Saturday, 4 February 2006

Physicians, heal thyselves

LINE & LENGTH/BUSINESS STANDARD/New Delhi January 28, 2006

T C A Srinivasa-Raghavan

Reform is slow in India because of reformers. It is their shrillness that is the problem

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.