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Why reforms are slow in India

January 28, 2006

Many moons ago, in October 2004, this column had suggested thatwhile the Left idea was all right, it was the Leftists who were aproblem.

As much, I now think, can be said about reform and the reformers.

Earlier this week, as is customary these days before an Indian PrimeMinister goes to Washington and more rarely before a US President

comes here, the government made a gesture of goodwill.

In the old days gifts would be exchanged. Now greater market accessis given.

So the government decided to allow very limited foreign investment inretail. Most commentators were not satisfied with what had beenopened up.

They wanted much more. They also attributed the slow approach to

the government's desire to protect Indian capital, as if that wassomehow wrong.

But I want to know: if Indian governments don't protect Indian capital,who will? Foreign ones?

If big Indian business houses want to get into retail first, before theeven bigger American ones like Wal-Mart are allowed in, is it not thegovernment's duty to let the Indians have the first bite at the cherry?What is so wrong with that?

This is only one example of how simple-mindedly our reformers viewthings, in black and white, as good and bad. There are many more,such as persistently and parrot-like demanding labour law reformwithout specifying what exactly they want reformed and why;agriculture markets reform without addressing the very live political

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concerns of state governments; competition policy; regulation, etc. Itis monkey-see, monkey do.

Don't get me wrong. Economic reform is a must. We have to do it,especially if it means taking the government out of business activities.

But that does not mean that reformers should always take an un-nuanced and crude view, like they often do. And this practice, I think,is what has given reform a bad name in India.

The mullahs of reform have done it in by their shrillness and theirrefusal to even acknowledge the political and social dimensions ofreform. Not just reform, they have discredited all reformers.

For example, one way or another, the case the mullahs invariablymake is pro-foreign capital. But the truth is that FDI doesn't come toIndia for any number of reasons. Corruption is a major problem, forone thing.

Nevertheless it is our labour laws that are held to be the mainproblem. Even the Prime Minister has said so.

But then may I point out: it is not as if FDI is not coming. Indeed, it isincreasing. So are all these investors idiots?

If we reformed our labour laws, I am told, even more would come in.But how is it that those who have invested are earning a better returnhere than in China, where there is no labour law to speak of? Andthis, without always hiding behind high tariff walls?

Or take competition. The received wisdom is that competition is goodand monopoly is bad because monopolists restrict output and raiseprices whereas competition achieves the opposite. But amazingly thisdoesn't always hold in India.

The railways and the power sector are excellent examples of thebreakdown of economic theory. Both have consistently loweredprices in real terms and increased output. Economists get very shirtywhen I point this out.

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However, there are two cases that prove competition works: airlinesand telecoms. Earlier, the government monopolies in thesebusinesses did keep output down and charge outrageous prices.

So, surely, the right question to ask is what is different between therailways and power, on the one hand, and telecoms and airlines, onthe other? To the best of my knowledge, no one has done so.

Sometimes I am patronisingly told that the railways and power areinefficient and depend on government subsidies. But when I point outthat even in the US these businesses are inefficient and depend ongovernment subsidies (in the form of tax dodges) there is no properanswer.

Foreign banks, I am told, should be let in on request. Certainly,because they bring in technology and superior practices.

But has any financial sector reformer in India examined how difficultthe US makes it for Indian banks to operate in the US? Or Japan? Oranyone else, like China?

Reciprocity is bad policy, I am then told, because unilateral openingup will benefit us. Is that right? Then why don't other countriespractise it?

Multilateralism in international trade is good, bilateralism, FTAs andregional trading arrangements are bad, I am told. But when I ask whythe US began moving away from multilateralism in goods trade in1984, even as it was advocating it for services, I get no properanswer.

India should not think it can generate a great deal of employmentfrom services, I am told. But it already does, I say. This isunsustainable is the answer.

Well, I next ask, how many people can Indian manufacturingeventually employ? Around 75 million or so. Out of a workforce of400-odd million? What are the rest going to do?

In order to employ 75 million people in manufacturing, as againstChina's eventual 120 million or so, how much capital and physical

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resources would be needed at a wage level of around $100 a month?If you can employ twice as many people using half in capital andresources, what is wrong?

You guessed it. I get no answer.