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Why reforms are slow in India

January 28, 2006

Many moons ago, in October 2004, this column had suggested that
while the Left idea was all right, it was the Leftists who were a
problem.

As much, I now think, can be said about reform and the reformers.

Earlier this week, as is customary these days before an Indian Prime


Minister goes to Washington and more rarely before a US President
comes here, the government made a gesture of goodwill.

In the old days gifts would be exchanged. Now greater market access
is given.

So the government decided to allow very limited foreign investment in


retail. Most commentators were not satisfied with what had been
opened up.

They wanted much more. They also attributed the slow approach to
the government's desire to protect Indian capital, as if that was
somehow wrong.

But I want to know: if Indian governments don't protect Indian capital,


who will? Foreign ones?

If big Indian business houses want to get into retail first, before the
even bigger American ones like Wal-Mart are allowed in, is it not the
government's duty to let the Indians have the first bite at the cherry?
What is so wrong with that?

This is only one example of how simple-mindedly our reformers view


things, in black and white, as good and bad. There are many more,
such as persistently and parrot-like demanding labour law reform
without specifying what exactly they want reformed and why;
agriculture markets reform without addressing the very live political
concerns of state governments; competition policy; regulation, etc. It
is monkey-see, monkey do.

Don't get me wrong. Economic reform is a must. We have to do it,


especially if it means taking the government out of business activities.

But that does not mean that reformers should always take an un-
nuanced and crude view, like they often do. And this practice, I think,
is what has given reform a bad name in India.

The mullahs of reform have done it in by their shrillness and their


refusal to even acknowledge the political and social dimensions of
reform. Not just reform, they have discredited all reformers.

For example, one way or another, the case the mullahs invariably
make is pro-foreign capital. But the truth is that FDI doesn't come to
India for any number of reasons. Corruption is a major problem, for
one thing.

Nevertheless it is our labour laws that are held to be the main


problem. Even the Prime Minister has said so.

But then may I point out: it is not as if FDI is not coming. Indeed, it is
increasing. So are all these investors idiots?

If we reformed our labour laws, I am told, even more would come in.
But how is it that those who have invested are earning a better return
here than in China, where there is no labour law to speak of? And
this, without always hiding behind high tariff walls?

Or take competition. The received wisdom is that competition is good


and monopoly is bad because monopolists restrict output and raise
prices whereas competition achieves the opposite. But amazingly this
doesn't always hold in India.

The railways and the power sector are excellent examples of the
breakdown of economic theory. Both have consistently lowered
prices in real terms and increased output. Economists get very shirty
when I point this out.
However, there are two cases that prove competition works: airlines
and telecoms. Earlier, the government monopolies in these
businesses did keep output down and charge outrageous prices.

So, surely, the right question to ask is what is different between the
railways and power, on the one hand, and telecoms and airlines, on
the other? To the best of my knowledge, no one has done so.

Sometimes I am patronisingly told that the railways and power are


inefficient and depend on government subsidies. But when I point out
that even in the US these businesses are inefficient and depend on
government subsidies (in the form of tax dodges) there is no proper
answer.

Foreign banks, I am told, should be let in on request. Certainly,


because they bring in technology and superior practices.

But has any financial sector reformer in India examined how difficult
the US makes it for Indian banks to operate in the US? Or Japan? Or
anyone else, like China?

Reciprocity is bad policy, I am then told, because unilateral opening


up will benefit us. Is that right? Then why don't other countries
practise it?

Multilateralism in international trade is good, bilateralism, FTAs and


regional trading arrangements are bad, I am told. But when I ask why
the US began moving away from multilateralism in goods trade in
1984, even as it was advocating it for services, I get no proper
answer.

India should not think it can generate a great deal of employment


from services, I am told. But it already does, I say. This is
unsustainable is the answer.

Well, I next ask, how many people can Indian manufacturing


eventually employ? Around 75 million or so. Out of a workforce of
400-odd million? What are the rest going to do?

In order to employ 75 million people in manufacturing, as against


China's eventual 120 million or so, how much capital and physical
resources would be needed at a wage level of around $100 a month?
If you can employ twice as many people using half in capital and
resources, what is wrong?

You guessed it. I get no answer.