From Business World of 10 May 2004.
A reform agenda
India has been doing reforms for 13 years
now; but most of the world’s trade, most of international investment and most
of the world’s travelers avoid our country. Our market shares in trade,
investment and travel have gone up, but still continue to be minuscule. In the
world’s estimation we have gone up. But it is a tiny minority of Indian
software engineers that have changed our image; meanwhile, the majority of the
people have seen little improvement in their lives. Our self-image has improved
more than our real condition.
How can we
improve people’s real condition? Their condition depends on how hard they have
to work, how work is distributed amongst them, what they earn for their work,
what their earnings buy, how stable and satisfying their lives are, and what
prospects they face for themselves and their children. What can we do in
respect of these?
v Quality of work: The first thing we
notice when we go to advanced countries is that no one does hard physical
labour in the open; the first thing their people notice when they come to India
is the hard, harsh class distinction between blue-collar and white-collar
workers. The reality is also reflected in the hunger for sedentary jobs.
Considerable physical labour has already been eliminated in our country; every
tractor replaces 25 ploughmen, every combine harvestor 200 women with sickles,
and every truck 500 labourers. More can be eliminated if more and cheaper
energy becomes available. This requires the following reforms:
§ Electricity: Transmission and
distribution should be combined into a single corporation. It should be
financed by public borrowings, and sustain itself by a flat charge based on the
volume of electricity transported and the distance it is carried. Generation of
electricity should be freed of all restrictions; anyone should be allowed to
sell power to anyone else. Competition will lead to much cheaper power, and
spread it all over the country. Transmission lines to villages should be
subsidized, but not power itself.
§ Oil and gas: This industry should be
completely denationalized, all import duties and cross-subsidies should be
removed. Government corporations should be privatized; they are strong enough
now. All pipelines should be 50% public carrier. Refining should be delicensed.
A joint Indo-Pak pipeline should be laid to bring Iranian gas to India.
§ Coal: All coal reserves not being used
by government coal companies should be licensed out to private companies.
v Distribution of work: Our high-wage
organized industries have created little employment; the way to create jobs is
through small-scale industries, trade and services. Instead of trying to help
them directly, we should tackle their major problems: location and finance.
·
Location: The most convenient location for small industry is close to the
market, in towns; outdated zoning regulations continually harass small firms
that come up in residential areas. Restrictions on activity should not be based
on location, but on the capacity of an establishment to disturb or pollute.
·
Finance: Nationalization created big, risk-averse banks; compulsion has not
made them finance small industry adequately. We need to redesign our financial
architecture in the way outlined further below.
· Housing for workers: Workers in small firms have typically to rent housing; and our
zoning restrictions make sure that pucca housing would be out of the reach of
low-wage workers. That is why we have such vast slums in cities. The problem
cannot be solved by giving people land or loans to build houses for themselves;
the solution lies in mass construction of small, standardized flats for
renting. Land and finance should be given to mass builders of such flats in
every city.
v Earnings: Everyone should be encouraged
to earn more, and to stabilize lifetime earnings by saving.
·
Working hours: Adults should be allowed to work as many hours as they like; the
restrictions placed in the Shops and Commercial Establishments Act should be
removed.
·
Size of cities: All time spent in commuting to work is wasted. Our workers spend
too much time in commuting because our cities are big and congested. State
governments concentrate investment in capitals, which have grown too big. We
should create 100 states, and thereby spread out urban investment.
·
Public transport: All public transport is state-owned and offers low-quality service
at subsidized prices. Because of the subsidy it can never be expanded to meet
demand. Because of its low quality, anyone who can afford it buys a personal
vehicle and congests the streets. Anyone should be allowed to transport people
at any price; competition and product differentiation should be encouraged.
Restrictions on ownership should be replaced by pricing of road access; access
to particularly congested areas should be licensed, and licences for crucial
areas should be auctioned.
v Cost of living: The more people can buy
with their income, the better. But producers are bigger and more organized than
consumers. Many producers’ delegations meet the Prime Minister and his
ministers, and ask them to stop supplies or raise prices in various ways; a
consumer never has a chance to pressure politicians in this way. But a
politician who cares for the people will resist producers’ lobbies, and do the
consumer justice.
·
Imports of necessities: The NDA government raised import duties on common foods like rice
and wheat to absurdly high levels. It placed an enormous duty on palmolein,
which is much cheaper than local ghee and vanaspati. All these import duties on
essential goods should be abolished altogether. Local production of some will
fall; instead of soybean, farmers will grow cotton. The rest will adjust.
·
Imports to create jobs: Similarly, import duties on all goods that are used in production
and create employment – raw materials, metals, fibres, timber, bricks, cement,
tiles, machinery – should be removed. Duties on the rest should not exceed 10
per cent. If duty reductions make things difficult for the majority of
producers, the Rupee would be devalued to protect them.
·
Remove agricultural subsidies:
Foodgrain and fertilizer subsidies should be
scrapped. They go mostly to producers; and they create dual prices – a sure
recipe for black markets and profiteering. They have also kept India’s farmers
tied to producing food, and they are producing too much. Instead, the
government should give low-interest loans for storage of foodgrains to ensure
food security.
·
Subsidize farmers, children
and old people: The government should take the DNA
of all Indians and make a database, and a complete record of land ownership
from terrestrial pictures taken from satellites. The money saved from food and
fertilizer subsidies should be divided by three. One part should be given as a
flat per acre subsidy to all owned land, one as a per capita subsidy to all
children under 12, and the third as a per capita subsidy to all old people over
65.
·
Restructure taxes: Taxes on goods and services should be replaced by taxes on income,
and taxes on profits should be replaced by taxes on value added. Cities should
introduce a property tax based on area under occupation and market value of
land in each area, and a poll tax on all urban residents who use its
infrastructure.
v Stability and satisfaction: It is
impossible for anyone to live a predictable life. There are accidents and uncertainties
in the history of nations, and their citizens must share the risks. But they
should not be subjected to manmade risks; they should be helped to develop
capacity to bear misfortunes, and be given help to bear those that are beyond
their control.
·
Savings: The present financial structure gives people more security than the
country can afford. They put their money into banks with a guarantee of
security, but the banks lend out what is essentially risk capital. Hence the
recurrent cycles of bad debts and government bale-outs. The financial system
should be reorganized into three types of banks. The first sort would only keep
people’s cash and let them write and receive cheques; for this service they
would charge money. Of these cash holders there can be any number. The next
sort would offer people the choice of investing in traded portfolios on the
lines of the present mutual funds; but the portfolios could also consist of
traded IOUs of credit-rated businesses. These too can be many. Finally, there should
be banks of the present sort which give loans to individuals and businesses –
except that they should also be allowed to invest in equity. These should be
few and subject to regulatory controls.
·
Skill portfolio acquisition: Just as people spread risks in investment, they should be enabled
to spread risks relating to livelihood. The present system locks up children
for years in prisons called schools and colleges, and slowly injects a dilute
dose of education in them. Skills can be imparted much faster if training is
reorganized into modules of essential skills. The modules can be imbibed at the
student’s convenience if they are offered off the web or on television. The
present age-related education system should be replaced by an opportunistic
training system from which people can pick up practical skills whenever they
want in life.
·
Vice-financed health: Ill-health represents a serious lifetime risk to workers as well as
others. The present high taxes and vexatious controls make vice industries like
drinks and tobacco a plaything of politicians and big businessmen. They should
be deregulated, and taxes on them should be brought down to a level that would
maximize revenue. From that revenue, the drinks and tobacco companies should be
made to build a nationwide system of free hospitals and medical services. New
vices should be recruited to expand this system.
·
The golden rule: All the governments should bring down their fiscal deficit to zero
in five years. All they have to do is to put in place some mild controls that
would keep expenditure within the sum of revenue and allowable deficit. After
that, state governments should always balance their budgets. The central
government should follow Gordon Brown’s golden rule: that it should run
surpluses in boom years and deficits in slack years and balance its budget over
a trade cycle.
v Dreaming of the future: for decades we
made absurdly ambitious five-year plans and watched them fail every time. The
reforms of the 1990s improved our performance and raised our sights. They have
raised sights too much; with the governance we have, becoming a super-power, an
advanced country, is a pipe dream. But if we do all the above, then our
prospects will improve enough for us to dream. Each will have his dreams:
scientists will dream of gleaming laboratories, villagers will dream of city
lights, and fat women will dream of great kitty parties. But the India worth
dreaming about is an inclusive India.
India is just a
geographical expression; what gives it its character is what goes on on its
soil. So let us make this a home for the world’s most important industries,
most creative research, most mind-blowing entertainment. If some industry is
undeveloped in this country, if something is being made better elsewhere, we
should be asking ourselves why we are not the favourite base for it. We should
ask its makers why they are not here, what we should have to do to bring them
to India. And here they should find the brightest people to choose from,
whatever their nationality. This country should become hospitable to capital,
to entrepreneurs, and to educated people from all over the world. Sri Lankans
and Kenyans should be able to park their savings in India; Pakistani scientists
should be able to come and work in our laboratories; Chinese companies should
be enticed to come and produce cheap consumer goods. The only nationalism worth
bothering about is locational nationalism; nationalism of religion, skin colour
or corporate domicile is sheer waste.
