Dr. Bimal Jalan - Governor, Reserve Bank of India     


ďIndiaís Economic Prospects - Are they Real?Ē
- ĎOutlookí weekly newsmagazine, Delhi, April 3, 2006

Close to sixty years after independence, India has indeed become one of the fastest growing economies of the world. Hardly a day passes without somebody saying that India is arriving or has arrived. Even optimistic forecasts, like BRIC (Brazil, Russia, India and China) by Goldman Sachs have been updated by newer discoveries of Indiaís potential and fresh hopes. Our place in the world economy seems unshakeable and set to grow.

Indiaís comparative advantage in the world has changed for the better because of four factors. The first is our skills. This is evident not only in knowledge industries. Even in cars today, a lot of new content, or what economists call value-added, comes from technology, skills, software and so on. Thus, for example, steel is no longer the major component of costs in a car. Our growing mass of educated people, larger than the population of a European country, is an asset--a comparative advantage over other nations.

The second factor is the integration of financial markets, the practically free flow of capital. Money is no longer a constraint for a company with a new project, either at home or abroad, even though we do not have full capital account convertibility. There is no shortage today even of equity capital. The third is the change of technology, aided by a great reduction in government control. Today, we can set up a 10 or 20 mt steel plant in much less time or even land than it was needed for, say, the Tata Steel factory in Jamshedpur. Over the eighties and nineties, the heavy hand of the government to allocate, control, to manage or to interfere came to be lifted. Today, the corporate sector has restructured, new entrepreneurship has come of age, we are buying companies, the US is afraid of their jobs being taken away by us rather than the other way round.

The fourth factor-and do not undermine the importance of this-is our strong foreign exchange position. . Part of the excitement about India in the outside world is owing to the fact that we are no longer a debtor country looking for aid. We havenít had a balance of payments crisis after 1991. India is lending to the IMF, instead of borrowing from it. This has wrought a complete psychological change both in our corporate outlook as well as the global view of India. It has also contributed to our strength. India is perceived as a strong economy, compared to even fully liberalized economies of Africa or Latin America that have few takers.

Thus, I have no doubt in my mind that we have crossed one important threshold. There is now no constraint that is external to us. If we compare ourselves to China, we find that we have similar entrepreneurship skills and similar forex advantage. We are emerging as an attractive destination for investment as China. We also have the strength of our democracy and the power of the people. So I have no doubt about the potential for the next threshold, a 9-10 per cent growth, but I do have extreme doubt whether we can actually reach that level.

The main reason for this is what I call the public-private dichotomy. If we look at all the areas of excellence in recent years, be it corporate, media, IT, telecom, fashion and so on, we see that the initiatives and successes are all in the private sector, not in the government. Worse, there has been an immense deterioration in governance, both at the state and central levels.

The worse manifestation of poor governance is seen in the public delivery system. By public delivery system I donít mean only food at ration shops or health cards, but public delivery of most economic services. Itís the delivery of public irrigation where nobody knows the number of defunct or absent tubewells in a defined space; of primary health centers where doctors are absent as a routine; of primary education where there is rampant teacher absenteeism or neglect. These are services that cannot be substituted by markets or technology from the IITs. Mere announcements of work or intent are no longer enough; the delivery system needs a radical change from its present non-performing state.

What happened in Bombay during the heavy rains of August last year is reflective of the crisis in administration. It stands as a metaphor for the arterial clogging, as it were, of the governance system. It is a system that has defied consistent efforts by good people inside or outside it, either by excluding them or by defeating them.

And this system works in concert. Letís say you want to set up a world-class sports facility for women. A very laudable decision no doubt, but how many doors of the government will you have to knock on? You will need permission from no less than seven to eight departments-planning commission, finance, sports and empowerment, land development, women and child development, state government--and more depending on the quality of the state administration. Nobody can do anything without involving a hundred people. To be sure, there are pockets of excellence; a good district collector here or an efficient secretary there, but they can always be shifted out. This short-term-ism has now extended to the main political instrument-the government. No government has succeeded itself since 1991 at the center. As for states, for instance in UP, weíve had ten chief ministers in this period, some lasting for six months. And with every change in government, the entire system undergoes a transformation. No matter how good a work has been done, it becomes imperative for the next government to change the people and sometimes even undo the work. Such short-term-ism and unstable outlook can only breed corruption. And so it does.

For a citizen, the easiest way to get a taste of this is to seek an answer from the government on any issue of importance to them. Letís take the Bombay floods. If you ask a question to the state government about, say, how much money has been spent on drainage or flood control in the city since August, you will find that the sums and the excuses will hardly vary between the years. Take a look at the starred questions and their answers in Parliament. They remain practically the same, down to the last department, digit or drudgery, irrespective of the government of the day. This is really the heart of the matter.

The issues here are thus coalition reforms as also improvements in the delivery system, public sector efficiency, and the fiscal system. We cannot neglect the fiscal system because a fiscal gap constitutes the absolute disempowerment. The present government is fully apprised of and worried over these issues. They have set up a commission for administrative reforms but by the time of implementation of the report, they may not be there. We can announce any number of measures but unless there is an end to political apathy and a beginning of an accountability of those in power, the system cannot be changed.

There are indeed solutions to this conundrum. They cannot be achieved in a day but itís possible to get there over a period of time. For one, there has to be a change in the norms of politics. The changes made in defection law give us the precedents in this respect. One suggestion, for example, is that the power of the small parties--say any party with less than 5 per cent of votes--to join or leave a government or vacillate at will be curbed. There is also no need for any such party joining the government to maintain a separate parliamentary party.

Secondly, the power and privilege system that an Indian minister now enjoys must end and his accountability has to be sharply defined. There is a huge discrepancy between the powers and entitlements of a legislator and of the person as a minister, leading to a great sense of deprivation once they have to give up office. Why cannot we just continue with the same personal privileges system-house, car, home office, staff or attendants-for a legislator even when he becomes a minister? If the British or the American democracies are comfortable with such a system, why do we still follow the same colonial/ruler mindset? Why, all this pomposity?

Third, we must streamline bureaucratic/official appointments. The minister need not have any power to appoint or change officials. Even if he or she is allowed to make an appointment, there cannot be any change in that position for the entire term of the government. The Public Enterprises Selection Board had been working well, why distort it by bringing in ministerial approval?

Fourth, the government must do much more outsourcing. There are some areas where it doesnít have any role to play anymore and there are some areas where it does not need to play one. These jobs should be contracted to the private sector with government ownership so that they can be done efficiently and properly.

These are just a few suggestions to get rid of the unnecessary colonial baggage and bring in more accountability for a public servant. There is also the office of the CAG, which is more accountable than Parliament, and we must strengthen it. All these changes require a great deal of consensus and awareness and the media has a big role to play here. The people have shown great awareness and sensitivity in the Jessica Lal case, but I didnít find anybody lighting candles against the deviation from democratic/political norms in Jharkhand, Bihar or Goa!

However, we live in hope. One great positive change in this direction has been the Right to Information Act and people should make full use of it. To begin with, we can ask that every single government department must put on record all the decisions taken in a single day, except in matters concerning national security. One hundred and sixty-seven pages of finance bill but who decides what is going out or in or up and down every year and why? We have been very fortunate in our prime ministers and finance ministers but we cannot take that luck for granted. The power of the leaders to dominate over the people must be curtailed.

All this can be achieved without undoing or undermining the power of the people and the strength of our democracy in any way. One of the greatest positives of our political system has been the general irreversibility of major decisions. There has been continuity in our economic reforms too. Our system works very slowly, yet steadily. But we must remember that the economy is not on auto pilot. It is a myth that politics or governance issues do not matter. Without substantial changes of the type I have mentioned, we can get 6 per cent, perhaps even eight per cent for a while, but for 9-10 per cent, systemic reform is a must.

Or we may get high growth but there can be riots because of popular frustration. We can get Latin American-style growth, which may not be sustainable. There will always be a downside risk, there will be the risk of flight of capital. What has happened may have been irreversible so far, but that luck can run out with a different type of coalition.

Change must be the buzzword for the future leadership of India; the ability to conceive, plan and bring about positive change. And the people must make its leaders stay on course. They are, after all, our people, our elected representatives. Give them short-term goals and not targets for 2010 or 2011, ask them to deliver what they have promised, and make sure that they deliver.

Thank you.

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