M.D. Nalapat
Manipal, India — Manmohan Singh, India's
present prime minister, was brought back from Geneva to India as economic
advisor to the government in 1990 by the commerce minister at the time,
Subramanian Swamy. The long-time bureaucrat had been particular that a protege,
Montek Singh Ahluwalia, be made the commerce secretary, a condition that was
accepted by the minister.
A year later, Singh became finance minister
in the first regular Congress government to be headed by an individual not from
the Nehru family. P.V. Narasimha Rao was determined to accelerate the pace of
economic reform, aware that the statist policies of the past had led India to
bankruptcy, and in Manmohan Singh, found a willing instrument in the process.
Sadly for the country, by 1995, Rajiv
Gandhi's widow Sonia began a political destabilization of Rao, afraid that his
continuance would permanently block the Nehrus from reclaiming the Congress
Party. From the beginning of that year till Rao's election defeat nearly two
years later, the cautious finance minister obeyed the new signals and slowed
down the reform process to a crawl.
Fortunately for Manmohan Singh, his
numerous contacts in the Delhi media ensured that this phase was ignored, and
that he -- rather than Rao -- got the credit for the 1992-96 reform package. It
was therefore with substantial expectations that the 280-million strong Indian
middle classes welcomed the takeover of formal power by Singh eight years after
the 1996 election defeat of the Congress Party.
Nearly four years on, these hopes have
died, together with the reforms.
While subsequent governments were able to
maintain the 9 percent growth rate achieved under Narasimha Rao, rather than
moving to the 12 percent level anticipated by former admirers of Manmohan
Singh, growth has come down to 8 percent and is slipping. The government spends
US$50 billion on subsidies for food, fuel and fertilizer, and a further US$6
billion each on keeping afloat the public enterprise sector and hooking the
consumer on subsidized petroleum products.
Disinvestment of public enterprises has
halted altogether, as has the setting up of Special Economic Zones. Neither has
there been any effort at reform of the labor laws that have created an
abundance of "jobless growth" in a human power-rich country, with
most investors preferring to increase outlays on capital assets rather than on
augmenting labor stock.
Although power has become a primary
bottleneck to growth, this sector too has been kept immune to reform, a fate
shared with a higher education system that has become totally dysfunctional.
The absence of research capabilities and vocation-based training within the
Indian university system has led to dependence on outside technology, as well
as human power in crucial fields such as aviation.
As for the Indian legal system, this is
still cluttered with more than 23,000 separate regulatory fiats, thus forming a
corpus stifling to adaptation. Unlike its predecessor, the Sonia-led United
Progressive Alliance has not even tried to simplify and rationalize the choked
Indian legal system.
During the 1970s, India had the distinction
of having an effective marginal income-tax rate that topped 95 percent. Small
wonder that evasion became rampant. As finance minister in 1997, Palaniappan
Chidambaram cut back the top tax rate to 30 percent, but after coming back to
the same job in 2004, has instead presided over a vicious expansion in the
powers of the income-tax department, the word of whose officers is final in
matters of computation of income and tax, with even judicial remedies closed by
statute. As a consequence, bribery levels within the department have gone up
substantially, together with harassment.
Today, even expenditures as essential to
modern business as corporate travel are being taxed as "fringe
benefits." Unfortunately for the deficit -- and India runs a current
account deficit that amounts to 3 percent of GDP -- the finance minister in his
new anti-reform avatar is, in the manner of former colonial masters of the
country, paying attention only to the collection of revenue, and not how it
gets spent. Official bodies themselves say that the leakage to corrupt
officials and politicians from swelling government expenditure is as high as 97
percent -- in the National Rural Employment Guarantee Scheme, on which US$49
billion is the outlay for just the current and the previous year.
While the stock market regulator, the
Securities and Exchange Board of India, has taken its cues from the Sonia-led
government and slammed the Indian investor with a slew of restrictive
provisions, the Reserve Bank of India has enforced a policy of monetary
restraint on the private sector that has sucked out nearly US$60 billion of
liquidity from the system and pushed Indian bank interest rates to a level
three times that paid by U.S. and European competitors.
As for China, the steady upward increase in
the value of the Indian rupee -- caused by conscious central bank policy -- has
resulted in an estimated 12 percent fall in competitiveness of India with China
over just the past six months. Textiles in particular, which hoped to displace
their Chinese competitors, have been the hardest hit by the negative swing in
the exchange rate, leading to multiple job cuts caused by falling orders.
To top this beaker of misery, a misnamed
Competition Act has been passed by the UPA government to make it much more
difficult for Indian companies to make acquisitions abroad. In brief, while the
socially efficient private sector is being constrained, the corruption-filled superstructure
of public expenditure is ballooning. Just when India seemed to be on the verge
of an economic takeoff, its dirigiste leaders are working overtime to once
again pull growth down to the "Nehru" rate of 3 percent.
-(Professor M.D. Nalapat is
vice-chair of the Manipal Advanced Research Group, UNESCO Peace Chair, and
professor of geopolitics at Manipal University. ©Copyright M.D. Nalapat.)
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