I wrote previously about the reform process in China  in the context of impending trouble for the banking systems of China and India . In those articles, I categorized Chinese reforms as the dog that did not bark. In this article, I will discuss why Indian reforms have been all bark and no bite, with an outlook that is even more dire than in the case of China. Once again, the focus is on economic rather than political reforms.
I don’t think that an extensive case needs to be made about Indian reforms having failed to deliver any punch since the mid-1990s. Barely any loss-making Indian government-owned companies have been sold. The process of privatization is central to any reforms in India given the massive budget deficit at more than 10% of gross domestic product per annum. In absolute terms, the state sector eats up some US$5 billion directly every year; indirect costs such as pilferage in coal mines easily account for another $1 billion every year.
The effect of significant deficits is to increase inflation pressure, even as deflation threatens many product categories thanks to rampant price competition with Asian manufacturers. As the government pays for uneconomic activity through borrowings in the local market, the result is also to reduce the availability of funds for deserving companies, thereby increasing their cost of funds. Structural reforms, such as in the financial and power sectors, are even more critical to the long-term success of the Indian economy, but are notable only in their absence.
The key reasons for the lack of meaningful reforms can be divided into three broad categories: players, process, and the people.
If the devil’s greatest illusion was to convince everyone that he did not exist, the greatest illusion pulled off by the current government is that reform-minded politicians head it. Prime Minister Manmohan Singh has an undeserved reputation for forward thinking; instead he is a mere lackey to broader political interests in the Congress party.
From his days as an economics lecturer in an elite college, Manmohan has always sung a socialist economic tune. He does not appear to believe in the free market, and certainly did nothing to argue for it in parliament over the past few months. His record of reforms, which his fans celebrate, was in the early ’90s when the government was in essence acting on the instructions of the International Monetary Fund. Ironically, at the time he only secured the job of finance minister because no politician wanted the hot-potato job as it was seen as selling out India.
If Manmohan is not reform-minded, his finance minister is even less so. P. Chidambaram has the job of appearing market-friendly while kowtowing to political interests. Lacking a popular base and being from the south (while the Congress party posts are held largely by people from the north and west), his ability to push through reforms was meager from the start. The rest of the cabinet, which is composed mainly of regional chieftains from coalition members, has disallowed even the most cosmetic reforms. Regional political parties, much like the Congress itself, won on populist platforms that are likely to saddle India with more debts in future. Some ideas, such as the Rural Employment Guarantee, are downright stupid in economic terms, putting forth silly notions of localizing jobs rather than urbanizing the workforce.
Congress party president Sonia Gandhi would like nothing better than for her children to succeed her. Heir-apparent Rahul Gandhi is a member of parliament who has not made a single policy speech in the House for the past two years. In the few interviews on record, he has come across as neither cogent nor intelligent. Blatant incompetence aside, dynastic politics make it impossible for India to confront its demons. For example, to argue in favor of privatizing banks would be to contradict Indira Gandhi, who nationalized them in the 1960s in an attempt to live up to her father’s socialist legacy. Looking at today’s most promising young politicians does not cause me any optimism – all are children of mediocre politicians.
Compounding the problems of poor players, reforms in India are challenged by overly complicated processes. A simple example can be found in the power sector.
The government needs to increase the total electricity output by some 250-300% in the next 10 years, just to keep pace with the current economic trajectory. This is not a simple matter of commissioning more power plants and linking them to the grid. State governments, rather than the federal government, control the sector, with some disastrous results. In Haryana state, for example, agricultural users are not charged for electricity because of promises made by the local government to secure its own election.
Meanwhile, more industrial states such as Maharashtra have encountered corruption in expanding their power sector. Ironically, that state’s then chief minister, who was widely pilloried for inking a deal bad for the state’s finances allegedly because of corruption, is now a federal cabinet minister. Leeway provided to states to charge differentially for power has led to many exceptions. This creates some strange anomalies, such as a cement factory that is in mountainous Himachal state.
Thus an entire industrial sector that is needed to deliver economic growth is stuck in miles of red tape, with projects bouncing back and forth between New Delhi and the various states. This has caused the private sector to create its own generating capacity, as the information-technology sector has done in Bangalore. Of course, that is at unacceptable cost if you are a manufacturer.
As if all this weren’t enough, India’s judicial system affords another layer of complication. While the country can be justifiably proud of its independent judicial system, things do take very long. Delays in settling commercial disputes are measured in years, not months. Don’t even think of the few weeks it would take to settle a case in Singapore, for example. Thus an investor without strong paperwork from multiple levels would find the likelihood of legal challenges quite unappetizing even if the opportunity does appear significant.
There is a simple failure to discern the benefits of reforms among taxpayers and, more important, among poorer sections of society. A simple example is the status quo in the power sector wherein low prices promulgated by populist states allow extraordinary inefficiency to persist. Making it a federal matter and rationalizing the tariff structure is wildly unpopular, as many people believe that electricity prices would increase.
The benefits of such an arrangement, namely greater power generation that could then be used to generate more meaningful employment, is simply not understood by a vast majority of the people. The attendant benefit of more reliable power supply is also not a major factor in shaping popular opinion. Similarly, the most obvious benefits of privatization, which would be a reduction in government deficits that could reduce the debt load for future generations of Indians and also decrease inflation pressure among the wider population now, is simply not even discussed in Indian colleges. Instead, the discussion is usually framed in terms of the key beneficiaries, with geriatric communists always scoring points by alleging that foreign investors would end up owning India. This is a ridiculous argument, and yet one that always carries the day.
You can’t entirely blame a people who are still taught Nehruvian socialism in their schools, but the lack of debate is breathtaking in a country that otherwise debates everything from the latest Middle East crisis to the benefits of solar power. A democratic society would need an educated base for effecting any changes; India simply doesn’t have this essential ingredient in place.
The lack of any appropriate players to push reforms’ benefits is central to the mess described above. India simply lacks the leadership and the urgency to achieve any meaningful reforms for years if not decades to come.