The graduation day of the 11th graduating class of the Post Graduate Programme in Management class of 2012 of the Indian School of Business (ISB) in Hyderabad on April 7 saw economist Raghuram Rajan share his thoughts on Indian governance and in the process leaving some morsel to chew on for the new batch of students as they step into the real world outside their classrooms.
The Eric J Gleacher Distinguished Service Professor of Finance at the University of Chicago's Booth School of Business and the honorary economic advisor to the Prime Minister of India had some interesting observations to make. Here are some thoughts that he emphasises are his personal "opinions":
"Even though there are many examples of achievements in India today, such as the New Delhi Metro or India's success in milk production, we should also be realistic about India's deficiencies. Even as the world becomes competitive, India's star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated.''
He says, "Our politicians seem unable to come together to vote for growth-enabling reforms, even while they are willing to join hands in every populist vote. Coalition dharma seems to fail us only when steps to sustain growth have to be taken. Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad.''
He feels that the "government does too much of what it should not do, too little of what it should do, even while capricious and unaware of its limitations." In his observations on state ownership, he says, "The natural reaction of the government is to protect its progeny by giving them special privileges. But this tilts the playing field against the private sector. An Air India, which is on continuous and interminable life support from the taxpayer can charge whatever prices it wants and offer whatever service it has the inclination to provide for it has no need to make a profit."
It therefore is not surprising when he says "state ownership in many areas no longer serves the public interest, and the only reason it continues is because it serves the many vested interests that benefit from the status quo - the public sector workers who have cushy undemanding safe jobs, the unions who enjoy the power, the occasional corrupt executive who rakes in bribes, and the minister who enjoys the patronage.''
He has a thing or two for the country's private sector: "Incumbents in the private sector are not blameless either; it is no secret that for a long time, the government's willingness to keep air fares high so that inefficient Air India would lose less money, allowed private competitors to make a killing even while they could rely on the government to keep out entrants. It is only recently that they have begun complaining about a more aggressive state airline driving them out of business.''
On fixing the problems in the public sector, he says: "Privatisation has fallen into disrepute, because the public does not trust the government to sell firms fairly to new private owners. Minority share disinvestment is no answer for it preserves all the ills of government ownership while allowing the state-owned firms more resources that the government can influence...." His solution: "For many of the state-owned firms, we need to first break them up if they are monopolies, strengthen corporate governance and oversight, then return these firms to full broad-based ownership through a public offering.''
He also coined a special term for this: 'publification'. "It is a contorted but precise term, for it puts them back to work for the public rather than for narrow interests.''
Raghuram Rajan feels India has missed "a golden opportunity to show its respect for the rule of law even if it believes the law is poorly written". That, he says, "is far more damaging than any tax revenues it could obtain by being capricious.'' He discusses the Vodafone controversy and says, "the key concern with the Vodafone controversy is not the government's right to change the law prospectively if it believes it was poorly written and allows an unintended loophole. It is not even the government's right to change the law retrospectively if it believes that everyone knew what was intended. The concern is that it intends to change the law retrospectively after the Supreme Could upheld Vodafone's interpretation of the law."
He therefore goes on to ask: "What is the point of having an independent judiciary to interpret the law and adjudicate disputes between government and business if the government has no need to obey it?" A government, he says, "that changes the law retrospectively at will to fit its interpretation introduces tremendous uncertainty into business decisions, and it sets itself outside the law.''
Rajan however remains hopeful and says "a self-assured India, brimming with ideas and energy, can play an enormous positive role in the world. We could offer an alternative view of development, one of the first developing countries to grow rapidly even while being a vibrant democracy, with an economy that has cutting edge innovative companies even while providing bottom-of-the-pyramid services.''
Therefore, he feels "we could teach the West and the rest, even while learning from them, as we did in the historic past when we were a global broker of ideas. We could be a voice for good in the international arena, where all too often we are either silent or simply trot out old tired visions.''