Business Today

Ending stasis

Sanjiv Shankaran        Print Edition: September 4, 2011

Perhaps it was the TV channels running - almost looping - stories that an accused in a telecom scandal had dragged his name into a corruption case. Or, it may have been uncertainty over India's economic future after two decades of reforms.

Whatever the reason, Palaniappan Chidambaram was a listless speaker at a book launch function the last week of July. "Reforms can be stalled, if you do not take an aggressive stance," the Union Home Minister said. Stalled reforms could drag the country's growth trajectory down to a range of five per cent to six per cent, he added. Coming from India's longest-serving finance minister in 20 years, this was almost alarming. For, growth in India has averaged 8.4 per cent over the last five years, despite a short recession in much of the developed world.

P. Chidambaram, Union Home Minister
Reforms can be stalled, if you do not take an aggressive stance: P. Chidambaram
The debate at the book launch - it was a book on India's transformation since 1991 - unsurprisingly focused on governance, or lack of it, in India. Questions about the sustainability of India's economic trajectory have been raised earlier, but were ignored in the euphoria of a phase of high growth.

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Five years ago, Bimal Jalan - former RBI Governor, bureaucrat, and parliamentarian, had pointed out that India had shaken off external constraints to growth. Jalan, a man who knows the Indian state well, had warned a trajectory of a sustained nine per cent to 10 per cent growth was unlikely. Falling governance standards in public institutions was the drag, a trend Jalan termed as public-private dichotomy: an improving private sector co-existing with a deteriorating public sector.

"At the moment, we are in stasis," says Jalan in an interview . Stasis, a word with Greek roots and elaborated by historian Thucydides, means inactivity or stagnation.

A short distance from Jalan's office, the finance ministry, meanwhile, was busy proving governance is far from at a standstill. Four days after the book launch that Chidambaram presided over, a dozen business leaders, including Ratan Tata and Anil Ambani, trooped into North Block, perched atop New Delhi's Raisina Hill and home to the finance ministry.

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After spending over 150 minutes in a closed door meeting with Finance Minister Pranab Mukherjee, the industrialists stepped out to mouth positive sentiments to a waiting army of journalists. This ran counter to the prevailing business sentiment. The latest BT-C fore Business Confidence Survey, for instance, showed nearly half the respondents expected the business environment to moderately or substantially worsen in the six months from June; the comparable number was just 11 per cent in the previous survey just a quarter ago.

What then was the meeting really about? "Perception," says a senior finance ministry official who attended it, with candour that comes only with anonymity in government circles. Part of that effort: new, neat burgundy curtains along the corridor that the visiting businessmen took to reach the meeting venue, while chik curtains enveloped in faded blue tarpaulin stayed untouched in other corridors.

He did not say as much but one cause of what Jalan called stasis lay in a throwaway line of Chidambaram's talk at the book launch. "It is the delivery system that is very rickety, in some places, broken," the Home Minister candidly said. That and what Prime Minister Manmohan Singh has repeatedly used as an excuse - "compulsions of coalition politics" - for gaps in governance.

A little after Singh began his second innings as prime minister in 2009, his now honorary economic adviser, Raghuram Rajan, wrote an intriguing essay along with Abhijit Banerjee, a Massachusetts Institute of Technology economist. They said there was a deep crisis in the provision of public services to the poor in the world's second-fastest growing economy. "Unless the crisis is tackled, through a mixture of economic and political reforms, India risks all the gains made in recent years."

That crisis, many experts believe, has become worse today. When the poor cannot get their legitimate rights, their logical option is to use the only tool they wield in a skewed set of power equations: the vote. Political groups, increasingly fragmented, provide patronage in return for the vote. And, since almost every political party is forced into such "transactions", the system misses out on the kind of accountability voters ought to demand. Compulsions of coalition politics, in other words.

Anu Aga, Director at boilermaker Thermax, and a member of the National Advisory Council, a policy advisory group led by the ruling Congress party President Sonia Gandhi, does not pull punches. "Greed and grab is very prominent among a few industrialists," she says, picking out mining and construction as among the worst. As long as administrations have the leeway to be corrupt through instruments such as vast discretionary powers, she says, there will be little change in industry's behaviour. "It is almost impossible to do business honestly; the rare few can afford to be honest."

Mukherjee, who dons the garb of the Congress party's chief firefighter often, has promised the situation will soon change for the better. A group of ministers headed by him has suggested eliminating some discretionary powers, the details of which are not known yet.

In this scramble to put Band-Aid fixes on problems, what is being missed is the predictability that comes as part of a well-governed economy. In 2006, an eclectic multi-country team of economists and policy makers undertook a two-year study to find out what makes economies grow. One of its conclusions was about the importance of institutions. "Mature markets rely on deep institutional underpinnings," the study of the team, headed by 2001 Nobel prize winner in economics Michael Spence, said. "An important part of development is precisely the creation of these institutionalised capabilities."

Ironic as it may sound for the world's largest democracy into its seventh decade as a republic, it is India's institutions that are failing. Institutions, at the simplest, set out the rules of the game clearly: the formal rules, conventions and their enforcement - all of which influence the course of economic development.

One view of India's recent economic development is that the quality of institutions India started with has played an important role in its high growth. Arvind Subramanian, an economist at American think-tank Centre for Global Development, in 2007 wrote that the quality of institutions "bequeathed" by India's founding fathers provided considerable returns with relatively modest reforms. The judiciary, bureaucracy and police were among key public institutions identified by Subramanian as having played a vital role earlier in driving the economy, but badly in need of reforms now.

 Anu Aga, Director, Thermax; member, National Advisory Council
It is almost impossible to do business honestly; the rare few can afford to be honest: Anu Aga, Director, Thermax; member, National Advisory Council
Some of India's institutions, to be sure, still compare well with their international peer group. "The Indian central bank is more credible than People's Bank of China," says V. Anantha Nageswaran, an independent macroeconomic consultant, based in Singapore. "RBI still has a lot of credibility, it has the competence to be critical [of the government]." Anecdotal evidence and formal studies, however, indicate a decay in the bureaucracy. For instance, the charges in the ongoing telecom corruption case show sections of a complicit bureaucracy.

The key question today is whether India's institutions are up to dealing with an economy on the threshold of touching $2 trillion. If they are not, "we are constraining our potential growth rates," says Samiran Chakraborty, Regional Head of Research, India, Standard Chartered Bank. The slowdown in fixed investments, partly on account of the fallout of corruption issues, over the last two years has pared up to one percentage point of growth of gross domestic product, the Economic Advisory Council said this month.

Enhancing the quality of India's institutions may be crucial to sustaining high growth, but they are not the only set of reforms needed. They need to be complemented at policy and execution levels. "You can't pose the question as either or basis," cautions Anantha Nageswaran.

Amidst the gloom, democracy remains the best bet to break the vicious cycle and trigger a new wave of reforms, many believe. There is some buzz coming from New Delhi on how big ticket policy changes - foreign ownership in multibrand retail, for instance - are round the corner. The mayhem in global markets after the downgrade of US debt by Standard & Poor's and worries over the European Union only add to the urgency for such reforms.

India has been a middle-income country for the last four years and the latest per capita income estimate of $1,441, or Rs 65,517, is close to the $1,500 threshold that ICICI Bank Chairman K.V. Kamath says, will trigger a big demand for better governance.

The Prime Minister's Economic Advisory Council has forecast per capita income will touch $1,632 by March 2012. But there is some scepticism that this trigger may take a while coming. "Demand for institutional reform will require much higher per capita income," says Chakraborty. Then, others like Jalan believe in the power of bottom-up pressure. For instance, the illegal iron ore mining scandal in Karnataka, which forced Chief Minister B.S. Yeddyurappa to resign. The rot in this instance was deep and entrenched across all levels of the state government - from the lowest to the most powerful - but the dogged pursuit of the issue by a handful of individuals who are part of the system has forced a chief minister out of office.

People in India seem to be more pessimistic about her institutions and their future. The view from overseas is that India has a lot going for it that might trigger positive developments. "I'm bullish on India," says American economist Lant Pritchett, currently a professor at Kennedy School of Government in Harvard University, on phone. "The federal structure makes me very optimistic. The power structure is too diffused and too regionalised to lock out really successful entrepreneurs forever."

Pritchett is no stranger to India; he spent three years here as a World Bank economist. He iterates the confusion he saw here first hand, when he wrote a paper last year provocatively titled 'Is India a Flailing State?'. "There's no orderly transition. India is going to look messy every step of the way," he says, "and end up way ahead of everybody else in the world."

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