India’s Wonderful Reforms

In an Indian Express article by Vijay Kelkar (Advisor to the Finance Minister) and Ajay Shah (Consultant, Department of economic affairs) ponder the question Why is this a very happy Diwali? (Oct 2003) Their answer is REFORMS. It is an interesting article and it belongs to the same class as the series of articles that Arun Shourie wrote around mid-August regarding the rise of the Indian economy.

The article by Kelkar and Shah essentially tells us that the Indian economy is not doing badly and that we would not be remiss if we indulge in a little bit of self-congratulatory back-slapping. They indicate with pride the progress we have made. For instance:

In a recent month, we added two million mobile phones, an event that made the global telecom industry sit up. Prices have crashed. In a truly ironic reversal of roles, land lines are now a luxury, mobile phones are cheap and ubiquitous.

The turnaround time at our ports has come down by half. And we are finally getting the first high-quality highways in our history. We used to build 11 km of highway per year; we are now on the verge of building 11 km of highway per day.

Services exports: Ten years ago, we started exporting software. This sounded like an elitist thing, where a handful of top universities would produce computer engineers for the software export industry. That industry was enormously broadened owing to an explosion in private and public production of IT skills.

But then IT exports have metamorphosed into the much wider field of services exports, where all kinds of services (and not just software) are being exported. Its components include call centres, financial back offices, database creation.

A whole range of labour-intensive activities can now be traded on international markets, thanks to improvements in telecom. India is the country best equipped to harness this.

All very fine and good and it gives a body a very warm and fuzzy feeling. Until one stops to ask a different question. Nobody seems very eager to even ask that question. It is an important question that if not answered, can have some serious consequences.

Kelkar and Ajay write

FOR many decades, we in India watched with envy while countries of east Asia embraced globalisation, cut customs duties and obtained export-led growth by harnessing the dramatic rise in world trade in goods in the 1970s and 1980s.

The question we need to ask is this: Why did the policy makers and leaders of this blessed nation strap itself into a suffocating straitjacket and stifled the economy so as to condemn hundreds of millions to a degrading inhuman existence below an abyssmal poverty line and reduce the nation into a basket case?

“Well, we are great. We need to congratulate ourselves for the wonder that we are.”

“What wonder is that?”

“We are doing really well. Our children have stopped crying all day long. Now they only cry a few hours a day.”

“Did they really cry all day long?”

“Yes, they wailed all day long. We used to look with envy at our neighbors’ children because they did not cry at all. But our children used to cry a lot. So now that they cry less, we are catching up with our neighbors and we are starting to feel good.”

“That’s really good. But what was it that made them cry? Why did they cry?”

“Well, we used to beat them mercilessly all day long. Now that we don’t beat them continually, they cry less. And that is why I think we are great. Our children have stopped crying all day long and we are really making progress.”

“I see. You must have noticed that your neighbors did not beat their kids and that the kids did not cry?”

“Yes, we knew that. But we have made progress. You have to admit that we are the best because our children have stopped wailing all day long. We are great.”

“Wait a minute. You used to beat them all day long. And now you only beat them occassionally. So you are congratulating yourself for stopping doing something that you should not have been doing in the first place. Are you a brainless cretin or are you just a sadomasocistic idiot?”

Whenever we hear the word ‘liberalization‘, we need to ask what was the reason for chaining the economy in the first place. What was it that caused the economy be be bound and gagged and strangled and choked and stifled? Unless we understand that cause, we will not completely be able to deal with the effects.

Like the cretin in the above dialog, the government has stopped continually beating up on the economy but has not yet stopped entirely. It still does it. You may say, it is better than before. Sure it is, but why not stop entirely? Here is a joke that illustrates my argument.

A motorist does what we call a “California Stop”, that is, he comes to a stop sign and slowly rolls through without actually coming to a stop. A cop catches the guy and is about to write a ticket when the guy explains that he should be let go because even though he did not stop, he did slow down and isn’t slowing down just as good as stopping? At that the cop (and this is just a joke) starts rapidly slapping the motorist. The motorist shouts in alarm, “Stop, stop!” The cop asks, “Do you want me to stop or should I just slow down?”

The good news is that we don’t have to be particularly smart or heroic to improve our economy; we just have to stop doing the stupid things we have been doing, and do so immediately. The telecommunications sector provides an illustrative case in point.

The telecommunications sector was declared off-limits to the private sector and kept as a public sector monopoly. The laws governing phones was framed in 1885 — that’s not a typo, it really is nearly 120 years ago. The objective of the government then was to deny the citizens access to a tool that would empower them. It was meant to be the sole preserve of the government (British) so that they could administer the country. When the British left, the objective of controlling the population did not change. Hence we had until very recently a pathetic telephone system. The waiting time for receiving a telephone line even in cities was of the order of 10 years, leave alone telephones in rural India.

So while our chests may swell up with pride that we are adding a million cellular phones each month, the question is what took us so long and what was the reason for the colossal idiocy of not allowing the telecommunications sector freedom. Why, indeed, even now is the sector not being allowed to reach its potential? Why are the private providers being forced to squeeze money out of their customers to feed the government machinery?

Reform is great. But the need to reform implies that something was rotten in the first place. What need to inquire into the cause of that rot and having figured it out, we need to remove that cause from its very roots. If we don’t do that, we will continue to be also-rans in a race that is so fast and furious that like Alice, we have to keep running as fast as we can just to be at the same place.

Author: Atanu Dey

Economist. View all posts by Atanu Dey