My brief time in the finance ministry made me realize what a depressing life Maharajahs must have led. The worst experience was the procession of lobbyists who wanted to see me before the budget - and often at other times - and ask for one favour or another. Before we liberalized the economy in the early 1990s, the government had tremendous influence over business, and lobbying was an essential part of doing business. We tried to make that unnecessary; still, I could not avoid listening patiently to demands of chambers of commerce. This expression of my frustration was published in Business Standard of 21 November 2000.
THE BUSINESS OF PETITIONS
It is a custom for all who care to do so to make
submissions to the finance minister at this time of the year in the hope that
their wishes will come true in the budget. The ministry receives a few hundred
memoranda, most of which are forgotten the minute they are received. But
important organizations get a hearing from the finance minister himself.
Amongst them are the major chambers of commerce. In my brief time in the
ministry, the best presentation was made by Dhruv Sawhney for the Confederation
of Indian Industry. It was not only technically good; it was full of ideas for
reforms. FICCI was not to be seen; its
luminaries were deeply disgusted by the reforms, in disarray, and disinclined
to lobby with Manmohan Singh.
Now the season is here again for the chambers to
start preparing their memoranda. Both the chambers have changed since the early
1990s. FICCI had a rather nasty election scandal; rigging was alleged, Indian
Merchants’ Chamber, the main chamber of Bombay, walked out, and there were
allegations that FICCI had become a coterie of Rajasthani businessmen. The
allegations stung; FICCI has made concerted efforts to attract a broader
membership. In the meanwhile, CII was captured by Rahul Bajaj and friends, so
there was little left to choose between them.
CII now has a resident economist in the form of
Omkar Goswami, who will no doubt be orchestrating its submission. Following Pai
Panandikar’s retirement, FICCI got as secretary general Amit Mitra, who has
taught economics. So its economic illiteracy also ended. Import substitution in
economics could have the same disadvantages for the chambers as for the
country. But at least it ensures a minimum input of economics in their
deliberations.
Something else has changed. Well into the 1990s, I
was always struck by the extreme age of FICCI’s grandees. If you think the BJP
is a gerontocracy today, you should have seen FICCI 15 years ago. You would
walk into the meeting, and year after year you would meet the same
septuagenarians. They made the same speeches they had made in the 1920s, and
promptly dozed off when you started to speak. Today there is a distinct
sprinkling of younger people. They actually listen, and react to what you say,
instead of letting you hear what is clattering in their heads.
But despite the new blood, certain habits persist.
The memoranda are put together as cut-and-paste affairs. Each influential
member says what he wants; the secretariat puts together all the demands, good,
bad and indifferent. At a time when there were some intelligent people in the
ministry, such an approach was extremely damaging to the chambers’ cause; the
secretary (economic affairs) or whoever read the memorandum would see the
self-serving and contradictory demands and promptly ignore them. Today’s civil
servants in the finance ministry have been chosen for their political
sophistication and economic illiteracy, so a cut-and-paste document may do less
harm to a chamber and more harm to the country.
This is particularly true of the rampant cries for
protection. The chambers are backing their members’ demands for protection
against Chinese goods. They find a sympathetic ear in the higher echelons of
the BJP government, amongst which Sinophobia is quite fashionable. This unholy
combination is likely to do great damage to the Indian economy. Industrialists
who live behind tariffs of 50-60 per cent are unlikely to become
internationally competitive in their lifetimes. And if they are going to
confine themselves to the Indian economy, their market will be strictly
constrained by its growth. Cooped up as high-cost units in a small economy,
they will find it difficult to attract outside capital. So they will turn to
government financial institutions for finance. They will be vulnerable to
competition from foreign companies entering India, which will have no problem
in raising capital. There is no way they can survive in a protected market if
there is free entry of foreign capital: they only have to see what has happened
to Hindustan Motors and Premier Automobiles. They will fail, and the financial
institutions will have to write off their loans. But in the years they take to
die, they will do great harm to their own industries and to the economy. If
they argue for protection, they should also argue for a ban on foreign direct
investment and controls on the capital market – in other words, for a return to
Congress socialism. The halfway house they seek is unsustainable;
liberalization has to go forward or be reversed.
The industrialists argue that they want protection
as compensation for the high costs of power, transport and other infrastructure
services they face in India – for costs that are higher than in competing
countries. But the government can force only the Indian consumer to subsidize
the Indian industrialist; it can never force the foreign buyer to do so. The
BJP, which is beholden to industry, will grant the latter ever higher
protection. In the circumstances, activities that do not need that protection –
for instance, export of services – will leave the protected firms far behind in
growth. This is the way to lose weight and influence. The sons of the
antiquated industrialists will themselves abandon those industries and run for
the new economy. Already, the new economy billionaires’ fortunes dwarf those of
families that have been getting rich for a century and more. In ten years’
time, the new economy industries will dwarf those of the old economy in wealth
and magnetism.
This is one illustration of the fact that as an
economy gets liberalized and government controls on market are removed, the
interrelations between markets increase. It is no longer enough for
industrialists to understand their own industry; it becomes necessary to
understand the not-so-obvious but quite inevitable economy-wide consequences of
policies affecting a single industry. For instance, the raising of an import
duty reduces imports and hence the demand for foreign exchange. The fall in
demand tends to lead to an appreciation of the rupee, and increase the import
competition faced by industries in general. It is also likely to raise domestic
prices and make other industries internationally less competitive. One would
have thought that Goswamy and Mitra would point this out to the members of
their chambers; but as employees, they are perhaps too subservient to the
latter to be too frank.
The other thing the industrialists do not realize is
that the abolition of industrial and import licensing has changed the balance
of power between them and politicians. Earlier, they were supplicants; today,
politicians stand before them as supplicants. At election time, politicians
will be queueing in the industrialists’ waiting rooms. The industrialists could
use this new-found bargaining power to force changes in policies which they
could not earlier touch – for instance, the rampant cross-subsidization which
makes power and railway services so expensive to industry. Politicians may tell
them to leave these political fixities alone. But nothing is fixed any longer.
He who pays the piper calls the tune. If only he knows what tune to call.
