Thursday, August 16, 2007

More economic freedom is the key

Source: Economic Times, August 15

India is experiencing a little bit of triumphalism on the 60th anniversary of Independence. That is understandable when one considers its considerable institutional stability and, more recently economic success, compared to the state of affairs in Pakistan and its offshoot Bangladesh. Indian companies are taking over (struggling) British steel-makers and our offshoring prowess generates the respect that comes from fear. As is usually the case with a rising power, its cultural exports (largely Bollywood) have suddenly become attractive. Even the Indian cricket team delivered a series win right on cue.

The India-US nuclear deal represents a tough exercise of sovereignty unlike, for instance, Pakistan whose President reportedly had to discuss his plans to impose emergency with US secretary of state Condoleezza Rice. In a mirror image of the debate in this country, the Bush administration is accused of capitulating to India. Democracy, IT and a world-class corporate sector are the principal elements of India’s soft power.

In a speech earlier this month South African President Thabo Mbeki referred to India’s success in creating great companies, as an example for his country as it entered its second decade after liberation in 1994. The fact India has developed, like Japan and South Korea, but unlike, say, Malaysia and Thailand, world-class companies with managements that have international credibility, will stand it in good stead.

Of course, India always had plenty of soft power, staring with the freedom struggle. Unlike, for instance, the Russian and Chinese revolutions, whose legacy are controversial, to put it mildly, India’s independence movement is universally regarded as embodying the finest values of humanity, a moral beacon for all ages. Gandhi, India’s greatest export of soft power, has inspired freedom fighters in the decades after 1947. Martin Luther King, Poland’s Solidarity movement, Nelson Mandela, imbibed their techniques from the Mahatma.

Unfortunately, a glorious freedom struggle did not translate into great economic performance. Though India’s economic performance in 1947-80 was far better than that of the British Raj, a disastrous turn leftward in the late 1960s ensured that for a time India’s lustre dimmed as countries like South Korea and Malaysia raced ahead, both in terms of per capita income and social indices, particularly health and education. The pernicious legacy of the high noon of socialism still blights many sectors.

It is almost universally true that sectors with a high degree of government involvement, sugar, fertilisers, petroleum are all doing badly. That’s a lesson the government and the wider political class needs to keep in mind as it contemplates fiddling with booming sectors such as retail or natural gas.

It’s not clear if India’s politicians, many of whom are ‘knowledge -proof’, as Manmohan Singh in his avatar as finance minister once described them, entirely get it. India seems to have hit a sweet spot with savings and investment in the 34-35% range and the demographic dividend — 25% of Indians are between 20 and 35 — kicking in. According to a recent McKinsey report, India’s consumer market, currently the 12th largest in the world, will reach the size of Italy by 2015, and will be the fifth largest by 2025. Its middle class will be close to 600 million by then.

As in the case of the East-Asian miracle, high growth appears to be engendering high savings leading to high growth. GDP growth in the 8-9% range for a 20-year period will transform India. It will generate tax revenues, which if wisely spent, will improve India’s wretchedly poor social sector indices. These include an infant mortality rate of 58 per 1,000, life expectancy of 64 and the fact that too few Indians go to college.

Improving these statistics will help make growth more inclusive by enabling more and more Indians to participate in the higher rungs of the globalisation ladder. But then only high growth can generate enough revenues to make that happen. To ensure this India will have to spend more on upgrading its still abysmal infrastructure: power, roads and ports. A lot of this will be through private investment, though the government will have to step in, in case of rural roads, water supply and irrigation.

Apart from its role in hard infrastructure creation, the government will need to work concertedly at its governance, right from ensuring transparent bidding processes for public-private projects to ensuring delivery of health and education services. Above all, the state ought to reduce uncertainty in business decision, which it generates by constantly changing all rules and the occasional ban. The fabulous legacy of the freedom struggle can only be nurtured, for the next 60 years and beyond, by more economic freedom.

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