IN these troubled times for the global economy, it may be worth narrating a story about the mentality of Indian politicians. When the Congress returned to power in the summer of 1991 after the Janata Dal interregnum, the cabinet of Prime Minister P.V. Narasimha Rao was presented a note by the ministry of finance advocating dramatic reforms that included the deregulation of the economy. The note was greeted with predictable scepticism, if not outright hostility, by the cabinet.

Looking for a way out of the logjam, Rao despatched a young aide to one of Indira Gandhi’s trusted confidants for advice. The hard-nosed veteran read the finance ministry note and then offered his suggestion. Wouldn’t it be more advisable, he asked, to preface the document with appropriate passages from Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi? It would, he suggested, definitely enhance the comfort level of the cabinet to know that the proposed measures were in conformity with the scriptures.

The wily Rao didn’t hesitate to accept the sage advice. A reworked cabinet note was circulated and this time, the opposition melted away, giving the prime minister the mandate to pursue liberalization as the highest stage of Nehru and Indira’s socialism.

This delightful story may well be true, partially true or plain apocryphal. What is remarkable, however, is not the revelation that the Congress party is made up of dinosaurs, but the extent to which orthodoxy takes hold of the political imagination to resist change. This is, of course, true of India but it is equally a global phenomenon.

In her autobiography, The Path to Power, Margaret Thatcher spelt out the insidious hold of the post-War consensus on the British political imagination: ‘By 1964 British society had entered a sick phase of liberal conformism passing as individual self-expression. Only progressive ideas and people were worthy of respect by an increasingly self-conscious and self-confident media class.’ Thatcher may well have been talking of India.

Nominally, India may have travelled a long way from the days when inefficiency and sloth were regarded as economic virtues and when personal rates of taxation for the highest slab touched 97 per cent. What is significant, however, about the massive economic shifts that were first brought in by Manmohan Singh’s 1991 budget is the remarkable extent to which change has been ushered in without fanfare and, more often than not, by stealth.

It required the 1991 balance of payments crisis and the emotional trauma of the physical mortgaging of some of India’s gold reserves to begin the assault on the licence-permit-quota raj. Likewise, it required western sanctions against India in the aftermath of the 1998 Pokhran-II blasts to lift many of the curbs on foreign capital and rid Atal Bihari Vajpayee of his party’s accumulated swadeshi baggage.

 

As 2011 draws to a close, India is at a similar crossroads. The economic downturn in the United States of America and the Eurozone crisis has left no economy untouched. Complemented by what is called the ‘governance deficit’, India’s economic indicators have moved southwards. The gross domestic product projections are down from nine per cent to seven per cent; the already-large fiscal deficit is expected to breach the budgeted five per cent level and touch more than six per cent of the GDP; inflation has been hovering around 10 per cent for nearly a year and shows little sign of coming down despite 13 interest rate hikes since March 2009; the sensex has lost 22 per cent since January and foreign direct investment inflows have virtually ceased after touching a record $29 billion in 2010; in the preceding quarter, the profitability of Indian companies fell by an average of 30 per cent; and the Indian rupee, now blessed with a distinctive symbol, has lost some 15 per cent of its value in barely three months, thereby making imports prohibitive and adding to the inflationary spiral.

Middle India’s overall comfort level with Prime Minister Manmohan Singh rested on two beliefs: first, that he was a man of integrity and innate decency and, second, that he had the requisite skills to manage the economy. On both these counts, Singh’s reputation is in tatters. No one accuses the prime minister of being personally dishonest, but the sheer scale of the corruption charges before the courts have put a question mark on his ability and willingness to tame his roguish colleagues.

Worse still, there is complete consternation at the prime minister’s inability to ‘fix’ the economy. That he doesn’t possess the proverbial ‘magic wand’ is conceded by all reasonable Indians. What strikes them as odd is that the sense of urgency and purpose that should have accompanied the economic slide are missing. The government appears to have simply given up. Particularly disturbing is the extent to which a beleaguered political class seems ready to fall back on the ideological shibboleths that many imagined had been steadily discarded since 1991. The approach to the fiscal deficit is a classic example of a government that seems unconcerned.

 

There is a stalemate in the US over the failure of the White House and the Republican-controlled Senate to agree on measures to reduce a trillion dollar deficit, and in both Britain and the Eurozone, the deficit is at the root of a political and diplomatic stand-off. Yet in India, fiscal consolidation has been deleted from the vocabulary of the ruling party and its allies. The hugely expensive and inefficient Centre-sponsored welfare schemes are not merely regarded as holy cows but there are moves to expand the net. So whimsical is the sop culture that the commerce ministry recently announced a Rs 3,844 crore ‘package’ for weavers in eastern Uttar Pradesh because Rahul Gandhi demanded it.

On 18 December 2011, the Cabinet approved the Food Security Bill which is likely to cost the exchequer nearly Rs 95,000 crore, at a time when revenues are shrinking thanks to a falling GDP. No wonder Mamata Banerjee believes that handouts are her birthright too. In Europe, it is said that ‘austerity is the new normal’. In an economically fragile India, fiscal profligacy is the norm – the preferred Rahul alternative to the widespread beggary he detected in Uttar Pradesh. India is living beyond its means but the political class seems impervious to the problem.

 

In most of the countries gripped by the downturn, the trend is towards removing as many obstacles to growth as possible. In Britain, for example, stringent planning norms have been relaxed to facilitate a growth in housing. In Italy, the new ‘technocrat’ prime minister has announced a series of measures that include fiscal prudence, welfare cuts and the dismantling of restrictive practices. In India on the other hand, there are moves to add a statutory premium on land acquisition for housing, industry and public utilities. Additionally, limited progress has been made in enlarging the scope of foreign investment in insurance and retail because of the government’s failure to secure agreement within the ruling coalition.

One thing that united both the proponents of foreign investment in multi-brand retailing and their disparate opponents was the conviction that foreign capital will introduce a spectacular degree of efficiency in a largely chaotic sector. It was recognized, and has been recognized since the NDA was first excited by the idea, that bulk buying and a streamlined distribution channel will help lessen the huge ‘farm to fork’ differential. That a transformation of retail into a part of the modern, organized sector will have a multiplier effect was also not seriously disputed. What was debated was the magnitude of the change.

But that’s where the convergence ends. For nearly 10 days, Parliament was disrupted and the government confronted with the most serious internal challenge since the Left withdrew support over the nuclear deal in 2008. Most MPs and a majority of chief ministers chose to mount a robust defence of inefficiency and opposed the likelihood of discounted grocery bills for three reasons. What were the reasons?

 

First, even after 150 years of its liquidation, India hasn’t got over its mental fear of the East India Company. In the language of socialism, which we still carefully preserve in the preamble to the Constitution, all foreign trade is suspect and calculated to puncture our national sovereignty and independence. Last week, a senior BJP leader who was feted as a great champion of economic reforms in his time as minister, was actually heard cautioning about the ‘strategic’ consequences of foreign players in the retail sector. It was reminiscent of the time India was warned that WTO membership would involve a ban on chewing neem twigs since neem would have been patented by some American company.

Second, when it comes to shopping at home, we would rather buy from a Haldiram rather than a Heineman. It is a different matter that no trip to London is complete without the mandatory shopping at Tesco, a great British company which, some people deem, must never travel to India. It is a bit like Jawaharlal Nehru who preached austere self-sufficiency at home but let it be discreetly known that he wasn’t averse to a decent bottle of Burgundy, preferably Grands Echezeaux, during his European tours. Nehru had good taste, as did Indira Gandhi, but they were clear about one thing: what was good enough for the first family wasn’t appropriate for the rest of us. That was the essence of India’s socialism.

Finally, each side had its own reasons to explain where they stood. The prime minister was anxious to refurbish his reformist credentials and, if possible, ensure that the outflow of money from India was reversed. The swadeshi types smelt a great opportunity to embarrass the government and, maybe, even engineer its fall. They claimed to be speaking for both the middlemen and the petty retailers groups genuinely apprehensive of the impact of supermarkets on their livelihood. But in all this high economics, low politics and appeasement of special interest groups, one group was missing from the debate: the consumer.

 

In an erudite article in Economic Times, opposition leader Arun Jaitley made a curious observation: ‘Domestic retailers source domestically. International retailers operate on the principle of buying internationally at the cheapest cost.’ The assertion is dubious since the city corner shop today stocks everything for the price-conscious consumer. These include Italian spaghetti, Chinese light bulbs and South African peaches. But that is besides the point. What Jaitley is fearful is that the consumer’s buying decision will be dictated by her budget rather than the ‘Made in India’ label.

The consumer may well be charged with being innately unpatriotic. But does nationalism, by definition, have to be high cost? What does it say about Indian manufacturers if shoes made in Vietnam turn out to be cheaper and more durable than one made in Aligarh? Should the consumer be compelled to buy an inferior, expensive item on swadeshi principles, as used to happen with the import substitution policy in the past?

International competition can have two possible reactions. It can either generate lethargy or it can spur India to take those measures needed to make the economy truly competitive. The retail reforms could make India shake off its complacency. Or, the nation could wallow in the sense of entitlement that high-cost inefficiency brings. At least we now have a choice.

 

In one of the few meaningful interventions on the state of the economy in this disrupted winter session of Parliament, Leader of Opposition (Rajya Sabha) Arun Jaitley imagined he put the prime minister in a spot by referring to his expressed opposition to foreign direct investment in multi-brand retail in 2002, when the Atal Behari Vajpayee government was in power. In stressing that Manmohan Singh is as governed by expediency as any lesser being, Jaitley was undoubtedly making a powerful debating point. Yet, in his speech he deftly avoided a more obvious question: Why do politicians across the board behave one way in government and the opposite way in opposition?

The question is relevant in the context of both the Congress and the BJP. The idea of opening up India’s protected retail sector to some form of foreign competition was an idea that was first mooted by the DMK’s Murasoli Maran when he was Minister of Commerce in the NDA government. It wasn’t an idea that found enthusiastic support from everyone: the Bharatiya Mazdoor Sangh led by the uncompromising RSS leader, Dattopant Thengdi, was vocal in its public opposition, as were politicians belonging to the ‘swadeshi’ camp in the BJP. But the idea was sufficiently attractive to be included in the 2004 election manifesto of the NDA – although not in the BJP’s Vision Document. If it was the coalitional imperative that scuttled the scheme this month, it was coalitional enthusiasm that put the scheme in the NDA manifesto.

 

The inconsistencies don’t stop here. Mamata Banerjee was viscerally opposed to FDI in retail and was even willing to vote against the government in Parliament if it came to the crunch. The Congress in Kerala was similarly discomforted by the government initiative. At the same time, the Shiromani Akali Dal, which has experienced the benefit to farmers from organized retail was enthusiastic in its support. So apparently was Gujarat Chief Minister Narendra Modi who, however, bowed to the party line and put his preferences on hold – Modi stressed that what inspired him was Amul not Walmart. It also seems that many BJP MPs were dismayed by the party’s unequivocal opposition and preferred a more nuanced position. They were struck by the absence of any discussion within the parliamentary party before the BJP firmed up its position. Congress MPs would doubtless have the same complaint about its government’s unilateralism.

The point I am emphasizing has, however, less to do with the lamentable secrecy and lack of consultations that surround most executive decisions – the retail liberalization may well have gone through had it not happened in the midst of a Parliament session. What I find interesting is that, political considerations apart, the government’s decision had supporters and opponents cutting across the political divide. More significant, the broad support for corporatizing retail trade appears to have come from states which are either relatively better placed in the GDP – states such as Punjab, Haryana, Delhi, Gujarat and Maharashtra – or expect gains from an efficient cold chain – as, say, Himachal Pradesh, Sikkim and Arunachal Pradesh.

For West Bengal, Mamata’s unrelenting opposition was quite understandable. Having lost its manufacturing base during the 34 years of Left Front rule, the unorganized retail sector is one of the largest sources of livelihood for a large range of people from the very lowest strata of the middle class to the rural poor. The relative lack of other opportunities has made retailing the only possible source of livelihood for many people. A shrewd politician, Mamata would not meekly have handed over such a large and vocal community to the Left. For her, opposition to organized big retail made a lot of economic and political sense.

 

The real problem that the government faced was a conceptual one. There was just no way in which a momentous decision over retail trade would have a uniform effect throughout India. In certain states the benefits to both farmers and consumers would far outweigh the threats to the local kirana shop or middlemen. In other states, however, there would be disruption of local communities which had the potentiality of triggering social unrest.

The question that needs to be asked is: should, say, Gujarat or Punjab be denied the opportunity of becoming more integrated with the world market for the sake of West Bengal and eastern Uttar Pradesh? The concentration of power in the Centre makes this inevitable and forces essentially local considerations to become pan-Indian impediments. Logically speaking it seems absurd that the decision to allow a Tesco to operate a chain of supermarkets in Delhi should invite a veto from a Tamil Nadu-based regional party. But that is how India has organized its politics and separation of powers. In a genuinely federal state, such decisions should be taken at the state level and be governed by mundane considerations such as municipal planning permission. Instead, it became a test of the Union government’s credibility.

 

The simple truth is that the idea of a redistributive Centre which was at the heart of the socialist planning process has run its course. In today’s India, it is the centralization of power on crucial issues such as labour, power, infrastructure and environment that constitute obstacles to growth. Uneven development is a fact of life that cannot be controlled by bureaucrats and politicians. There is often talk of a twin-track Europe. In India, we need to acknowledge the necessity of a multi-track, federal India.

India, it would seem, is sleepwalking its way into an economic disaster zone. Yet, there are two remarkable features of this death march. First, there is no widespread realization that the troubles aren’t confined to inflation and price rise but affect the nerve centres of economic growth. Second, there is the presumption that statist intervention and a more rigid regulatory regime (that deters private sector corruption) is the appropriate way out.

Nehru, it must be said, did a remarkably good job in turning progressivism into common sense. Even two decades after liberalization transformed India and heralded far wider levels of prosperity, India has not yet turned its back on the belief structures of the bad old days. Economic reforms, it would seem, become meaningful only when accompanied by an intellectual revolution which, unfortunately, has eluded India for too long.