Thursday, November 13, 2008
What kind of capitalism does India need? What I have in mind is certainly not the 18th century merchant capitalism of the East India Company, the 19th century industrial capitalism of Dickens and Marx, or the twentieth century monopoly capitalism, with its emphasis on bigness and the control of social processes and institutions. Rather, what I have in mind is a wholly new kind of capitalism — very fast-moving, highly competitive, even self-consuming, decentralized, driven by entrepreneurs distinguished by a phenomenal capacity for innovation and a deep hostility for whatever is old.
It is by now a cliché, but nonetheless true, that India produces as many of the new type of capitalist as any country in the world, perhaps more. Unlike most countries, however, India has gotten into the habit of exporting a huge share of these world changers. And for all the pride that can be expressed about the successes of overseas Indians around the world, the truth is that the main beneficiaries have been the importers (the US, in particular), not the exporters of India’s prodigiously talented people.
If India is to capture a decent share of the benefits of its own pool of extraordinary men and women, many of whom have been educated at public expense, it is vital that the country’s political economy be thoroughly reformed. The state, as everyone knows, must be transformed from arbiter and dominant player in the nation’s economic life, to enabler and enforcer of competition. It should be a catalyst, not an absorber, of human creativity. Its principal role should be, as India’s Nobel laureate Amartya Sen keeps saying, to develop and invest in, not draw down, human capacities.
Ten Years of Reform
We are now some 10 years into the process of economic reform. After a decade of liberalization, globalization, mobilizations and strikes, changes of government, demonstrations, endless public interest litigations and Parliamentary debate, where are we now?
On reflection, I am reminded of a famous drawing by M.C. Escher. Examining what seems to be the top of a Renaissance tower, the viewer is drawn to a set of stairs ascending inside the four outer walls. Visually, or even manually, the viewer naturally follows the stairs up, segment by segment, only to find that, turning the fourth corner, she is back at the beginning! On first blush, the Indian reform process appears to be very much like the journey up Escher’s stairs. I think the impression is ultimately quite wrong, but let me explain why it seems so compelling. Consider the following short list of reform benchmarks.
Privatization: Ten years after the reform movement began, the Government of India has yet to privatize a single major public holding. Even the term privatization is in disfavor; the official term remains disinvestment, a weenie-word for permitting private ownership without ceding management control.
Deregulation: A massive thicket of government regulations, the legal framework of the “license raj,” has been removed. But this has not prevented a rather clever, more insidious form of “post-license raj” politicking from developing in which industrialists use influence to impose targeted administrative, regulatory or tax constraints on their competitors.
Size of government: The bureaucracy has not shrunk, but actually grown during the last ten years, and with the mid-90s reform, actually became much more expensive to maintain. “Regulation is gone, but regulator is still there,” is a familiar refrain. No one has yet explained to the bureaucrats what their new role is supposed to be.
Public investment: During the last 10 years, government investment in education and health and in infrastructure has actually declined, crowded out by competing claims for subsidies for state enterprises, the government wage bill and other vested interests.
Fiscal discipline: Ten years ago, the catalyst for reform was an explosive growth in government debt. Today, the combined federal and state deficit is said to be on the order of 13 percent of GDP. Debt service is crowding out private investment and dramatically raising the cost of capital to Indian industry.
Liberalization: India still has the highest tariff barriers outside the Communist world — nearly triple Asian levels, and many multiples of OECD levels — and the Indian market remains effectively closed to large classes of foreign imports. High tariffs on intermediate goods have killed literally millions of dollars of investment, diverted value addition away from India, and have cost the nation hundreds of thousands of high-paying jobs.
Campaign finance reform: It is often pointed out that the American solution to buying political influence has been to legalize it. But it is worth pointing out that legalization has brought with it two important consequences: public disclosure and the separation of political from personal accumulation. In India the topic is much discussed, but nowhere on the public agenda.
Beams of Hope
It is not for nothing, then, that many of India’s sons, daughters and friends have despaired. But as I say, I think the impression of intransigence is very misleading. There have been some important and dramatic eruptions in the reform process, especially in the last 18 months. And I believe these are symptomatic of a slow boiling, but nonetheless real, subterranean ferment.
India’s dramatic third generation of reforms in telecom is a striking story. It began in earnest during a period in the summer of 1999 when India was between governments, and took off after the current administration came into office in October 1999. A glimpse into the process: In June 2000, the old-style populist Minister of Communications and the new-style Secretary of the same ministry came to San Francisco, met with experts from Stanford’s Asia/Pacific Research Center, entrepreneurs from The Indus Entrepreneurs, and a group of companies attending the annual meeting of the US-India Business Council. The result was an impressive list of specific recommendations for additional reform. When Secretary Shyamal Ghosh traveled to Washington with Prime Minister Vajpayee three months later, all of the recommendations had been implemented.
A similar group convened at APARC with Secretary Ghosh and M.S. Verma, chairman of the newly reconstituted Telecom Regulatory Authority of India (TRAI) in November. There, a strong recommendation was made to accelerate the opening of local services to competition. The idea was to effect as quickly as possible a shift in emphasis from control of access to the fostering of competition through regulation of interconnections. Within weeks after intensive study, the TRAI chairman recommended opening basic telephony to wireless local loop, much to the consternation of cellular operators who demanded preservation of quasi-monopolistic franchises.
In financial services, especially insurance, the government has embarked on a path few imagined possible three years ago. Here, as in telecom, the order of the day is not just liberalization, but corporatization, and almost inevitably, privatization of former state monopolies. Nor are these isolated developments; rather they have been presented, opposed and ultimately passed as bellwethers and models for change in other areas.
The reality of India today is one of extreme, albeit contained, intellectual and political agitation. The pressure is on, and the stakes are very high. Typically the foreign press wants to present the actors in this drama as simply as the most formulaic characters in a Hindi movie. Rapacious businessmen conspire with corrupt bureaucrats and craven politicians and battle enlightened NGOs to cheat India’s poor. In fact the battles lines cut across and through these institutions. There are civil servants on both sides of the divide, and politicians, captains of industry, industry associations, NGOs, think tanks and more. It is trench warfare. It is made far more difficult by the heritage of India’s peculiar form of socialism — a command economy without any of the social safety nets that actual socialist regimes provide to their people. And it is terribly exciting. No one should be afraid to join it.
Dr. Michael T. Clark is Executive Director of the US-India Business Council, the premier US industry association promoting deeper trade and investment links between the two countries. The views expressed here are strictly personal.
