THE Indian bureaucracy is a curious animal. It has the residual legacy of the Raj when the primary purpose of the iron frame of the government was to prevent, or at least minimize, insurrection by its subjects. Absence of insurrection was not just a passive act. It also involved a steady stream of revenue for the state, primarily from regressive land taxes and even more regressive indirect taxes like the notorious levy on salt. It has a residual mind-set, if not an actual work tradition, bequeathed to it from earlier monarchical dispensations of the Mughals and the Marathas. Overlaid on these hoary and dubious traditions is the Soviet-style central planning paradigm that we adopted in the fifties, albeit in our own half-hearted Indic way.

From the perspective of a new entrepreneur, the Indian bureaucracy is a source of frustration; however for an established business, a helpful bureaucrat could even be an asset in thwarting competition. Thus emerges a public ‘hate’ and a private ‘let’s use them’ approach on the part of those inside the tent to exclude or impede those seeking entry. At its extreme, this manifests in crony capitalism whose main feature is to prevent entry of new competing firms without which both the efficiency gains and the moral high ground of market-based economics are lost.

Let me explore a few illustrative cases, not in order to ensure statistical empirical validity, but to provide some powerful, albeit anecdotal insights into how the bureaucracy works, its role in thwarting and, on occasion, helping development goals of companies and the nation at large and the appropriateness of the reputation it has developed.

 

Let me start with a positive story. In the eighties, the Government of India established ‘Export Promotion Zones’ where the rigours of the draconian foreign exchange controls then prevalent in the country would not apply, where import licensing rules would not prevail and where, within the confines of the hot-house zone at least, a business could operate freely and hopefully be competitive in a global marketplace where firms from other countries did not have the stifling restrictions of India. The zone that attracted the maximum number of technology companies was the Santa Cruz Electronics Export Promotion Zone (SEEPZ) near the airport in Bombay. However, after several years of operation this remained a relatively small affair and one could argue that on balance SEEPZ and other zones had failed, especially as far as software exports were concerned.

The basic assumption underlying the rationale for setting up these zones was that the key inputs required were imported and the purpose of the zones was to value add to these inputs. Since computers attracted a 140 per cent duty (one can hardly believe it these days) and since import of computer hardware was necessary in order to produce software, merely exempting the duty was expected to help. What the policy did not anticipate was that small Indian firms (at that time all Indian firms were small) needed flexibility in their location.

They could not all locate in Santa Cruz; their labour pool (which turned out to be a more critical input than computers) was not all located near Santa Cruz. Many could not afford the high rents inside the zone and so on. Additionally, the bureaucracy within the zone was untrained and naive. For instance, it did not understand that software could be exported over telecom lines without any physical good leaving the zone. Many companies had to physically send out diskettes and invoice them as ‘exported’ in order to convince the suspicious customs inspectors!

 

Then, as happens fortuitously sometimes in our country, there came along a bureaucrat with a difference. His name was Vittal. He was made head of the Department of Electronics in Delhi. Intuitively Vittal realized that the zones were not working and we needed a radical rethink. The simple expedient of reducing the duty on imported computers to zero percent was unthinkable in those pre-liberalization days. Vittal decided to imitate the success that the diamond exporters had achieved, operating not from a separate zone but from their traditional location the Pancharatna building near Chowpatty in the heart of Bombay.

The Pancharatna building had been declared a ‘special’ zone and a small Customs office was established in the building with the space being provided by the diamond traders. Vittal grasped that this model could work for software. He pushed through the now famous Software Technology Parks of India (STPI) initiative. Any building, any floor in any building, any office in any building, any flat in any city in India, could by fiat be called an STPI and immediately computers could be imported duty free. At one stroke Vittal created the geographically dispersed (Bangalore, Hyderabad, Pune, Chennai were to become far bigger than Santa Cruz was or could ever be) Indian I.T. industry.

 

The STPI regulations provided for something really unusual in the entire history of Indian regulations. The government stopped being suspicious of business. Each business could self-certify and audit itself to ensure that imported duty-free equipment was not being smuggled into the Indian market and was being used to support exports and so on. For this replacement of suspicion by trust alone (which at one stroke eliminated the crippling inspector raj), Vittal should qualify at least for a Padma Vibhushan. Given the overwhelming advantages of operating from an STPI, this trust was rarely violated as the discovery of a violation during an audit would have led to disproportionate losses to the operating company as opposed to the trivial gains that might ensue from breaking the law.

The rest is history. The Indian I.T. industry took off from small flats and offices in a large number of cities that had earlier been considered implausible locations. The key question is whether this would have been allowed to happen had there been large successful incumbents in SEEPZ. I would wager that it would not have. The incumbents would have successfully lobbied that STPIs spread out across the country and empowered with the dangerous weapon of self-certification would be lead to abuse, detrimental to the nation and so on. Fortunately, the absence of big players allowed for this creative deregulation to slip in below the radar screen. Vittal’s personal integrity was a great asset. No one could accuse him of being corrupt or on the take. And he had direct access to the prime minister. Intervening ministers with their own axes to grind and their search for the rents from corruption could not prevail.

 

Now let me discuss a negative story also involving the Department of Electronics. Some twenty years ago I was a member of the Board of Governors of the Xavier Labour Relations Institute (XLRI) in Jamshedpur. The Director of the institute, Fr. Abraham and I discussed the lack of a proper large or mid-sized computer for his students to use and learn on. I persuaded a friend to donate a used Digital VAX machine to the institute. I then agreed to pay from our corporate funds (I was working in an international bank at that time) a Data Centre to house the computer.

We then discovered that we needed the approval of the Department of Electronics in order to import even the gifted computer which involved no foreign exchange outflow. When we got in touch with the DOE, they first told us that they could not waive the 140% duty on their ‘estimate’ of the value of the computer, even though it was a gift and was a used item. This became a major roadblock as the duty involved was quite substantial.

After considerable agonizing, I persuaded my bank to agree to foot the bill for the duty. We wrote to the DOE in this regard. They called us for a meeting. (Throughout they preferred to deal with us verbally than in writing because doubtless they were scared that any public disclosure that they were stalling and imposing onerous duties on a computer gifted to an educational cause would make them look foolish.) I flew in from Bombay (on Indian Airlines –there was no one else then) just for the meeting. They kept us waiting in a searing hot ante-room for two hours. At the meeting we were constantly interrupted by phone calls which the officials serenely responded to, not worried about their rudeness to us. They hummed and hawed and kept wasting our time.

Finally in exasperation, I asked point blank whether they were going to give the approval or tell us why they would not and indicate to us what we would have to do (apart from ensuring no foreign exchange outflow and full payment of duties) to obtain their okay. The exalted Deputy Director said to me: ‘Mr. Rao – why don’t you get your friend to donate a new machine.’ I lost my cool, left the large room (where two other meetings were being held simultaneously) and stopped the pursuit of the elusive gift. The Data Centre which had been built stood empty.

 

Years later, I finally discovered what it was that ensured we did not get the sought-after approval. It turns out that at the time there were a few Indian ‘manufacturers’ who were assembling computers in India. They were against the import of computers, even on a gifted basis. In retrospect, I wish the DOE had been transparent and told us this. We could have tried to get an Indian manufacturer to make a gift or supply at a discounted price (after all we were willing to pay a substantial sum as duty on the imported item). Or at worst we would not have wasted so much time and effort on trying to get the approval.

The problem was not so much with the bureaucratic rules but their commitment to opacity rather than transparency in their actions and a complete lack of sensitivity to the investments in time and effort that their supplicants (ourselves) were making. Because time is not a factor of consequence in the workings of the government and because they are idle most of the time anyway, they had no sense that it might be important to others. They were also coy about their sweetheart relationships with the local ‘manufacturers’.

My conclusion is that the best antidote to this warped and citizen-unfriendly bureaucracy is to move them into a regime of transparency. They are bound to resist it. But even a halfway success would help. And the key thing to look for is who the gainers are from the obduracy and delaying tactics employed by the bureaucrats. We return to the issue of how successful incumbents while piously proclaiming their distaste for the bureaucracy (presumably when it affects them negatively) are perfectly willing to use the same system to further their own ends.

 

Let me close by again looking at two success stories that seem to have some common characteristics. By all accounts the Department of Atomic Energy and the Department of Space are two agencies of the Indian government which have been on balance relatively successful. The commonalities are as follows: they are both headquartered outside Delhi (Atomic Energy in Mumbai; Space in Bangalore); they have both always been headed by non-IAS specialists; they have both always reported directly to the prime minister without any intervening ministry or functionaries.

Two data points and the Vittal/STPI case are insufficient to derive any solid theory from. And not everyone can have direct access to the prime minister. But these are certainly pointers and we need to think more about them if we are ever to successfully clip the wings of the Humphrey Applebys of India. Thatcher managed to do it in Britain. Given focused effort, there is no reason why we cannot succeed in India.