WITH the exception of senior citizens who read this magazine, few in today’s India will remember the country as it was in 1991. Consider telephones. Without being a politician, bureaucrat, a well connected person or a ridiculously persevering fellow, it was impossible to get a telephone. India in 1990-91, with a population of 839 million, had just 4.5 million telephone lines, or 0.53 phones for every 100 citizens. Owning this instrument didn’t mean that you could automatically connect to the few who did. Quite often, there was no dial tone; the phone was engaged for no obvious reason, or cross-connected.

Consider LPG, or gas connections. There were two choices: either wait till eternity, or use influences to help you jump the colossal queue. For the middle class that didn’t have gas, the only other choice was kerosene for which you needed a ration card, perhaps the most valuable document in India pre-1991.

Consider banking. Thanks to Narendra Modi’s demonetization of Rs 500 and Rs 1,000 notes, we can again recollect the long lines and sheer tedium of banking in the early 1990s. There were no ATMs. You deposited a cheque at one counter and received a numbered brass token. Many entries were made in different ledgers as the cheque tortuously made its way to the cash counter, which could take three quarters of an hour on peak transaction days. The cashier would holler your number, and you would rush to get the money and escape.

Consider stencils, correcting fluids, duplicating ink and Gestetner Roneo machines. Very few government offices had computers; none laser printers. Documents were either carbon copied or mimeographed – a term that can’t be understood by today’s 30-year old. Up to four copies were typed with carbon papers. For more, the document was typed on wax paper stencils, on which the typos were first covered by a hideous pink fluid which had to dry, and then be typed over. The final document was then taken to a Roneo machine. The operator would coat the top of the machine with black duplicating ink, get smudged in the process, thread the stencil, and let it rip. The first five copied were over-inked; the next 15 passable. After that, he had to re-ink and repeat the process.

Consider Indian Airlines sans competition. Each of us has at least one horror story of a sudden strike ridden delay; inordinately long lines in the check-in counters; uncalled for rudeness; shabby service; and of staff genuflecting to politicians and local bureaucrats who could, and often did, delay flights to suit their convenience.

Compared to these everyday images of a quarter century ago, we have come a long way – indeed very far from the terrible crisis that had gripped the nation in the summer of 1991. On 21 June 1991, when P.V. Narasimha Rao was sworn in as the ninth prime minister of India, the economy was in ruins. In 1990-91, wholesale price inflation was at 10.3% – the highest in a decade. Consumer price inflation was at 11.6%. The combined fiscal deficit of the central and state governments exceeded 9% of GDP. Public debt of the central and state governments was over 70% of GDP. The current account deficit was close to 3% of GDP, the highest in decades; and hawking the State Bank of India’s and the Reserve Bank’s gold reserves did nothing to dent the huge shortfall in foreign currency, which had plummeted to less than three weeks of imports.

 

The economic situation was disastrous everywhere. Decades of poor lending practices coupled with inadequate recognition and insufficient provisioning of bad debts had led to a seriously weakened banking system. Entrepreneurial growth was stultified by a pervasively restrictive environment of industrial licensing, extensive public sector reservations, a dysfunctional anti-monopolies law, severe limitations on the use of foreign exchange and over 900 products kept reserved for small-scale industries. Competition was further curtailed thanks to a peak tariff of 300%, backed by some of the highest customs duties among industrializing nations and a massive list of quantitative restrictions on imports.

It was time for radical change. And changes there were, and have continued in significant measure. In the quarter century since June 1991, average tariffs have reduced to well under 10% with virtually no quantitative restrictions on foreign trade. India’s foreign currency reserves stand at over US$ 365 billion. Barring a hic-cup after the global financial crisis in 2008, the nation’s balance of payments position remains comfortable. Between 1991-92 and 2015-16, the country’s GDP at constant prices has grown at a compound rate of around 7% per year – an achievement that is second only to China’s over the same period. Measured in constant US dollars and taking into account purchasing power parity (PPP) across countries, India’s per capita GDP in 2015 was 3.3 times that of 1991. People living under the poverty line have reduced from over 45% of the population in the early part of the period to around 22% today – and the national estimates tally well with the World Bank numbers calculated at US$ 1.90 per day PPP.

 

India has witnessed a veritable telecommunication revolution, with the tele-density rocketing from 0.53 phones for every 100 people in 1991 to 83 (153 phones per 100 in urban areas and 51 per 100 in rural). Again, second only to China. In 1991, public offers of all corporations were under the Controller of Capital Issues, which was eliminated to make way for the Securities and Exchange Board of India, today among the top 10, perhaps even among the top five, capital market regulators in the world. Inter-account cheque transactions between all urban centres are settled in 24 hours – versus three to four days in the UK and often five working days in the USA. Corporate India has been on a roll. Consider some basic facts about listed companies between 31 March 1991 and 31 March 2016: (a) The top-line (gross sales plus other operating income) for all listed companies was 11 times greater in 2016 versus 1991; (b) Profit after tax was 25 times greater in the course of these 25 years; (c) And market capitalization was 118 times greater.

Thus, the top-line grew at 10 per annum, PAT at 13%, and market cap at 19%. India had not witnessed such corporate growth rates ever in the period between its independence and 1990. Not even remotely close to it.

I could continue with more good news, but that would be both unprovocative and profoundly boring. Let me now, instead, focus on five concerns. Some of these are culled out from a chapter that I’ve written for a forthcoming book entitled, A Quarter Century of Transformation: The Indian Reforms Story edited by Rakesh Mohan.

 

The first is what I would call the services-manufacturing conundrum. In the current regime where ‘Make in India’ is being paraded as a major thrust area in the nation’s economic policy, it is useful to examine where India stands in manufacturing vis-à-vis other comparable nations in Asia and Latin America. The data are from the World Bank’s World Development Indicators for the year 2014. India’s share of industry is 30% of GDP and services is 54%. For five East and South East Asian nations – China, South Korea, Thailand, Malaysia and Indonesia – the share of industry to GDP is significantly higher than India’s. One, South Korea has a higher share of services as well; and another, Thailand, has approximately the same share. In fact, four other nations that have a higher share of both industry and services vis-à-vis India: the Philippines, Russia, Mexico and Chile. Only four countries have a lower share of industry than India’s, though higher of services. These are Brazil, Turkey, Argentina and Bangladesh.

So, which way do we go? Over the next couple of decades, should we continue on the same path where we take relatively small strides in manufacturing and larger ones in services? As it stands, services hold the upper hand because there are fewer barriers to setting up or expanding myriad service activities throughout India vis-à-vis starting new factories. It is not necessarily a bad thing. Even today, services tend to be more employment intensive than mining, manufacturing and other industrial activity. There is also a vast range of services, both in scale and offerings, which can accommodate enterprises ranging from the small to the very large. Besides, these sectors are generally more immune to the pressures of lower pricing via global trade.

However, if we want to predicate higher growth and competitiveness through greater manufacturing, as ‘Make in India’ so earnestly exhorts, what reforms should we immediately engage in?

 

That brings me to my second point: the failure of physical infrastructure and the difficulties of doing business in India. Barring the period of the National Democratic Alliance (NDA) led government under Atal Bihari Vajpayee (1998-2004) and the first three years of the United Progressive Alliance (UPA-I) regime under Manmohan Singh (2004-2009), India has suffered from an acute failure in providing much needed infrastructure. Things have improved under Narendra Modi, but we have a very long way to go. To understand how poorly off we are, it is useful to compare ourselves with other East and South East Asian nations. Consider a sample of eight such countries: India, China, Thailand, Malaysia, Indonesia, Vietnam, South Korea and Bangladesh.

In terms of per capita consumption of electricity, only Bangladesh is lower than India. The average Chinese citizen consumes 4.8 times the amount of electricity versus India; the average Malaysian 5.9 times; even Vietnam’s per capita power consumption is 1.7 times higher. Of the eight countries, only the citizens of Bangladesh have lower access to electricity versus India. As far as annual container port traffic goes, China dwarfs us by a factor of 15.5; Thailand, South Korea and Malaysia also have significantly greater traffic. In logistics performance, only Bangladesh is worse than us. Others are between 15% and 20% better, which translates to huge efficiency improvements in today’s ‘just-in-time’ global manufacturing.

Even more can be outlined. We still do not have dedicated, high-speed freight corridors, although two are expected to come into being by the mid-2020s. Regarding national highways, we have a total of 24,900 km that are presently four and six-laned, of which about 2,000 km are tolled expressways. China has over 265,000 km of highways of which some 140,000 km are expressways.

 

It is useful to glance through India’s scores in the latest Doing Business survey conducted across 189 countries by the World Bank and published in 2016. The story is pitiful. A quarter century after the advent of economic reforms, we rank 130 out of 189. Thus, 70% of the countries are ranked higher than us; 97% do better in obtaining construction permits; 73% are better off in registration of property; 83% face lesser troubles in paying taxes; 94% are better off in enforcing contracts; and 72% rank higher in resolving insolvency. In such a milieu, how does a federal state such as India transform the slogan of ‘Make in India’ to actually produce more in the country?

My third concern is jobless growth. In the last five to seven years, companies throughout India, especially those in manufacturing, have made a determined effort to reduce the labour force. This has been partly accomplished by not replacing those who retire; but in substance it has been through reducing contract labour, and replacing such people by the use of more productive machines or better management of throughput. So, too, among the sales forces which increasingly use IT and better logistics and warehousing to reduce the number of employees. The reasons are simple enough.

 

There is a distinct corporate concern about creating a sense of ‘permanency’. Companies, therefore, are either rotating their contract employees, limiting them to ancillary activities or, in recent years, replacing such labour by mechanized systems. Besides, many manufacturers have opted for labour saving computer numeric controlled (CNC) machines and more scientific organization of workflows. Prices of such machinery are significantly lower today than in the early 1990s, and the benefits are such that wage savings and higher output allow the capital cost to be recouped in a couple of years. Thus, a cotton mill today employs far fewer workers than a couple of decades earlier; so too do automobile and auto-ancillary manufacturers, and even traditionally labour intensive factories that produce garments and piece goods. This shows up in the employment elasticities.

The Planning Commission published some disturbing figures a few years ago that showed a sharp fall in employment elasticity, or the percentage change in employment for a percentage change in value added. For all sectors taken together, the employment elasticity has slumped from 0.44 between 1999-2000 and 2004-05 to 0.01 in the next five year period (2005-06 to 2009-10). In manufacturing, it has fallen from 0.76 in the first period to -0.31 in the second. In other words, growth in value added has occurred with an absolute decline in employment. So, too, was the case for agriculture: down from 0.84 to -0.42. What is probably most disturbing given its share in GDP, employment elasticity in services slumped from 0.45 to -0.01.

 

Now that most sectors, especially manufacturing, are producing more output with lesser number of persons, the country faces a huge problem of gainfully employing the potential labour supply. The numbers are huge. According to a study that I did earlier (published in Getting India Back on Track: An Action Agenda for Reform edited by Bibek Debroy, Ashley Tellis and Reece Trevor, Random House, 2014), over the next two decades India will need to create additional employment for over 20 million workers each year right up to 2035-36. How can we expect this in a climate of negative employment elasticities?

Moreover, a growing share of future jobs will need greater literacy, IT and machine skills. Given the state of education and technical training in India, how can one expect even a reasonable percentage of the additional 20 million people seeking jobs each year to have these requisite skills? This is a central problem which we are stubbornly pushing under the carpet, all because it is too difficult to comprehend, leave aside tackle. It is facile to exult ‘demographic dividend’ in public when the reality may be a demographic and employment nightmare.

My fourth concern is demography. Here are the facts:

* There were 364 million Indians up to the age of 14 in 2015, which will fall marginally to 351 million in 2030. What have we got in place in the different states to ensure that these kids get decent primary and secondary education, leave aside adequately functional health facilities and proper nutrition?

* There were 234 million in the age group of 15-24 years, which will rise a bit to 237 million in 2030. What is the quality of our high school education, our colleges, our technical training institutes and skills development courses?

* In addition, there were 384 million people aged 25-40 years, which will rise dramatically to 453 million in 2030 – or the great demographic explosion. How can we ensure that they have jobs in an increasingly IT and skills-based world?

These are terribly important issues which we as a nation – both at the federal level and in the states – have failed to scratch, let aside address. And in the next quarter century, if we don’t deal with these facts, we are going to have a very volatile country left relatively far behind.

 

My final concern is what I call the problem of ‘East and West of Kanpur’. Detailed household level census data for both 2001 and 2011 clearly show a very disturbing trend. Very many districts and tehsils to the east of a rough longitude drawn through Kanpur are among the worst off in terms of house-types, household assets, access to basic amenities like water and fuel and such variables that make for a reasonably secure quality of life. Districts in Bihar, Jharkhand, Chhattisgarh, eastern Madhya Pradesh, swathes of Orissa, parts of West Bengal, lower Assam and parts of lower Meghalaya rank among the worst in terms of the possessing or accessing things in life that we automatically take for granted. It is hardly surprising that many of these areas are hotbeds for Maoist movements and other separatist violence.

In contrast, we have the prosperity of Kerala, Udipi and western Karnataka, parts of Tamil Nadu, the West Godavari-Krishna area of Andhra Pradesh, much of Telangana, Goa and the Konkan belt, the sugar cultivating areas of Maharashtra, a hand reaching out of Mumbai right up to Nashik, the Malwa region of Madhya Pradesh, almost all of Gujarat, the irrigated tracts of Rajasthan, Delhi, western Uttar Pradesh, Haryana, Chandigarh, Punjab, Himachal Pradesh, Uttarakhand and large parts of Jammu & Kashmir that are well off – some extremely so.

Thus, we have a major dichotomy. Much of the East of Kanpur has been left behind – to be sure better than before, but relatively far less than the prosperous North, West and the South. For a nation that has huge empowerment of vox populi where a large part is utterly disempowered in terms of an economic present and future, this is the fuel for major discontent. Unfortunately, the solution lies largely with the ‘East of Kanpur’ state governments who, over the last four decades, have shown themselves incapable of real, people oriented long-term economic and social reform. I can only pray that we govern for the better. Unfortunately, the census data for 2001 and 2011 suggest that such prayers may remain steadfastly unanswered.

 

I have no doubt that as a nation we can and will grow at over 7% per year over the next decade, perhaps even much of the next quarter century. I have no doubt that real incomes will improve and the share of people living in abject poverty will come down. Equally, I have no doubts that the better entitled – be these industrialists, entrepreneurs, upper and upper-middle echelons of society and large agriculturists and those who have access to good education – will grow even more rapidly. Which, in turn, will simultaneously raise incomes while increasing economic inequalities. We will grow. But we will grow in a tinderbox. And there lies the rub.