REFORMS: WHAT TO DO NEXT

Stanford was charming, but my thoughts turned often to my home country, and to the reforms that I could not carry through. Vajpayee's government had proved more open to reforms, and I had hopes of it. So, early in 2000, I wrote this series in Business Standard.

Whither reforms? 

 

I   A balance sheet of the 1990s

The state of the Indian economy appears to be embarrassingly sound. It is now two years after the nuclear ceremony, which brought universal condemnation and sanctions upon India; just the month before last President Clinton christened our subcontinent the most dangerous spot in the world, thereby telling American business not to invest in India. Despite this confrontation with the capitalist world, India’s balance of payments remains surprisingly strong; through hail and high water, the reserves keep rising.

And that is not because of foreign investment. Foreign direct investment is distinctly down after the coming of the BJP governments. Portfolio investment is not, but it is a fickle bird of fancy. It has been down and up. It is here today and may be gone tomorrow. In any case, capital inflows are not responsible for the rising reserves. One cannot avoid the conclusion that the external fundamentals are strong.

And more surprisingly, inflation is down. The level of inflation showed a distinct fall from 1996 onwards; in the past year it has come down to levels that have not been seen since the days before socialism and the grand follies. Something has changed; we are no longer in the boom-and-bust mode of the 1960s, 1970s or 1980s.

What has changed? Five things in particular. First, industry is no longer in a position to pass on cost increases. Domestic competition has increased, and now there is some competition from abroad as well. This accounts for much of the fall in inflation. For this, the credit must go to the Fund and the Bank, which forced us to abolish industrial licensing in 1991, and to Narasimha Rao who had the sense to yield to force. If the Fund and the Bank had any strategic sense, they would be advertising their success in India instead of drawing comfort from Côte d’Ivoire and El Salvador.

Second, the illegal balance of payments has collapsed. The havala premium has disappeared, and billions of dollars that used to be siphoned off into illegal foreign exchange transactions have come into the legal channels. For this, credit again goes to the Fund and the Bank – they forced us to devalue in 1991, begin to dismantle import licensing in 1992, and start reducing tariffs in 1993 - and to Manmohan Singh at the Finance Ministry and P Chidambaram at the Commerce Ministry who carried out these changes. But I would now give greater credit to Chidambaram. For when Manmohan Singh liberalized gold imports through NRIs without releasing foreign exchange for them, he in effect legalized smuggling; most of the gold came to be brought in by couriers of big Dubai smugglers. When Chidambaram allowed a few banks to import and sell gold in 1996, he dug the grave of gold smuggling. We see the effects of this single measure today in the death-throes of havala. The rise in the reserves is due to the fall in the demand for gold and smuggled goods, and in foreign exchange balances illegally held abroad.

The third change is something Manmohan Singh did in a moment of righteousness. He felt it was unfair that the government should take away people’s savings without a by-your-leave through the loans it compulsorily sold to the banks. So he resolved in 1992, without anyone asking him, that the central government and its institutions would no longer resort to the Statutory Liquidity Ratio. On the face of it, it changed nothing; even now the Reserve Bank sells thousands of crores of central securities to the banks. But the absorption is no longer automatic; the Reserve Bank has to cajole, threaten, twist arms, and even then it sometimes cannot sell the loans. It has had to raise interest rates; the cost to the government has gone up. IDBI and ICICI have had to raise money from retail investors at high interest rates. The change is working its way through the system. When Yashwant Sinha inveighs against the fiscal deficit, he is not being a reformer; he is just reflecting the consequences of Manmohan Singh’s decision.

The fourth change is in taxation. Manmohan Singh brought down the income tax rates. If I write that revenue has increased as a result, Mr S S Bagai will immediately write back showing that it has not as a proportion of non-agricultural income. But I would still claim that that in a country where tax evasion is so rife, all taxation is unfair to honest taxpayers; the reduction in taxes has evened the scales slightly in their favour. It is not just the tax reduction; there are two further fiscal changes. One is that the rate of corporate tax and the peak personal rate of tax are about the same, so the gains from declaring personal expenses as corporate expenses have declined, and so have the advantages of controlling companies for that purpose. And Yashwant Sinha abolished the tax on dividends in the hands of shareholders, and thereby reduced the double taxation of dividends (as against the single taxation of undistributed profits). This too reduced the advantage of controlling companies. With these two changes, a promoter no longer has to control a company to be able to live off its profits; he can hand it over to competent managers and live comfortably as a shareholder. A handful of promoters have done so already; many more have hired more competent CEOs than themselves.

The last change is not very clear to me: something has happened in the foodgrain market. In the 1970s, the green revolution created a flood of wheat; to save Punjabi farmers from distress, the central government turned the rationing scheme into a scheme to subsidize foodgrains and increase their consumption. But there are always many claimants for a subsidy: farmers, who would like higher prices, consumers, who would like lower prices, and the officials of Food Corporation, who would like fat margins to blow up on themselves. The farmers have politically been the most powerful, and have won an annual support price increase of 10-15 per cent year after year. That is what raised the rate of inflation from an average 7 per cent in the 1950s and 1960s to 11 per cent in the 1980s, even though the growth rate of foodgrain output rose. In the 1990s, somehow, the political advantage of pushing up support prices petered out. The first sign came in the eight state elections of 1994-95, of which the Congress lost six. Manmohan Singh connected this to Balram Jakhar’s pushing up of support prices by 60 per cent in three years. He applied all brakes and brought down inflation to an incredible 4 per cent by the general election of 1996; but the Congress still lost. The present government is, if anything, even more beholden to Punjabi farmers; but it has been more circumspect in raising support prices. The urban supporters of the BJP have at last found a voice. So inflation has come down, and I think the fall may last.

These five changes have buttressed the economy and opened up great opportunities. In the next article I shall suggest how the momentum imparted by these reforms can be maintained.

II   The five best reforms

Some months ago I wrote a series on the pending reforms. That series was more for reform aficionados; it was meant to outline what in my views would be real reforms and not pseudo-reforms. They were not what is going to happen; our political system is creaky and cranky that it would take centuries to put through such a programme of reforms even if we had statesmanlike leaders and reasonable followers. Given the limited capacity of the system for change, it is worth making a short list of the things that are most worth doing. In my view, they are five.

1.    Abolition of customs duties: This sounds radical, but is not. We have reduced the maximum rate of duty from 350 per cent in 1991 to 38.5 per cent today and the average rate from 48 per cent to 29 per cent; now it is only a matter of reducing it to zero. It would pose no threat to industry; all we have to do is to make the appropriate devaluation to keep industries afloat. It cannot exceed 38.5 per cent; it will probably be more like 15 per cent. Nor would it mean the end of all import taxation; imports should still bear the single-rated value added tax (see 2 below). Amongst the advantages, it would become impossible for politicians to favour one industry against another and for firms to use customs duties in their competitive wars; and zero duty would make duty drawbacks for export industries unnecessary, and thereby abolish the huge empire of corruption and export discouragement that the customs department and the DGFT have built up. Caution: if customs duties are abolished, the exchange rate would be the only instrument for holding the balance between domestic industry and imports, and would have to be managed for that purpose. That means some controls on capital flows; full convertibility is out.

2.    Integration of business and commodity taxation: There should be a single rate of value added tax, which would replace the present excise duties, state sales taxes, and corporate income tax. It would be a tax on value added generated in all businesses. It would be calculated just like the corporate income tax, except that the base would be value added, and not profits. The base would be much larger, and hence the rate would be much lower. A single tax collection agency can replace the Central Board of Excise and Customs, the corporate tax arm of the Central Board of Direct Taxes, and the revenue departments of state governments; the fewer the collectors, the less the harassment and corruption. The base rate of VAT would act as a base rate of personal income tax on all employees and businessmen. There can be one or two higher brackets of personal income tax. Caution: Although the tax would be based on annual accounts and become due once a year on their finalization, its collection may be spread out over the year just as with the present corporate income tax.

3.    Government borrowing only for fixed investment: Curbs on government borrowing are in the air. What is wrong is not that the governments are borrowing, but they are borrowing without lenders’ consent and spending the money on unproductive expenditure. The statutory liquidity ratio should be abolished; banks should no longer be forced to lend to the governments. A law should be made that governments may raise debt only in the market, and can finance only productive fixed investment with it. They would thus be forced to consider their servicing capacity before borrowing, and to use borrowings for investments that would lead to a rise in revenue.

4.    Separation of cash holding and investment: At present banks provide two services in a package: they hold cash for depositors, and invest it in loans, government bonds etc. The two businesses should be separated. All banks should be made to offer a pure cash holding service to depositors, on which they would pay no interest and may levy charges. The cash holdings would be simply entries in a central computer owned by the Reserve Bank; they would be completely secure, and transferable at will. In addition, banks may offer their depositors the option of investing the money in packages, which may consist of loans to borrowers of a particular credit rating, bills of exchange, bonds, shares or mutual funds. They should have to disclose to the investors the full risks of investment in a particular channel. The investors should bear all the risks of non-payment of interest or principal, or of bankruptcy. That would end pre-emption of savings by banks, as well as accumulation of bad debts by them. Caution: Government banks would have to be privatized; otherwise they would continue to lend by preference to the government and be subject to politicians’ whims. Although cash holding would become a very simple business and anyone should be allowed freely into it, only banks that can offer their depositors a certain minimum range of choice should be allowed into the business of investing depositors’ savings. That means continued licensing of such banks. Reserve Bank should organize and run local markets for bonds and bills, and thereby securitize as much of bank debt as possible. Packaging of loans of similar credit rating would permit banks to pay rates of interest reflecting the risk; depositors would thus be able to choose different risk-return combinations. Interest spreads and investor choices would determine the volume of credit available to businesses of different sizes and risk levels; the present tendency of banks to fund large, low-risk borrowers would disappear.

5.    Dereservation of small industry: Small industry reservation should be abolished. It was never needed. The evidence is that small firms pay lower wages and can compete perfectly well with big ones, and have vanquished large firms in many industries. Most of the 800-odd reserved products are not important to small firms; and few small firms depend much on reserved products. The other concessions – directed credit, tax concessions, industrial estates, government purchases – favour a small number of small firms. What these privileges have achieved is to punish those small firms that grow beyond the small industry thresholds; they have thus thwarted the growth of precisely those firms that could make India internationally competitive. Instead of small firms, new start-ups should be favoured by means of a five-year tax holiday from the single-rated value added tax proposed above. Caution: Such a tax holiday could lead to tax evasion: firms might be wound up after five years and restarted under another name. Profits on liquidation should therefore be taxed.

I think that these five reforms would do more than anything to make India more competitive, to limit licence-permit raj, and to unleash the forces of growth. But they are not the kind of things that appeal to politicians, least of all to BJP politicians. So in the next article I shall take up the types of initiatives that appeal to them, and describe how they can be made more rational and effective.

III   Reforms BJP-style

Although the five reforms I suggested in the last article would do most to dynamize the economy, they are not the kind that would appeal to politicians. Politicians are players in a political game, and they want winning strategies that would win them the loyalty of the electorate and the contributions of rich friends for decades to come. They long for the kind of dream run the Congress had for forty years. Some of them also have ideals. They are looking for winning formulae, and have pursued a number of agendas with that aim. Let me take up those agendas and show how best they are pursued.

1.    Employment: We slick townsmen cannot imagine how the problem of employment haunts politicians. Members of Parliament and MLAs are pursued by job-seekers. Once they get into power, their survival depends on their giving jobs to their supporters. Hence the popularity of Lallu Yadav, a shameless rewarder of supporters; hence the hold of reservations on our political system; hence the longing of every politician from Bihar and Bengal for the railway ministry, one of the last ministries which can still be loaded with useless supporters. On employment, a liberal’s view is that employment should be productive, and that it should be created in the private sector by macro-measures which do not favour one constituent against another. Hence in the liberal view, faster growth of production is the key to faster employment growth. A liberal favours openness because he believes that international trade will enable each country to employ more of its abundant resources – for instance, labour in India. Although being a democrat he will not say so loudly, a liberal distrusts trade unions, which he thinks raise wages and reduce the demand for labour. This is all correct; but it is not going to satisfy politicians who depend on local electorates thirsty for jobs. My own thinking is that industry could absorb much labour 150 years ago; since then so much labour-saving technology has been developed that industry cannot be efficient and give many jobs. Agriculture, on the other hand, is hugely inefficient and will shed jobs if given a chance. Jobs can be created only in services. They are being created there and will continue to be. But services require interaction with buyers, and have to be produced wherever they are sold. Hence mobility of labour is all-important to service jobs. It will be helped if transport services are good and cheap, there is housing everywhere for the poor, and they are educated to be versatile and to communicate well. Transport, housing and education are also top priorities of the BJP; to these I go on.

2.    Transport: The Prime Minister’s cross of roads has attracted much criticism, including from me. But the spirit behind it is laudable: the idea is to employ people and cheapen transport. Except that a north-south road and an east-west road are poor ways of doing it. Good roads these days are highly material- and capital-intensive: they are made of reinforced steel and concrete, and making them with big machinery saves time and hence money. Nor are new roads the cheapest way of increasing road capacity; it is cheaper to widen the roads that are there, to remove bottlenecks, and to improve road surface. Of the three ways, the last is the most labour-intensive. To create employment, the governments should give out long-term contracts to improve the surface of and to maintain particular stretches of roads; the payment for the contracts should depend on the minimization of potholes and other defects. Transport costs are raised and delays caused by states’ and local authorities’ checkposts. Their removal will increase road capacity and actually lower total costs.

3.    Housing: The BJP as well as the NDA manifestos placed great stress on housing. Ram Jethmalani got the Urban Land Ceiling Act repealed – with little effect, since most states continue to impose the same restrictions. Yashwant Sinha has allocated money each year for housing schemes. But these are not the means to improve housing cheaply and quickly. What India needs is housing for the poor. The cheapest housing the poor can get is what they themselves build. Unfortunately, it is low-rise and hence wasteful of land; and since they cannot buy land, they squat, mainly on public land. The solution that is popular with politicians is to remove the poor from their squats, give them land on city outskirts and help them build little houses. Sanjay did it, so did Thackeray, with little effect. Apart from disrupting lives, it only shifts the current poor; they are soon replaced by new squatters. The solution is to release land – public land, or land purchased from private owners – for standardized high-rise housing made up of small flats in which none but the poor would want to live; if the costs are so high to take the flats beyond the poor’s reach, their building should be subsidized. Lower interest rates would help; but not the poor, for they would also raise land prices.

4.    Education: Murli Manohar Joshi has been very active. But his agenda is only ideological and political: he would like to introduce Bharatiya Samskriti into education and find jobs for BJP supporters. This is a very narrow agenda. What matters is taking education to the poor, and giving them education that would enable them to diversify their skills and improve their communication ability. For this, what they really need to learn is languages – not just their mother tongue, but languages of states where employment is available, and English – and arithmetic. The way to make such education widely accessible is to impart it on television; today, DTH television, which can send 200 channels at a time, offers an ideal medium for education. Government schools are no answer; they are just havens for teachers who teach little. The answer is to give children vouchers to attend any school they want.

5.    Technology: Starting from the Prime Minister, BJP politicians are enthused by the software success and would like to replicate it on a large scale. The instruments are there in the universities and government laboratories. They all need to be privatized and liberated from government rules on appointments, promotions, pay etc; they must also finance themselves, which they will do by selling research. Subsidies should go, not to institutions and their staff, but to students and to equipment. Recruitment in the institutions should be opened up, not only to all Indians, but to the best from anywhere in the world. Just as America drains away our best brains, let us drain Pakistan, Bangladesh, Egypt, Kenya and other neighbours of their brains.

Thus, the aims chosen by the BJP are worth pursuing; but the instruments they choose are unlikely to succeed. If they want to achieve anything in the directions of their choice, they will have to look for economic solutions – and those solutions will not be such as to suit their predilections.

MOBILE CALL PRICING

Telecommunications technology is extremely powerful; cellphones have been the biggest technological advance seen by India in a long time. It could have a much greater impact; unfortunately, its potential was lost in the shortsightedness of the department of telecommunications and the turf battles of the two regulators, Telecommunications Regulatory Authority of India and Reserve Bank of India. In India, one tends to live with our institutional limitations. The year in Stanford opened my eyes to what opportunities we were wasting. I later wrote a book about it: India's Telecommunications Industry: History, Analysis, Diagnosis, Sage, Delhi 2006.

TELECOM ARCHITECTURE

“Calling party pays” (CPP) has a long and sordid saga in India. It would seem natural justice that if I ring someone, I should pay, and not the poor recipient of the call. It is also obvious that the cellular operator pays for all the additional infrastructure he requires, and that the calls he feeds into the basic system cost its operator nothing extra. The cellular operator will want to recover the costs of his towers and so on, which he may do out of a one-time charge or periodic charges; as long as he does so, an additional call from or to a cellular phone should cost no more than to a wired phone. And yet, single calls from a cellular phone cost more. Why? Because Indian cellular operators avoid or minimize initial or periodic charges in order to encourage cellular ownership, hoping that anyone who gets a mobile will use it. American cellular operators reason the other way: when they sell a mobile phone, they give with it the right to use it free for so many hours.

CPP has not yet come to the US; here, the cellular operator pays for both outgoing and incoming calls. The cost of incoming calls can mount, especially if a caller receives long-distance calls from a distant friend who incurs high roaming fees. So, like in India, here too mobile owners switch off their phones or avoid giving their numbers to too many people. The pricing system goes back to the 1980s when cellular phones first arrived. At that time they were looked upon as a luxury for the filthy rich who could afford to pay for incoming calls. But today, 80 million Americans – over a quarter of the population – use mobile phones. Kids carry them to schools. There they are considered an utter nuisance, and their use during classes is banned. But that does not prevent defiant teenagers from chatting with their boy friends, who should themselves be in class. The growth of cellular ownership has slowed down, and cellular companies want to make inroads into the $100 billion cable telephone market.

When the US deregulated its telephone market in the 1970s, it broke up AT&T, the monopoly provider, into a number of regional Baby Bells, and prohibited the residual AT&T from entering into their local markets. They remain regional monopolies; new firms have not been able to make much of an inroad into their business. AT&T retained and developed its long-distance telephone business, and is trying to integrate it with cellular operations. It now offers “one-rate plans” which eliminate roaming fees and long-distance charges. But even its customers have to pay for incoming calls. Cellular operators are not prohibited from offering CPP. But Federal Communcations Commission, the national regulator, has studied the pricing for years without coming up with a set of rules; in the circumstances, operators are unwilling to go over to CPP.

Meanwhile, all of the European Union has CPP; the result is that cellular ownership has expanded faster there. Some countries like Finland have gone almost entirely cellular; Nokia’s success as a maker of mobile phones is at least partly based on the large and loyal home market it has. As the market has expanded, so has the size of cellular operators. The merger of Vodafone and Mannesmann is the world’s biggest to date; it was the merger of two cellphone operators. Here, the growth of cellular operators has been stunted by the pricing practices. In the US the government worries that American companies might lose out in the world growth stakes; so it is considering whether to introduce CPP.

But in the meanwhile, the cellular industry has moved off into a direction that poses problems. Frustrated by their inability to penetrate local markets, cellular companies have increasingly introduced roaming facilities – i e, the possibility of using the same cell phone and number wherever one is in a country, a region or the world. So by looking at the number of a cell phone, one cannot tell whether its owner is; for all one knows, he may be halfway round the world.

In Europe this does not matter so much, for people still remain by and large confined to their own countries and cities. Wireless phone companies get nationwide licences, so roaming fees do not apply. Also, in Europe as in India, cell phone numbers have a digit or two more than ordinary numbers, so a caller knows from the number he dials that he may have to pay more. But in America, basic and cellular numbers are the same ten-digit numbers. And America is a melting pot; a cell phone owner may be in Oregon today and Connecticut tomorrow. So if the caller has to pay, he would not know what he would be charged; and that might deter calls if CPP is introduced. If wireless companies in the US had their way, they would rather that he did not know. Their preferred solution is to introduce a beep that would tell the caller that he is calling a cellular number.

There is also the problem of sharing charges. Bell Pacific sends me bills which have two parts – its own charges, and long-distance charges that are due to AT&T. If CPP is introduced, every phone company may owe money to every other phone company. A bill would have to list charges due to all other companies, and the receiving company would then have to transfer charges due to other companies. The basic telephone operators are balking at it; they would rather that every company did its own billing. In which case I might be getting 25 telephone bills every month.

But a new type of company is coming up which will welcome such chaos, namely bill payment operators. You only have to tell them which bills you would like them to pay; they will track bills from those parties – bills for rent, groceries, club subscriptions etc – every month, consolidate them, and make a single charge to your credit card. Where there is a problem, there is an opportunity.

But the problem of intersecting cash flows is common to many businesses; the best solution for them is the one adopted by the better stock exchanges, namely a clearing house. Nowadays, a clearing house is just a computer; the more transactions it encompasses, the better.

This is why I am advocating the bifurcation of all banks into two businesses: a cash management company and a lending company. The cash management company would only keep your cash and make and receive payments for you; for this it would levy a charge. All the transactions would be implemented through a national computer to be managed by Reserve Bank of India. RBI is just beginning to introduce such a system. But it is being extremely cautious; and it does not allow anyone except the banks to use the system. It ought to be far more ambitious: it should aim to eliminate all currency transactions in ten years. Then we could have any number of telephone companies. Financial innovation is the key to competition.

Shuffling the cards

The Directorate General of Foreign Trade (DGFT) has been one of the most obstructive arms of the government; and obstruction always creates scope for corruption. Since India is poor in natural resources, it can build up exports only on the basis of imports. Quantitative restrictions on imports, which the DGFT administers, have been the second biggest enemy of exports – the biggest being the Customs Department. Between the two, they have ensured that India lost the growth stakes to Korea, Taiwan, Japan, Thailand, Malaysia and Indonesia.

The Uruguay Round sounded the death knell of the DGTD, for by 1 April of next year, India must remove all quantitative restrictions except for reasons of morality, defence and environment protection. Older Indians will remember the day ten years ago when P Chidambaram removed quantitative restrictions on the imports of industrial inputs and capital goods. At that time there was an even more corrupt government department, the Directorate General of Technical Development. Irate officials of the DGTD had then stormed Chidambaram’s office; his name plate, which they removed, was missing for many months.

Chidambaram was a brave – some would say headstrong – man; the threat of an attack is just the kind of thing that would have spurred him on to impetuous action. Murasoli Maran is a very different kind of man. He is not a reformer. That does not mean he is hopeless. Ministers can be classified into three classes. First, there are ministers who are venal or cowards; they either use their office for pecuniary purposes or allow their bureaucrats to do so or both. Then there are ministers who do nothing. They enjoy the trappings of power, get what publicity they can, but function essentially as figureheads. Finally, there are ministers with a bee in their bonnet. It need not be a reformist bee; it can even be a downright demented bee. But there are ministers who have a demon in them; they are the ones to watch.

Maran has till now fallen somewhere between the second and the third class. He makes it a point to be on good terms with his bureaucrats; he does not want to flutter any dovecotes or disturb any cozy games. At the same time he gets into these moods sometimes when he feels he must achieve something. As industry minister, he took his own time, but at some point he saw the point – which he could not miss, seeing the adverse publicity he was getting - that the games that certain IAS officers were playing against Suzuki were doing the country a lot of harm. Then he did seek a way out of the hideous labyrinth, and extricate himself with some skill.

He has become Commerce Minister at an interesting time. The Commerce Ministry’s prime function has been to license imports; it must therefore lose its raison d’etre by next year. So logically, the Commerce Minister ought to be preparing to do himself out of his job. This sounds shocking, but is not. In industrial countries, many ministers have done precisely this as government enterprises have been privatized and corporatized.

But if I am right in thinking that the Commerce Ministry has been a powerful force obstructing exports, then its officials – especially those of the DGFT – cannot face its demise with equanimity. So they would be planning ahead to create new empires of obstruction. Where would these empires emerge?

There are two areas for them. One is the Export Promotion Capital Goods (EPCG) scheme. Here, firms apply to the Commerce Ministry promising to export a certain amount in the coming years, and in return they are given a licence to import equipment duty-free. This scheme is very difficult to police. A firm that does not export as promised may vanish in thin air; or it may be employing so many workers that the government dare not take action against it. But such a firm gives a bureaucrat an opportunity to shuffle files. And lo and behold, Maran has extended the scope of the EPCG scheme. Earlier it was available to firms that imported at least Rs 200 million of equipment; now even a firm that imports a thousand Rupees’ worth can get EPCG licences. So, more work for the babus.

The other is duty-free import of inputs. For this there is an age-old duty drawback scheme. The duty drawback is given by Customs, and they have traditionally needed much persuasion to give duty drawbacks. It takes exporters months to get drawbacks, if they get them at all. It is obstruction finessed to the nth degree.

Not only were duty drawbacks not working, but the benefit from them went only to Customs officials. So at some point the Commerce Ministry invented advance licences, which they gave out; now they had a slice of the action. But advance licences worked as badly as duty drawbacks; often the DGFT issued an advance licence months after the exports had left the country. And then Customs could also get back into the game: they would refuse to honour the duty-free licence because it was no longer in advance of the exports.

To get around these founts of obstruction and venality, I suggested a pass book when I was in the government: that instead of getting licences against each export transaction, exporters would get book entries in a pass book. Every export would result automatically in a duty credit which would be written off against input imports. The passbook was introduced in 1994. The Customs detested it, and harassed passbook-holding exporters to the worst of its ability. But the passbook was so much simpler than the alternatives that its popularity grew despite all obstruction.

Now Maran has announced that the passbook will be abolished in 2003 and merged into – guess what – the duty drawback scheme. Who will benefit? No prizes for a guess. The reason given is that certain European countries do not like it. But these countries are working in league with our Customs Department: both argue that the passbook scheme involves hidden subsidies. It need not – especially if customs tariffs were simplified, so that duty could not be saved by importing one thing rather than another. This is why I think that with this export-import policy, Maran has risen out of the second class: he has fallen into the clutches of self-seeking officials of the Commerce Ministry. 

But what about the Special Economic Zones? Just the kind of cosmetics that babus use to bamboozle the public. Renaming EPZs does not make India a China. The Chinese Special Economic Zones were not of a thousand hectares, but of millions of hectares: they were substantially self-supporting. The Indian SEZs are so tiny that they will continue to depend on surrounding unspecial areas for workers, food, inputs etc. There will continue to be vast economic flows between the two, which the babus will have a field day policing.

So has nothing changed? Yes, something has; in a year’s time, almost everything will become importable, and consumer goods imports will fatten the Customs and their revenue. But thank WTO for that; Maran himself is a mere vessel of the inexorable forces of globalization.

Microsoft: the judgment on law

In India we are used to judgments which encompass the facts, the law and the verdict. Hence I find the slow unfolding of the Microsoft case fascinating. In this case, Judge Thomas Penfield Jackson of the United States District Court in Washington gave his findings of facts in November and his findings in law on 4 April; he still has to give his verdict, which he seems to be in no hurry to do.

Even for Indians inured to cases on which courts do not come to a conclusion after 40 years, this deliberate pace may seem excessively slow. But Judge Jackson is pursuing two ends that are not often in the minds of Indian judges. First, he is giving the litigants time to come to a settlement amongst themselves. He even arranged for them an arbitrator, Judge Richard A Posner, an intellectual judge strong in economic law, to help them construct a settlement. If they settled, at least the present plaintiffs would not file fresh cases; and that is an important consideration in this prodigiously litigious society. And the plaintiffs will embody into any settlement instruments satisfactory to themselves for policing the agreement. That will make them less prone to running to the courts every time complaining that Microsoft was not following the orders of the court. The American judicial system has always been less adversarial and more accommodative towards bargaining between litigants. Here, even government prosecutors bargain with criminals on what charges they would plead guilty to – and what they will not be charged with. Thus whereas a judicial system of the British type results in punishments that are severe but uncertain, the American system aims at less extreme but more certain punishment. (Judge Posner finally gave up his mediation when he found that although Microsoft and the Federal Department of Justice could have reached a settlement, some of the 19 state attorneys who have joined this case were holding out and making an overall settlement impossible.)

Second, Judge Jackson is also aiming at a judgment that is likely to be upheld by higher courts. For his is the lowest in the hierarchy of federal courts. Above him is the US Court of Appeals of the District of Columbia. Beyond it is the Supreme Court. This too is unlike Indian courts, where some lower judges are prone to give extreme judgments in the belief that there is a higher court to moderate or correct them. But here Judge Jackson had a delicate task, for the Washington Court of Appeals had already in 1998 ruled in favour of Microsoft on a crucial point: it had conceded Microsoft’s right to integrate its internet browser with the Windows operating system. But in that judgment, the Court of Appeals had split 2 to 1. So Judge Jackson did something that would never happen in India: he disagreed with the superior court, and said that it had interpreted the case law, embodied in earlier Supreme Court decisions, wrongly. He was thus looking forward to the time when the appeal would land up in the Supreme Court, and acting on the expectation that the Supreme Court would support his interpretation.

Resiling only slightly from his statement of facts of five months ago, Judge Jackson has now ruled that Microsoft did not make it impossible for Netscape to distribute its Navigator browser. Although its packaging of Explorer with Windows shut out Netscape from the OEM and IAP markets, it did not close all routes. This finding follows from the fact that Navigator did actually win a fair share of the browser market.

The plaint against Microsoft rests on Sherman Act of 1890. That was the time when Rockefeller was rapidly creating a monopoly by buying up kerosene and fuel oil marketing outlets and depriving oil well owners of markets. It is a federal act and hence cannot apply to what happens within states; it applies to what happens between states, and between the US and other countries. In respect of this area, its Section 1 prohibits “every contract, combination …, or conspiracy, in restraint of trade and commerce”, and section 2 makes it unlawful “to monopolize … any part of the trade and commerce among the several states, or with foreign nations.” Following the passing by Congress of the Sherman Act, various states passed equivalent legislation for themselves; they are suing Microsoft with their own Acts.

Judge Jackson first finds against Microsoft under Section 2, which was easier to deal with. Microsoft’s “monopoly power” is difficult to deny in view of its market share. The only contrary argument is that Microsoft never priced Windows as high as its monopoly would have enabled it to. But that is consistent with a monopoly trying to reduce the possibility of competition eventually emerging. More important for its attackers to prove is that Microsoft used anticompetitive means to maintain its monopoly power.

Here, Judge Jackson did not in November and does not now accept Microsoft’s defence that Windows and Explorer are a single integral product. He enumerates Microsoft’s efforts against the Navigator in the browser market and against Java in the applications market, and comes to the ringing conclusion: “Microsoft mounted a deliberate assault upon entrepreneurial efforts that, left to rise or fall on their own merits, could well have enabled the introduction of competition into the market for Intel-compatible PC operating systems. While the evidence does not prove that they would have succeeded absent Microsoft’s actions, it does reveal that Microsoft placed an oppressive thumb on the scale of competitive fortune, thereby effectively guaranteeing its continued dominance in the relevant market. More broadly, Microsoft’s anticompetitive actions trammelled the competitive process through which the computer software industry generally stimulates innovation and conduces to the optimum benefit of consumers.”

He relies on the same rejection of integrity in finding against Microsoft under Section 1. He regards the markets for operating systems and browsers as separate ones, and finds Microsoft guilty of tying the sale of one to the other. This is where he is in conflict with the Court of Appeals, and relies on Supreme Court judgments which enjoin that the definition of products and markets must depend on buyers’ perception rather than on legal dogma. On the charge of exclusive dealing, however, he absolves Microsoft on the grounds that Netscape did manage to sell its Navigator despite Microsoft’s exclusive dealing arrangements.

In a few weeks we should get Judge Jackson’s verdict; given his leanings, I cannot see how he can avoid ruling for a breakup of Microsoft. That is going to be hugely unpopular, for Bill Gates and Microsoft have enormous public goodwill. It is also likely to have no immediate effect, for an appeal to the Supreme Court is inevitable. And by the time Chief Justice Sandra O’Connor masters the lore of IAPs and ICPs and comes to a decision, Linux may well have won the war in the operating systems market. For all future IBM machines will operate on Linux; and even now, anyone with access to the internet can unload it free. For all their passions, the government attorneys are fighting a battle of yesteryears.