Demolishing the dream, Bric by Bric

Appeared in Biblio, October 2005

Two years ago, with the NDA’s India Shining campaign and investment firm Goldman Sachs’ very rosy projections of India’s future in its Dreaming with BRICs report, it was difficult not to believe that India’s time had finally come. Over the next four decades, Dominic Wilson and Roopa Purushothaman argued, Brazil, Russia, India and China (the BRICs) would become larger than the G6 in dollar terms; and while US per capita income was 74 times India’s today, the difference would fall to under five by 2050. More important, the report argued, most of this would happen with a growth rate of just around 6 per cent, a figure just slightly higher than India’s base growth of around 5.5 per cent. Since this coincided with the services revolution in India, with the tremendously flattering backlash in the US against outsourcing to India, and the impending end of the MFA system which restricted textile exports from countries such as India, both the NDA’s campaign and the BRIC report looked very real.

Against this background, a book which argues none of this is possible if things don’t change, is a bit disconcerting, more so if it is penned by one of India’s foremost economic bureaucrats. But disaggregate the data a bit, and the concerns don’t look invalid – while GDP growth in the 1980s was broadly similar to what it was in the 1990s, there is a big break in trend around 1997. GDP growth in the period 1993-94 to 1996-97 averaged around 7.5 per cent while that for 1997-98 to 2001-02 was a much lower 5.6 per cent – even more worrying, investment growth in the second period was around half that in the first period.

Fast forward to today, and it’s obvious that while there were particular global circumstances that made growth rates fall in the late 1990s, India hasn’t quite taken advantage of the global boom in textiles trade following the abolition of quotas as it is still largely unprepared with very little fresh capacity created, partly due to the fact that rigid labour laws have made companies think twice about investing. It is also true that while India’s strides in software services exports are very impressive, moving up the value chain is not proving to be as automatic and obvious as assumed earlier – for one, most software firms agree, India has a serious manpower crisis, and finding trained staff is increasingly becoming a problem. While the UR Rao report had pointed to a 70 per cent shortage of teachers with PhDs and MTechs in the country’s engineering colleges, IT major TCS has set up a mini-university of its own with a capacity to train 1200 people at a time and imparts 56 days of extra training to each person it hires from over 100 engineering institutions across the country – while this serves TCS’ immediate purpose, it adds to costs, and clearly limits TCS’ ability to do more high value work for clients.

Similarly, as the latest Doing Business report of the International Finance Corporation shows, doing business in India remains fraught with risk. Indeed, the country has slipped in the global rankings in terms of the time/procedures required to open and shut businesses in India, to get legal cases resolved, to collect dues and so on. India is ranked 116^th out of 155 countries, with Pakistan ahead at number 60, and China at 91.

Jalan’s book, of course, alludes to a lot more than just this, though he does cite instances of the country’s bureaucratic morass – Jalan points out that while the strength of the bureaucracy has increased tenfold since independence, the quality of governance has declined dramatically, and cites surveys of the Public Affairs Centre to show just how bad things have become. The thrust of this book, Jalan explains in the preface, is not so much the country’s economy and policies, subjects he’s dealt with extensively in previous books, but the quality of politics and governance in the country.

Coinciding as it does with his membership of Parliament, the insights offered are frightening, and a very clear disconnect can be seen between where the country wants to go in economic terms and the institutional mechanisms that are supposed to deliver all this, and more. To continue with the example of education and its importance in India’s budding services-led growth, Jalan points out that while the Tenth Finance Commission had projected a 2.5 per cent annual growth in real terms for expenditure on elementary education upto the end of the century in four states which had the highest incidence of poverty and illiteracy, the real growth (outside of salaries of teachers) was actually negative. It doesn’t help of course that while the government spends 2-3 times what the private sector does per student, results from government education are nowhere as good as those from private education.

Jalan’s book, however, is not about such details, important as they are, it is about larger governance issues. So, he points out, how can you expect change if the country’s electorate repeatedly votes out parties that deliver on growth and change, such as the NDA last year or Narasimha Rao in 1996; or that it continues to vote in parties at the state level despite their complete lack of performance – Lalu Prasad in Bihar being the most obvious example. And while the electorate expressed their displeasure and made sure that a third of the members of the NDA lost their seats in the last parliamentary election, it is also true that 100 of 543 MPs in the Lok Sabha have criminal charges against them, and six of these are now ministers in the Union Cabinet.

Similarly, for all the talk of the government being accountable to Parliament, Jalan says that, in 2004, as many as 1,337 ‘assurances’ given in the Rajya Sabha and 1,630 in the Lok Sabha, some of them more than a decade old, were still pending. In any case, MPs don’t even discuss in detail various items of expenditure made by the government – August 26, 2004 is this big black day in Parliament’s life, Jalan keeps repeating in the book, since the regular question hour was suspended to pass Rs 475,000 crore of expenditure and the Finance Bill without any discussion, within just a few minutes! Flip through reports of the Comptroller and Auditor General, and you’ll see the same thing, in the form of hard data – the reports give figures of how many ‘audit paras’ they’ve made during the year, and how many of them have been discussed by the legislature for different years. In the case of just Maharashtra, for instance, the CAG report on the state shows that of the 1,007 audit paras issued till March 2001, only 119 had been discussed by the state’s Public Accounts Committee!

As for inner-party democracy, according to Jalan, with the passing of anti-defection and other such legislation, the hold of the party leadership has increased and has actually weakened inner-party democracy. After all, anyone who disagrees with the leader can no longer even threaten to walk away with a part of the party.

Other issues that will ruin India’s chances of attaining economic power status, Jalan notes, are those relating to the state of the country’s judiciary – this, not surprisingly, is one of the factors taken into account by studies such as the IFC one to explain why India’s such a bad place to do business in. Jalan quotes a statement given by a former Chief Justice of India in a foreign court saying that India’s judicial system is practically non-functional when it comes to settling commercial disputes – hardly surprising, then, the fact that it takes 10-15 years to settle even the most blatant and clear cut legal violation.

So what does Jalan recommend at the end of the day? Faster reforms, a US-style presidential form of government, serious modification of the first-past-the-post system which allows politicians to get elected with just a small fraction of people voting for them? None actually, and this is where you can either find the book disappointing, or compliment Jalan on his voice of experience. The US-style presidency, Jalan says, is prone to abuse, and certainly the events in Afghanistan and Iraq (possibly Iran?) show just what concentrating so much power in the hands of one person can do. Modifying the current electoral system may have its merits, but the author argues that in a society which is still largely uneducated, this may complicate things and make them non-transparent for a large number of voters. Jalan, similarly, is not for sweeping economic reforms, and argues that slow-but-durable ones are a better bet.

This, however, is the book’s fatal flaw, for while Jalan says politicians should keep off appointments to autonomous institutions and regulatory bodies, that appointment boards should follow transparent procedures, and so on, there have been too many experiments over the past quarter of a century with precisely such well-meaning solutions for us to have faith in them anymore. The navratna policy of PSUs is the biggest example of this farce, with the government continuing to decide who will head each PSU; in the case of the oil sector, the ministry has even told companies to change tender specifications and wants to appoint politicians to the boards of PSUs as independent directors! As for independent regulators, it can be seen just how political their appointments are; indeed, the ministry of power has been trying to cut the powers of state-level electricity regulators and the telecom ministry has been trying to cut the powers of the telecom regulator. Gentlemanly solutions, arrived at after informed debate, are just not going to happen – as Jalan himself testifies, there are no reasoned debates even in Parliament any more. Jalan may be right that Washington Consensus-style policies may not work in India, and reforms have to be sequenced/gradual, but unless there is a momentum of the type there was in 1991, things aren’t going to change in any meaningful fashion.

The author is Associate Editor, Business Standard