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India in the Year 2002:  New Year's Day Special

Economic Times invited three economists (Jagdish Bhagwati of Columbia University, Kaushik Basu of Cornell University and Arvind Panagariya of the University of Maryland) and two industrialists (Azim Premji of Wipro and R. Seshasayee of Ashok Leyland) to address the following five questions:

1) What is your assessment of the state of the Indian economy today?

2) What is your wish-list for the coming year?

3) What kind of public-private partnership do you think is most suited to India?

4) Are falling standards in public life affecting our economic performance; if yes, what is the remedy? 

5) Is there a future for a society like ours that seems to be getting more and more polarized with each passing day?

Here is what they said.

There is no Doubt India has been Impacted

Jagdish Bhagwati:

Economy: India has suffered like everybody else from the declining world demand. This is the first time you have a synchronised recession in the world as a whole which means you don’t have one area pulling up the rest of the world like you did during the Asian crisis, for instance.

Then the US economy was doing well and so could act as an engine of growth for other countries. There’s no doubt we have been impacted; but China is more exposed to the world economy, but is still growing at 7 per cent. Sure, that is lower than in the past, but it has still done pretty well. Whereas we are expected to grow at only about 4-5 per cent.

A more open economy is better able to withstand pressures like recession because you have to be very smart to be able to handle the downturn through things like, say, product diversification, etc. That kind of flexibility doesn’t come in a sheltered market, which is what India has been.

Wish list: We are a small country compared to the rest of the world. Nobody is really going to bother about what we do, so we should simply devalue. Let the rupee fall and simultaneously take away a lot of the tariffs.

If we have a situation where the tariff is 25 per cent and then you have, say, a 25 per cent devaluation, then that is like a tariff that you have taken away and so you are not hurt. At the same time, since you get increased exports receipts for every dollar, it’s like you have an added protection in the foreign market.

Industry will be better off. Now is a good time for Yashwant Sinha,with the RBI, to let the rupee fall and at the same time reduce the tariff rates by maybe even half. But this must be done with advance notice and after explaining to people why it is being done. The reason this is important is that otherwise people just jump to the conclusion that they are being deprived.

Partnership: Public sector reform has to be through things like adjustment assistance for people. The main thing is that ngos can really do much more than we in India have allowed them. NGOs have the micro-knowledge and the motivation but they don’t have the funds. So the government can supply the funds and then work with them. The kind of partnership we need is to identify a number of NGOs and see how we can use them in creative ways because they are very powerful.

Public morality: Beyond saying that we should change the laws I think it is the complete removal of the licensing system in all forms that will make a difference. That takes away the incentive for any kind of rent-seeking. A powerful media is a must — investigative journalism can help a great deal here — so is a judiciary before which you can appeal. On paper we have rather good institutions but the problem is that you have bad governance.

But that doesn’t mean we shouldn’t open up because frequently I find people like Joe Stiglitz saying that protection is justified because you can’t open up to free trade when governance is bad. I disagree — you have to compare like for like — given bad governance, is it worse if you have more free trade? I don’t think so. Freer trade is like allowing more sunlight to come in, more contacts and so on.

Future: The very fact that you have raised this issue makes me optimistic. Take Ayodhya. What was significant was not that it got out of hand but that a large number of people immediately protested saying, ‘this is not on.’

In a multi-ethnic, multi-religious society, there are bound to be problems and India is no exception. I keep telling my American friends when they talk about India, judge a democracy, not by whether things go wrong, but how responsive it is to such situations. That is the ultimate test.

"Seeking the 8% Growth Trajectory"

Azim Premji

Economy: The Indian economy is poised for sustained good growth provided we free it from controls and distortions built up over the years. The US economy is expected to look up by the second quarter of 2002, which should boost growth impulses.

Wish list: I would like the government to do the following to firmly place the country on an 8 per cent plus growth trajectory: Dismantle price distortions arising out of controls or support prices, whether in power, water, foodgrains or fertilisers.

These have been the major reason for huge subsidy bills and dissavings by the public sector, leading to uncontrollable budget deficits. This has made privatisation of PSUs a non-starter. For example, SEBs are in such a miserable shape that divestment will be impossible. This is the most important factor curbing growth.

Accelerate divestment of PSUs where distortions of price controls are absent. Privatisation is the only way to raise productivity and bring down the fiscal deficit. Raise investment in road building and irrigation significantly — a major reason for low productivity and efficiency are inadequate road networks and irrigation. Higher agricultural growth can have a large impact on GDP growth.

Attract investment in retailing — large-scale retailing in food and other products can be a powerful growth engine for agriculture. Foreign investment in retailing should be encouraged as MNCs have built up a huge knowledge base in this field.

Eliminate reservation for the small scale sector — this can unleash powerful forces of growth by attracting investment into goods which can now only be manufactured by SSI units. Dismantle land market distortions — unclear real-estate titles, constraints on sale, high stamp duties etc. have distorted the supply of land, and consequently the prices. Eliminating these distortions will give a huge boost to construction and retailing, among the most manpower-intensive sectors.

Attract investment in healthcare — average life expectancy and under-5 mortality, both need major improvement. Healthcare has the potential to become the largest sector of the economy, apart from being a major foreign exchange earner. Healthcare is not treated as infrastructure and many incentives available to sectors such as roads and telecom are not available to it. Given its employment potential, healthcare deserves greater attention from policy makers.

Partnership: Assuming that the major task of the government is to provide good quality social infrastructure, whether in education, healthcare, sanitation or roads, I see a great possibility of partnership between the government and private enterprise. Our experience at the Azim Premji Foundation bears this out.

The Foundation has the mission of universalising primary education and works with state governments in rural and urban slums. We are working with existing government initiatives and also creating new initiatives to improve access, content and delivery of education. We are clear that we would work with the existing system and not create a parallel system.

Public morality: Instead of lamenting falling public standards, we should make governance more transparent to bring down the possibility of rent seeking. Information technology offers an elegant way to increase transparency.

The use of IT, whether in payment services, information dissemination or interactive services can make governance significantly more responsive and transparent.

Future: There are more powerful forces at work that would overwhelm the forces of polarisation. The average Indian is seeking a better future and is willing to work hard for it. I am seeing this urge in the young IT professionals I interact with every day.

"India now Integrated more into the World Economy"

Arvind Panagariya

Economy: The reforms of the 1990s have brought about two fundamental changes: India is now more integrated into the world economy and on a higher growth path. As a result of the former change, the slowdown in the world economy has brought down India’s growth rate. The latter change has meant that despite the slowdown, the growth rate is higher than the trend rate during the 1960s and 1970s. 

But India’s growth rate and living standards remain far below their true potential. If the momentum in reforms achieved during the first half of 1990s had been maintained, we would be growing at double-digit rates today. China has kept up the reform process steadily moving ahead and is growing currently at 7 to 8 per cent despite its greater dependence on the world economy. 

The government appears to have had a loss of will for continued reforms. This is the inference I draw from the assertion coming from various quarters of the government that there is no consensus for reforms. Isn’t there greater consensus today than in the first half of 1990s when much deeper reforms were undertaken? 

Wish list: One can be expansive with the wish list, but four feasible reforms that could boost growth rate by another 3 per cent are: an end to small-scale reservation, the labour law reforms promised in last year’s budget speech, a reduction of 15 percentage points in the top tariff rate, and a substantial progress on privatisation of PSUs. 

Partnership: I would like to see the private sector replace the public sector entirely in manufacturing activity except perhaps defence. Potential for partnership exists in infrastructure, education and health but even in these sectors, the private sector must be given a greater role than exists currently. 

Public morality: There are virtually no penalties on officials for sacrificing the larger public good to promote their private interest. The result has been huge inefficiencies and low morale. Because the government is an active player in so many sectors, low standards in public life have particularly large impact on the economy in India. The pragmatic solution perhaps would be to keep pressure for reforms to move economic activity progressively into private hands. Corruption may exist in the private sector also, but the market place imposes tight limits on it, especially if competition is global. 

Future: I think India has a great future. Remember this is one of the five or fewer developing countries — and by far the largest one in the world — that have functioned as genuine democracies over the entire past half century. It is also the country with probably the greatest diversity of culture and religion in the world and has nevertheless kept moving forward peacefully over the past several decades. The polarisation fades in comparison with what we have seen in Africa and parts of Europe in recent times. Despite its complex system of discrimination and favouritism, genuinely secular Indian democracy has provided an environment in which talented individuals have flourished regardless of religion, caste, class or gender. 

Where India has gone wrong is in choosing its economic policies. But the correction is under way. It may be slow but it will happen — India’s youth and entrepreneurs will ensure that there is no going back from the path of reforms.

"Depression will Persist till 2002 End"

Kaushik Basu

Economy: The economy is going through a bad phase with annual growth rate down to 4.5 per cent. There are two factors behind this. The first has to do with the recession in the US. But the American recession is widely expected to lift by the middle of 2002.

I am personally more pessimistic on this, since this recession, unlike most recessions, is caused not by shrinking demand but by shifting demand (caused by the terrorist strike of September 11, which had a huge distorting affect on consumer spending). So my expectation is that a low-grade depression will persist till the end of 2002, since the US is making the mistake of trying to reflate the entire economy, as we do in standard recessions, without paying enough attention to the inter-sectoral imbalances. In any case, this ‘foreign’ cause of India’s woes will eventually go.

The more worrying factor is the lack of initiative on the part of the Indian government. There is too little that is happening in terms of new economic ideas and investments. Arguably, the single most important variable for a nation’s long-run growth prospect is the savings/investment rate, as a per cent of GDP. The performance on this has been poor during the last three or four years. The investment rate, which had risen to 27 per cent in 1995, is down to 23 per cent. This is mainly a product of over-consumption by government.

Wish list: I would like to see major initiatives to boost investment, especially in infrastructure, and to curb corruption. Turning to sectoral matters, it will be a mistake to think that the software boom is over. The downturn that we are seeing now is merely an adjustment, mainly to correct for the stock-market euphoria of the past few years. The fundamentals of this sector are very strong. If the IT sector is joined by a take-off in bio-technology, India will witness major improvements in the quality of its citizens’ lives.

Partnership: Indian thinking has traditionally been encumbered by a zero-sum view of the economy. A government that facilitated private business was assumed to be working against the interest of the workers and the public sector. When doing a deal with another nation, if we saw the other nation happy, we jumped to the conclusion that we must be losing out. In reality, economic life is full of complementarities. This is true for public and private firms.

It is not surprising that some of the most successful public-sector firms are to be found in countries (e.g. Korea) with the most efficient private-sector firms. I think even more urgent than privatising existing state-owned firms is to allow the entry of private firms into sectors earlier reserved for the state.

Public morality: The answer is an unequivocal yes. The same kinds of individuals who flounder in India, flourish in the US and elsewhere. This points to something in the ethos of our economy that fails to reward industry and honest work.

The most important ‘ethos variable’ responsible for this has to do with standards in public life. To improve on these will need initiative at the level of the Prime Minister’s Office. These are not matters that can be solved by the finance or commerce ministry alone.

Future: The answer is, unfortunately, yes. India could get polarised and yet continue to grow (this is happening in China) and prosper on other dimensions. But I think we should view polarisation as undesirable in itself; and initiate policies to distribute better the spoils of progress. The market, left to itself, can bring riches and growth, but it has no innate ability to bring about greater equality and to root out poverty. We need state action for that.

"Rural Economy the Main Worry"

R Seshasayee

Economy: The woes of the Indian economy and the on-going recession in industry segments are too well documented to bear repetition. What is not so visible is the rural economy.

Monsoons continue to decide the fate of agriculture, which still contributes 25 per cent of GDP, despite the much talked about role of the service sector. Labour and land productivity continue to be well below international standards. Agricultural incomes have grown a paltry 1.2 per cent in two years, well below a growth of close to 2 per cent in the rural population. Land reforms, modernisation and technology induction have remained mere words of wisdom in the agricultural sector.

Hamstrung by poor revenue collections and a fiscal deficit growth far outstripping GDP growth, government’s investments in the social sector have lagged behind stated intentions. That one in four Indians still lives below the poverty line states the enormity of the task.

In terms of physical infrastructure, there has been some action on rural roads and national highways, but the outlay was dwarfed by the enormous needs. In all other infrastructural sectors, there hasn’t been any movement forward. Overall, we are a grossly under managed, under performing economy, with dormant potential.

Wish List: I wish that the government steps up investments in social infrastructure. The rightsizing of state governments is an opportunity to re-deploy staff in areas of social infrastructure. For this to succeed, there has to be a major attitudinal change.

The government still has the opportunity to translate the overflowing silos to some much-needed improvement and extension of the road network and even more significantly, shelters and at least two square meals for most of its citizens.

I hope we can find the funds for fleet replacement and augmentation by the state transport undertakings. The logic of mass transportation is not new but the urgency increases every year with more private vehicles on the road, more congestion and pollution.

Industry has learned to live with wild demand fluctuations by reducing fixed costs. Labour reforms have to keep pace, by recognising the need for flexibility in respect of contract labour, outsourcing, downsizing and layoffs. There is no other way Indian industry can be globally competitive.

In respect of disinvestment, the prescription has not changed in the last few years: create a transparent system, create political consensus by shedding ideologies that are not pragmatic, and DISINVEST.
Partnership: I see a role for the private sector at three levels: consultative, collaborative and community-centric. At the consultative level, I am happy to see, in the post-reforms decade, greater consultation between industry and government.

Partnerships: In terms of collaboration, at the operating level, I find two potential partnerships : between industry and the government’s research establishments: and between industry and academic institutions. Both are hugely synergistic.

While the business of business is to run business, a combination of mandated transparency and corporate values is reflected in an increasing responsiveness by companies to the needs of the community.

Public morality: The answer is , yes. We have to make a choice between meritocracy and mediocrity; between consistency and convenience; between national interest and individual inclinations. And enforce these choices without exception.

Future: We are adding to the divisive denominator. Since the numerator cannot be boosted beyond a point, we have to work on the denominator. A national mission is potential glue. It is also possible that economic growth can render some of these divisive issues irrelevant.

Economic Times, January 1 2002