Seeking visionary leadership

My column of Wealth Insight released online on 28th July is here. Reproduced below

While it is wrong to blame democracy for slow growth, what India needs is a policy framework that creates a transparent environment

By Anand Tandon | Jul 28, 2012

A recent report by Kotak Institutional research serves to remind us of the need for growth. Basing his numbers on average income growth rates, the analyst concludes that 100mn additional households (i.e. half billion people) will remain in the “survivor” category by 2025 if GDP grows at 5% rather than at 9%. In other words, a growth rate slower by 4% per annum will consign approximately 7% of the world’s population to poverty over the next 13 years. Poverty that could have been avoided! High growth is incontrovertibly a desirable objective for any government.

Is democracy a hurdle?
Our erudite prime minister included, the current political class and “chatterati” blame India’s democracy for slower economic growth compared to China. This is without basis.

Yasheng Huang, a professor of Political economy at MIT delivered an excellent lecture at TED last year which I strongly urge the reader to listen to (http://www.ted.com/talks/yasheng_huang. html). Huang compares India’s growth with China and concludes that the growth differential arises less out of political structure and more out of differences in education and health parameters.

One of the interesting points that Huang makes is that India, during the period 1961-1991, had a dominant single party rule (less democracy, more autocracy – the Emergency being a case in point). During this period, the economy averaged a growth rate of 1.8%. Post 1991, with the first “minority” government, and under subsequent coalition governments, average growth for the next two decades has exceeded 5%. In itself, this should silence those who blame “fractious democracy” for slower growth as the data suggests exactly the opposite.

Data given in the below table is worth thinking about. In 1981, India had better rail coverage (a proxy for infrastructure) than China. However, India lagged significantly when it came to human indicators. Literacy in China (1985) was significantly higher – with women literacy more than two times that of Indian women. Perhaps that explains the higher life expectancy of the Chinese by more than a decade. Indian women had a life expectancy lower than that of men – in itself an unnatural situation. Post this decade, the difference in growth rate of China and India diverged significantly. If no other data is presented, would it not be logical to conclude that growth rate differentials are driven more by human capital, and less by the ability to set up infrastructure? Huang, in fact, concludes that infrastructure development is a result of economic development and not its cause. As the economy develops and generates savings, infrastructure improves.

Does “reform” only equal “FDI in retail”?
Indian “reform” started in the decade of the 90s with lower licensing requirements – allowing the Indian entrepreneur to use his talents as he sees fit. Trade barriers were lowered with lower import tariffs, forcing Indian industry to become more competitive.

Capital restrictions were reduced. This led to an increase in foreign inflows within the country – and, of late, overseas investments by Indian corporations. Another factor of production, i.e. “capital”, was unshackled.

Human Development vs Infrastructure Development  India  China Infrastructure   Railways (1981) Km 61,240 53,900 Electrified Railways (1981) Km 5,345 1,700 Human Capital   Adult Literacy Rate(1991) 48.20% 77.80% Women Literacy (1991) 33.70% 68% Life Expectancy Men (1985) (yrs) 57 68 Life Expectancy Women (1985) (yrs) 56 70 Source: Presentation of Y Huang

Two other economic factors of production – “land” (which, in economic terms, includes all natural resources) and “labour”, have, however, escaped any significant “reform”. We therefore have a situationwhere, though consumption demand in India remains strong, supply is restricted. In fact, the country has to rely on imports to meet its demand. Supply increase, which should act as automatic stabiliser to increased demand and fuel growth, is restricted by land and labour laws that are cumbersome and archaic.

Despite this, calls for economic reform restrict themselves to allowing “FDI in retail” as a magic formula to erase all ills that afflict the economy. This can partially be put down to vested interests of analysts – most employed by “sell side” brokerages – who mouth what their clients want them to – i.e., greater market access. However, one wonders about the compulsions of the writers of the Economic Survey, who also repeatedly dish out the same formula, while remaining silent on the market destroying features of the proposed “land reform” bill, or the lack of clear policy in handling out natural resources for use by industry.

Needed: A focus on factors other than capital
Running a government is complex. More so, in a large, diversified country like India. Any leader can get overwhelmed by the enormity of the task. But, as I stated in the beginning, slow growth destroys opportunities for 7% of the humanity. A visionary leader would focus on one or two issues in a term of 5 years – issues that can unleash the potential of millions of his countrymen and women. Education and health are two such issues. Natural resource is another.

True reform would be to provide a policy framework, and create a transparent environment where the Indian entrepreneur can use these factors of production to further the goal of economic growth – and generate employment. Providing “entitlements” to people without empowering them to reach their own potential is the hallmark of bureaucracy, not leadership.

What to expect from the new CEA

I have a new blogpost on CNN-IBN's India Blog site. The link is here. I am also copying the blogpost below:

Last week, the Indian government appointed Dr Raghuram Rajan, a distinguished economist, as its chief economic adviser (CEA). The CEA advises the government on possible policy options and priorities. There are no executive responsibilities other than to prepare the various economic reports that are presented to Parliament - including the Economic Survey. In this context, it may be useful to look at the policy preferences of the new CEA.

In April, Rajan made a speech in New Delhi in the presence of the PM where he signed off with "I have been frank as an academic, that is the only value I bring". This suggests that perhaps he thought that his speech would not be to the liking of his listeners. But was it really that radical?

The speech (along with my somewhat liberal translation for the non-economists) identifies some issues with recent economic policy:

"Rent, patronage, or entitlement enhancing measures have sailed through."

"Private consumption, especially in rural areas, is growing strongly on the back of rising incomes, strong credit growth and continuing government transfers and subsidies. The result: The gap between our spending and our saving is making us dependent on short term foreign inflows to a dangerously high extent."

My translation:

Policy paralysis led to bureaucratic/political adhocism, encouraging corruption. India's unwashed masses have been satisfied through hand-outs in the form of subsidies for which there is no apparent way to fund.

The Government has raised minimum support prices for agri commodities at much higher rates than the rate of inflation. Along with free hand-outs (referred above), and forced lending to rural sector through compulsory priority sector lending, we are consuming well over what we save. Soon we will need China to fund us!

So far, I see no problems with the diagnosis. The problem starts now!

Rajan says: "We need a common minimum programme across all sensible political parties to ensure that we stabilise the economy and foreign investor perceptions quickly."

Here we have it. By implication, democracy in India is a problem. If you don't agree with policy wonks of the government, you are not "sensible", and foreign investors are more important than local.

In reality, democracy is good for the economy as are policy disagreements. Enough data exists to prove it. One example is that India's growth rate has gone UP significantly in the period since we have had coalitions ruling the country.

Additionally, most large Indian houses have been investing overseas (perhaps in quanta at least as large as inflows) over the past few years. That should cause policy makers to pause and see why domestic industry does not see the potential in India while we are supposed to invite foreigners.

Rajan goes on to suggest that by 2000's, "powerful elements of the political class which had never been fully convinced about giving up rents from the License Raj ..., had by then formed an unholy coalition with aggressive business people ..... The new post-License Raj equilibrium became the Resource Raj."

The statement is misleading seeming as it does to suggest that the unholy politician/industry alliance is new. When did India ever have a strategy to offer national resources in a transparent manner? It was always through licensing which is by its nature open to corruption. Only difference this time the scale of corruption is unprecedented under the current dispensation.

So what is the solution that Rajan prescribes? He says, "simply moving our millions from low productivity agriculture to rural industry or services will give us growth for years to come, provided we are willing to do the minimum necessary to collect the low hanging fruit."

How do we do this? "We need to liberalise sectors like education, retail and the press, freeing entry and improving customer choice. We need to transform more government-owned firms into well-managed publicly owned firms which are free from political influence or government support. And we need to evolve transparent means of pricing and allocating the bountiful natural resources in our country."

Get the connection? Huh? Well I don't too. How does letting foreign investment in the press, retail or higher education (he speaks of higher education, not primary, when he speaks of liberalisation somewhere else in the speech) help in increasing rural industry or services? Privatisation of government-owned companies has already been ruled out of the policy tool box of the current government and is unlikely to find its way back.

Unfortunately, the rest of the prescriptions too don't offer anything new: increase fuel prices (instead of curtailing wasteful government expenditure), find a policy for allocation of natural resources (non contestable except that no format has been suggested, so this is a motherhood statement and no more) and look out for foreign investors (I fail to see why it is not necessary to be kind to Indian investors as well).

So far, what one sees of the new CEA seems to be only old wine in new bottle. Worse, it does not seem to be based on fact or cogency of argument. Hopefully the reality will be better for India's economic future.

A surreal experience

An early morning ballon flight over rose valley Cappadocia, Turkey. You can see from the colors of the mountains why it is so named. This is as close to gnome valley as one can get - have not seen this kind of landscape ever before. I broke my long-held self-imposed rule of never riding any vehicle or animal that did not have an ENGINE - can't say I have any regrets. Not going to make it a habit though - markets are behaving in an engine-less manner anyway.

After 5 days in Istanbul, awaiting the flight to Cappadocia.

Istanbul is all it is made out to be - great historical monuments, wonderful energy, and a very modern outlook.

Watch out for weak air conditioning (even in the best hotels), and nasty taxi drivers.

Language is interesting - many common words with Hindi. Kofta, kebabs, shorba (I'm using hindi spellings, though the turkish words are the same with the same meaning). Shakkar(sugar) shakarpara are other examples. Dikkat (danger), and meydani (maidan) are close - and this is only a sample. The slave dynasty left more than a few monuments in India.