are held in general contempt. Now that Indians are better able to
examine their country's failures, they are also quicker to allocate blame. Thisdisillusionment is sharper because of the reverence in which Indians hold the
grubby modern breed's predecessors, Gandhi and Nehru.
As people lose their reliance on government, so they look to the private
sector to fulfil their aspirations. In the past, the hordes of graduates who
hit the job market every year used to scrabble for public-sector posts that
offered at least a secure pittance and a cramped flat: now people would rather
join a private firm. The old prejudice against private enterprise and in favourof public service has been reversed. Many in government still have to catch up with this change. As P. Chidambaram, who resigned as commerce minister in 1992
says, "The people are ten years ahead of us." Outdated attitudes in government
are holding back what should be one of the world's most vibrant economies.
Headline: The revolution so far
"IT IS not entirely wrong," writes Jagdish Baghwati, an expatriate economics professor at Columbia University and long-time critic of India's old ways, "toagree with the cynical view that India's misfortune was to have brilliant
economists: an affliction that the Far Eastern super-performers were spared."
For those clever, foreign-trained economists who packed the committee-rooms of
Delhi during the decade after independence designed in fine detail a system thatcombined the worst of socialism and capitalism, by suppressing growth while
failing even to deliver the social welfare that communist systems provided.
Maybe the economist-surplus has its advantages, though; for three decades
later a different group of equally brilliant people is conspiring to undo the
system their predecessors built. The task is a harder one, for once a system
exists the powerful people who do well by it have an interest in preserving it. Momentum is on the reformers' side; yet the battle is still only half-won.
The system developed in India after independence constrained the growth of the private sector by allowing it to expand only with government permission. Itreserved heavy industry for the public sector, and stunted trade by quotas and
high tariffs. Access to foreign exchange was limited. There were controls on
land use, on trade in farm products -- even, if the mood suited, on the price ofonions. Such a cock-eyed system was sustainable only so long as India's
macroeconomics were in order.
On this front at least, India has done better than host other poor
countries. Its governments have aid their debts, and kept budget deficits and
inflation low. In the 1980s, however, India's macroeconomics came unstuck:
governments began to push 6r growth not by giving the private sector its freedombut through Latin American-scale borrowing. By the end of the decade, India's debt-to-GDP ratio was nearly twice its level in 1980. In 1991, with only two
weeks-worth of foreign-exchange reserves left, the government went to the IMF.
The macroeconomic crisis was resolved with impressive speed, if not in the
most desirable way: the budget deficit, which had reached 8.4% of GDP in the
April-March 199,D-91 fiscal year, dropped to 5.7% by 1992-93. Some of that
reduction came in things the government should never have been spending on, suchas export subsidies; some in less-expendable items, such as health and
education. Yet India got off lightly: macroeconomic stabilisation meant that between the fiscal years 1991-92 and 1992-93, GDP grew by 1.1%, and picked up inthe following year to 4%. By contrast, Mexico experienced no net growth at a
for nearly a decade after its (far-worse) debt: crisis in 1982.
Reformers took advantage of the macroeconomic crisis to push through some bigmicroeconomic changes. Much of the industrial-licensing system was dismantled, and areas once closed to the private sector were opened up: electricity
generation, bits of the oil industry, heavy industry, air transport, roads and
some telecommunications. Foreign investment, formerly allowed in only
grudgingly and subject to arbitrary ceilings, was suddenly welcomed. Approval
is now automatic for foreign equity stakes of up to 51% in most businesses;
stakes up to 106,% may be allowed. Raw materials and capital goods can be
freely imported. The maximum tariff rate is down from 400% to 65%. The rupee
was devalued by 24% in 1991; most exchange controls have been lifted, and the
currency is now pretty much convertible. The top rate of income tax is down
from 56% to 40%, and of corporation tax, from 57.5% to 46%. A complex system
of excise duties has been replaced by a sort-of-VAT.
Politicians and bureaucrats explain at length that reform in India is
"pragmatic" not "ideological". What that seems to mean is that hardly anybody
in the government believes in it. That is probably because India never
suffered a disaster on the scale of Latin America's hyperinflation or the formerSoviet Union's economic collapse. India had a short-term financial problem
that was swiftly sorted out; and both politics and the bureaucracy are packed bypeople who do not see change as in their interests.
Even when reform nevertheless has support from the top, India is an
especially hard country to push it through. Pranob Bardhan, professor of
economics at the University of California at Berkeley, and Mrinal Datta
Chaudhuri of the Delhi School of Economics, have called it a "multiple-veto
system". This may be partly the result of the bureaucracy, in which files pass from desk to desk to desk, needing the signature of each incumbent; it may also reflect the anarchistic individualism of Indians, all of whom think they des
a say. Indians are an opinionated lot, and no great respecters of authority.
This does not help things to happen quickly.
The war goes on
So the reform process moves on, but slowly. It resembles guerrilla warfare,
with the aggressors a small band of technocrats fighting the rest of the
bureaucracy and almost all the politicians. The finance minister, Manmohan
Singh, counts as a technocrat: other politicians certainly do not regard him as one of them. His principal lieutenant is Montek Ahluwalia, the finance
secretary. They have their men planted in most of the ministries, usually as
economic advisers.
Indeed, a few individuals have been crucial to reform. Airline
liberalisation, for instance, happened because the skies were run by two
successive reformers: Arif Mohammed Khan of the Janata Dal, followed by
Congress's Madhavrao Scindia, who has since been edged out of government. Sincea direct attack on the monopoly of Airlines, the government-owned domestic
carrier, was politically impossible, aspiring carriers were given licenses to
run air taxis. In fact, they operated as airlines, but were not allowed to
advertise or publish schedules. This was clearly absurd; and a public outcry
forced the government to regularise their position.
Mr Scindia's successor takes a different attitude. He has ruled that privatecompanies cannot recruit Indian Airlines' staff without six months' notice and agovernment no-objection certificate; they must run unprofitable routes; a stay
order has been put on the import of new aircraft; and Damania Airways, which
had started enticing passengers with free liquor, was grounded for 45 days
because a passenger was said to have got drunk. "The empire strikes back,"
comments Cyrus Guzder, managing director of Air Freight, Indian partner of the
London-based courier company DHL.
Mr Guzder is happier than he was, though, for he now has a supporter within
the government. Over the past decade, the private sector has quietly broken thepublic postal monopoly in high-value items. There are now hundreds of courier
companies, in a market worth around $ 100m a year. Last year, the postal
ministry tried unsuccessfully to reimpose its monopoly. Mr Guzder and his
colleagues got their customers to petition the government; but he gives most
credit to a new secretary to the department, who told the private companies thatthe government was reconciled to losing its monopoly of high-value items so longas it retained control of the bulk postal service. A new postal bill is now
being drafted. "Incredible," says Mr Guzder, who had earlier lost faith in the government's ability to change.
Headline: India business shapes up
HIGHLIGHT:
Business has leapt at the challenges that the new environment presents
BODY:
AFTER four decades of suffocation and a couple of years of post-adjustment
gloom, Indian business is bouncy. The business-confidence index compiled by theNational Council for Applied Economic Research went from optimistic to ebullientduring 1994. Corporate profits in the first half of 1994-95 were up by 102%.
The capital-goods industry, the first to go into recession, is flourishing. Itsoutput shrank by 5.3% in 1993-94; but in the first two months of 1994-95, it
was 18% up on the same period of the previous year.
Yet the statistics do not present a clear picture of a business sector that
has leapt on to a higher growth path. GDP growth is still slower than in the
198Os. Some recent figures seem downright contradictory. The Centre for
Monitoring the Indian Economy (CMIE) runs a survey of 1,800 companies that
suggests a 15% increase in sales for the first half of 1994-95. But the
industrial-production index, which should not diverge too far from the sales
figures, looks like coming in at around 7%. Exports rose by 20% in 1993-94; butclaims that India was on its way to join the big exporters' league looked
premature when in the first half of 1994-95, growth dropped back. Exporters
have been disadvantaged by the capital that has flowed into the country thanks
to foreign enthusiasm for India: although the government has been buying
dollars to prevent the rupee appreciating, an inflation rate edging towards two digits has meant that the real exchange rate has gone up.
The huge flow of funds into the stockmarket -- market capitalisation grew
from 1,110 billion rupees in 1990-91 to 3,980 billion in 1993-94 -- has given
companies plenty of investable cash. Yet it is not clear that they are
investing the stuff. Much of it has been used to restructure their finances,
exchanging expensive bank loans for equity; but companies do not seem to be
using this cheaper money to build new factories. CMIE figures show that in
1992-93, companies were putting 3% of their funds into stocks and bonds and 52% into fixed assets; in 1993-94 they put 22% of their money into the markets and
only 47% into assets.
Yet this does not mean that nothing is happening in Indian business. When
the environment is changing fast, thanks to the opening of the economy to
foreign and domestic competition, new companies have an advantage over old ones.In India, the business scene used to be dominated by firms with pedigrees
going back before independence. Now there are sizeable new players speeding
past them. Videocon, owned by the Dhoot brothers, formerly motorcycle dealers, is one of three big television manufacturers. It is currently negotiating a
joint-venture to make Toshiba VCRs for export. Essar, in steel and oil
refining, is planning to expand abroad. The Jain Group, which makes farm
equipment, has seen a 400% increase in turnover in the past three years, and nowemploys 3,000 people. Anil Jain says that they could have done it without
liberalisation, but it would have taken four to five years longer.
Management consultants are much in demand, as old business houses try to
restructure. McKinsey has 50 consultants in India; other consultants include Andersen Consulting, Coopers & Lybrand and a host of Indians with foreign
education and working experienc. According to one such, Mrityunjay Athreya, thenew environment de- a new range of skills: "In the past, when companies were
making plans, the first thing they looked at was the statute book. Now they
have to look at the market." Market research, advertising and public relations, none of which companies really bothered with before, are booming.
Companies are also trying to restructure to cut costs and increase
efficiency. Some of their hierarchies were as nonsensical as the civil
service's: one engineering company had a (now defunct) senior assistant deputy
manager. Typically, according to Mr Athreya, companies are cutting their
hierarchies from nine levels to four or five. And they are sampling a couple ofdecades'-worth of foreign management fads. All at once, people are trying
just-in-time, kaizen (continuous improvement), business process re-engineering, total quality management, human-resource development. The arrival of the latestforeign management guru in India is often front-page news.
"There is more competition for talent, and the arrival of foreign companies
is pushing salaries up. Clever Indians are nothing like as cheap as they were. Pradip Shah, a Harvard graduate who had been earning 400,000 rupees a year
running a credit-rating agency, has been hired by George Soros for over 10m
rupees. Salaries of $ 100,000-200,000 a year are no longer rare. By American
or British standards, this is not astounding; but in a country in which, until
August 1993, the government set a ceiling on chief executives' cash salaries of 15,000 rupees a month, it is a big change.
From an era when companies spread themselves wherever they could get a
permit, companies now have to think about concentrating on "core competences".
Some are restructuring: the huge old business house Tara, which is strongest in engineering, has sold its soaps and toiletries company to Hindustan Lever. ShawWallace has sold a profitable tea company, Tezpore Tea, because it decided tha
it did not fit with its strategy to expand into the fast-growing liquor market. With the maximum tariff down to 65%, companies now face fiercer competition fromabroad, and so are having to think harder about what it is that can be done wel
in India. Fast growth is most noticeable in areas that need cheap but
well-educated people.
High levels of engineering skills, for instance, have led to a boom in
exports of car parts. The Anand group exports to General Motors, Ford and
Chrysler; the Kalyani group supplies Daimler-Benz in Indonesia; Mahindra
produces parts for Chrysler, Ford and Renault. Software exports began to take
off in the 1980s. Bangalore, home of India's software industry, is now one ofthe world's largest software exporting centres. Other computer-related servicesare also migrating to India: a company called Airline Support Services in
Bombay's Santa Cruz Electronics Export Processing Zone, for instance,
computerises all Swissair's paperwork. In Switzerland, the labour would cost 25times as much.
The geography of industrial expansion is changing, too. In the past, as wellas determining which sectors it wanted new investment in, the government decidedwhich areas of the country new factories should be built in. Now that compa
can go where they like, they are choosing the parts of the country that are
already rich and well-provided for. That will make the differences between richand poor India, between the places that seem to operate in time-zones
centuries apart, even more painfully obvious than they are already.
Headline: The revolution yet to come
HIGHLIGHT:
There are still too many constraints on the economy to allow it to functionas
efficiently as it could
BODY:
THE lively competition at state level has a parallel in Delhi: it was partly China's success that shamed the Indian government into changing.
Correspondingly, recent worries among foreign investors about China are making
the Indians smug.
They do not have much reason to be, according to Mr Chen, the umbrella-parts maker in Rajastan, who opened a factory in China two years ago. He does not
think that, as things stand, India has a chance against China. The factory inChina went into profit in its first year; the factory in Rajastan may take
another two or three years to make profits. There are four problems. In
India, he pays 25% duty on capital goods and 50% on raw materials; for goods
he exports from China, he pays no tariff on imports. In India, he pays 18-21%interest on borrowed money; in China, he borrows from Hong Kong at 6%. The
power problems are worse in India, with three-hour-a-day power cuts and
damaging voltage fluctuations that require companies to generate their own
power. And then there is productivity. Indian workers, says Mr Chen, cost
around $ 50 a month; in China, they cost the same; in Taiwan, they cost $ 950 a month. But, he says, pointing at the factory floor below his office, the
furnace is manned by one person in Taiwan, two people in China and six people in India.
Some of Mr Chen's problems are being addressed. Further reductions in importduties are promised. The cost of borrowing is coming down: in October 1994, thegovernment allowed banks to set their own interest rates. Rates immediately
dropped by 1-1 1/2%. Private-sector investment in infrastructure may help solvethe power problem. Low Indian productivity, however, reflects a complex of
influences, only some of which are being sorted out. Part of it is to do with
India's rotten education; but it is also to do with politics, not markets,
dictating how the private sector operates. The removal of the licensing system went some way towards solving this. But a range of surviving restrictions stillsuppress the growth of the private sector.
Why, for instance, doesn't India export toys and cheap radios? So many
countries that have made it from poverty to prosperity -- Japan, South Korea,
Taiwan -- started that way. This correspondent went to a toy stall to find out.Most were tacky, ugly and fragile. There was, in a corner, a tough-looking,
nicely-designed tape-recorder that could have sold in any western toy shop. Notsurprising; for it was made in China. Presumably the disparity in price and
quality between Indian and Chinese toys is such that it was worth smuggling in; for the import of most consumer goods is still banned in India.
Toys, like cheap radios and 836 other items, including most consumer goods,
are reserved for the "small-scale" sector -- companies with an investment of
less than 6m rupees. The idea of small-scale reservations, peculiar to India, goes back to Gandhian beliefs about the virtues of the village economy,
intellectualised by the economists of the 1950s, who argued that if the
consumer-goods industry expanded too much, it would become capital-intensive andthus not provide jobs.
The consequences for the textile sector have been detailed by Dipak Mazumdar,a World Bank economist. Large textile mills were not allowed to increase the
production of cotton cloth, which was reserved for small firms. The big mills
expanded into synthetics, which were heavily taxed to protect the cotton
industry. So Indian consumers paid exorbitant prices for synthetic cloth, whilecottoncloth production became uncompetitive on world markets. Between 1960 and 1980, India's share of world exports of cotton textiles dropped from 8.8% to
4.1%, while Pakistan, Taiwan and South Korea raised their respective shares from4.9% to 9.4%, 1% to 5.1% and 0.4% to 6.6%.
Linked to reservations for small firms is the ban on consumer-goods imports. If big Indian companies are not permitted to expand into consumer markets, the
argument goes, why allow foreign ones? So India's consumer-goods industry
suffers not just from being kept artificially small; protectionism also fosters poor design and shoddy quality. Now that the government is keen to promote
exports, it is embarrassed by the poor quality of most Indian goods. A couple
of complaints from foreign buyers of Indian goods in 1994 provoked a typical
response from the commerce ministry: instead of advocating that Indian industry should be exposed to competition, it proposed imprisoning the exporters of
low-quality goods.
The government's residual puritanism underpins the import ban. "There's a
clear political perception," according to Rakesh Mohan, economic adviser at the industry ministry, "that loosening up on consumer goods would lead to more
conspicuous consumption. In a sense, this is hypocritical, because the rich
have always been able to get these things." Shankar Acharya, economic adviser atthe Ministry of Finance, argues that things are changing. Exporters can apply
for a special import licence for certain consumer-goods imports, and there is
"de facto liberalisation" through smuggling. "Of course, this isn't government policy."
Nobody now seriously tries to justify small-scale reservations on economic
grounds. It is, says Mr Mohan, "purely a matter of vested interests.
Small-scale producers aren't cottage fellows. They are people who perhaps have turnovers of 10m-30m rupees. In their locality, they're the big shots. And if you have 500 politicians, maybe 100 will know 200 big industrialists, and 400
will know 5,000 small ones. Which do you think will be the stronger lobby?" Mr Mohan says there is "glacial progress" on getting rid of small-scale
reservations. In the garment industry factories may be set up with an
investment of 30m rupees so long as they export 50% of their product. Mr Mohan hopes that this is the thin end of the wedge. "The same thing happened with theindustrial licensing system. We chopped away at the edges, and finally the
whole thing was abolished."
V.N. Gadgil, official spokesman of the ruling Congress party, sees things
differently. Asked whether the small-scale reservations will go, he shakes his head firmly, several times. "You may call it emotional, but it is pan of the
struggle for liberation. The reservations started to protect the producers of
khadi [rough cotton cloth]. Gandhi called it the livery of freedom." But what
if the reservations hamper India's ambitions to become an exporter? "We have a large enough domestic market. The exporters do not need to worry too much
about that."
Let them die
Along with these restrictions on companies' expansion, there are even more
damaging constraints on their contraction. The government does not seem to
accept that merely allowing companies to grow is not enough to produce a healthyeconomy. Companies must also be allowed to merge, shrink -- or die.
As newly-free companies expand eagerly, some markets are looking distinctly
overcrowded. The tyre industry, for instance, has around 16 producers in a
market that can probably sustain only five. Some restructuring is obviously
needed; but there are all sorts of barriers to takeovers in India. Their
origin, argues Omkar Goswami, an economist at the Indian Statistical Institute, lies in the instincts of past governments to look after the interests of
established business families. The Companies Act, for instance, places
restrictions on the transfer or acquisition of shares, including a provision
that allows the government to refuse a transfer of a block of shares if it wouldcreate "a change in the controlling interest of the company . . . and that such a change would be prejudicial to the interests of the company or to the public
interest."
If it is difficult to take over a failing company, it is even harder to closeone down. The reformers have been struggling to establish what is known as an
"exit policy" since 1991. Labour laws make it hard to fire anybody. A firm maynot make more than 100 workers redundant without government permission -- which is almost never granted. When cases have gone to the courts, they have
generally found in workers' favour. Mrinal Datta Chaudhuri, of the Delhi Schoolof Economics, says that judges have regarded labour cases rather as
child-custody cases, seeing the workers' welfare as their primary
responsibility. There is a hint that this may change, however: in 1994 the
Supreme Court threw out a petition by trade unions against the takeover of a
Tata company by Hindustan Lever.
Some argue that labour laws do not much matter, because businessmen simply
pay their workers to resign. They do, but that makes restructuring expensive;
and the hassle and cost involved are a disincentive to investing. The laws
may also have made working conditions worse, not better, for they have pushed
businesses out of the "organised sector" to which they apply. Increasingly,
industry is in the largely unmonitored "unorganised" sector of small companies
that rarely conform even to the barest of safety standards. The share of the
labour force in the "organised" private sector fell from 3.3% to 2.8% between
1981 and 1991, a curious phenomenon in a developing economy.
In Dharavi, in northern Bombay, the "unorganised" sector provides employment for migrants from poorer states. In a shack made out of corrugated iron, 12
workers dye fabrics that will be made into garments to sell to western chain
stores. There are pools of chemicals on the floor of the 20-foot by 15-foot
room, where the workers cook, eat and sleep between the vats. They have no
plans to leave, though: they come from Uttar Pradesh.
Headline: They can't let go
HIGHLIGHT:
The Publice sector is dragging the economy down, and politics is preventing the government addressing the problem
BODY:
THE problems of the public sector in freer India were neatly illustrated atDelhi airport's old domestic terminal. On one side were the new private
airlines, Damania Airways, Sahara, Jet Airways, East West Airlines and Modilufi,their punctiliously-polite staff smiling with the determination of cut-throat
competitors. On the other side of the bartier was the state-owned company,
Indian Airlines, almost empty of passengers, though still fully staffed. IndianAirlines' flights are still relentlessly late, its staff as unforgiving as ever -- and already there are rats scurrying down the pipes in the new terminal.
Indian Airlines may have a better future than other public-sector companies, forone of India's most respected managers, Russi Modi, has left the Tata group tojoin it. Yet he will not even have the power to set pay levels: throughout the
public sector they are determined centrally.
In theory, India's public sector makes a 2% return on capital. In
practice, according to Y. Venugoppal Reddy, economic adviser to the commerce
ministry, this is an overstatement. Yet the prime minister has no plans to let the private sector take over state-owned companies. "We have not bitten the
bullet on 51%," says Shankar Acharya, economic adviser to the finance ministry. That is not, he believes, thanks to overwhelming public support for public
ownership. "Partly it is ideological: there is still a view that public
ownership is not a bad thing. Partly it is to do with the trade unions.
Bureaucrats are not best-placed to judge these things, but my impression is thatthe average voter would not mind privatisation."
The government claims that its policy of selling off small tranches of sharesin the more profitable public-sector companies will improve their efficiency.
But an internal government document shows that some bureaucrats do not agree:
Partial divestment of equity in the public sector enterprises fails to
address the efficiency problem . . . it has no impact on ownership, control and management . . . it has been used more as a fiscal tool in order to raise cash
to finance the government deficit, rather than to improve the efficiency of
enterprise operations. . . . There is also the danger that such an approach
can be a temptation to privatise badly and to postpone the more difficult but
much-needed longer-term fiscal reforms.
Bureaucrats, however, do not understand the politics of privatisation. Look at electricity. India consumes 382 kilowatt hours of electricity per person
per year, compared with 11,000 in America. At peak hours, there is already a
20% shortfall in capacity; hence persistent and worsening power cuts. Accordingto the latest Five-Year Plan, 43,000MW were supposed to be installed in 1992-97.In fact, 12,000MW will have been installed. "If the economy picks up," says on
American power expert, "demand is going to go crazy." He reckons that 6%
economic growth requires an extra 9% of power capacity a year. That means an
investment in electricity of $ 200 billion over the next 12 years.
The obvious solution is to turn to the private sector. This has two
advantages: the government will not have to finance the expansion, and
politicians can make lots of money from backhanders. So the government has
embraced the idea of private investment in infrastructure with enthusiasm.
But there is one problem: unwillingness to tackle the public sector's
inefficiencies.
Electricity is run mainly by state electricity boards (SEBS), with some
generating capacity in the hands of the National Thermal Power Corporation. On average, the cost of producing electricity in India is 1.61 rupees per unit;
and the price is 1.31 rupees. Prices are low because state governments want to bribe voters -- especially farmers. In Tamil Nadu, farmers get their
electricity free. In other places, they pay nominal charges. Industry normallypays over the odds, to help make up the losses. Officially, 22% of power is
lost in the course of transmission and distribution. Unofficially, the figure
is 48%. That is partly because of shoddy equipment; but it is more because of
the man from the electricity company who says that he can reduce your bill on a freelance basis -- and because of the "jumpers" that people attach to power
lines.
The SEBS have also been job-creation centres for friends and relatives of
politicians. Andhra Pradesh's SEB has 5,000MW of installed capacity and 80,000 employees: that is 150 times as many as would be employed to generate and
distribute a similiar amount of power in America. And the SEBS owe the NTPC 50 billion rupees. Foreigners thinking of investing in power generation in India find the SEBS off-putting. "Would you want these people as customers?" asks
one.
It would, of course, be possible to reform the SEBS. And, nudged by the
World Bank, six state governments ernments are indeed considering restructuring;one, Orissa, might even be persuaded to think of privatisation. But the
better-off state governments have no such plans, for the SEBS are too useful a
source of patronage to let go.
The solution, enthusiastically espoused by state governments and the power
ministry, is for central government to plug the hole. A test case involves the Dabhol project in Maharashtra, a 2,015MW project put together by three American companies, Enron, Bechtel and GE Capital. They want a counter-guarantee from
the central government, which would mean that, if the SEB didn't pay its bills, the money would come out of the state's allocation from central government. Thefinance ministry, which knows that in reality the money would come out of the
central government's budget, has been battling against giving a
counter-guarantee. It believes that once Maharashtra got such a promise, other states would demand one too.
Headline: Illfare
BODY:
IN 1947, when Jawaharlal Nehru spoke to Indians of their "tryst with
destiny", he promised that a main task ahead for the government was to eliminatedisease and ignorance. India's poor performance here darkens the country's
economic prospects: sick, illiterate people do not make good workers. But more important, it demonstrates that governments have failed in the most basic way toimprove the lives of their citizens.
India's most visible failure over health is filth. The consequences got
embarrassing publicity in an outbreak of pneumonic plague in 1994. Less
noticeably, 300,000 children a year die of diarrhoea. The illnesses that in
1992 killed 79 infants out of every 1,000 (compared with 31 in China) are mostlyrelated to poor sanitation.
Indians are themselves partly to blame, with their astonishing disregard for public space. People with spotless homes tip their rubbish into the street justfar enough away from the front door so that they do not actually trip over it.
Hinduism is obsessed with purification, yet people commonly urinate in the
street.
Some people speculate that the caste system that divides Indians so rigidly
also leaves no sense of responsibility for communal places. Or perhaps the
blame can be laid with purification rituals, for creating a sense of inner
cleanliness that permits indifference to real filth. But that cannot explain
why, amid New Delhi's grand imperial buildings, the courtyard below the finance minister's office is occupied by a pile of broken furniture and three dead
plants; or why there are rats running around the office of the secretary to the economic adviser in the ministry of commerce; or why municipal services cannot
clear away the heaps of stinking rubbish that pollute the air.
According to India Today, an investigative magazine, Delhi generates 3,880 tonnes of garbage a day and clears away 2,420 tonnes; it produces 1,800m
litres of sewage a day and collects 1,260m of them. India's cities are
growing unmanageably fast. But they would cope better if their municipal
services worked as they are meant to. Officials admit that many people on the
payrolls do not exist. According to G.M. Khairnar, formerly Bombay's municipal commissioner, three-quarters of its sweepers work for no more than three hours aday. Sometimes they do not turn up at all; or they subcontract their jobs, for
which they get 2,000 rupees a month, for 10-20 rupees a day. The law stops themfrom being sacked. The contractors who run some of the rubbish-collection
lorries are also involved in various scams, according to Mr Khairnar, for he
initiated actions against 70 officials; but he has been suspended from his job
for complaining about political corruption.
As for Indian education, the odd thing is that in some areas the record is sogood. Kerala's literacy rate of 90% is better even than China's 73%. But that only goes to show how bad things must be elsewhere in India to bring its
overall rate down to 48%.
Kerala's performance cannot just be put down to a history of Christian
missionaries and benevolent rulers. In the days of the Raj, parts of Kerala
were left under "native rule" by royal families who believed in educating their people. But the areas directly ruled by the British trailed behind; and yet in the past half-century, they have caught up because left-wing governments set
out to improve the lot of the lower orders.
Amartya Sen, professor of economics at Harvard, argues that educational
inequalities reflect and entrench social inequalities. India's hierarchical, brahmin-dominated society has been noticeably casual about primary education;
resources have been poured into the higher education that benefits the upper
classes.
Primary education in India is not compulsory: central government leaves it to states to decide whether it is important to send children to school. They
have often decided that it is not. In rural India, a quarter of boys and halfof girls in the 12-14 age group have never been to school. Those who make it
through secondary school, however, have an excellent chance of getting a
high-class university education. India has a huge supply of people with more education than they can use. The well-offpay peanuts for this privilege, as thegovernment subsidises tertiary education to the tune of 50 billion rupees a
year. In India as a whole, primary, secondary and tertiary education get
around a third of the budget each. In Kerala, primary education gets 60% of thebudget.
High levels of education do not guarantee rapid growth. Kerala, one of the
poorest parts of India, is evidence of that. But education is probably a
necessary, even if not sufficient, condition for fast growth. A recent study bythe World Bank on the origins of the East Asian miracle could identify nothing
that the region's diverse successes had in common except for low inflation and
high levels of education. At least India Scores pretty well on inflation.
Headlines: No rows for Rao
HIGHLIGHT:
Narasimha Rao is using old political methods to bring in a new set of economic
rules. It is not working
BODY:
POLITICIANS often have an interest in keeping things the way they are; yet itwas a politician who started all this change. Narasimha Rao, the prime
minister, has at least one of the attributes of a statesman: he thinks about howto win in the long run as well as more immediately.
Mr Rao is a rather ambiguous figure. Nobody expected him to launch economic reform: he was seen, before he became prime minister, as a standard Congress
party operator with the usual lack of vision and integrity. He is a scholar, anold-style brahmin pundit, but he never flaunts his learning. He is an
exceedingly clever man -- James Manor, a shrewd observer of Indian politics at
Sussex University, reckons that he is the cleverest prime minister India has
had -- who seems to go out of his way to conceal the fact. Asis Nandy, a
political scientist at India's Centre for the Study of Developing Societies,
says that he "has that quality which is essential for political survival in
South Asia: to look stupider than you actually are."
Nobody expected Mr Rao to last as long as he has. He was never supposed to
come to power in the first place: he took over as a safe pair of hands when
Rajiv Gandhi was assassinated during the 1991 election campaign, and won withoutgaining an overall majority. The Bharatiya Janata Party was riding a wave of
right-wing Hinduism; and the conflict between Hindus and Muslims over the holy
site at Ayodhya was coming to a head. His government seemed bound to collapse.
But Mr Rao survived, and the BJP lost. In subsequent state elections,
Congress did well and the BJP disastrously. No doubt the BJP in part brought
about its own decline, both through its internal divisions and because it
presented Indians with a vision of social disruption that many reject. But Mr
Rao is also a cunning political operator, who knows how to choose the right
candidates for the right constituencies, how to make a patchwork of alliances,
and how to lie low at the right time.
Lying low is Mr Rao's most characteristic game. At moments of crisis, he
often disappears. His principal aim seems to be to lower the volume in Indian
politics. In an excitable country, where only a decade ago 3,000 Sikhs were
murdered in Delhi in a couple of days, that is an attractive ambition. Yet Mr
Rao's unwillingness to face conflict makes him cautious; and caution does not
suit a statesman. That is the contradiction in his administration: he has the
vision to recognise the ends, but not the courage to will the means.
One of his long-term aims was to clean up the Congress party. To that end,
he announced that in 1991, after a 19-year gap, there would be party elections. They were an embarrassing failure, rife with violence and rigging, exposing to
the country the nature of the party. The venture was aborted. Mr Rao said he
was going to persist; but has not done so. His own behaviour has not been
impeccable, either: doubtless fearing threats to his position, he is both party president and prime minister. Nobody else is allowed to have both a party and agovernment post.
Perhaps Mr Rao has given up his aim of cleaning up Indian politics. It may
seem too long a shot. Economic reform, however, he has not abandoned; but rightnow he seems to lack the courage to do the hard bits. "It comes in such small
doses," says Mr Chidambaram, his former commerce minister, "that one sometimes
despairs."
Mr Rao may believe that the reforms made so far will buoy up the economy
enough to make these hard bits easier. Job losses in the private organised
sector, the public sector and among the central government's 4m civil servants
would be easier to sell if the rest of the private sector were generating more
employment. But the economy will not really flourish as long as the next stage of reform remains undone. The burden of publicly owned industry means that
taxes have to be higher than they should be, that the government does not spend on things it should do, or that it ends up running a dangerously inflationary
economic policy. The missing "exit policy" means that businesses find it hard
to improve their efficiency by restructuring.
Mr Rao's caution is, in a way, curious. It is not as though large numbers ofvoters would suffer from such measures. He seems to be perpetuating what Mr
Reddy at the commerce ministry calls "the tyranny of the 10%" -- the proportion of the labour force who, because they are in the private organised sector, the
public sector or the civil service, might be affected by measures necessary to
get the economy working properly. There are only 26m of them, out of a
population of 950m. Those who belong to Congress-affiliated unions expect
special treatment; even more could make life difficult if they decided to go on long, disruptive strikes. But a prime minister who combined courage with visionwould tackle them. "We are a democracy," Mr Rao's apol-explain, when asked wh
he has failed on this front.
In that case, Mr Rao might turn for support to another group, whose interestsdo not coincide with this powerful minority: the other 924m Indians. The
government has made almost no attempt, so far, to gather political support for
the grand task it is attempting. Reform has been carried out almost
surreptitiously, as though it were something to be ashamed of. Perhaps Mr Rao
feels overshadowed by the rhetoric of Gandhi and Nehru. Salman Khurshid,
minister of state for foreign affairs, suggests that this is a problem: "We havenot," he says, "found the right vocabulary." If that is so, Mr Rao might take a lesson from Margaret Thatcher, a woman he probably does not admire, but with
whom he has a lot in common. She took on vested interests by appealing over
their heads to lower-middle-class voters, promising them freedom and
opportunities that they had been denied. This argument is stronger in India, whose economic system has reinforced a social-class structure built on a
religion that sanctions inequality.
Or perhaps Mr Rao is more comfortable with traditional Indian politics -- thepolitics of division. India's politicians have usually eschewed ideology in
favour of building alliances from caste and religious groups. Congress's
traditional constituency, now breaking down, was built from the untouchables at the bottom of the pile, the Brahmins at the top and the Muslims on the side.
Other parties of the left and right made do with the castes in between.
Caste is at the centre of the liveliest current political issue, the argumentover reserving jobs and college places for particular castes. The original
intention was to help untouchables who in a brahmin-dominated society had few
hopes of a university place or a government job. But the politicians soon
realised that handing out these goodies was an easy way to buy votes, so the
number of jobs and places reserved for "backward castes" escalated. The
"backward castes" make up around half of the population; it is a sad comment on Indian democracy that half the country's people reckon they need to rig the
system to make it work for them. The issue has become so fraught in places --
particularly the poorer parts of the north, where job opportunities outside
government are limited and violence anyway comes easily -- that questions about how to create more opportunities by building a prosperous economy do not get a
hearing.
A braver leader than Mr Rao might have the courage to try a new sort of
politics, one based on conviction not on division. It is possible that one
might emerge if Mr Rao's reversals in state elections in December 1994 are
compounded by a bad performance in more state elections early this year. Since Congress has no mechanism for getting rid of a leader, it seems likelier that MrRao will simply cling on until the general election in 1996.
Congress is unlikely then to win an overall majority. The small left-wing
parties that have gained some ground recently might form a coalition, which
would fall to pieces as swiftly as previous Indian coalitions have; or Congress could form another weak administration, preoccupied with offending nobody. And Mr Rao's friends would still be saying "We are a democracy, of course," when
asked why difficult things had not been done.
Headline: Righteous anger
HIGHLIGHT:
Indians are fed up with the way their country is run. They need to unite to
demand change
BODY:
DEMOCRACY has always been a source of pride for Indians: the country may not match up to its Asian neighbours in prosperity, but its people have always been able to boast that it scores better than most on political freedoms. That
refrain is heard less often these days, however. Not only are India's
economic failures more obvious, as the rest of Asia streaks ahead; so are the
flaws in its political system. Shame and anger at the way politics works have
overtaken pride.
Thanks to India's free and increasingly hard-nosed press, everybody knows
which ministers are said to be taking cuts from which contract; who is good
friends with which underworld king; or who has taken more trouble to fix the
results of a state election. People say -- as they always do -- that it has allgot worse. Maybe it is just that journalism has got better and that more peoplecan read; or that these days Indians expect better treatment from their leaders.
But if things are getting worse, there is a plausible explanation. Indira
Gandhi corrupted politics by using gangs as enforcers for the politicians; and
the enforcers slowly came to realise that they could do both jobs themselves.
In Bombay, where six politicians have died in gang warfare in the past two
years, the connection between politics and the underworld is notorious.
Elsewhere too, violence is so commonly used in politics that a newspaper story
claiming that "an opposition Telegu Deasm worker was killed in a bomb attack,
carried out allegedly by Congress activists" during the Andhra Pradesh state
election got only two paragraphs on the inside page of a newspaper.
"The political class," says a veteran politician with passion, "is so venal, so corrupt." A top civil servant, on first meeting, launches into a diatribe
against the morality of India's rulers, arguing that the only positive sign inIndian politics was the beginning of a popular revolt against the politicians.
In the vanguard of that revolt is an unlikely character: the chief election
commissioner, T.N. Seshan. Cabinet secretary in the 1980s, he was given the
election commission job by Mr Rao, who probably now regrets it.
Mr Seshan produces sheaves of documents off his shelves, detailing the abusesof the electoral system. This "Voter's 20-point programme" has 2OO items under the "what goes wrong" heading, such as: "musclemen are used to capture booths,
criminal elements are nominated as candidates, politically motivated officers
actively assist in electioneering, forthright officers are sidelined, electoral rolls are rigged in favour of political parties", and so on. He leaps upon all manner of election abuses: during the state election campaign in late 1994, he
indicted two central government ministers for trying to bribe voters with
promises of cheap sugar and reserved jobs for Muslims.
Mr Seshan has had countless run-ins with the government, but the government
has always lost because the Supreme Court has taken Mr Seshan's side. At one
point it called a special session of parliament ("a Seshan session," says Mr
Seshan, chortling) to amend his constitutional powers. The public response has been extraordinary. There are Seshan fan clubs all over the country. He gets
100-2OO letters a day and has 1,000 pending invitations to speak. "I'm just
fighting what the ordinary man in the street thinks is his fight against a
corrupt political system," he says with uncharacteristic modesty.
But if the ordinary man in the street wants a decent political system, why
does he not vote for one? Probably the explanation is something to do, once
again, with the divisions that criss-cross Indian society. When Indians are so easily divided on caste, regional and religious grounds, it is hard for a
political party to unite them on an ideological issue. That is the secret of
the Congress party, which has ruled India for 43 out of the 48 years since
independence.
Twice in the past ten years, Congress has faced a serious challenge from
parties that marketed themselves as promising a cleaner, better future. That iswhat brought V.P. Singh to power with the Janata Dal party in 1989 after he
broke away from Congress. The right-wing BJP swept polls in the early 1990s
with a promise of renewal and regeneration before it took up the insidious causeof Hindu fundamentalism and thus, fortunately, sunk itself. Both attempts
failed not because the platform lost its appeal, but because the movements
dissipated in division and disagreement.
Perhaps there is something to be said for India's divisiveness. Had the
BJP, with its appeal to Hindu fundamentalism, spoken to a united mass of
Hindus, it might have swept the country; as it was, the differences between
higher and lower castes, and between moderates and extremists, kept it from
hanging together as a coherent force.
Yet if India's divisiveness helps defend it against dangerous enthusiasms, it also makes it harder for anything good to happen in the country. For
conviction and vision find it hard to make themselves heard against the noise ofa multitude of different squabbles. That is why Indian politics fails to
grapple with such important matters as education or, right now, whether to
pursue an economic reform programme that at last gives the country a chance to
fulfill its potential.
Perhaps good will come out of Indians' growing anger at the way their countryis run. V.S. Naipaul, an Indian by descent but not by upbringing or
nationality, touches on this possibility in his latest book on India. He
wrote two books on the country in the 1960s and 1970s: short, harsh books about a place sunk deep in post-colonial shame. His new one is long, rambling, more
ambivalent and compassionate: a worse book, but truer to India's ambiguities. "The idea of freedom," he writes, "has gone everywhere in India . . . People everywhere have ideas now of who they are and what they owe themselves . . .
The liberation of spirit that has come to India could not come as release
alone. In India, with its layer below layer of distress and cruelty, it had
to come as disturbance. It had to come as rage and revolt. India was now a
country of a million little mutinies."
India is an ambitious country these days: there is more hope, but there is more frustration too. If Indians can stop turning their anger on each other,
and use it instead to demand the kind of government they need, they will be on
the way to getting a healthier, better-educated country with cleaner politics
and an economic system that works. Then -- but only then -- there will be no
stopping the new tiger.