India?s economic transformation began in the crucible of the 1991 crisis. It has since progressed in fits and starts. GoI has been a reluctant, recidivist reformer lacking the courage of conviction in its hesitant conversion to market economics. It is odd, in a country so committed to political freedom and human rights, that so many Indian governments have for so long been so cavalier about economic freedom and respecting private property rights. The benefits reaped so far from reforms have been underplayed, partly because they have not been well distributed.
India has a burgeoning number of dollar billionaires. The number of its citizens living in poverty has not diminished quite as rapidly or as obviously. As India gets richer, the pervasiveness and visibility of its poverty becomes more embarrassing and less acceptable. The poor account for crores of votes; the super-rich for a mere handful. So, India?s leaders avail of every opportunity (including the current global crisis) to be reticent in claiming success with the recipe of economic freedom and rapid growth as the best route to greater inclusion through more rapid employment. They have resented the shift in aggregate power that reform has triggered; from the public to the private sector, and from the political and bureaucratic classes to the entrepreneurial class, which politicians have now joined.
In looking at how the benefits of reform have been distributed so far, what is obscured by the typical bipolar portrayal of benefits accruing entirely to the rich and not the poor is the emergence of the Indian middle class. It is driving India into the future at a faster pace than experienced before. The middle class has been the principal beneficiary of stilted reforms. But it seems unaware of that reality and accepts the status quo of half-finished reforms in a stupor of bovine sublimity. What it seems more aware of is the deprivation it suffers when its immediate demands (e.g. for infrastructure and housing, as well as power, air-conditioning, water and decent public transport) outstrip supply. In the 1980s, India?s middle class was estimated to be about 50 million. In 2009, it is estimated at 250-300 million growing at 5-7% annually.
Rural prism
It is the growth of the middle class, and the rapid urbanisation that has been triggered by it, that exerts the greatest pressures on India?s future growth and transformation?economically and politically. India?s economic future lies in meeting the consumption demands of that growing middle class for more/better education, healthcare (along with shelter, investment, savings) and safety/security, along with continually increasing standards of living. An economic model based on the continuation of command-and-control by the state will not be able to meet those demands.
Likewise, the future of India?s polity lies in anticipating and accommodating the transformation that is necessary to embrace the increasingly affluent urban middle class as a political force that will become dominant by 2025. At present, India?s politics are imbalanced toward representing (allegedly) the rural poor. Consequently, India?s political prism is distorted. Its blinkered rural politicians (many of whom display appalling ignorance of national macroeconomic issues) are unable to acknowledge or deal with the challenges that the future poses. That asymmetry between a rural polity and a rapidly urbanising economy poses a significant obstacle in preventing the state (polity and bureaucracy) from adjusting to the future as swiftly as it must.
Instead of modifying its successful post-reform model, to ensure that returns are more equitably distributed not just to the poor but also to the middle class, India?s leaders find it politically correct or convenient to criticise it, forgetting that the statist model it replaced was considerably worse. The over-sensitivity of India?s political dynasties to criticism makes it impossible to acknowledge the damage caused by the policy mistakes of previous regimes. These errors increased and prolonged India?s poverty, thus delaying emergence of the middle class. Such profound mistakes are invariably airbrushed or misportrayed as wise. No one is ever held accountable for these disastrous policy choices with the consequence that the proper lessons are never learnt forcefully enough by succeeding generations of these dynasties. Yet public catharsis, and admission of the strategic errors that have been made, is essential if India is to prevent a relapse, avoid the ?middle-income? trap, and become a developed country within the lifespan of the next generation.
Swadeshi hangover
Modern India prolapsed from 1950-90 because of policy choices in 1950-70 that were wrong. Those errors were aggravated by the public appeal of the Gandhian ethos of self-denial and self-reliance with its utopian emphasis on small-scale swadeshi. Such choices sealed India?s fate in the 20th century. In discarding the legacy of foreign rule over two centuries, India threw the baby of corporate market capitalism out with the bathwater of colonialism. In an angrily anti-colonial era, India?s leaders associated capitalism with colonialism. In doing so they discarded the tenets of good economics and sound trade theory. Bad economics was disguised as development economics.
Consequently, India experienced an economic or financial crisis of varying severity in every decade in the second half of the 20th century. The worst were in 1966, 1979 and 1991. These were self-induced. In between there were a series of mini-crises caused by the three successive oil shocks of the 1970s. All these crises resulted from the pursuit of self-defeating economic policies based on high-minded ideologies coupled with an overzealous command-control mentality permeating Indian administration. Admirably, these policies attempted to deliver social equity, equality and poverty reduction. But rhetoric was unmatched by reality. As in other instances, India?s road to economic hell was paved with good intentions that increased rather than ameliorated poverty.
Neither Soviet nor Chinese forms of communism appealed to a country of rampant individualists and genetically gifted entrepreneurs. US market capitalism did not appeal to India?s political leadership, or to its governing elite?marinated for too long in the left-leaning intellectual ethos that permeated Oxbridge/LSE from the 1950s to the 1970s. Despite its many flaws, and the current global crisis supposedly heralding its death (which has not yet materialised), market capitalism still remains the world?s most successful economic model. To be sure, it has been leavened in a number of ways in different countries to accommodate their particular social and political realities. But regardless of these derivatives, the basic model has dominated the world since 1989 when the USSR rapidly collapsed under the weight of a system that simply could not deliver the goods.
Oddly enough India?s leaders overlooked the fact in the 1950s that market capitalism was precisely the right model for India, given its reservoirs of individualism and entrepreneurship. These natural resources of extraordinary human capital and risk-taking capacity were harshly suppressed for half a century before they were unshackled. Subsequent results are too obvious to contradict though they are resented by the Left. Instead, to its considerable cost, India adopted a different model with state-driven public rather than private enterprise as its propulsive force. In doing so it suppressed and marginalised the one resource it had in abundance: its entrepreneurial capital.
Soviet model
India in 1952 was seduced by the USSR?s apparent ?success??especially with heavy industrial and military production, seen then as the main aim of industrialisation. Accordingly, its perspectives were warped. Consumerism was seen as toxic. Forced private (but not public) savings were good. Borrowing and consumption were bad (except by government). Public investment was good.
Private investment was self-serving and therefore misdirected. The Soviet model of planning was good, hence the entrenchment of the Planning Commission.
Relying on markets and competition for economic evolution was inferior to relying on government discretion and fiat.
Public and private monopolies (e.g. in cars) were good. Production aimed at satisfying consumer demand (even abroad) was bad. Import substitution was paramount, no matter how inefficient or damaging. It was accepted that goods produced for domestic consumption would be inferior to those produced for exports (hence that wonderful phrase ?export quality?). Developing export proficiency across-the-board was for others. Foreign exchange was seen as a naturally scarce resource for a country like India rather than being seen simply as a function of the right price in domestic currency. Draconian capital controls were good. Freedom of cross-border capital movements was too dangerous to contemplate (even now!).
The point was missed that the raison d??tre of industrialisation was ultimately to satisfy domestic and global consumer demand and choice, however mistaken or trivial the authorities believe such demand/choice might be.
With some peculiar biases dominating ?thinking? in government, India opted for a statist model of development that proved dysfunctional. It required the state to own and command key economic heights?monopolising mining, heavy industry, large swathes of manufacturing and infrastructure services (i.e. power, water, transport and communications). Large private groups (like the Tatas and Birlas) were constrained from expanding or diversifying efficiently by the Monopolies & Restrictive Trade Practices Act.
At the same time, other areas of manufacturing?which the rest of East Asia exploited to enormous advantage in its eventual domination of manufactured exports?were reserved for small scale enterprises. That policy ensured that economies of scale, efficiency and cost-effectiveness would not be permitted to influence production. The damage was multiplied in 1969 when banks and financial institutions were nationalised and the government?s direct and indirect stranglehold on the economy increased. It also left a debilitating legacy that resulted in the Indian state controlling the economy totally: directly through ownership of enterprises, as well as indirectly through licensing and control over finance.
As a result, like Gulliver, India was bound and chained in a Lilliput that the state?s machinery for economic strangulation created?a good example of how the theory of unintended consequences works. Some of these chains were broken in the 1990s. But an unfortunate legacy remains: the Indian Gulliver has developed an ingrained Lilliput complex! A big (not yet great) country thinks about itself and its future in terms that are too small, incremental, gradual, cautious, conservative, and risk-averse! The peculiar irony is that yesterday?s men?elderly Lilliputians who cut their teeth in the earlier era?with an entrenched antediluvian psyche are in charge of making Gulliver face the challenges of tomorrow! It is this attitudinal discrepancy?being big but thinking/acting small?that differentiates India from China, much more than differences in their models and systems.
?(To be continued)
The author is an economics and corporate finance expert