What are the reasons for the economic turmoil that the country is going through, particularly over the last 12 months? Can you explain how the politics and the economics, reforms, decision-making in the economic sector, the markets, relate to the political dispensation at the Centre?
One has to trace the roots of the present discontent back to 1996 with the onset of the United Front government. It started the experiment with coalitions at the Centre. The United Front coalition was a very disparate coalition. It did try to keep the reform momentum going and had many achievements to its credit. However, it delivered a body-blow to the Indian economy by accepting the recommendations of the Fifth Pay Commission with alacrity. There was the spectacle of government ministers not negotiating with the employees but actually encouraging them to demand more. The trade union leaders couldn’t have hoped for a better deal. Then in 1997, two prime ministers came and went in rapid succession.
The NDA government came in 1998 with a lot of expectations. Unlike the UF coalition, the new coalition had a strong, dominant core in the BJP. Initially, all the noises that came from the government were very encouraging. They did not follow through with their agenda which they had when in the opposition; in fact, there was a dramatic reversal of earlier held positions. For example, the opening up of the insurance industry, which they had actively opposed. They had opposed the WTO, but in the new context they actually engaged with the WTO. So much of the rhetoric of the BJP and their allies when they were out of power got eaten up when they came to power. And don’t forget that industry was solidly behind the BJP. Both in 1998 and 1999 industry, the entrepreneurial classes, were with Vajpayee and the BJP.
I think part of the problem today is that the expectations were extraordinarily high and these have not been fulfilled. Whether this is because of the PMs ill-health, or his inability to use his authority to enforce consensus, both within and outside the alliance, I don’t want to get into that. The industrial downturn that we are witnessing, however, is also not recent, it goes back to December 2000. What is recent is the feeling of helplessness, that this government is not doing anything, it is frittering away its time, and that all that the PM is doing is collecting reports from various expert groups and not implementing them.
Are you saying that this coalition is incapable of taking decisions and building a consensus vis-a-vis the economy? How are the others arms of the Sangh influencing economic policy at the Centre which is influencing the downturn?
We should distinguish between issues which require legislative consensus and those that do not. Parliamentary approval is required if you want to amend the Industrial Dispute Act and the Sick Industrial Companies Act, to privatize the banking industry, or denationalize India’s coal industry, which remains one of the last vestiges of nationalization. But there are many issues that do not require parliamentary approval. The unfortunate part is that the pace of activity, even in these areas is frighteningly slow. Take privatization for example. Contrary to popular belief, privatization does not require parliamentary approval. If the government of the day decided to privatize Maruti or self-off VSNL, or Air India, or Indian Airlines or ITDC, which are the classic examples, they could have easily done so. But three years have gone by and all you have to show is privatization of Modern Foods, which was a Rs 100 crore privatization, and BALCO, a Rs 500 crore privatization. There will be debate and perhaps opposition in Parliament, by trade unions, but it does not require legislative approval.
How is it that all governments have stalled on privatization whatever their ideology?
I think it is related to the fact that the political-bureaucratic system does not want to let go of control. Ultimately it is the political economy of control. Maruti, is a classic example; it ought to have been privatized five years ago and we would have got a very good price. The reality is that people do not want to let go, regardless of which party is in power.
Is it related to the redundant laws that we are carrying from our past?
No, I think it has to do with electoral financing. This is where the link between politics and economics is very important. As long as you do not have a transparent system that is going to generate adequate resources for legitimate political activity, politicians will continue to use these types of perks that they enjoy for enforcing non-commercial decisions. For example, why would a minister want to interfere with the functioning of Maruti? Why would he want Maruti dealerships and contracts to be given to his cronies? It is because of the kickbacks involved. He is spending that money to get re-elected and for supporting his workers.
There is an intimate link between the reluctance of the political class in India to give up control over the public sector and the fact that we do not have a system in place that finances legitimate political activity transparently. It’s not my argument that if you have such a system, politicians will suddenly become clean. But I do believe that most political corruption in India today is need based, not greed based, that need based corruption arises from a lack of an institutional arrangement to finance politics.
Is not the private sector indulging in the same kind of restraint vis-a-vis their own opening up; in a sense wanting to hang on?
Today, the status quo is being threatened; old family groups are being destroyed, new groups are coming up and the pressure of competition is being felt. Anybody who thought that competition would not result in this type of extermination of one generation of industrialists, not necessarily of industry, was living in a fools paradise. The process of change is destabilizing and threatening and there is bound to be a rear-guard action.
The positive aspect over the last 10 years has been that all governments by and large have not succumbed to the momentary pressures of the day. Take the allegations of dumping by the Chinese. It is ironic that the BJP government which used China as a demon to justify the Pokhran tests in 1998 and wrote to President Clinton on that score, resisted pressures from FICCI, CII and Asocham to impose anti-dumping duties on Chinese goods, or impose non-tariff barriers on the import of Chinese goods across the spectrum. This is a good example of the changing political economy.
What about global competition? Given the WTO regime, and the kinds of electricity and other tariffs, how do you see us entering the global market without being overwhelmed?
The roots of our uncompetitiveness lie in our domestic policies. For example, we are not the player in the textile industry that we ought to be because we had this policy of small scale reservation which has gone on for the last 30-40 years creating an uneconomic structure of exports which completely prices out our products in the global market. 70 to 80% of global trade in textiles and garments is of blends and synthetics, but 80% of our export is cotton. Our approach to exports is that the world should buy what we sell, not that we should sell what people want to buy, and textiles is a classic example. This is an industry in which we had a substantial market presence, which has dwindled to a measly 3-4% now. This is entirely because of domestic policies that have actively discouraged a labour intensive, mass manufacturing revolution in India.
Are you saying that handloom, for example, should be knocked off and priority given to something else? How do you deal with the handloom sector?
There is a better way of dealing with handlooms. You could have a promotional regime that allows low productivity handloom occupations to die, that allows high productivity handloom occupations to make the transition to power looms, from power looms to the organized mill industry. The entire power loom industry is an aberration, a direct consequence of controls on the organized mill industry that we have strangulated systematically over the last 50 years.
On textiles I will make another comment. India is the only late industrializing country that has not followed a ‘textiles first strategy’. Look at Japan, South Korea, Philippines, Thailand, China, they have built a global presence on the back of a globally competitive textile industry. In fact, I am worried about what will happen after the abolition of the multifibre agreement in January 2005.
Actually, quotas helped Indian industry because then we could have justified continuing all our domestic policies that were anti-competitive. Now we are in a real soup. We have to address the problem of small scale reservation. Small scale industry, traditional industry will grow by promotion, not by protection. How is it that if you go to any super market in the world you see the textile goods, consumer products, sports goods, toys, electrical appliances, electronics hardware at the low end, all made in China? Why couldn’t India have been a global supplier?
Doesn’t it have to do with infrastructure, particularly power?
Part of it has to do with power, part of it is that you need to have world class infrastructure, undoubtedly. But then you still have a policy regime that does not allow such growth to take place. We have abolished licensing in one respect, but continued with small-scale reservation. This in my view is the single most important reason, other than infrastructure, why India has failed to emerge as a global player of labour-intensive manufacturing. This would have created jobs domestically.
In 1980, China’s exports were roughly twice the level of India’s. In the year 2000 China exported five times the level of India. What is China exporting? It is not exporting high-tech stuff; China is exporting low-end, low-tech, labour-intensive, consumer-oriented manufactured goods, which India could also have done, but we did not because of small-scale reservation and labour laws.
Let’s now take infrastructure. Why is it that we are not able to provide a world class power system in our country? Why is it that the power system in Delhi, which could have been world class is not so? This is where we get into the interface between politics and economics. We have a system where trans mission losses, through theft and inefficiencies are over 50%. We have an irresponsible political system, as in Punjab, where all political parties are promising free power and water to farmers. If free power is provided and people are not going to pay, where will the resources to pay for expanding the power system come from?
Particularly in power, I would say that very few attempts have been made: Chandrababu Naidu started to do something but quickly ran up against a wall; my own party opposed him violently in Andhra Pradesh. Then Kalyan Singh started doing something in Uttar Pradesh where my own party opposed him. When my party started doing something in Rajasthan, the BJP opposed us. This is the old parliamentary principle: where you stand depends on where you sit; so if you are in power you try to reform, if you are in opposition you tend to oppose the reform.
What is your prognosis over the next five years, particularly for infrastructure?
The single most critical sector today is power. The fiscal system of the states is directly related to power. 50 to 60% of the revenue deficit of the states is on account of power subsidy, power losses and the like. If we can address the issue of power, and put it on commercial functioning, many of our problems of lack of investment, high fiscal deficits, high revenue deficits, will automatically get solved.
How would you do it?
We have to recognize that for 10 years we thought that the Enron type solution would work. It was not the solution then and it cannot be the solution now. If we do not impose commercial discipline and accountability in the public sector, we are not going to be able to reform. Distribution cannot remain in the public sector; it only results in the type of indiscipline that you have in a city like Delhi.
In the capital city, with a public sector distribution system, losses are 50%. Mumbai, where you have private sector distribution, the losses are only 10-12%. I think that is the starting point of reform: we must move towards a system where distribution of power is not in public hands. It must be in private hands where power supply is metered, where what is metered is billed, and what is billed is actually collected.
All political parties must agree that the era of free power is over; no power system can be sustained by supplying 30-40% free power. This only results in a cross-subsidy and one ends up charging industry more, which is then unable to compete. This is what is happening today. Of course, it cannot be a cost-plus system, there has to be some normative basis, like efficiency based costs. Nobody is saying that farmers should suddenly start paying 3 rupees a unit. Some 5 or 6 years ago there was a modest suggestion that a 50 paise per unit minimum agricultural tariff should be agreed to. That has not been done, even in Karnataka, with which I am involved; they charge 25 paise a unit. It is difficult to persuade the system to impose a modest agricultural tariff. This is the second element – the agricultural tariffs. Then there are a whole set of technical solutions that one need not get into. The important point is that we need a world class power system which is based on (a) cost recovery and (b) on private sector distribution. That’s very important.
The additional investments that are required in power and other infrastructure projects, how do you see this country making those investments?
I think that it’s a chicken and egg problem. We are not able to invest because most of our public expenditure is either going into subsidies or into inefficient areas like power, which is a black hole: the more power you generate, the more losses you have. In the transition period of 3 to 4 years, once this process is moderately successful, we will be able to generate enough resources. Today the entire power sector consumes about 2% of the country’s GDP. In a commercially functioning power sector, investments could increase by 2% of GDP. That investment currently going to an inefficient public sector, inefficient power, subsiding power losses and theft, could go into education, health.
Take privatization: why should the government be subsiding inefficient public sector units? There is a role for the public sector in power generation, building of roads, dams and canals because the private sector will not come in the foreseeable future. But why are public resources being locked up in public sector units I fail to understand, except that the politics of it makes the process of reforms very slow.
What about the problem of the low tax to GDP ratio?
Part of the problem with a low tax-GDP ratio is that agriculture and the bulk of the services sector are not taxed. The industrial sector, the secondary sector bears the brunt, and it goes back to your question: why are we uncompetitive? We are uncompetitive because among other reasons, we pay more for power as we subsidize someone else, we pay more taxes as we are paying for the government’s inability to tax the primary sector, and for its inability to tax a growing tertiary sector. Consequently, the secondary sector ends up bearing the burden. I am not in disagreement with you about the general point, that a tax-GDP ratio of 14% is a low figure and that there is a need to collect more revenues even at existing rates.
When I was with the finance ministry we did a study demonstrating that at existing rates of income tax, we can increase annual inflow of tax revenue by 30 to 40%. This requires a determined political leadership, an incorruptible administrative leadership. Part of the problem of tax-GDP is not tax rates, it is tax collection, tax administration and the fact that we are not yet in a value added tax regime, which would then take care of the service sector. As you know, other countries have been characterized by a declining primary sector, increasing secondary sector and then a transition to the tertiary sector. India has gone from primary to tertiary without building up the secondary sector base. Therefore, Indian industry bears a disproportionate share of the burden, whether it is power or tax. That is one reason why Indian industry is uncompetitive.
I am going to take you back to this whole question of the politics and the economics. Over the past 10 years you have been closely associated with governments and policies and all these issues. How is this going to change and where are we headed?
One of the positive developments in the last five years is that today, out of the 30 chief ministers in India, there is a critical mass who are talking reforms, some are walking reforms, may be not as fast as we would hope it to be, but this is the single-most important encouraging development post 1995. Deve Gowda, when he was chief minister of Karnataka, was the first to run with Manmohan Singh’s policies. Then Chandrababu Naidu took over. This had a multiplier effect.
Today, out of the 30 chief ministers, barring four – P.S. Badal, who talks a different language; the chief minister of West Bengal, who talks a different language although he believes what he is talking is not necessarily the right thing; the CM of Tamil Nadu, who doesn’t talk; and the CM of Bihar who I have yet to hear – you have 26 chief ministers today, who in their own way are working to bring about change. Take Rajasthan for example, the way in which Gehlot tackled the bureaucracy, the way he is addressing the problem of power sector reform, these are all encouraging signs. This is the positive side.
The real negative side is that the Centre has withered away. This is most dangerous. Any reading of Indian history will tell you that central authority was an infrequent occurrence. In fact, the history of India is a history of regional empires, a history of regionalism and centrifugal forces; it has not been a history of centralised states, barring Ashoka, Akbar, the British and now post-Independence India.
In a system, even though we are wedded to the principle of cooperative federalism, the emergence of states as independent economic actors is an encouraging sign. However, the Centre still has a very important role to play. For example, unlike in Brazil or Argentina, the Indian states cannot borrow from abroad. This is a fundamental difference between our federation and other federations. It is a good thing too that Indian states are not borrowing abroad, because the entire country would have gone bankrupt and we would have had a financial crisis of the severest magnitude.
If you look at the political economy of India, and this is a paradox that few appreciate, a communist China is fiscally more decentralized than a democratic India. A democratic India runs a more centralized political economy than a communist China. The Centre in India plays an important role both in resource allocation and resource raising. Unlike in America where you have state-level payroll taxes, income tax in India is collected centrally and than devolved to the states. Similarly with excise duty; it is collected by the Centre and devolved to the states. The most depressing thing is the lack of political leadership at the Centre, and the fact that it is increasingly being held hostage to local, partisan sentiment.
If you have a strong emerging federal structure in terms of the states asserting themselves, than surely the Centre should devolve more powers to the states, including fiscal power.
Federalism does not mean the Centre being held to blackmail. Take the entire food economy, the procurement price business. The procurement price is basically the Centre’s way of keeping Punjab, Haryana and Andhra happy. Basically it is a resource transfer from the Centre to these three states. If you are of the view that we need a national procurement system, a national food security system, then you need a central government to procure rice and wheat from Punjab so that the Keralites, Andhraites and Kannadigas can eat. I think we are still wedded to the concept of India. Otherwise one can very well get up and say, people from Kerala can import rice from Thailand, or elsewhere. But I don’t think we have reached that situation.
What are the economic issues that should come under central diktat?
Take the issue of privatization. There are 250 companies run by the central government. Who else is going to privatize them but the central government? What I am concerned with is that the decisiveness with which the central government can move has been hampered. The central government moved decisively in 1991; perhaps the lesson of 1991 is that our political economy moves only when there is a crisis; only when there is an external crisis will we see deep reform.
With 45 billion dollars of foreign exchange reserves, with the rupee stable and not convertible on the capital account, with no short-term borrowings, with strong software exports and workers’ remittances coming in, we are in a comfortable position. We have become a victim of our own success. Unlike Turkey, Argentina, Brazil, East Asia in the mid-1990s, India does not face an external crisis. In a way the external sector looks good for India. Looking at India in the global context, there are only three major countries in the world today which are growing at 5% plus: China, India and Russia. However, an economy that grew at 6% in the ’80s and 7% in the ’90s, surely cannot be happy with a 5% growth. So we cannot buy the argument that 5% is good because it is higher than all other countries.
The fact that we have managed our external account so well, face no serious turbulence in foreign exchange markets, don’t have a problem with our external debt sector, in fact, no current account deficit to speak of primarily because of booming remittances – about $ 10 billion a year – and a golden goose of software exports which contributes 6-7 billion dollars, has meant that in our external sector we are very safe. But we are faced with an internal crisis: we are not investing in power, roads, education; 90-95% of states’ finances are going into salaries, pensions and interest payments.
The only time any government had the courage to make cuts was Indira Gandhi’s government in the mid-70s. She imposed a savage wage policy which froze dividends and DA. Manmohan Singh was, in fact, the author of that package. But it’s a commentary on the changing politics that what he did in the mid-70s, with a strong leader, he could not do in the 1990s when he was finance minister. Part of the problem is the fact that the decisiveness that one expected of the central government is not there.
Can one expect decisiveness from a coalition government with 24 partners?
I think so. What are the rules for making coalition governments successful? The Kerala experience with coalitions clearly demonstrates that a central core is necessary for a coalition to succeed. You cannot have a coalition like the United Front, comprising of many small groups, and a leader who is supported by virtually nobody. I had high hopes from this government; this coalition has a strong, dominant, ideological core – the BJP. For some reason this core has not been functioning. The tensions are not from outside the government but from within.
Can you elaborate on what the failure has been?
There is nothing to stop the prime minister from doing what he wants. Take an example not related to the economy. What happened on the CTBT debate? If the government of the day had decided to sign the CTBT, they could have done it. It did not require parliamentary approval. It is an example of the awesome power that the executive has in India. Look at the four budgets presented by Yashwant Sinha: is there anything Swadeshi about them? Is there any roll-back in any of the budgets, particularly his last one which was forward looking? It could have been Manmohan Singh’s or Chidambaram’s budget.
Why then did it collapse within days of its presentation? What accounts for the low morale in the country?
The symptoms are Tehelka, the fact that suddenly the government was seized with a political crisis of high magnitude, corruption against the prime minister’s office – these were all the symptoms. But ultimately it boils down to sheer administrative incapacity. This coalition was not able to enforce its ideas; it had the right ideas but was unable to translate them into actual practice.
Yashwant Sinha has maintained that the markets collapsed which eroded confidence. I don’t buy this argument. What happened was that a series of promises were made in the budget, but there was a failure to execute them. Take the promise of labour reforms; the labour minister refused to present a bill on labour reforms in Parliament. The PM should have ordered that the bill be introduced, but that did not happen. Don’t ask me why. Perhaps the personalities involved do not have the fire in them. A lot of things can be done by a government which is proactive.
The government of the day must work a consensus on many issues. There are some bills which will be opposed, but there are others which will not be. The initiative for a consensus in a parliamentary system must come from the government of the day. The Congress did behave cussedly on occasion; on the other hand it has been more than supportive on other occasions.
We are now in a situation where the loss of confidence in Vajpayee is complete. The entrepreneurial classes who supported him have lost faith in him to deliver; not as an individual and as a good man. In Delhi, I do not see this government, this political constellation delivering. Even a Congress would not be able to form a government within this Lok Sabha as far as the arithmetic of the present Lok Sabha is concerned.
We will see a lot of political uncertainty in the next few years. The only hope is for state satraps, the Krishnas, Digvijay Singhs, Gehlots, Naidus, Budhadev Bhattacharyas to assert economic autonomy and to move the reforms forward, whether it is power, infrastructure, governance, or social sector reforms. These are fairly and squarely the responsibility of the state governments. If you have forward looking and dynamic chief ministers with the right ideas, maybe the future will not be as bleak as it looks.
What will be the impact of the changed global environment?
The global environment has certainly taken a toss. The American economy is not likely to do well in the coming year or so; Japan will continue to be mired in recession. For the first time in 60 years we are witnessing a synchronized global downturn (not a global recession) and I see this lasting till the latter half of 2002. Till the American economy revives, the global economy will remain depressed. China will be a major factor, they will be entering the WTO next month. It is perhaps the only country in the world growing at 7 to 8%, but it’s not a multiplier effect economy. Under these circumstances the forces of globalization will be mute; there will be no gung-ho approach to globalization as in the ’90s.
I am not one of those who thinks that this calls for a paradigm shift as far as India is concerned. It is a temporary blip, an aberration. It gives us the time and opportunity to concentrate domestically, to clean up our act, to get rid of the last cobwebs of licensing, pull up the power sector, small scale reservations and put in place a system that will ensure that our industry is competitive. When the bounce-back takes place we should not be caught napping. The interregnum must be used to push domestic reforms at a much faster pace.