Worshipping false gods

SUMAN BERY

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2001 has been a discouraging year for India, economically and politically. The end of the year finds the Indian intelligentsia demoralised and in despair. On the economic front, paced by a slowdown in industrial production, economic output measured by GDP grew more slowly than at any time since 1991. Politically the situation is perhaps not quite as grave, in that the coalition at the Centre continues unchallenged.

However, recurrent political and financial scandals have presented an unattractive spectacle, the compromises needed to maintain the coalition at the Centre have been all too visible, and there is little sense of progress toward such declared goals as privatisation or fiscal consolidation. On the diplomatic front, our political and bureaucratic establishment appeared inept in its handling of Pakistan at Agra, and needlessly shrill in its rush to support the U.S. missile defence proposal and later the U.S. intervention in Afghanistan. Our apparent drift and amateurism are seen in marked contrast to the relentless progress and increasing sophistication of China on all fronts: economic, social, diplomatic.

In this article I argue that this despair is misplaced. Indian performance over the past twenty years, and indeed since Independence, has significant successes to its credit. India needs to have confidence that its economic and social institutions, and the processes that shape their evolution are strong enough to meet the challenge from China, difficult though that is to imagine at this time. Indeed, we should see the rise of China as a huge opportunity (a giant market on our doorstep) and as a stimulus to show us how much is possible.

The paradox is that India commands increasing respect overseas at precisely the time when its own citizens are losing heart. What accounts for this paradox and asymmetry? Why is it that others are now according us a respect which we seem reluctant to acknowledge? What is it that they see that we seem blind to? The list is a long one. First is the reality of India as a functioning democracy. We have become complacent about it, but the magnitude and significance of this one achievement alone is huge. The grant of universal suffrage at the time of independence to an impoverished and illiterate population was a massive gamble. It is a gamble that has paid off. India possesses constitutional mechanisms for the acquisition and transfer of power which are impressive in their maturity.

 

 

Of equal importance has been the development of the political system over the recent years, particularly since the Emergency. Yes, this has been the epoch of rising criminality, violence and corruption in Indian politics, and of a palpable decline in governance. But, as is evident below, contrary to the predictions of development faddists, this decline in governance has not yet been accompanied by any visible slow-down in growth; quite the opposite.

At the same time there have been important positive structural developments. At the zenith of the Congress monopoly, roughly the period till 1971, it was not easy to see how the monopoly could be challenged. The period of the Emergency and the route to power followed by the BJP created considerable unease for communal harmony, and the situation remains fluid. But now that the smoke has partly cleared, the outlines of a new political structure seem to be emerging, and they are relatively encouraging.

We seem to be on the way to a political system similar to the U.S.: two broadly centrist coalitions, one of the centre-right and the other of the centre-left, both driven by power rather than ideology, rooted in the states and disciplined by the pragmatism needed to retain power. Again, analogous with the U.S. each coalition/party has its ideological wing that needs to be humoured. In the case of the BJP, the Sangh Parivar plays a role analogous to that played by the Christian coalition in the Republican Party, while as is the case with the Democrats in the U.S., trade unions, particularly in the public sector, play an important role in the Congress coalition.

As events in Parliament over 2001 confirm, the conventions of a constructive opposition are yet to be established. But the larger development must not be lost sight of. We are in sight of a functioning two-coalition system. This is not something that can be imposed or imported: it has to evolve, to be homegrown, and has to reflect the political genius of the country. With national political and cultural unity largely having been achieved, the two big political tasks facing India are inclusion of the backward castes and the Muslims. Through somewhat messy and inefficient affirmative action schemes, the former is being achieved.

 

 

More interestingly, as recently pointed out by the noted columnist Tom Friedman in the New York Times, there is progress to be reported on the latter. Friedman notes that India, with the second largest Muslim population in the world, has been notably tranquil post 11 September. He attributes this to the success of the Indian political system in providing participation and voice for this community. It can be argued that, in the fifty-odd years since Independence, India has coped with the problems of its minorities at least as well, if not better, than the U.S. did in the fifty years after the Civil War.

In parallel with the decline of Congress hegemony there has been a renaissance of the states. To those who believe that India’s complexities require decentralisation this is a welcome development. As Swaminathan Aiyar has recently observed, much of the success of both the United States and of China has been the result of competition and experimentation at the local level. The looser control of the Centre over the states, while a source of some risk, also carries considerable promise.

 

 

These political achievements are perhaps broadly accepted if insufficiently valued. More surprisingly and controversially, an equally stout case can be made when it comes to economic management. The common view in the Indian elite, including most economists, is that India’s performance has been relatively poor over most of the post-war period; also that the reform effort that started in the 1980s has been only partially successful. Yet several recent pieces of research tend to suggest otherwise.

Bradford de Long, a distinguished economic historian at the University of California, Berkeley, has examined Indian growth after Independence. On the basis of admittedly preliminary research, he finds that even in the period associated with the infamous Hindu rate of growth (roughly till the 1970s), India’s performance was close to what would have been expected, taking into account the country’s prevailing percapita income level and population growth rate. De Long further argues that the step-up in the growth rate that took place in the 1980s and 1990s in India is a major achievement, worthy of much greater comment than it has received.

Closer to home, in several recent research pieces Arvind Virmani, formerly of the Ministry of Finance and now of the Planning Commission has also looked carefully at India’s relative growth performance, as well as the success of its external liberalisation efforts in the 1980s and more particularly in the 1990s. According to this work, India’s growth record places it sixth among the developing countries over the period 1980-2000, after China, Korea, Thailand, Singapore and Vietnam.

With the exception of 1991, this growth performance has been relatively even; equally remarkable and significant, the slowdown in growth and the consequent loss of output in the process of stabilisation in the early 1990s was negligible. This is in sharp contrast to the lost decade of the 1980s in Latin America (and the 1990s in Japan), and the continuing malaise post-1997 of the South-East Asian economies, particularly the largest country, Indonesia.

Virmani also points to the significant success that India has had in its external accounts as a result of the reforms of the 1980s and early 1990s, incomplete though those are. The gains include a strong balance of payments, fast growing exports, declining external indebtedness (as a share of GDP), a build-up of foreign exchange reserves, and low and declining inflation despite these increased reserves and a rising fiscal deficit.

 

 

In the areas of poverty and inequality as well, India’s experience and performance has been creditable. While there remains controversy on the measurement of what economists like to call ‘head count poverty’ (the proportion of the population below the poverty line), a substantial body of professional opinion would concur that there has been steady progress in reducing poverty decade by decade, and that the 1990s continued this process, mainly because growth was sustained.

In respect of income inequality, and in contrast to popular perception, India has long been a country with one of the most equal distribution of income in the developing world, and on the basis of the fragmentary data available, this has not worsened significantly in recent years. Indians rightly worry about regional inequality, as measured by the disparity between states in the Indian Union. It is also the case that economic liberalisation tends to widen regional inequality. Comparative data are hard to find, but Indian levels of regional inequality are certainly better than say, Brazil.

 

 

The record thus clearly supports an interpretation of India as a successful political experiment, and Indian economic management as at least competent. But, it will be argued, this is to set the bar too low. Look at China: that aught to be the standard by which Indian performance should be judged. Indeed we should look at China, and learn from it, but not be blinded or overawed.

If we date the start of the Indian reform experience in the early 1980s, as the pick up in growth would suggest, then Indian reform has been going on for about as long as Chinese reform. If, on the other hand we date the start of the Indian reform as 1991, (and the Chinese reform as 1979) then we have been at it for only about half as long. We should remind ourselves that the present Chinese success was not preordained or inevitable: indeed, at the ten-year mark China was struggling with the aftermath of the Tiananmen Square uprising and the isolation from the world financial system that ensued.

The real issue is however, deeper: China’s route to growth is a more resource intensive one than that of India, and its economic, let alone political sustainability remains an issue. We have seen the totalitarian mobilisation route several times before. The case of the Soviet Union has been mentioned already. On a more personal note I worked for a length of time on Yugoslavia in the immediate post-Tito period, at a time when its growth performance was stellar and there was all praise for the new economic model being pioneered there. We all know how that movie ended.

The success of the extensive model lies in its capacity for resource mobilisation, and this certainly delivers both better human development and fast growth for a while. But there are at the same time two weaknesses. At some point the need for political decentralisation becomes irresistible and that transition is certainly turbulent and disruptive. Second, these models depend on high savings and investment rates which, if not invested productively, represent a waste in terms of current consumption.

Third, there is a denial of human rights which needs to be factored into the bargain. Certainly the Chinese and Soviet routes both involved large-scale, visible loss of life through purges and famines, although some might argue that the social violence involved in a traditional society is of the same scale, just less visible.

 

 

The fact remains that none of the currently advanced economies reached their present position by pursuing the so-called ‘extensive’ route. The real challenge of development is to put in place an economic framework that stimulates profitable investment and entry and exit of firms, and this is a slow process. Based on his study of the Victorian period, the eminent economic historian Arthur Lewis observed that it is difficult for a market economy to grow faster on a sustained basis than 4%-5% because of the coordination problems involved, and because of the need to maintain profitability of investment. Most of the fast growth scenarios we have experienced in the 20th century have attempted to relax these constraints, typically by rigging the financial system. India’s own experience with commercial bank nationalisation and public financial institutions is a case in point, and the Chinese banking system is in an equally parlous state.

While growth is essential for development and poverty reduction, there is no macho involved in aiming for ever higher growth rates as the present government seems inclined to do. Quite apart from the lack of realism of some of the numbers being tossed around, the long-term goal is an economic framework that stimulates continuous rises in productivity. India is not there yet by a long shot, but the path we are embarked on is a more tested path to that ultimate goal than the one China is on. We have once already, as a society, been tempted by the extensive model of development when we aped the Soviet Union. We should not worship at that altar again, under the spell of China.

 

 

India has experienced sufficient success to be confident as a society both in its chosen path, and in its capacity to make mid-course corrections. We no longer need to look over our shoulders to overseas ‘certifiers’, be they of foreign or Indian origin. But this is not to say that there is no need for action. Quite to the contrary: the agenda is enormous. What is it, and what is it not, both in economics and in politics, and in the intersection of the two?

The economic side is more straightforward, though there are many puzzles there as well. Indian manufacturing is clearly experiencing a recession. The key issue is why private investment demand has been so weak. Although most of the focus tends to be on the micro reform issues, macro issues such as interest rate and exchange rate policy may also be important explanations. The Indian macro economy has evolved in response to liberalisation and our macro-economic research and frameworks have not kept up with it.

In some ways the Indian debate is similar to Japan. There are clearly many structural issues in the Japanese economy, but economists are divided on whether those should be addressed first, or whether the underlying causes are macroeconomic, and many of the visible stresses are the manifestation of the macro imbalances. At the same time, based on the experience of the past decade, I personally believe that the Indian economy is innately resilient and robust and that some of the widely expressed fears of imminent collapse are not justified.

 

 

On the supply side of the economy the agenda is better known and defined. Further reduction of trade protection is an important unfinished business from the first generation of reforms, and direct tax reform is the key to the problem of the fiscal deficit. Of the welter of issues characterised as the second generation of reforms, much greater attention needs to be paid to the rural economy: both rural infrastructure and the food economy. This is certainly one respect in which we have a lot to learn from China.

However, as noted by the recent McKinsey report on India’s economic prospects, for a large continental economy such as India there is a tremendous payoff to sheer deregulation, particularly in land markets and retail trade. These issues can be pursued at the state level without waiting in all cases for the Centre.

Much the more interesting issues arise in the political sphere. As already noted, I am personally less discouraged by political developments than other commentators, both because I see the ‘governance penalty’ as being lighter in terms of economic performance than is sometimes asserted, and also because my expectations of the political class are relatively modest. For me, it is sufficient that they manage the revolution of rising expectations, hold the country together and avoid civil war, and this they have so far succeeded in doing. It should be noted that this is a greater achievement than that achieved by the U.S. at approximately the same moment in its political evolution.

Were we to be more ambitious in our expectations, what I would hope for is better selling of the case for reform. Until now, for compulsions connected with the ideological baggage of each of the major parties, the case for reform has not been made in compelling terms at the political level. Reform has remained an essentially technocratic project. What is needed is a political leader who can both voice, in compelling terms, the case for a liberal economy, and put together the political coalition needed to support that case. Knowledgeable observers such as Ashok Desai are very sceptical that this will happen, and that the natural tendency of the political class will be to revert to protection. I am more optimistic, but much will depend on the wider currents in the world. If the U.S. retreats into protectionism, as could happen, then that would certainly affect the debate in India.

 

 

To conclude, I am aware that I may sound like Voltaire’s Dr. Pangloss in seeing positives everywhere. That is not my intention. There is no guarantee of perpetual success in this world. My purpose rather is to indicate that the rhetoric in which we seem to have become trapped, of despair and negativism, does not have a foundation in reality. Over the 20th century Indian society has showed a repeated capacity to confront problems and find solutions; again the analogy with the U.S. is apposite. We need to derive confidence from these successes to face the formidable challenges that lie ahead. We are on the right track.

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