~This Issue's Index~

Different Times, Different Spaces:
Designing Economic Reforms for a Complexity called India

By Omkar Goswami

During a conference in the mid-1980s, Professor Mrinal Datta Chaudhuri of the Delhi School of Economics remarked, "One of the most obnoxious phrases that I repeatedly hear is 'But in a country like India…'" He was referring to a habit of Indian policy makers of routinely justifying bad policies by using this phrase, a ubiquitous practice in the state-controlled dirigiste regime of the times. Even today, nine years after India's first steps towards economic liberalization, I frequently come across this phrase, and get just as offended as Professor Datta Chaudhuri.

Yet, in a profoundly different manner, that phrase has a great deal of relevance, for not only does India live in different geographical spaces from the rest of the world, it also lives in very different histories. There is the India of Bangalore- a world of pubs, young software engineers, e-commerce, Silicon Valley aspirations, and dreams of getting listed on the Nasdaq stock exchange. There is also the India of Bombay, now Indianized to Mumbai-the financial capital of India and a city of enormous wealth and great poverty, where even the poorest of the poor are on the lookout for cutting a deal, and hustling for a chance to get their great break in life.

Then there is Calcutta-a city of past glory, of bankrupt and dying heavy engineering companies, living in its cultural past, and with a vast number of well-educated middle class youth in search of jobs that do not exist. And finally there is the province of Bihar-racked with poverty, bereft of any fully functioning infrastructure, devoid of the slightest semblance of law and order, and where people are routinely murdered only because they happen to belong to the wrong caste.

Bangalore and Bihar, for example, belong not just to different geographical spaces, but also to different epochs of history. Bangalore looks confidently forward to the new millennium, while Bihar looks resolutely backward to the medieval ages.

When I think of this vast diversity in terms of time and space-and Bangalore, Mumbai, Calcutta and Bihar are but four examples from thousands-I realize the enormity of the government's task to design and implement an economic reform package that can address the aspirations and needs of all stakeholders in India. Things that will please the high-flying corporate denizens of south Bombay or fuel the aspirations of the confident, upwardly mobile, stock option-holding software engineer in Bangalore have no relevance whatsoever for the exploited, landless laborer in the Jehanabad district of Bihar. Thus, the phrase "But in a country like India…" begins to take on a different meaning-not as an excuse for making bad policy, but as an appreciation of the difficulty of simultaneously ferrying all of India forward economically, socially, and politically. While no one dares to pretend to have a comprehensive answer to the complex questions which arise when fashioning India's economic development, there are some main areas of reform which must be addressed; and we must emphasize the creation of various political constituencies to support these reforms.

Growth and more growth

Readers may find it useful to begin with a simple statistic, drawn from the latest World Development Report of the World Bank. At the end of 1998, India had a per-capita income of $430, unadjusted for purchasing power parity (PPP). Despite the economic crisis, Thailand's per-capita income, also unadjusted for PPP, was $2,200. If India's gross domestic product grows at 7% per year-or 5.2% in per-capita terms-it will still take a little over 31 years for India to catch up with Thailand's present income level. This statistic is a stark testament to how low India is in the economic pecking order.

This example serves two purposes. First it highlights the absurdity of the claim that the Asian crisis only hit those who grew very quickly, while those who were slow and steady, like India, escaped the crunch. Even after the crisis, Thailand's per-capita income is still more than five times that of India's; and Indonesia-undoubtedly the worst hit-still enjoys a per-capita income that is 60% greater than India's. The second and more important lesson has to do with the desperate need for growth. At 7% GDP growth, India will take over three decades to catch up with today's Thailand; at 8% it will take 26 years; and at an astronomic 9% it will still take a bit more than 22 years. Quite simply, this nation has a long, long way to go.
This is not merely economic rhetoric culled out of the compound interest formula. It has deep political and social content. Everyone agrees that the next century will be the age of knowledge. Nations that produce and harness knowledge will gain enormous strategic advantages and maintain high economic growth rates. Those that cannot do so will be left behind, comparative advantages will be accentuated, and the gap between nations that leverage knowledge and those that don't will be wider than ever before. As things stand now, who will be India's winners and losers in the knowledge age?

The winners are not hard to ascertain: they will be the well fed, well educated people of India-those who have studied in decent high schools, colleges and universities, who have the basic human capital on which to build their knowledge aspirations, who can afford to be aware of the outside world, and who have never had to worry about basic human needs. Children from educated families, for example, will be comparable to children in Oregon or Massachusetts in their ability to leverage the Internet. Indeed, they are far better off than the children of the inner cities of America. These more fortunate children will not only be on top of the knowledge age, but will also gravitate to US universities and business schools, eventually entering high-knowledge careers as software engineers or fund managers.

But what about a 10-year-old child born into to a low-caste, landless labor family in the darkness of Bihar? A child of these circumstances is not rare in India, a nation with a population in excess of one billion, 72% of which live in villages. In total, more than 350 million live below the poverty line and over 450 million live on less than $1 per day (adjusted for PPP). More than 53% of the children under the age of five suffer from malnutrition. Only 16% of the population have access to sanitation. India still has an adult illiteracy rate of 47%. Even worse, 61% of adult females are illiterate. The poorest 20% of the population account for only 9% of India's consumption. Ultimately, these statistics paint a picture of a nation in which a huge mass of people is deprived of the minimum attributes and entitlement needed to be a part of the workforce of the knowledge age.

To a ten-year old child of an affluent urban family in India, the "mobile" is a gadget that Daddy allows her to use to occasionally call her friends. To the ten-year-old in rural Bihar, "mobile" means moving from the hut to the fields to labor for someone else. The first daughter will be a winner in the knowledge age, whereas her compatriot in the hamlet of Laxmanpur-Bathe in Bihar is all set to drop out of the knowledge map-unknown, unseen, and unheard. If this parting of destinies occurs on a larger scale, it will create even more serious political tensions in the already taut socio-economic fabric of the nation.

How does one ensure that the concerns of the poor and underprivileged are addressed in economic reforms? The answer comes in several parts, but all parts begin with the need to realize that there is no substitute for economic growth. Unless India grows at a minimum of 8% per annum for the next 20 years, we shall have no hope of dramatically reducing the extent of mass poverty and economic deprivation. Therefore, anything that induces growth must be actively encouraged; and any policy that has the remotest possibility of retarding growth must be ruthlessly eliminated from the choice set. This is the most important mantra for India: growth, growth, and more growth.

Critics will argue that those that utter this mantra sound like unabashed proponents of 8uthe "trickle-down" effect. Few will claim that growth alone will remove mass poverty in India. Similarly, none will claim that we will ever see a poverty-free India without significantly stepping up of the growth rate. Growth alone is not a sufficient condition for removing poverty and creating credible economic rights and entitlements for the poor. But it is certainly a necessary condition-and a vital one at that.

Investing in physical and social infrastructure

One need not be a rocket scientist-or a world-class economist-to understand that there can't be 8% growth on a long-term basis without significantly higher sustained investment in infrastructure. This not only involves physical infrastructure such as electricity, telecommunications, roads, railways, and ports, but also social infrastructure such as primary, secondary, and vocational education, primary healthcare, reliable supplies of potable water, and sanitation.

Let us first deal with the problem of physical infrastructure. India's per capita consumption of electricity in 1996 (the last year for which there is comprehensive data) was 347 kilowatt-hours; in contrast, China's was 687, Malaysia's 2,078 and Thailand's 1,289. In 1997, paved roads accounted for only 46% of the total roads in India. In Malaysia it was 75%, and in Thailand 98%. In the same year, India had 19 telephone lines per 1,000 people, versus 56 in China, 25 in Indonesia, 195 in Malaysia and 80 in Thailand. The turnaround time of container ships in Shanghai and Guangdong are a third of that in the port of Mumbai.

One could spout similar figures from a seemingly endless source of comparative statistics. And in whatever way that one looks at them, it becomes apparent that, at present, India just does not have the kind of physical infrastructure needed to sustain 8% growth. Even if today's level of infrastructure could support 7-8% growth for a couple of years, it would surely hit severe infrastructure constraints thereafter.

The problems with infrastructure are three-fold. First, there is a serious shortage of public funds at the level of the federal as well as the state governments. Simply put, neither the government of India of the day nor any in the foreseeable future will have the resources to fund infrastructure on its own. This is not, however, an insurmountable problem. The solution requires a wholly different way of financing infrastructure through active private sector participation. This approach has already been adopted in telecommunications, where both mobile and land lines have been opened to private telephone operators. The result: phone services are better than ever before. Ports, too, can be privatized without many complications-beginning with container and cargo handling facilities and then moving on to ports as a whole.

The second problem has to do with the pricing of services. Forty years of economic controls have created an ethos where governments are afraid of charging cost-plus prices for the use of utilities. Even today, power is supplied to most consumers at prices that don't cover the cost of generation and distribution; nevertheless, every state's chief minister is afraid of hiking power tariffs to reduce the losses incurred by the government-run State Electricity Boards. Substantial growth in private sector participation in power generation and distribution is impossible until there is wide acceptance of the principle of paying a proper price for electricity. This is, however, a political issue as well as an economic issue. Chief ministers will have to develop a political rhetoric that delineates a choice between price-subsidized but intermittent power, and cost-plus price but regularly supplied power. I believe that if the choices are placed in a stark and simple manner, consumers will opt for paying a cost-plus price. The same argument extends to roads. India badly needs private sector participation in roads. But for that to happen, governments need to agree to rational tolls spread over the lifetime of the investment.

The third problem has to do with setting up credible and independent regulatory authorities that balance the interests between suppliers and consumers of infrastructure. To be fair, India has taken steps in this regard. There is a regulatory authority for telecommunications, another for electricity, and a third for the newly opened insurance sector. Of course, the setting-up of these authorities hasn't been without occasional stalls. But that is to be expected of a state that is gingerly transforming from a controlled economic regime to a freer one. In the future, these authorities need to be strengthened, and should give the signal of fairness and impartiality.

Despite the present state of physical infrastructure, we need not be too worried about the future. For one, every political party has realized the need to attract private domestic as well as foreign investment in infrastructure. In addition, notwithstanding several glitches, the returns from infrastructure are attractive enough for private sector participation. What this trend needs is active encouragement, fair and transparent rules for foreign investment, and independent regulatory authorities that promote growth without price gouging. None of these goals is impossible to attain.

What is much more difficult is investment in social infrastructure. Throughout the developing world, six key areas of activity suffer from market failures. These are investments in primary health, primary education, drinking water, sanitation, internal and external security, and law and justice. Private profit calculation can never ensure the socially required investments in these areas, which is why active government intervention is necessary.

Unfortunately, neither the federal government nor the state governments have funds that are anywhere near adequate to finance these activities. Decades of running budget deficits at the central and state levels have impaired the exchequer from financing social infrastructure. At present, almost 50% of the federal government's revenues are tied down to interest payments on existing public debt. The government can hardly hope to finance social infrastructure on the scale that is needed to lift 350 million people above the poverty line. Yet, there can be no hope for sustained growth without these investments-after all, they create the basis for human capital. The question is how can governments get the funds for these purposes?

Sustained privatization

The only answer is determined privatization of state owned enterprises (SOEs). Today, India's SOEs account for a quarter of its national income. There are over 240 corporatized SOEs owned by the federal government. This excludes 27 public sector banks, five insurance companies, two investment banks, and non-corporatized government entities like the Department of Telecommunications (which provides the bulk of telephones), Post and Telegraphs, and the Ministry of Railways. In 1996-97, these 240-odd firms had a book value of capital stock that amounted to Rs.2,020 billion (US$ 57 billion at the prevailing exchange rate), and employed almost two million people.

The vast bulk of these SOEs operate in areas where there is no rationale whatsoever for government ownership of the means of production and distribution. Half of them are profitable; a quarter operate at a loss making but can be restructured; and the remaining quarter are perennially bankrupt and fit for liquidation.

Reasons in favor of privatization are manifold. First, as far as the profitable SOEs are concerned, there is a need for liberation from the shackles of government ownership and control-so as to have operational and commercial flexibility on one hand, and market accountability on the other. Indeed, it would be safe to say that with privatization, at least 100 of these SOEs would generate greater corporate value than before.

Second, there has to be a shift in the philosophy of the state. The government should focus on only those activities that are traditionally beset with market failures. The corollary is no less important: government should systematically exit from all economic activities where market forces work. This isn't a statement of economic faith. Cash-strapped governments cannot afford to do otherwise. The corollary suggests that government must actively privatize every one of its commercial SOEs in the next decade.

The third reason follows from the second: the government must commit itself to spending over two-thirds of its receipts from privatization on social infrastructure, and a third to amortize public debt. My guess is that sustained privatization can easily yield Rs.300 billion per year (or $7 billion) for the next 15 years. Two-thirds of that translates into an incremental annual expenditure of Rs.570 per person for the 350 million people who live below the poverty line. In real terms, this means more primary schools and health centers, a greater supply of potable water, and more money for "food-for-work" programs for the poorest of the poor. If this kind of expenditure is maintained for 15 years-and delivered with minimal leakage-then we shall see the beginning of an India with the mass-based wherewithal to become a winner in the knowledge age.

From rhetoric to reality

I have only touched on three aspects of economic development for India: fostering growth with no apologies, catalyzing massive private sector investment in physical infrastructure, and privatizing SOEs not only to liberate them from the shackles of government control but also to generate desperately needed funds to eradicate mass poverty and deprivation. Of course, there are many other areas of reform: creating flexibility in factories, changing antiquated laws, implementing better bankruptcy procedures, systematically opening the economy to global trade and investment, and freeing the financial sector, to name just a few. All these are important, but if I were to prioritize, I would still pick the ones that I have discussed.

Ultimately, however, will these changes happen? I believe they will. If India is to remain as one country, it will have to address the aspirations of its poor and downtrodden. Politicians-the most maligned profession in India-have begun to realize how unforgiving the poor are. Each act of callousness and non-delivery has garnered the response of incumbent politicians being roundly thrashed in elections. Gradually, politicians and voters are realizing that there must be a political rhetoric of reform-one that shows how economic liberalization actually translates to freedom from want. It is this realization, plus the fact that there is always a powerful electoral stick with which to beat the non-performers, that gives me hope. And I dream that today's deprived ten-year old girl child in rural Bihar will grow up to beget a daughter who will be well nourished, educated, and empowered to live her life in the knowledge age. This transformation obviously won't happen overnight, but I believe it can happen in the next two decades. Or else, India as we know it is history.