The liberalization of the Indian economy during my time in the finance ministry in the early 1990s was not popular with businessmen; they disliked the resulting competition and uncertainty. I helped Manmohan Singh with many speeches trying to persuade unhappy and sullen industrialists. Although the BJP-led government of the late 1990s was more to their liking, they did not like its reforms any more. Still, it brought down tariffs radically, and demolished the remnants of import licensing. Atal Bihari Vajpayee did big reforms with the least hoopla. This column is from Business Standard of 19 September 2000.
THE MYSTERIOUS AILMENT
General Pervez Musharraf thinks the Indian press is
patriotic. I am sure India’s official super-patriots do not think so. Ever
since I left the finance ministry, I have been visited from time to time by
foreigners, chiefly from banks, brokerages and governments. They usually come
after visiting government economists, and they want to check if the uniformly
rosy picture they were given was real. It generally was not; I told them more
or less what I have written in this column, and it has seldom been
complimentary to the collective intelligence of economic advisors. Terribly
unpatriotic of me; and I know many equal traitors. But we are a part of the
intellectual openness that attracts investors to India; it is equally an advantage
for Indian investors and companies. The con game that the Chief Executive
mistakes for patriotism is unlikely to win Pakistan many friends even if he
gets his press to play it.
But in the last two years, the official and my view
of India began to converge. Things certainly started looking up from 1999
onwards. Industrial growth began to rise, inflation fell, reserves rose, export
growth started looking up. When I left India a year ago, there was really
little to complain of. In Stanford, I could give straight-faced talks lauding
the state of the economy.
The year that has passed since then, however, has
seen a remarkable reversal of fortune. Industrial growth has again fallen to
modest levels, and stubbornly refuses to rise. Inflation has risen again. Reserves
have been under pressure, and would fall even faster if the government did not
indulge in such shortsighted measures as confiscation of half the balances in
the EEFC (exchange earners’ foreign currency) accounts and sending the
bloodhounds of the department of revenue intelligence after importers of
capital goods who have not fulfilled their export obligations. It is not clear that the situation is desperate; but the government is certainly acting
in desperation. What is worse, industry is in a panic. Many industries are
reeling from import competition. Industry after industry is going to the
finance minister and complaining that imports are cheaper than even its cost of
inputs.
Still, somehow, the xenophobia that infected
industry in the late 1990s is less in evidence. The change in attitudes too
must be related to the difficult business climate. When businesses get into
trouble, they look for a sugar daddy. If strong companies buy them out, their
competitors feel the heat; so such competitors are against foreign investors
coming in. Both tend to be in trouble together; there is no hard and fast
dividing line between the two. But the worse the business climate, the greater
the number of people who would like to sell out – and they are all for foreign
investment, which can only improve the sale price of businesses. The fact that
opposition to foreign direct investment has weakened suggests to me that even
more businesses are in trouble today.
How did this come about in such a short space of
time? Why did the incipient boom of last year peter out so soon? I think that
it has less to do with macroeconomic processes and more with particular events.
The balance of payments has worsened on account of
the rise in oil prices and a fall in foreign investment. Oil has seen sharp
ten-year cycles since the Arabs’ nationalization of their oil industries in the
1970s; the last year and a half has seen the latest upturn. It has nothing to
do with our policies, or indeed with any events in India; and it has raised the
import bill by about $5 billion.
Also, investment inflows have declined. Portfolio
investment has fallen because of the break in the US stock market boom. The
collapse was imminent in the preceding boom; we have done nothing to bring it
about. It has raised subjective risk premia of US investors, including the
perceived risk of investing in developing countries; India is just a victim of
circumstances. There has been a fall in direct investment from the high levels
of 1996-98, and it does have something to do with policy. The BJP has not restricted
FDI, but it has multiplied silly little rules and exceptions; given the
legendary reputation of the Indian bureaucracy for arbitrariness and
procrastination, any addition to rules gives foreign investors a negative
signal. This applies equally to non-resident Indians, from whom the Prime
Minister has sought $15 billion of foreign direct investment a year. They all
adore the PM, but they are not going to invest so much in India. They will
bring in a billion or two a year, mainly in the software industry; but the
customs officer and the labour inspector will continue to do a good job of
keeping them out of the rest.
Finally, the rise in inflation from the
extraordinarily low levels next year. It is largely due to two factors: the
rise in oil prices, and a rise in administered prices. The first was an
unavoidable consequence of external events, and the second was obviously
desirable. Neither was ideal; instead of the cabinet huffing and puffing for
months over the most trivial rises in public sector prices, the government
should set up mechanisms that delegate downwards the power to change those
prices and allow cost increases an automatic and instant pass-through. Still,
even a pass-through mediated by a sweating cabinet is that much reduction of
folly.
So by and large, the worsening of the economic
situation is due to external events, and not the result of stupid policies. The
reason why all eyes are on the government in these times of adversity is
because the government is in everything in which it should not be involved – in
oil, power, sugar, foodgrains, etc etc. And not content with its overstretched
brief, it is now trying to get a foot into the software industry – the one
industry that is doing well and bringing much prized glory to the country.
On the terrible dangers of this government
involvement in the only success story I shall write later. For the moment, let
me conclude by saying that India is not the only country affected by external
events or accidents. The rise in oil prices is global. The US is suffering one
of the worst droughts in decades. Investors who are wary of the euro have moved
money into London; the resulting strength of the sterling has hurt what remains
of British industry.
But in other countries, businesses are supposed to
tackle the problems arising out of such macroeconomic events; as a result they
are run so as to be prepared for such events, and sold if they cannot cope. In
India, they are in the habit of running to the government at every pretext; and
politicians love them to come asking for succour. The problem with Indian
business is not that it was protected for too long; it is that it does not want
to stand on its own feet. And it feeds the politician who loves to interfere in
what ought not to concern him. Their unholy alliance is the economic bane of
India.
