The Hindu Business Line : Lessons for architects of liberalisation

INDIA'S management of liberalisation is back in the hands of its architects — the Prime Minister, Dr Manmohan Singh, the Finance Minister, Mr P. Chidambaram and the Planning Commission Deputy Chairman-designate, Mr Montek Singh Ahluwalia.

It is about six years since they passed the baton to others, but the course set by them for the country remained. They, in turn, seemed to be generally happy about how the ship was steered by their successors. The rules of adversarial politics did not allow Dr Manmohan Singh and Mr Chidambaram to endorse the NDA management. It is generally accepted that the NDA did not digress much from the original agenda. In fact, they were quite proud of sticking close to it in letter and spirit. No such rules bound Mr Ahluwalia and, on the run-up to the last elections and while still perched on the lofty heights of the IMF, he just about endorsed the previous regimes claims of an India that is shining by confirming that India's GNP will grow at 7 per cent

The Planning Commission Deputy Chairman-designate, Mr Montek Singh Ahluwalia.

Mr Ahluwalia was aware of the fact that one 7 per cent is not good enough to warrant a pat on the back, particularly when that comes after a year of 4.6 per cent, preceded by 5.7 per cent and 3.9 per cent. This shows the average growth rate to still be in a low trajectory. But even if we accept that India is indeed shining, how good is that shine? Is it a burnish that reveals the quality of the metal beneath or is it a thin coat of varnish that just puts a superficial gloss? To understand that, a look at how good the years after the so-called reforms have been. The decade after the launch of the so-called reforms has not been very much better that the one before it. The GNP growth for the post-reform period (1992-01) crept up by a mere 0.2 per cent to 5.9 per cent. With a performance like that, it would be extremely difficult to make a case that the economic reforms or liberalisation, whatever it may be called — has made much of an impact on the nation as a whole.

Of course, some have benefited. As Ms Sushma Swaraj, senior BJP leader, said, there are no queues for telephone and gas connections. But India's teledensity is still a mere 3.2 per 100. And with just 58 million of the 180 million households with gas connections clearly suggesting that most households with less than Rs 80,000 per annum are without clean, efficient and cheap (and subsidised) energy, it hardly indicates any great spread of better lifestyles. This is still good news. But certainly not enough to warrant an outpouring of self-congratulations, for it is poor indices for infant mortality (69 per 1000), life expectancy (63 years), literacy (65 per cent), as well as the still huge incidence of poverty that dominate the reality.

A comparison of the first ten years of the economic performances of India and China after reforms (1992-2001 for India and 1979-88 for China) is instructive. China entered the first decade of the reforms as a fast developing and modernising country with an average decadal growth rate of 5.52 per cent. But, more important, was the performance (1980) of reducing infant mortality to 42 per 1000; raising life expectancy to 67 years; and increasing adult literacy to 66 per cent. India, by contrast, had a better growth rate of 5.7 per cent in the 1980s but was burdened with an infant mortality of 119 per 1000; life expectancy of 59.2 years; and adult literacy of 48.41 per cent. Many reasons have been advanced for China's stupendous performance. Few are as valid as what Prof Amartya Sen wrote: "China's relative advantage over India is a product of its pre-reform (pre-1979) groundwork rather than its post-reform redirection."

Another comparison is even more instructive. In 1978, at the inception of its reforms, China's per capita GDP (in constant 1995 US dollar) was $148, whereas India's in the same year was $236. Seven years after it began its reforms, in 1986, China caught up with India in per capita GDP terms ($278 vs. $273) and a decade after reforms, in 1988, it was comfortably ahead of India with a per capita GDP of $342 compared with India's $312. In the first post-reform decade, the Chinese economy grew at 10.1 per cent while the Indian economy grew at 5.7 per cent in the corresponding decade. Quite clearly, that was India's lost decade.

But what did we achieve in the first decade of our reforms? In 1992, in the first year of reforms, India's per capita GDP was $331, which grew to $477 in 2001. During the same period, the Chinese per capita GDP surged from $426 to $878 in 2001. In the 1990s, China grew at the rate of 9.7 per cent and India at 5.9 per cent. Far from beginning to catch up, we fell well behind. It is true that both countries have transformed themselves after they embarked on the path of economic reforms. But the transformations were entirely different. In 1980, the sectoral break-up of China's economy was as follows: Agriculture 30 per cent; industry 49 per cent; and services 21 per cent. In 1990, that changed to agriculture 27 per cent; industry 42 per cent and services 31 per cent. In 2000, that picture changed some more. Agriculture fell to 16 per cent; industry grew further to 51 per cent, while services steadied at 33 per cent. Note the growth in the share of industry now. This was primarily made possible by overseas investment, which amounted to $293 billion during the decade, which also created millions of new jobs. The sheer enormity of this foreign direct investment and the role it has played in turning China into a global manufacturing hub is something the two Left parties in the United Progressive Alliance should take note of. Quite clearly, this is the time to shed old notions and ill-suited ideas of the role of international capital.

The Indian picture makes for a study in contrasts. The share of agriculture fell from 31 per cent in 1990 to 28 per cent in 2000. The share of industry too fell from 28 per cent to 26 per cent; services' grew from 41 per cent to 46 per cent. Software exports apart, the biggest contributor to the growth of the services sector has been the growth of public administration, which has been bounding at an average rate of 32.5 per cent each year from 1993-94 onwards. In 2001, the salaries of central, state and local governmental together topped Rs 167,715 crore. This kind of spending was not what Keynes had in mind when he advocated public spending to stimulate the economy! Now that the original management team is back at the helm, one hopes they will have a few critical course corrections in mind. For where we have been bound after the advent of the so-called reforms is not where we would like to go. Quite clearly, liberalisation is a much deeper process than merely scrapping the corrupt and inefficient industrial licensing regime. We need to also have a more efficient, less intrusive and less expensive government. The trends have not been optimistic at all. But the real litmus test of a liberalised economy will be when the major part of the public administration expenditure (minus Defence) is incurred by the local government system, providing the citizen with all the daily services such as education, health, water and sanitation. This shift has taken place in China. In India, on the contrary, there is increasing centralisation and, hence, more remote and constricting government. This is one course correction we can ill-afford to miss.Just as the Communist regime in China has shown that foreign capital, far from being inimical, is essential for rapid industrial growth, it has also shown that dogmatic trade unionism hinders productivity and inhibits growth. The Chinese have also shown that policies that protect jobs even in long-failed companies can only be at the cost of the more needy and, hence, deserving. In India, it is common for farm workers to take up the hardest kind of employment in makeshift relief works when drought stalks the land. On the other hand, we never hear of industrial workers having to work in such relief works when a recession grips the economy. Less than 28 million of a nationwide workforce of about 403 million are employed in the organised sector, which means they have the protective comfort of unions, and permanent employment and are shielded against the downturns of the economy. The only way India can become an industrialised country — and there is no other way to becoming a wealthy nation without being industrialised — is by having large and efficient production bases. This means that all the industries, including the public sector units (PSUs), have to become leaner and agile. This can be achieved by making them functionally autonomous and strengthening them by consolidating, merging or restructuring. The challenge ahead is not catching with China's growth rate, which inevitably must slow down. When nations compete, growth rates matter little if one is already well ahead. Can we do what China did to us in 1986? Can we come abreast with it? To do that in 2020, we need to grow at 11.6 per cent and to do that long after most of us are gone in 2050, India must grow at 8.9 per cent every year. Catching up with growth rates is not good enough. If that were the game, India would be doing much better than the US, Europe and Japan.

(The author is with the Centre for Policy Alternatives, New Delhi. E-mail: cpasind@yahoo.co.in)