Tuesday, October 14, 2014


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.


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.