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Opinion » Lead

Updated: February 4, 2013 00:19 IST

Freed from government, challenged by governance

Pulapre Balakrishnan
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There is more to building a flourishing economy than just a liberalised trade regime, as is evident from the unequal distribution of public goods

The national government gyrates between clutching at what it sees as revenue springs and purchasing what it assumes is encashable electoral capital. This is most reflected in the hesitant steps to decontrol the pricing of diesel accompanied ostentatiously by the raising of the cap on the number of gas cylinders admissible to a household. The vacillation conveyed by such policy announcements termed ‘reforms’ gives not the impression of a vision being pursued as much as of reacting in an ad hoc manner to the exigencies of Westminster-style politics. While occasional such announcements may be eagerly awaited by investors whose profits depend upon the government easing restrictions on their chosen activity, they hold out little for the larger populace. A government has been elected to build a flourishing economy, rather than to solely engage in dismantling restrictions. In a democracy we elect governments to do what individuals on their own, including the most intelligent and wealthy ones, cannot, i.e., deliver public goods and employment. In a market economy, as opposed to slavery or communism, the state cannot peg the level of employment even though it can, via its economic policy, create the conditions for its generation. These range from the maintenance of aggregate demand to training and re-training the labour force. On the other hand, the provision of public goods it can control fully. This has the stout implication that unlike with employment any failure in the provision of these goods must be lain at the door of the government itself. As India is a union of states, it goes without saying that a very large part of the responsibility for this must rest with the State governments.

As public goods, by definition, can be accessed by all and often involve the locking-in of investment, the private sector is usually reluctant to enter into their provision unless backed by guarantees of the pecuniary kind. Typically, infrastructure is considered the quintessential public good but in India, unexpectedly, sanitation — or the lack of it — has emerged as a rival. The provision of public goods is not the only area that the private sector shuns. It also shuns activities that yield a rate of return that is low compared to servicing the demands for high-value consumption of the better-off. We can see this logic working itself out today when we have more makes of automobile assembled in India than there are flavours of Baskin-Robbins’ ice-cream while quality schooling or health facilities for the overwhelming majority are unavailable. It is by now evident that in over two decades since 1991 we still do not have the public goods that a decent economy ought to have. Of course, it may be argued that the reforms were not meant to deliver them in any case and that would be correct. So what then were the reforms of 1991, and after, meant to deliver? By making India’s exports competitive they were to deal permanently with the weakness of the country’s balance of payments. But 22 years later, the current account deficit is actually greater than it was in 1991. It is important to understand why.

Policy reforms

The main elements of the policy shift of 1991 were trade and industrial policy reforms. Tariffs were lowered, quantitative restrictions rescinded and industrial licensing eliminated altogether. The exchange rate was left to float after the rupee had been devalued. In the minds of some, India was finally free. Following this integration with the world economy, the products of Indian firms were to become competitive internationally. There was a rationale to these reforms. Indian industry had enjoyed protection for far too long. Also, absurdly high tariffs on imported intermediate inputs made Indian manufacturing firms uncompetitive. But there appears to have been a leap of faith involved in the assumption that the exposure of Indian firms to global competition per se would make for more efficient domestic production. As stated, we find that we are faced with a current account deficit greater than that in 1991. It is indeed that case that the greater part of the trade deficit itself is due to oil and gold imports, and these goods have no domestic substitutes presently.

Woes persist

So the idea of efficiency is not particularly relevant here. But even overlooking gold and oil, we have reason to believe that the trade reforms have not succeeded in increasing the competiveness of India’s exports. The trade deficit as a percentage of the volume of trade in manufactures is now actually higher than it was in 1990 implying that after trade liberalisation manufacturing imports have risen faster than exports. India’s balance of payments woes have not disappeared with the reforms. An overvalued exchange rate and restrictions on trade were held out by critics of Indian planning to have been at the root of what they saw as poor manufacturing performance. However, we are now able to see that there is more to boosting exports, and successful industrialisation more generally, than an open trade regime. A significant input into manufacturing is non-tradable in the form of infrastructure. Roads and highways, electricity and waste disposal facilities count as much for a dynamic manufacturing sector. Production must take place before exporting is possible. So governance comes to matter twice over for exports. First, in that publicly-provided producer services are made available to Indian firms and secondly in that the government machinery is enabling of trade at the points of exit and entry. Failing this, Indian firms cannot attain competitiveness.

I have flagged the manufacturing trade deficit. But there is something at work which has got even less attention. Research being done by Sunil Mani at the Centre for Development Studies points to something that has gone unnoticed. The investment account of the balance of payments shows that debits which had been a mere one per cent of credits in 1991 have by now risen to close to 30 per cent. This points to foreign investors leaving the country lock, stock and barrel, taking their money with them. In a growing economy with a market for the goods that foreign investors produce, this is unexpected. Very likely it points to the difficulty of doing business in India. It is not possible to conclude from this data whether this stems from inadequate infrastructure or bureaucratic impediments, but we can see that government would be central to improving either. It has perhaps been too easily assumed that mere removal of the legal barriers would induce the foreign investment to flow in. The decision to locate by firms, in this case foreign, is closely linked to the availability of producer services and a result-oriented rather than rule-bound government machinery. Unimaginative governance may be turning India into an uncompetitive destination.

Much has been made of the allegedly negative signal conveyed to foreign investors by the heated debates in Parliament over FDI in retail. The Prime Minister himself has referred to this. But nothing could have damaged India’s image globally than the brutal assault on a young woman by a gang of feral youth in Delhi last month. Predictably, it was covered on television and written about in editorials around the world. At Davos, Mecca for India’s corporate leaders and younger politicians, Christine Lagarde, the head of the International Monetary Fund, while grieving for “the daughter of India” gently pointed out to Indian media that economies do better “when women do better”. This profound observation should make us think seriously about the importance of a social policy for the economy and assess how they may be made effective.

For accountability

But it seems we cannot escape governance even here. In the debate that had followed the rape in Delhi there has been an overdose of reference to the need for changing mindsets. Then there has been much wringing of hands over how long this would take to filter through our rigid school system. Less has been said about the role of governance in dealing with the situation. Surely we can make India safer for women immediately if the police were given more freedom from written rules and held to far greater accountability. If at all we needed a confirmation that this is the right way to think, we now have it from Justice Verma and his colleagues that the lack of safety for women in our public spaces has nothing to do with the statute book and everything to do with governance. Inspired by the Bard of Avon, we might even declaim “it is not in our laws but in ourselves that we are misgoverned”. In a democracy the political class exerts itself precisely to the extent that we expect of it. It is up to the citizen to raise the bar on governance.

(Pulapre Balakrishnan may be reached at

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Great article indeed. Again the lack of governance is obvious when the
government delays in implementing the Justice Verma recommendations on
the stringent laws on the Civil servants.

from:  Akilan
Posted on: Feb 5, 2013 at 00:00 IST

Indeed, public services and good governance are a must. If a company has to
ensure that it will be able to provide adequate power supply backup with
expensive diesel generators 24/7, if there are enormous overhead costs involved
in getting employees to work with company buses and company taxis in the
evening especially for female staff owing to lack of safe and usable public
transport, if every local politician expects his 5% commission before the
foundation of the new company is laid, it will discourage business.

Nonetheless, the point is quite simply that opening up the market alone cannot
turn a country into a manufacturing superpower. That can only be one step among
many and we haven't shown either the desire or the imagination to take those,
whereas East Asia and China have.

from:  Vivek
Posted on: Feb 4, 2013 at 14:03 IST

terrific article. looking forward to more of this kind.

from:  ashutosh
Posted on: Feb 4, 2013 at 13:51 IST

India's current account deficit remains high because imports have
gone up substantially. This is good for the economy and doesn't in
anyway indicate that Indian firms have become less competitive.

from:  YSK
Posted on: Feb 4, 2013 at 13:26 IST
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