WHY REFORMS ARE BACK - A reforms agenda born of economic conviction has few takers

By Swapan Dasgupta

There is a singularly purposeless battle being fought on television and the pages of the print media which can be given a simple title: ‘remember’. Remember what an approach paper of the erstwhile National Democratic Alliance said about foreign direct investment in retail in 2002? Remember the pronouncement of the Bharatiya Janata Party’s Vision Document on the same subject in 2004? Remember what the then Leader of Opposition Manmohan Singh wrote in a letter to a retail trade organisation in 2002? Remember what Arun Shourie said in Parliament around the same time and square it with what he is saying now? Remember the assurance given to Parliament earlier this year by the then Finance Minister Pranab Mukherjee about ‘consultations’ preceding any move to permit foreign capital in retail trade? And so on.

Consistency being the virtue of little minds, the only discernible winners in the ‘Remember’ game happens to be Communists, Mamata Banerjee and functionaries of the Rashtriya Swayamsevak Sangh who have kept away from electoral politics. Apart from them, almost every mainstream party, be it the Congress or the BJP, stands guilty of inconsistency or, as the Breaking News scroll on TV would have us believe, ‘doublespeak’.

‘There is no inconsistency’, those charged with the offence will doubtless argue, ‘there was a context to the earlier stand.’ That is stating the obvious. Every position and every political move always has a ‘context’. When the BJP cosied up to foreign direct investment during the NDA years they did so because they imagined the timing was right: India was on a high and Prime Minister Atal Behari Vajpayee was dreaming of a sustained 10 per cent growth that would keep the alliance in power for the foreseeable future. When the Congress opposed the 2002 initiative, it did so because it believed it would expose the saffron party’s swadeshi pretensions and highlight its elitist orientation. Today, the Congress wants a rash of FDI initiatives because it seeks to reassure global investors that India hasn’t lost the plot. And the BJP is back to its swadeshi ways because it is convinced that ‘reforms’ are just a ploy to divert attention from the Congress’ record of corruption and fiscal mismanagement. Additionally, there is the BJP’s loyal base of small traders in the Hindi heartland to cater to.

There is one overriding message that flows from the transition from correctness to correctness: political parties (with some dishonourable exceptions) are not committed to non-negotiable economic philosophies. This by itself is not such a bad thing. India’s experiences with economic experiments based on ideologies that have ostensibly been adapted to Indian conditions have not been encouraging. The socialistic path, for example, had run out of steam by the late-1960s when India became a third-rate, shortage economy that lived a ‘ship-to-mouth’ existence. Yet, the formal recognition that it was time to change course didn’t happen till 1991, although Rajiv Gandhi did make tentative moves in that direction.

Was September 2012 another 1991 moment, as the Prime Minister hinted in his bland address to the nation? The Confederation of Indian Industry and some other industry bodies seem to believe so, and they have extended enthusiastic support to the ‘reforms’ agenda. Unfortunately, the evidence isn’t so conclusive.

For a start, it is pertinent to ask why the UPA Government slept over much-needed reforms for a full eight years?  Mamnmohan Singh inherited an economy that was well poised to benefit from the business-friendly measures and the structural reforms, including fiscal consolidation, initiated by the Vajpayee Government. For nearly four years, the UPA-1 regime wallowed in the positive fallout of these steps. It shifted the Government’s priority from the creation of infrastructure to the creation of welfare net for the aam aadmi. The total quantum of subsidies, for example, rose from Rs 57,125 crore in 2006-07 to Rs 2,16,297 crore in 2011-12. The fiscal deficit rose from 3.3 per cent of GDP to 5.8 per cent in the same period. At the same time, the UPA halted and indeed reversed the NDA bid to roll back the frontiers of the state. Most important, the NDA Government’s attempt to facilitate entrepreneurship and make life easier for business was abandoned. The term ‘reforms’ disappeared from the official vocabulary and was replaced by a new word—‘entitlements’.

The shift in the strategic thrust of government was given a resounding thumbs-up by the electorate in 2009. A post-mortem of that election suggests that many of the UPA’s populist measures, notably the introduction of the National Rural Employment Guarantee Act, the generous waiver of loans to farmers and the freeze on prices of petroleum products helped the Congress upstage a disoriented BJP which, in any case, had dialled a wrong number on the Indo-US nuclear accord.

The UPA’s re-election in 2009 also led to a strange consensus among the entire political class. While it was acknowledged that India had changed unrecognisably since the liberalisation process began in 1991, the political class arrived at the simultaneous conclusion that reforms and market-friendly policies don’t and can’t win elections. The lessons of the NDA’s failure to secure re-election in 2004 through its ‘India Shining’ theme were imbibed by all parties, as were the implications of the UPA’s victory in 2009 on a populist plank.

The BJP responded by shifting tack from aspirational politics to espousing ‘good governance’ which covered a multitude of approaches. These ranged from Narendra Modi’s relentless quest for higher growth through entrepreneurship and infrastructure-building to Shivraj Singh Chauhan’s perusal of efficient Keynesianism. An invitee to a recent conference of BJP chief ministers was struck by how difficult it was difficult to achieve a measure of consensus on national economic priorities.

On its part, the Congress which always carried the inheritance of an over-burdened state, thought of economic restructuring in two ways. First, it was justified as a measure of expediency to stave off a crisis. Alternatively, for the more cynical, a measure of extra space to the private sector was perceived in terms of cronyism. Just as the public sector had also served as a means of patronage and a nest egg for loyalists, the private sector and, indeed, foreign capital, began to be seen as a milch cow. The commodities boom and the sharp rise in the value of real estate fuelled these tendencies and turned growth into greed, as did the maze of clearances an entrepreneur had to negotiate.

Over the past two years, industry bodies, India-watchers overseas and the ratings agencies made ‘policy paralysis’ and the absence of reforms the focal point of their dissatisfaction with UPA-2. However, despite the prognosis of a crisis of monumental proportions, it is significant that ‘reforms’ had slipped away from the lexicon of the political class. Its abrupt reappearance a fortnight ago had as much to do with a fear of the fiscal deficit running riot, the rupee sliding further and corruption becoming a battering ram against the government. The Government needed a short-term agenda to talk up the market and pool resources to fund a Food Security Bill and a possible universal healthcare scheme in next year’s Budget. A reforms agenda born of economic conviction has few takers.

This, indeed, is the problem the UPA-2 has to confront. It needs to talk reforms to instil confidence among investors and the creamy layer of the middle classes. Yet, its understanding of politics indicates that only sops, hand-outs and populism are electorally viable. Unless the mind of India undergoes a miraculous transformation, Manmohan Singh has only the smallest window of opportunity before his reformism is subsumed by political common sense. 

The Telegraph, September 28, 2012

Rousing a sleeping giant without moral authority

By Swapan Dasgupta

Reflecting on the spread of the British Empire to which he was passionately committed, Lord Curzon once remarked that “We have often blundered into many of our greatest triumphs.” Many Indians who cherish a vision of a vibrant India but were nevertheless disappointed by the prolonged drift in public policy could well be wishing that what Curzon held to be true for the Empire will also turn out to accurate for the Indian Republic.

Contemporary India has rarely conducted itself with a sense of mission. The economic deregulation initiated by P.V. Narasimha Rao and Manmohan Singh in 1991didn’t happen because the two were conviction politicians made by the same firm that created Lee Kwan Yew and Margaret Thatcher. India turned its back on an inefficient socialistic path at gunpoint. Likewise, the second wave of liberalisation was prompted by the NDA Government’s desire to offset the possible adverse consequences of the sanctions imposed on India by the West after the nuclear tests of 1998.

If Prime Minister Singh was indeed the great reformer he is portrayed to be, he would have unleashed India’s “animal instincts” immediately after his May 2009 victory when he had little to fear but fear itself. Instead, he waited till GDP growth had fallen below 6 per cent, the rupee was fragile, inflation soaring, the fiscal deficit out of control, politics vitiated by corruption scandals and business confidence at an all-time low. What would have been bold initiatives in 2009, grudgingly digested by a dispirited opposition and accepted by a people anxious for more of the good times, has become a last-ditch, cynical gamble three years later.

The public discourse in India cherishes boldness and decisiveness. To the extent that the Government has been propelled into a burst of activity, there is critical appreciation of the fact that there is more to the Prime Minister than the ridicule that was heaped on him for the past year. Industry bodies have rallied enthusiastically to his support, stock market speculators have given their thumbs-up, the editorial classes are awe struck and even a demoralised Congress appear to have convinced itself that it is better to have fought and lost than not to have fought at all. On the face of it, a sleeping and indolent giant appears to have been aroused.

However, as the old colonials used to remark, for everything that is true of India the opposite is also true. For the past 20 years, market economics has become the new consensus. With the exception of dinosaurs in West Bengal and Kerala and ideologues who nurture a visceral hatred of what they call ‘neo-liberal’ economics, mainstream India is committed to the idea of reform. However, like vocational education which is always good for the neighbour’s child, reform is also expected to be detached and morally uplifting at the same time. In the 1990s, reforms implied dismantling controls and opening up large chunks of a fortified economy to the private sector and global forces. This liberation from Nehruvian dogma unleashed entrepreneurship and put an end to the shortage economy. Some people got very rich but a larger number of Indians moved into the middle class and ceased to be impoverished. It was win-win situation.

Today, the situation is different. The Government is asking people to lower expectations, make sacrifices, to reconcile themselves to the erosion of subsidies and to tighten their belts—all for a larger cause. Unfortunately, for the past few years this larger cause has become both hideous and blurred. After repeated scandals, some involving unimaginable sums, the earlier mood of expectancy has turned to cynicism and disgust. The Government stands discredited; the political class is equated with venality and brazenness; and India Inc. is increasingly being seen as the nesting ground of cronyism and dodgy practices. Almost all the institutions associated with public policy have become objects of disrepute.

In an India overwhelmed by disgust and despondency, the Government’s plea for a sense of national purpose may well end up being viewed as a cruel joke. It has become necessary to refurbish the moral authority of the economic order first. Unfortunately, that is beyond the scope of economists.

Sunday Times of India, September 23, 2012

United we vote, divided let's shop

By Swapan Dasgupta

In one of the few meaningful interventions on the state of the economy in this disrupted Winter Session of Parliament, Leader of Opposition (Rajya Sabha) Arun Jaitley imagined he put Prime Minister Manmohan Singh in a spot by referring to his expressed opposition to foreign direct investment (FDI) in multi-brand retail in 2002, when the Atal Behari Vajpayee government was in power.

In stressing that Dr Singh is as governed by expediency as any lesser being, Mr Jaitley was undoubtedly making a powerful debating point. Yet, in his speech he deftly avoided a more obvious question: Why do politicians across the board behave one way in government and the opposite way in Opposition?

The question is relevant in the context of both the Congress and the BJP. The idea of opening up India’s protected retail sector to some form of foreign competition was an idea that was first mooted by the DMK’s Murasoli Maran when he was minister of commerce in the NDA government.

It wasn’t an idea that found enthusiastic support from everyone: the Bharatiya Mazdoor Sangh led by the uncompromising RSS leader Dattopant Thengdi was vocal in its public opposition, as were politicians belonging to the “swadeshi” camp in the BJP.

But the idea was sufficiently attractive to be included in the 2004 election manifesto of the NDA — although not in the BJP’s vision document. If it was the coalitional imperative that scuttled the scheme this month, it was coalitional enthusiasm that put the scheme in the NDA manifesto.

The inconsistencies don’t stop here. Mamata Banerjee was viscerally opposed to FDI in retail and was even willing to vote against the government in Parliament if it came to the crunch. The Congress in Kerala was similarly discomforted by the government’s initiative.

At the same time, the Shiromani Akali Dal, which has experienced the benefit to farmers from organised retail, was enthusiastic in its support. So apparently was Gujarat chief minister Narendra Modi who, however, bowed to the party line and put his preferences on hold.

It also seems that many BJP MPs were dismayed by the party’s unequivocal opposition and preferred a more nuanced position. They were struck by the absence of any discussion within the parliamentary party before the BJP firmed up its position. Congress MPs would doubtless have the same complaint about its government’s unilateralism.

The point I am emphasising has, however, less to do with the lamentable secrecy and lack of consultations that surround most executive decisions — the retail liberalisation may well have gone through had it not happened in the midst of a Parliament session.

What I find interesting is that, political considerations apart, the government’s decision had supporters and opponents cutting across the political divide. More significant, the broad support for corporatising retail trade appears to have come from states which are either relatively better placed in the GDP — states such as Punjab, Haryana, Delhi, Gujarat and Maharashtra — or smelt gains from an efficient cold chain — as, say, Himachal Pradesh, Sikkim and Arunachal Pradesh.

For West Bengal, Ms Banerjee’s unrelenting opposition was quite understandable. Having lost its manufacturing base during the 34 years of Left Front rule, the unorganised retail sector is one of the largest sources of livelihood for a large range of people from the very lowest strata of the middle class to the rural poor.

The relative lack of other opportunities has made retailing the only possible source of livelihood for many people. A shrewd politician, Ms Banerjee would not meekly have handed over such a large and vocal community to the Left. For her, opposition to organised big retail made a lot of economic and political sense.

The real problem that the government faced was a conceptual one. There was just no way in which a momentous decision over retail trade would have a uniform effect throughout India. In certain states the benefits to both farmers and consumers would far outweigh the threats to the local kirana shop or middlemen. In other states, however, there would be disruption of local communities which had the potential of triggering social unrest.

The question that needs to be asked is: should, say, Gujarat or Punjab be denied the opportunity of becoming more integrated with the world market for the sake of West Bengal and eastern Uttar Pradesh? The concentration of power in the Centre makes this inevitable and forces absolutely local considerations to become pan-Indian impediments. Logically speaking, it seems absurd that the decision to allow a Tesco to operate a chain of supermarkets in Delhi should invite a veto from a Tamil Nadu-based regional party.

But that is how India has organised its politics and separation of powers. In a genuinely federal state, such decisions should be taken at the state level and be governed by mundane considerations such as municipal planning permission. Instead, it became a test of the Union government’s credibility.

The simple truth is that the idea of a redistributive Centre which was at the heart of the socialist planning process has run its course. In today’s India, it is the centralisation of power on crucial issues such as labour, power, infrastructure and environment that constitute obstacles to growth.

Uneven development is a fact of life that cannot be controlled by bureaucrats and politicians. There is often talk of a twin-track Europe. In India, we need to acknowledge the necessity of a multi-track, federal India.

Deccan Chronicle/ Asian Age, December 16, 2011

BJP risks losing urban support

By Swapan Dasgupta

Economic reforms in India are usually achieved at gunpoint. It was the horrible balance of payments crisis and the emotional effects of the mortgaging of the country’s gold reserves that facilitated the historic process of deregulation by the Manmohan Singh Government in 1991. Seven years later, it was the wave of global sanctions after the Pokhran-II blasts that propelled the Atal Bihari Vajpayee Government into using reforms as a weapon to neutralise the West’s hostility to India.

The qualified opening up of the retail sector to foreign investment announced last Thursday is the only step in the direction of economic liberalisation that the UPA Government has taken since it assumed power in 2004. It is being said that the retail initiative will be the precursor of reforms in civil aviation and, perhaps, insurance.

For the Prime Minister, the retail initiative may have salvaged his jaded image in the outside world as a reformer. But while this may have played some role in encouraging him to overrule Cabinet and Opposition objections, it was not the clincher. What tilted the scales in favour of a politically high-risk initiative was the rapid depreciation of the Rupee, soaring inflation and the dismal state of public finances. In other words, the opening up of the retail sector wasn’t occasioned by a deep rooted conviction that the present protectionist regime was inefficient and served neither the farmer nor the consumer. Had the  realisation—as Commerce Minister Anand Sharma put it—that under the present system “the famer bleeds and the consumer is fleeced” been widespread, the Indian politician would have rushed in with reforms much, much earlier. The Congress, after all, has very little support base in the wholesale and retail sectors. The Akali Dal is essentially a party of Sikh farmers and its endorsement of the reforms is revealing. It suggests that the agricultural sector wants greater choice in determining who buys farm produce.

The present system was allowed to continue for 20 years after the liberalisation process was initiated because successive governments chose the line of resistance and allowed themselves to be intimidated by traders. The traders’ veto on reforms would have continued had the government not been forced to make changes. The consumers should thank the Eurozone crisis and the UPA’s profligate expenditure policy that the monthly grocery bills should register a decline in the medium and long term.

In the short term however, the Government still has a problem on its hands. There are projections that the retail sector should see nearly Rs 1,75,000 crore additional investments (some Rs 70,000 crore in foreign investments) in the next five years. Yet, it is going to be a slow process. For the moment, the UPA faces a situation whereby the possible losers are incensed by the changes but the beneficiaries aren’t terribly excited—because the gains will take a long time to be felt.

In political terms, this is dangerous. It is estimated that nearly a lakh of people per Lok Sabha constituency will see themselves as an aggrieved community. The petty retailers and their families are almost certain to be receptive to the populist rhetoric against foreign companies and the demonology that is building up around Walmart. The doomsday scenario may well be terribly exaggerated since urban clusters with populations below 10 lakhs will retain their protected status for the foreseeable future. Yet, a grievance is a grievance and with this retail reform the Congress has replenished the numbers of the burgeoning anti-Congress vote bank.

They may, however, be compensatory advantages for the ruling party. Economic reforms have traditionally won the support of the urban middle classes—a group that swung to the Congress in sufficient numbers to decimate the BJP in urban seats in 2009. Despite being a natural supporter of deregulation and the free market, the BJP has, since its defeat in 2004, adopted a cussed approach to economic reforms. This has led to a growing middle class indifference to a party it supported quite enthusiastically in the 1990s. In fact, like the Reagan Democrats, the 2009 election saw the emergence of the Manmohan BJP voters—people who broke away from traditional support to the BJP and endorsed a pro-reforms Congress.

In actively championing the cause of the vyapari mandals in the big cities, the BJP has to be careful of two things. First, it must convince its supporters that it is not a status-quoist party wedded to serving particular lobbies. Secondly, it must be careful that the anti-foreign and, by implication, anti-West imagery of the protests it plans on December 1 and thereafter does not end up creating a cultural mismatch between the below-35 generation and the ageing leadership of the party.

One of the features of contemporary India is that the below-35s, who will soon make up nearly half the voting population, combine fierce patriotic with an approval of westernisation and western lifestyles. In overdoing the anti-Walmart rhetoric, as Uma Bharti did last Friday when she threatened arson against the multinational if it set up shop in India, the BJP risks imposing a new cultural barrier for itself.

In 2009, the BJP ceded the modernity plank to the Congress with its hyper opposition to the Indo-US nuclear accord. It has to take care that in opposing the government, it doesn’t paint itself as a party of the Flat Earth movement. 


Sunday Pioneer, November 27, 2011