Dr Manmohan Singh’s Interview

It is always instructive to learn what our policy-makers are thinking. Prime Minister Dr Manmohan Singh is especially edifying since he is at the helm of the ship of the Indian state. I therefore recommend the recent interview (Aug 16th, 2005) of Dr Singh by Rajat Gupta published in the McKinsey Quarterly.

Dr Singh is a competent and well-respected prime minister. He is also an economist by training and actually earned his “Dr.” title (unlike some pretenders that shall go unnamed here.)

Allow me to highlight some of his responses. He states:

The first and foremost priority is to finish the unfinished task which the founding fathers of our republic set out for us at the time of our independence: to get rid of chronic poverty, ignorance, and disease, which have afflicted millions and millions of our people.

Recognition of the true state of affairs is a good beginning. I would only wish to stress that persistent chronic poverty, ignorance, and disease are consequences of flawed strategies that the founding fathers in their great wisdom imposed on the nation. The ills that India suffers is an enduring legacy of the policies that they espoused.

I point this out not out of meanness of spirit but out of a pragmatic concern that unless we recognize that, we may continue to embrace those policies out of ignorance and reverence for the founding fathers. For instance, the socialist labor policies. When asked about it, Dr Singh said:

First of all, we must make a distinction. When we talk about labor reforms, we are essentially talking about 10 percent of our labor force, which is accounted for in the so-called organized sector.7 Outside this 10 percent, for the 90 percent we are a completely flexible labor market. The normal laws of the market take precedence. Even within this organized sector, the problem is most acute in the public sector. In the private sector, most people tell me that they can find ways and means of working out voluntary agreements with the trade unions, whereby necessary labor flexibility can be introduced. In the public sector, we have rigid laws, and therefore there is this problem.

I find it curious that Dr Singh downplays the problem of flawed labor policies on the grounds that only 10 percent of Indian labor is in the organized sector. He further narrows down the deleterious effect to apply to only the dysfunctional public sector firms. No, it is not curious, it is downright astounding that one can even excuse the labor policies on the fact that the organized sector employs only a very small percentage of the total labor force.

Having most of the labor force in the organized sector is a requirement for a healthy economy. The imposition of mindless labor laws leads to a small organized sector and this hampers economic growth. Then dismissing the damage caused by those labor laws on the grounds that the organized sector is small is beyond comprehension. (See Kaushik Basu on Why India Needs Labor Law Reform.)

Moving on, here is Dr Singh’s take on job creation.

Jobs have to be created in all sectors of our economy. Agriculture still accounts for 60 percent of our labor force, and I believe that we will need a second green revolution to increase production and productivity, and in the process, I hope, we will create more jobs. But essentially over a period of time, our salvation lies in getting people to move out of agriculture. Services today account for 50 percent of our GDP. There are lots of people who tell me that services cannot move far ahead of what’s happening in manufacturing, and that worries me—this imbalance. I feel we have to do a lot more on manufacturing because, ultimately, services respond to what’s happening in the production sector.

Maybe he was just speaking loosely. But I get a very uneasy feeling when the PM speaks loosely on matters that have grave consequences.

We have 60 percent of our labor force in agriculture and that is a terrible thing. Roughly speaking, six Indians labor to produce food for 10 Indians. That leaves only four Indians free from producing food to do other things, from programming computers to manufacturing stuff to shop keeping. The last thing you want to do is to create more jobs in the agricultural sector. Indeed, the goal should be to reduce jobs in the agricultural sector by increasing productivity (even as production increases.)

It is trite but true that fundamentally it is all about production of stuff when it comes to economic well-being. And manufacturing is the best known method for producing stuff. If India has to move beyond being a subsistence economy, it has to manufacture stuff. Dr. Singh got the last part right — services are secondary.

To manufacture stuff, you need human capital, not just machines and land. For that, a broad based education is the primary necessity. While a handful of IITs and IIMs are well and good for the elite that go there, it does precious little for the 99.99 percent of the people.

Dr. Singh notes:

The IIMs and IITs, the regional engineering colleges, they have served us well. But ultimately, if the educational pyramid is not right there are limits to getting dividends. Therefore we are making, for the first time, the most determined effort to ensure that all our children—particularly children coming from disadvantaged families, particularly the girl child—in the next four or five years have the benefit of minimum primary schooling. But that will generate demand for upgrading the quality of our secondary schools. We have not given that much attention toward upgrading our secondary-school system, and that is our next step. After what we have done in the last one year, primary education is well looked after. What we have now in place is a system which will ensure that all our children who are of school-going age are in primary school. But the secondary-school system will require a major effort, and it worries me.

My question is: what took the government so long to realize the importance of primary schooling? And if this recognition is not new, then why have they failed for half a century in that most basic of tasks? It is not as if the task is impossible. The country can be made 100 percent primary school literate in 5 years. So by 1955 we could have had a fully literate society. Yet, half a century past that date, we are no where near 100 percent literacy.

Moving on, Dr Singh identifies “big thrust” areas. Central planning horrors loom.

I am thinking of identifying areas where we need big thrusts forward. For example, steel is one sector where we are thinking about investing large amounts of money. Our own domestic steelmakers are very bullish in investment in this area. We’ve got the [South] Koreans involved in building a steel plant of 12 million tons’ capacity.

Old habits die hard. Nehruvian socialistic planning is hard to give up. It is not steel that the government should be focusing on. The private sector is quite capable of producing steel in all the required quantities. The demand for steel is a derived demand. People don’t want steel. People want stuff that may involve steel in the making. So you don’t start off by saying that our target is to increase steel production. That is putting the cart before the horse. You start by saying, for example, that we will build a modern efficient rail transportation system. The steel needed will magically emerge. Surely an Oxford trained economist would get that.

Dr Singh:

If I have any message, it is that it is our ambition to integrate our country into the evolving global economy. We accept the logic of globalization. We recognize that globalization offers us enormous opportunities in the race to leapfrog in development processes.

I don’t know what “accepting the logic of globalization” means. Perhaps it is a good line to throw out. But I have serious reservations about his idea of leapfrogging development processes. Development cannot be leapfrogged any more than you can go from being seven years old to being an adult, whether you accept the logic of globalization or not.

Development requires a bunch of things, none of which are optional. For instance, we have to have a stuff. Can’t leapfrog that. We need to have institutions such as a functional legal system. (More about this in the next column.) Can’t leapfrog that. You get the point. If there is a short-cut to development, I would be most interested in learning about it. Perhaps I will write to Dr. Singh to explain.

The entire interview is fairly predictable and standard issue. No great insights or shocks. The most memorable line for me is the following:

I have full confidence in the patriotism of our Left colleagues to believe that in the final analysis of what is good for India, they will also be on board.

I too am confident of the patriotism of “our Left colleagues”. And that’s precisely what gives me the heebie-jeebies and scares the bajeesus out of me. The Left colleagues are patriotic to the core and owe their undying allegiance to China and USSR (non-existent though it is.)

Dr Singh ends on a positive note and so shall I:

I think, overall, India is today on the move. The economic reforms that our salvation lies in—operating an open society, political system, an open economy, economic system—this has widespread support. Fifteen years ago, a Congress government launched this economic-liberalization program, integrating India into the world economy. Since then, three governments have come and gone, but the direction of economic policy has been, year after year, toward more liberalization. The pace may be slow, may not be as quick as some people would want, but the direction is unmistakable. India’s future lies in being an open society, an open polity, a functioning democracy respecting all fundamental human freedoms, accepting the rule of law and, at the same time, to emerge as a successful, internationally competitive market economy.

I am glad that it was the Congress government that launched the economic liberalization program. We just need to remember that present liberalization implies a past illiberal state which was the sole handiwork of the same Congress government. Taking the credit for liberalization and congratulating oneself is akin to boasting that one is a great proponent of women’s emancipation because one has recently slowed down–but not entirely stopped–the daily beating of one’s wife.

Well, I guess I can never take credit for stopping beating my wife; I never started. And that is the good news.