The Hindu Business Line : Greenspan’s prescription for India — II: Break the bureaucratic stranglehold

Our agricultural policies do not address the issue of the non-viability of millions of small and marginal farmers. We need to enable them to leave their non-viable farms to engage in more productive off-farm activities in rural and urban areas.

— K. R. Deepak

Farm productivity growth is the only viable way to maintain food availability as manufacturing draws workers from rural India.

T. N. Srinivasan

Mr Alan Greenspan is fully aware of the urgent need for reversing the recent decline in Indian agricultural productivity and the constraints on being able to do so.

“Growth of agricultural productivity has slowed since the 1980s. Although weather has been partly to blame, a highly subsidised government-directed agriculture that prevents market forces from adjusting acreage usage is the main culprit. The gov ernment in recent years has expended more than 4 per cent of GDP on subsidies, mainly on food and fertiliser, while state subsidisation of power and irrigation has added measurably more. If farm workers are encouraged to migrate to the more productive cities, as has happened in China, a level of agricultural output that feeds 1.1 billion people must be maintained. India’s ability to expand food imports is limited. Farm productivity growth is thus the only viable way to maintain food availability as manufacturing draws workers from rural India. Market competition in agriculture is badly needed.” (p. 321)

“Regrettably, the dismantling of large farm subsidies seems no more likely in Delhi than it does in Paris or Washington. Long-term subsidies are capitalised in the value of the land. The net beneficiaries of subsidies are always those who own land when the subsidies are created. Future owners pay for the expected continued subsidy flow in an elevated purchase price of the land. They are not, in principle, net beneficiaries. To increase taxes on farmlands — which, in effect, is what an uncompensated reduction in subsidies does — is not taken lightly by farm owners. Some progress in trimming these subsidies has been accomplished on the edges, but a frontal assault will be difficult considering the leanings of the Congress Party and its twenty-three coalition partners, including the Communists.” (p. 321)

Lagging FDI

On foreign direct investment (FDI): “But clearly the Licence Raj has discouraged foreign direct investment. India received $7 billion in FDI in 2005, a sum dwarfed by China’s $72 billion. India’s cumulative stock of FDI at 6 per cent of GDP at the end of 2005 compares with 9 per cent for Pakistan, 14 per cent for China, and 61 per cent for Vietnam. The reason FDI has lagged badly in India is perhaps no better illustrated than by India’s unwillingness to fully embrace market forces. That is all too evident in India’s often statist response to economic problems. Faced with rising food inflation in early 2007, the response was not to allow rising prices to prompt an increase in supply, but to ban wheat exports for the rest of the year and suspend futures trading to ‘curb speculation’ — the very market forces that the Indian economy needs to break the stranglehold of bureaucracy.” (p. 322)

Mr Greenspan is right in dismissing the feasibility of sustaining rapid growth by relying only on service sector growth to absorb the mass of workers currently employed in low productivity primary activities without any significant acceleration of growth of employment in manufacturing activities.

Obviously, without further opening of the economy to foreign direct investment and to import competition, investment in social (education and health) and economic (e.g., power, transportation) infrastructure not only growth of employment in manufacturing will be stunted, but also the recent growth of the service sector cannot be sustained.

Citing the National Rural Employment Guarantee Scheme (NREG) as an example, Mr Montek Singh Ahluwalia said that “the XIth Plan has a lot for those people living below the poverty line, including farmers and labourers. We are confident that the growth process we are witnessing today is more inclusive and will do more for the poor than in the past.” (The Hindu, September 23, 2007.)

Inclusive and rapid growth has always been the objective of India’s pre- and post-Independence planners. What was lacking until the systemic reforms of 1991 and limited reforms of the 1980s was a strategy and a policy framework for realising the vision. But for the reforms India’s growth acceleration and the associated reduction in poverty would not have come about.

What is needed now, among other changes, is to shed India’s present dubious distinction as the most protected economy among developing countries and integrate it far more with the world economy. A well-executed NREG, while it would certainly help alleviate poverty, is not designed to lift the poor out of poverty once and for all. Our agricultural policies do not address the issue of the non-viability of millions of small and marginal farmers. We need to enable them to leave their non-viable farms to engage in more productive off-farm activities in rural and urban areas.

Let me cite a few of Mr Greenspan’s comments on China, to give a flavour of the richness of his discussion.

The Chinese path

“Success on the farm encouraged the spread of reform to industry. Again, a modest easing of constraints produced greater-than-anticipated growth, giving impetus to the arguments of reformers who wished to move more quickly toward a competitive-market template. No advocates ever dared call the new model “capitalism.” They used euphemisms like “market socialism” or, in the famous phrase of Deng, “socialism with Chinese characteristics.”

“China’s leaders were far too perceptive not to see the contradictions and limitations of socialist economics and the evidence of capitalist success. Indeed, why else would they have embarked on so ambitious an enterprise so alien to the traditions of the Communist Party? As China was inexorably drawn further and further down the road toward capitalism, economic progress became so compelling that the ideological debate of earlier years seemed to have passed into history.” (p. 295)

“In my experience it has been the technocrats in the Chinese government — mostly in the central bank, the finance ministry, and, surprisingly, the regulatory agencies — who have pressed for market initiatives. Most of them, however, serve only in advisory agencies. The key policy decisions are made by the State Council and the Politburo, and it is to their credit that they have largely embraced market-friendly advice. A remaining critical hurdle, and one that threatens Communist Party rule at its core, is its ideological challenge.” (p. 308-309)

“In sum, the Communist Party leadership is confronted with very difficult choices. The track it is currently on will ultimately lead the Party to abandon its philosophical roots and more officially embrace some form of market capitalism. Does it then morph into a democratic socialist party, as has occurred in many states of the former Soviet bloc? Does it acquiesce in the political pluralism that is a likely consequence, thereby threatening the Party’s hegemony? Or does the Party abandon reform and revert to an orthodox regime of central planning and authoritarianism, which would almost surely undermine the prosperity on which the leadership depends for legitimacy?

“I have no doubt that the Communist Party of China can maintain an authoritarian, quasi-capitalist, relatively prosperous regime for a time. But without the political safety valve of the democratic process, I doubt the long-term success of such a regime.” (p. 309-310)

Democratic advantage

India’s strength is its vibrant democratic process, through which distributional and other conflicts could be peacefully and amicably resolved. The economic, social and political vision, so eloquently expressed by Nehru’s “tryst with destiny speech on August 15, 1947,” remains to be fulfilled in full measure.

It is “To bring freedom and opportunity to the common man, to the peasants and workers of India; to fight and end poverty and ignorance and disease; to build up a prosperous, democratic and progressive nation, and to create social, economic and political institutions which will ensure justice and fullness of life to every man and woman.”

A leadership that is committed to this vision, understands what needs to be done to realise it and has the fortitude and patience to convince the people of the necessity of further reforms to achieve it, is urgently needed.

Disinflationary impulse

Mr Greenspan suggests that globalisation imparted a disinflationary impulse on the world economy and reduced real interest rates through greater integration of and innovation in financial markets. While remaining optimistic he points out that these favourable trends could reverse themselves. If they do, India would find it harder to sustain its rapid growth. Whether his emphasis on containing emerging inflationary pressures and for monetary policy to make even a flat money economy behave “as though anchored in gold” (p. 291) is appropriate or not, he is right in his conclusion that, subject to his own caveat that formal statistical proof is difficult, “the last decade of unprecedented growth of both the developed and developing world is the ultimate proof of the dysfunction of a more than seventy-year-long economic experiment. The Soviet bloc’s stunning collapse led to or accelerated the abandonment of central planning throughout the world with China and India in the vanguard.” (p. 503)

India has not abandoned vestiges of central planning. Unlike China which no longer has one, our Planning Commission lives on. Alas, Mr Greenspan may well be right in saying “while India is an admirable democracy — the largest in the world — its economy, despite important reforms since 1990, remains heavily bureaucratic. Its economic growth rate in recent years is among the highest in the world, but that is off a very low base.

“Indeed, India’s per capita GDP four decades ago was equal to that of China, but is now less than half of China’s and still losing ground. It is conceivable that India can undergo as radical a reform as China and become world-prominent. But at this writing, its politics appears to be leading India in a discouraging direction.” (p. 501)

(Quoted by permission of the publishers, The Penguin Press, a member of Penguin Group (USA), Inc. Copyright (c) Alan Greenspan, 2007. The first part of this article appeared yesterday.)

(The author is Samuel C. Park Jr. Professor of Economics at Yale University.)

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