THE economic policies and actions of the new Indian government, which came into office following its election victory last May, will be driven by political objectives that are probably as crystal clear as those that any government has ever had to formulate. Wise after the event, politicians of almost all parties, political analysts, economists, academics and the pundits and commentators of print, radio and TV seem to have reached an almost unprecedented consensus about the lessons of the election.
Economic growth, at levels previously almost unknown, had benefited the urban, better off, better educated classes in a consumer boom of mobile phones for those sophisticated enough to use them, household appliances for those with space to accommodate them and TVs and videos for those with electricity to power them. Home computer sales jumped--to those already literate and numerate. Mobile phone sales went up 20 per cent in one year. The revolution in the outsourcing of helpline, back-office and front-office work from the US and Europe to India increased the job prospects and the salaries of the already-educated young of Bangalore, Chennai, Hyderabad and Delhi (see Contemporary Review, April 2003). This sector is now worth $3.6 billion and grows at 50 per cent per year.
But at the other end of the scale over 50 per cent of the people continued to have no phone at all and more than half of the rural and urban poor continued to have no electricity or running water. Countless more millions continued to live an impoverished life in slums and shanty towns within the cities.
Somehow, perhaps partly blinded by complacency, the commentators lost sight of some of the persisting facts of Indian life. The birth rate means that although the 'economic miracle' had been creating one million jobs annually, some nine million entered the workforce. The IT sector accounts for fewer than one million employees in a workforce of 430 million. World Bank figures state that India accounts for 40 per cent of the world's poor, i.e. defined as living on less than $1 per day. Even the politicians seemed to underestimate the importance of the fact that these illiterate, innumerate, people who try, sometimes unsuccessfully, to scratch a subsistence from village lands actually make up 70 per cent of the population and the electorate.
The clarity of the political objectives and economic policies for the government was such that it could be stated as keeping the economic growth going but getting more of it down to the lower levels. The trickle-down effect has to become more of a flow-down effect. Or in the more honeyed words of the government's 'common minimum programme' it aims for 'reform with a human face.'
For the purposes of this article, all the matters of getting the required national growth rate I am describing here as the macro subject, however untidy that may appear to the economic purists. The matters which are to do with getting resources to the under classes, I am describing here as the meso economic subject. I was tempted to use the word micro but that would have been even more unacceptable to the purists and I am just enough of a purist myself to feel that the subject was too far away from the normally accepted characteristics of micro economics. Meso economics may not be a commonly used term but I hope it serves my purposes in this article.
The government will be tested on how it manages the macro job of getting 7 to 8 per cent annual growth and on how it manages the meso job of how to get a full share down to the worst off. In both of these tasks it will be tested on how it can change the patterns of history and it will be tested on the matter of competence.
The Government's Macro Task
There is a discernible pattern in Indian politics and economics which shows that change has tended to take place only very slowly and gradually. This applies even when there have been, as in the recent past, radical changes of government. In 1977, the party which toppled Congress continued with almost the same policies for a long period. It was the supposedly left-leaning Congress government of the 1990s which was the one which, under the guidance of Manmohan Singh as Finance Minister, brought about the liberalisation and modernisation of the economy. It was they who promoted the free market, privatisation and foreign investment until they were replaced by the BJP in 2000. The pattern was continued to the extent that the BJP made a feature of promoting the same macro-economic policies even more enthusiastically than Congress. Now we have the same Mr Singh replacing the BJP and back in power as Prime Minister.
Perhaps one explanation of this inertia of motion is in the unique make-up of Indian politics. Some of the older democracies of the West have grown up with a relatively small number of political parties which have represented clear ideological divisions. But in India there is such a plethora of different (and even conflicting) races, religions, castes and regional interests that it has given rise to over sixty national parties and many more scores of regional parties. In such a situation there has been little room for any clear, simple alignment along the lines of one or two ideologies which could decisively change the country's direction. Rather, change takes place gradually through a more practical set of pragmatic compromises and coalitions.
But politicians, being politicians, like to make speeches which purport to show their policies in more decisive terms. This presents another unchanging pattern of Indian politics and economics: that there is a huge gap between political rhetoric and reality. In the early stages of the new administration the Communists have argued for a halt to further privatisation of profitable companies and a stop to any further reform of India's labour laws which strictly control hiring and firing. In these same early stages the government, which is an alliance of twelve parties but supported from outside by the Communists, has gone along with these sentiments but there is a long way to go and the momentum of change may yet reach even these areas. In the meantime, this nod on these issues to the self-esteem of the extreme left, has allowed the government to obtain its agreement on all the other broad priorities, including achieving annual growth of 7 per cent to 8 per cent. Indian Communists may use the oratory of the traditional left but they are not Cuban Communists when it comes to the pragmatics of money and their rhetoric will not seriously affect the direction of economic reform.
A good example is the Communist regional government of West Bengal which has for many years propounded the language of Marxism but promoted free market economics. In the interests of developing tourism as a means of economic development it is even restoring the emblems and landmarks of its colonial past, including the monument to Queen Victoria, the great colonial Empress herself.
All this leads one to the conclusion that, despite any rhetoric to the contrary, there are few forces which are likely to effect any great change in the direction of the country's macro-economic affairs. Therefore, so far as the government being tested on changing history in economic affairs is concerned, it has everything going for it. The force seems to be with it as far as macro measures are concerned in keeping up a high national growth rate.
Beyond this is the question of the competence of the government to capitalise on the trends and put its own individual input into achieving the planned results. I use the term 'competence' in the widest sense to include knowledge, understanding, and grasp, as well as power or jurisdiction and the experience of having previous success.
On all these counts I have to be optimistic for the macro process particularly since it was the Congress Party while in government after 1991 which began liberal reforms and it was the man now at the pinnacle of power, Mr Manmohan Singh, who, as Finance Minister, was the main architect of them. He became almost idolised by investors and respected internationally and at the same time learned the infighting tricks of successfully pushing policies through to realisation. And there is no doubt that the policies were hugely successful in producing continuing economic growth. Mr Chidambaram, the Finance Minister, has been in that job before in 1997 and in the time since then the number of individual taxpayers has doubled, mainly because of increased compliance stemming from the reduction in income taxes which he delivered. Mr Nath, the Minister of Commerce and Industry, also has long experience and an impeccable reputation as a successful economic reformer and achiever of growth. On the grounds also of competence, the portents for macro success have to be bright.
The words of the budget speech by the Finance Minister would have had the country's poor in transports of joy, but the rhetoric was not matched by equivalent spending commitments. If anything, the totality of the $105 bn budget was slightly contractionary, with the biggest increase, and to this writer the biggest surprise, being on defence which rose by 17 per cent.
Of central importance to the first part of the government's economic task is foreign investment. Kamal Nath, the Commerce and Industry Minister, immediately announced three measures to help with this. He outlined plans to raise some limits on foreign ownership, to introduce legislation on special economic zones and to propose laws protecting intellectual property and data privacy, measures which were in fact confirmed in the budget announced by the Finance Minister, Mr Chidambaram, in the budget of 8 July 2004. Mr Nath's proposals are likely to reassure international investors that his government is as strongly committed to reforming and opening up the Indian economy as the BJP were.
The government intends to continue raising the limits for foreign investors in Indian companies and even for entire sectors such as infrastructure, large-scale employment, and green-field development. The budget confirmed a first round whereby the limit in telecoms is raised from 49 to 74 per cent, in civil aviation from 40 to 49 per cent and in insurance from 26 to 49 per cent. While the Communists called for a scrapping of these plans, they said that they would not bring the government down over the issue. The momentum of reform will continue. Regarding the economic zones, Morgan Stanley, the US investment bank, has promised to underwrite $110m of foreign currency in such zones depending on satisfactory legislation. Stronger laws to protect data and intellectual property are intended to provide more comfort for foreigners and to accelerate investment in, for example, research.
Mr Chidambaram, the Finance Minister, is also focusing on domestic investment, and has stated that he wishes to be known as 'the Minister for Investment'. He has inherited something of a fiscal madhouse in that the country's consolidated deficit (including state deficits) is over 10 per cent of GDP--one of the highest in the world and, of New Delhi's budget of around $100bn, nearly three quarters is spent on interest, salaries, pensions and the military, leaving relatively little for investment. He is setting out to reduce the proportion spent on bureaucracy and at the same time increase the tax take so that there will be more for roads, railways, ports, and subsidies for the poor.
The previous BJP government passed into law a measure requiring the reduction of the revenue deficit to zero by 2008 and the new twelve-party coalition has agreed with its Communist supporters to adopt this target.
Among the measures in the first budget of 8 July, were some designed to help with the formidable trick of reducing the deficit and at the same time allowing more government investment. These, apart from a 2 per cent tax surcharge earmarked for education, focus on broadening the tax base. India has currently only 30 million taxpayers out of a workforce of over 400 million and its tax take is only 9.6 per cent of GDP, one of the lowest in the world, and the measures are aimed at removing some tax exemptions, simplifying compliance and bringing into the tax net the country's service sector. It accounts for more than half of GDP, including transport and IT, but is barely taxed at all. VAT is to be introduced by 2005: a move which will require the co-operation of the states. Here the support of the Communists will be of practical use because they control or are highly influential in many states and, paradoxically, are among the most enthusiastic reformers in the states they govern and influence.
Other aggregate economic issues concern multilateral and regional trading and in this connection it was fortunate that talks had already been scheduled between India and China by the previous administration. When Congress was in power forty years ago, India fought a border war with China in which it came off second best and these territorial problems remain unresolved. The Indian government will quickly need to work up an approach to a peaceful exchange on this subject as a precursor to wider engagement with China on trade and other matters.
For much of its previous life in government, Congress was friendly with the powerful Soviet Union and it will now, with the demise of eastern power, have to keep up the momentum of their predecessors in forging good relations with the US and work to build its fledgling security partnership. In return for American aid, trade and security support, India will be expected to back America on Iraq and its wider war on terror but it has not so far declared how far it will go in this direction.
One issue which could seriously de-rail India's economic progress would be regional tension or even war in the subcontinent, and the alliance showed its awareness of this by immediately setting up talks with Pakistan on the sensitive and dangerous subjects of Kashmir and nuclear weapons. On Kashmir the arrangement is to have continuous long-term talks (previous discussions have never lasted more than a few weeks) and a start was made with proposals to originate a bus service between Srinagar and Muzafarabad, the capitals of Indian and Pakistan-administered Kashmir.
It was the first time in more than five years that the two countries had formally discussed nuclear weapons and good progress was made by the creation of a permanent nuclear hotline between the foreign secretaries.
The Government's Meso Task
The necessity of getting more resources through to the poor is made manifest in a myriad of surveys, reports and statistics but it was epitomised in a timely way by official figures from welfare ministries published in July, the second month of the new government's term. They showed that in the prosperous state of Maharashtra more than 500 children die every day from malnutrition and related conditions. Not only this, but in the four years 1997 to 2001 when the demand for luxury goods surged, the deaths of infants under one in the state actually increased 43 per cent from 3,050 to 4,357. And Maharashtra is by no means the worst, with many states having higher infant mortality and Orissa's rate being more than double.
As with macro economics the patterns show only a very, very slow rate of change in the conditions which affect the poor but, whereas the momentum of national economics is one of continued growth, the momentum of the condition of the poor is one of continued, literally painful, poverty.
India's agricultural sector is home to two thirds of its people but accounts for less than a quarter of GNP and has grown only an average 2 per cent for the last five years. Illiteracy, hunger and poor health show little change for the better over time and in some cases have changed for the worse. Successive governments have talked about schemes for water harvesting whereby the monsoons are captured, and schemes for education, medicine and communications but, for the huge majority of the impoverished, things have barely changed in decades.
Also, whereas in a previous section the historic pattern of rhetoric belying action was illustrated by examples of Communists preaching Marxism but acting for market economics, it may be that the same thing will be continued in some way by this government and that its commitment to fiscal discipline and macro growth will be greater than its commitment to the poor. Opponents are already criticising it as having a 'talk left, act right' approach.
The speeches were full of references to poverty reduction, rural development, irrigation, public health and education plus a world-class infrastructure of airports, roads, ports, railways, and power supply. In all honesty, you have to look quite hard behind the speechifying to find the actual meso measures which are being put in place for the impoverished.
The 2 per cent tax surcharge ring-fenced for education has been confirmed in the budget and some definite measures have been set up for health care with a promise to move towards 3 per cent of GDP. $2bn more is budgeted for poverty programmes and $560m more for agriculture. But the much-hyped employment-guarantee scheme is only at the stage where a bill is promised 'soon' and, as far as I can see, no budget has been allocated. The food-for-work programme is only to be piloted in a number of districts. So also is the desilting scheme for small irrigation (5 districts) and food stamps (3 districts).
And on the income side, the money to pay for everything is to come from an 18 per cent increase in excise collections, a 26 per cent increase in income tax, 40 per cent in corporation taxes, and 70 per cent in service taxes. These would be feats never previously achieved and one could be excused for thinking of them as over-ambitious. Of course, it is only eight months into the government's term and perhaps not too much could be expected to be in final form but so far the reality is nowhere near the hype.
It is in the area of the competence of the government to make a real economic difference at the very lowest levels that I find most grounds for pessimism. I have for some time wondered if there was something of an individual human failing by top people in India to fully comprehend the lower orders and the machinations which take place between the levels.
This is said by a foreigner not in a patronising way but in a spirit of doubt and seeking for a constructive explanation. And I wonder, further, if the events of the election itself do not support this line.
Apart from the result itself, in some ways the most astonishing feature of that most astonishing of Indian general elections in May 2004 was the fact that almost one hundred per cent of the country's pundits, analysts and commentators were entirely wrong in their predictions. Virtually no-one saw it coming. Highly educated, sophisticated, well-connected political and economic experts and sages filled the papers and radio and television with forecasts of a continuation of the BJP coalition amid one of the highest periods of economic growth in years. I questioned a prominent economist from one of the country's pre-eminent economic institutions. Wiser after the event, he answered that he and others had doubted the forecasts, but 'they had all followed the press'. This of course was no answer at all because it leaves the same question 'why did the press get it so wrong?'
I stress the point because it seems to me that one of the fundamental problems of Indian politics, economics and society itself is that the intelligentsia, the better-off classes, and the generally better educated elements (not necessarily one and the same) have some difficulty in understanding the underclasses. Over the generations since independence, and maybe even for many generations before that, the divide between city and village, rich and poor, educated and illiterate, is such that the upper classes have a rather superficial, stereotyped concept of the mind-set and thought processes of the most under-priveleged.
Related to this is the question of how much or how little grasp the national shakers and movers have of the detail of the plethora of state, regional and local regulations which influence the lives of the poor, especially the village poor. These regulations, numbered in hundreds, are intended to govern the allocation and distribution of monetary aid, to manage the development of water, irrigation and communications and to control local trade. They are too often administered by many layers of incompetent and corrupt petty officials who are recruited from the localities but who often turn round on their fellow countrymen and cheat them out of what they are due. Although nominally for the benefit of the poorest they too often work against them. Arrangements for farmers to sell their produce between states fall foul of bribes and rackets to the extent that trade is restricted rather than assisted.
It was Mr Chidambaram's first prime minister, Rajiv Gandhi, who first estimated that of all the millions of dollars or rupees which were allocated by the government to the poor, not more than 15 per cent ever reached the intended beneficiaries. There are few commentators who would say that things are much different today.
Mr Singh has said that he realises that government at every level is not attuned to deal with the task and has promised to reform all its institutions. Much responsibility is being laid at the door of Mr Ahluwalia, the new deputy head of the Planning Commission, to improve and even revolutionise the way of reaching the impoverished. 'Subsidiarity' is to be the answer, a term used in the EU and meaning devolving decision-making and control to the most appropriate level of government. He wants to devolve control of more than a thousand programmes to the 28-state governments and even beyond, to village councils. To the charge that lower level groups may be illiterate, the answer given is that they could hardly do worse than the literates and that every district can be helped by local working or retired professionals like doctors, engineers, accountants etc.
It is probably true that devolution could hardly do worse but it is not at all obvious that it will do any better. Bureaucracy, inefficiency and, most of all, corruption, are endemic at every level. Perhaps, instead of all the hyperbole and rhetoric about the budgets and allocations for transforming the conditions of the poor, the powers-that-be should set themselves a more modest but measurable target of increasing the throughput from 15 per cent to, say, 25 or 30 per cent. Unexciting and undramatic, maybe, but this would virtually double the effects at the grass roots. The trouble may be that the new systems are devised from the top down, which means that they are devised by the very people about whom it is argued that they do not have enough comprehension of the people at the lower levels nor of the machinations which take place there, and therefore do not have the real competence to achieve effective end-results. Maybe the meso systems need to be developed from the bottom up, an idea which the people at the top are never likely to adopt.
So it looks as if the objective of a high national growth rate has got the thrust of history behind it as well as the competence of the operators to achieve it. Judged by the same criteria, getting more of the benefits to flow down to the lowest levels seems to have the momentum of history against it and there are question marks over the competence of the movers and shakers to change that situation.…