Future Directions for India Inc

- Lord Meghnad Desai,
Internationally Renowned Economist and Member,
House of Lords, UK

It’s an honour to be here. Late D. R. Gadgil was one of my heroes. In his sense Pune carries the tradition of doing Economics differently that he established at the Gokhale Institute, Pune. The Gadgil approach was always practical and deeply rooted in Indian reality and indeed there is a great contrast between what Pune and Bombay were doing compared to what Calcutta and Delhi were doing. And I think in a long run its Pune and Bombay Economic which is ultimately going to help not the Calcutta and Delhi one! I want to first of all meet the issue head on that when I talk about future direction for India Inc I do not think that there is any contrast or contradiction between what India Inc needs and what they call Bharat Limited needs.

The needs of India and Bharat are not different and I also strongly argue that the argument is somehow last 15 years of globalization has hound the poor or that it has widened the distance between the poor and the rich. People have forgotten the Economic stagnation that India suffered for 40 years under the name of the socialist pattern of the society. People have forgotten that the head count of poverty did not come down any time from 1947 till about 1980. People have forgotten that when Dandekar an intellectual production Pune and Rath published the poverty in India there was a shock across India how much poverty there was which a normal economist it was not true to say that some of India has become or some Indians have become poorer since globalization.

If anything exactly the opposite has been the result, if we look at data on poverty. Poverty by its head count that although there are all these debates analysts poverty by head count has come down faster in last 15 years that any other similar period in Indian history. I need of course, time to reason it that if any economy grows fast and if it abandons all capital intensive road of growth which had adopted in the first 30 years, no doubt there will be a common generation and people would benefit. It is true that poverty level is still so much high at somewhere between 20 and 25% and in terms of count of people there are still longer poor people well I also want to argue especially in relation to what President Kagliwal said that I actually regard the cause of poverty not in the corporate sector not in the private sector but inefficiencies of the State sector I actually very strongly feel that those who are called the friends of the poor are following policies which are wasteful, inefficient, ineffective and they are a major burden on the poor. The poor are paying the tax for the policy which is designed to help them and again and again the biggest failure in India today is delivery failure on part of the Governments. And given that the Government has the sources to spend and is spending. We still have remarkable shortfalls in its performances. In the first 30 years roughly from 1947 to 1977 and I could even extend that period to 1989, despite all the as it were protestation to the country the great socialist pattern of the society did not touch education or health. It completely neglected primary education and secondary education, education for women it completely neglected health. It wasted money on inefficient, non profit making things called ‘Navratnas’ and in my terminology jewels are a complete waste of money. That is not what any poor country need; the poor country does not need jewels and those jewels have been sold all of them. If anybody could find anybody to buy them, you need your head examined to buy any of this stuff. In a sense I mean formal development pattern for 30 - 40 years which was capital intensive not employment generating really a matter of pride for certain allied that they had shunning machines luckily 1991 the whole motor crashed and we got into the present failure and I think again as the President said the present phase has now proved beyond doubt atleast in the 21st century that the Indian Private Corporate Sector can actually respond to challenges. It was not immediately ready for the challenge of globalization. It was crying and protesting in Bombay cloud everything like that it talked about level playing failed and all sorts of excuses on not trying to attain gear up and become comparative but let us be credit be given, credit is due that by the turn of the century the Indian Private Corporate Sector has now made this management lenient efficient it has taken all competition from foreign imports it has collaborated and competed with foreign investors. It has improved its Management practices. India is not only a receiver of FDI but it actually is the second largest investor in the UK. Indian Management is right now has such a hard reputation that world over people are saying that if you want your problems to be solved get taken over by an Indian Management or try and collaborate with them. This transformation in Indian Corporate practice I argue is not an accident India was as in my Bramhanand lectures 2 years ago. India was not being industrialized by the British. India was between 1860 and 1920 – 1925 until the great depression hit India, linking more than industrial nations.

At Independence it was the 7th largest industrial country in terms of volume of output and it was entirely nationalist propaganda more influenced by what happened to depression that any other time we say this some of India was once very prosperous and very industrial and somehow the foreigners have de-industrialised. Indians prospered under foreign rule in India and Indians have prospered abroad under foreign rule. The firms of Indian Diaspora who have work abroad in terms of economic management and economic skill has shown that having your own government is not actually either necessary or sufficient as in our now to achieve good economic growth. What is happening now after 50 wasted years, Indian Private Corporate Sector at last performing like it should have been performing all the time. In 1947 India had alleging it global textile industries. It was trashed by Government policy of protect of stopping the Production growth in textile, encouraging small scale industries and total waste of money. Again and again economist put to that the investing in small scale industry was more capital intensive than investing in large scale industry a logic that cannot be followed by economic issues but coming to the present now I think its quiet clear again as the President said the sort of misgivings people had in 1991 that India would go under, would become, would get into foreign debt trap. It would be taken whole by MNC’s all those fallacies have been exposed India is not in a foreign debt trap. India is not under the control of MNC’s India has been able to adjust and rise the challenges of not an economy and therefore the victims psychology that govern policy making in the first 40 years has got to be batted. What one would means now is much more aggressive analysis of and forth right intervention by the Corporate Sector which has to say more oftenly than before that right now the biggest burden on Indian growth rate is the government. It really is not only because collision politics has made decision making very difficult and it would not matter if the government was weak as long as it was indecisive and unable to do much damage but the indecisiveness of government in a last few years has meant that urging reforms which are needed now to go to the next step in the growth trajectory are not being delivered.

It is very hard to convince the government that everywhere else in the World governments has stopped owning firms and industries and has got out of the production of goods and services and that the right role of a government if it was to perform it properly would be in health and education and welfare and environment so on and the Government of India has been very reluctant to abandon its role in producer of goods and services. We still carry a lot of burden of failures of past investments and still there is a great reluctance to privatize at the rate at which we should be privatised in but more than that in terms of education and health, the sort of delivery that should be there is not at all there. There are theoretical discussions all over the markets and all over the States and we have trained professional economist who can give you convincing reasons how and in how many ways the market can fail and therefore they immediately save all the State how to play a role. But the State they talk about is a State of economic theory and that State of economic theory was featured upon a well functioning Western Democratic System which can deliver good term services.

In India we are not talking about States, we are talking about governments and governments hands are full of failures and what we have seen again and again investigated by people and analysts, others that for example provision of primary school education the money is spent but there is no delivery. In health care money is spent but there is no delivery I was talking to Dr. Jadhav yesterday evening and indeed earlier today, about the farmer suicide problem. The farmer suicide problem has nothing what to so ever do with the globalization. The farmer suicide problem is a fact the 40 plus years almost 40 years after bank nationalization. Bank nationalization which was undertaken to improve the provision of rural credit, rural credit is not improved. It’s precisely because the farmers still again and again is subject to a variety of distortionary and exploitative practices at the hands of so on. Thing that Dr. Jadhav hopes to delineate very fully in his report we still have problems to debt miracle cash with which he could buy this pesticides or he could buy equipment or he could buy seeds without getting into hawk of the seller of seeds and pesticides or equipment than he would not only get a good price but he would save a considerable amount of the surplus that already eats out to these sellers. The reasons why this is not happening is that banks including I don’t know including or not including Bank of Maharashtra. Banks have failed singularly to provide the flexibility which is needed to understand the farmers problem and what the money lender does and has always done is what economic theory, a logic comment theory can actually eliminate the valuable number of prices here all the people I am asking did this work only go.

The money lender can separate each farmer in the separate risk class. The money lender can give separate loan terms to each farmer because he knows the farmer, he knows the conditions, he has investigated what the circumstances are, how the crop is doing, where it is, the money lender can do this because he has lot of information and lot of flexibility and the bank cannot. Why the banks cannot? - Don’t know because they have forms to fill out.

Banking is yet to come to India, it may come but banking is not directing India now Sector has to make clear that there needs to be an urgent down grading of the governments capital stock, urgently. You see again if the physical situation was much more controllable by the right now if the government was not borrowing money than doesn’t matter if India could control money supply much better and we could actually counter the rupee appreciation, you know you have a fiscal policy, monetary policy and exchange rate policy if quiet rightly as the RBI can act depends very much upon a sound fiscal policy and now the revenue is seems, suppose to be rather healthy, I think one the urgent task of the government is to retire a lot of the Government debt and reduce the burden on the money market of holding worthless paper and I think that there are ways reducing and I said in my Bank of Baroda Centurial lecture in September advocate, that if after March 2009 foreign banks are going to able to come into Private domestic banks and acquire 75% interest. The competition is going to be so much for the Public Sector banks that the only the Public sector banks would be able to compete would be if they were substantially privatized. Public Sector banks need to extra money the right way to the government to leave or for the government to get out if possible of Public Sector bank entirely if possible were substantially entirely differently and basically by selling the State let say if they sell upto 40% to give to the bank is so on they could retire lot of the debt that they are currently are carrying and not only retire the debt with a considerably input performance of the banking and what is not clear to people or making clear to me as the transaction cost of doing business in India by the banks must be enormous you know in within the cheque clearing system it should be possible to pay you know by a cheque on your deposit in one bank into another bank and when I tried I was confronted with all sorts of possibilities and I just don’t know how people do business here but anyway I don’t have to go much into that but again and again we have to do that first of all out of the productive sector of the economy, production of goods and services.

It is not absolutely clear that the Indian private sector can do the job and that the government should get out of it and in matters like agriculture again it is very important to get clear that the burden of excess rural population in agriculture is precisely because the failure of the manufacturing industrial Policy. India has been following a manufacturing growth policy which is meant that internally share of manufacturing in total GDP there has been stagnation yes there has been manufacturing growth in terms of highly skilled specialized Niche branches I mean India has done very well but they have done very well in those branches because the existing labour laws militate against going at a low tech or medium tech and starting large enterprises and Reachana has succeeded is precisely in that they have taken lot of rural population of the land and put them into factories, what I mean by factories, where there basically the unskilled and manual labour efforts can be rewarded, they can give proper and sort of proper jobs paying round the year without having to weaken the employment seasons, conditions, so on and because China has been able to move labour from rural area to urban areas it has been able to have much a high and much prosperous growth rate now in as much as the share of agriculture in GDP has declined share of services of course has increased correspondingly but the number of people who depend upon agriculture has not gone down that means the per capita output of agriculture has not risen as fast as we should like to know and it is not agriculture is never going to grow at 10% I do not know any agriculture growth at 10% point is to remove surplus labour from agriculture and that means the reform of the labour laws and I think it is astonishing that again and again people have been saying I have been saying for 15 years that we need labour laws reforms Dr. Arjun Sengupta the Prime Minister entrusted the examination of labour laws to him we know what would happen, nothing and as you saw the report just yesterday, he was entrusted to look at labour law and he is committed nothing whatsoever about the reform of the labour laws and the reform of labour laws is absolutely urgent because there were bankruptcy law, there were labour law, because we need to have large scale manufacturing output growth in India.

Manufacturing output growth is even now not good enough to be able to remove labourer from rural areas into small town or large town factories and to do and that is a way to get rid of poverty. We don’t create Jawaharlal Nehru, Rajiv Gandhi, Indira Gandhi rural employment schemes: that’s a complete waste of money and it is not purely for particular purpose we already know that Rojgar Uyojana has led to waste of money and it is not led to very much employment in hundred days, a per person in a family and we said before it started that it will not work its not what its science we know that if the government spend a 1000 crs rupee on its scheme less than a 100 is going to get down to the bottom we know there is systematic ways in which the government machinery alongwith the political machinery is going to rob every penny which it is suppose to go to the poor. If the government were to be pressurized by the Private sector to urgently reform the labour laws it would immensely improve the employment situation of the country and that would be sure a way of getting rid of poverty that any of the schemes which have been not so far. Poverty is not reduced by subsidizing the poor.

Poverty is not reduced by any reservations for the poor. Poverty is mainly reduced by making poor able to stand on their own feet and not needing extra help. When all these subsidies which Government of India has given, take the water subsidy what do we hear now in Punjab the water table is so low that the water is not poising, there are cancers happening and that is because water was subsidized it was under priced and therefore it was over used. The same is true of power subsidy, the same is true of fertilizer subsidy and again and again we have this and the Private Sector and even the economist are acknowledged after all these years that the subsidies the Government is paying were not having reflect but he is unable to reduce a single penny of the subsidies because of the political crisis that the country has been going under. There has been a total failure of the decision making because of what we know have is probably most intelligent economic scheme you can get hold of it. Manmohan Singh and Chidambaram and Montek Singh Ahluwalia and they have not been able to do very much. They have not been able to really go further on capital market capital convertibility they have not been able to bear any labour market reforms. They have not been able to do anything on banking reform.

They have made a complete hash of the farmers suicide problem and what we note is that after Maharashtra government having promised something about like 1500 crs and the Prime Minister having promised 3500 crs over 5000 crs have been promised I was asking Dr. Narendra Jadhav how many farmers are we talking about, he said 2 & a half lacs, now 2 & a half lacs, farmers have 5000 crs of rupees you know when we think about it, it is 2 lacs per farmers you could give each farmers a cheque for 2 lacs of rupees and he would never again have any debt problem that is not how it is being distributed. It is being distributed in every where except the way it will get to the farmers. They have been sold cattles which are useless they have been given you know the whole scene of scandals absolutely terrible but the failure in Vidharbha suicide thing is really absolutely the most varied illustration of the failure of the State to actually tackle what is a limited problem, 7 committed that investigated farmers suicide in Vidharbha, 7 committees. Its not lack of knowledge, its not lack of knowing what is happening, it is failure to do anything about it and the failure you know about is entirely structural and is historical. It is not random. The failure is built into the system it is part of the Democratic patronage System its how political parties raise funds, Political parties raise funds by declaring such subsidy programmes so that a lot of the money goes to the political parties.

SEZs were designed entirely in the landscape nobody has act for a serious SEZs Policy in India like the Chinese have. They are too small and they entirely desire to be given away for large sums of money paid to the Ministers concerning any stable going and to the political party funds which is why SEZ’s are not the success that they should have been. SEZ’s are an excuse for not doing anything our labour market reform that’s what they are for. Government is for 10 years somehow they are sending away few SEZ’s they can allow entrepreneur to do things which they cant do elsewhere and that tackle the problem, it will not tackle the problem, is not tackling the problem and also because land acquisition act 1894 has still not been reformed what we have is government using its mason to take land away from the farmers make compensation which is adequate or not because it is political side issue its going to cause trouble. Now why if a Private entrepreneur, Private Sector Entrepreneur wants to start a factory on land why doesn’t he just go to the farmer and buy the land. What it got to give to the government, why government that any how that every time it gets into this transaction we have bloodshed we have no longer even a matter of inefficiency it is a matter of bloodshed and I think it getting to a stage where a people really have to say where the farmer that with these we shall not put up because it is not tackling poverty to a great issue, not tackling poverty and the Private Sector is getting a bad name for it, everybody who doesn’t like globalization should. Our India is prospering or Bharat is empowering, all the force all the rising middle classes and this mentality that the economy is there. There is some gain and therefore, if somebody is getting better somebody must to be getting worser and the responsibility due for somebody is getting worser is the other person is getting better off either old zero some game mentality and its a false mentality.

Growth will come the growth will expand the cave, the growth has to generate employment and the obstacles in generating employment from growth are not in the Private sector. They are not in policy adopted by the Private Sector in terms of choice of techniques. The obstacles are in a legal domain we happen to have tremendous months of cheap labour and we have made it expenses we have made the most unskilled labourer most expensive by protecting its interest and protect its interest has went the numbering went to offer them a job because they are worried if you offer them a job if you heir them you cant fire them and as long as you go on protecting job you do not create employment it’s a paradox but you have to think about it. All jobs protection scheme lead to low or no the growth of employment and that’s exactly what’s happened to manufacturing sector in India. I think since I want to lay more time for questions the time is also going to extend that logic to those areas which was suppose to have them reserved for the State on the grounds of its analytics and social welfare and those are the areas of Education and health. Again I think its quite clear for all and the total evidence we have and how the poor people behave that if possible they would rather spent money and send the children to Private School where they guaranteed to have an education than send to a State school where they guarantee not to have the education and what you have increasingly is that people put their child on the public on the State school roll, now see no teacher is going to turn up, the child is also going to the Private School. And it really is remarkable tribute to the rationality of ordinary men and women in India rich & poor and they know the value of Education. They know that they are willing they will be benefiting if they sacrifice their current consumption and save money to send the child to good school. And they are doing that. Of course there are not enough Private good Schools because there are restriction on that and one of the other reasons to have more high quality input, high quality managerial input in the delivery efficient to Private Primary education across the country, efficient secondary education across the country

And of course in higher education there has been a lot of entry of Private Sector but again it has not been enough because human resource and development Ministry has been stopping the entry of Foreign Universities into the state and basically all that meets the tax on the poor by preventing foreign universities from coming into India you are saying that because my son can go abroad and I am rich you are poor and your son cannot go abroad, your son can’t work aboard and therefore you should suffer. It is not protecting the national sovernity or national culture or the national interest, it is basically tax on the poor who are confined to stay here and therefore have to pay the price of the ministers patriotism and I think again and again we have to expose these things what they are they are completely false that contortion created by the people who are who have no interest seriously no interest in peoples welfare they are interested in Public Sectors Trade Unions, in Teachers Trade Unions, in Industrial Trade Unions and Public Sector Trade unions and all they want to do is to protect those jobs the whole false about modernization of the airports shorts what the interest of the political parties were. They were not interested in the customers comfort they are not interested in deficiencies of travel they were interested only that the jobs of people employed in the airport industries should be protected and if that is the perspective if the prospective of the political classes is that the organized labour class which is about 8 % of the labour force perhaps is to be identified with national interest than we have to say this is another thing we cannot put on with and by fighting that you are not going to harm the interest of those workers employment is going to expand one of the argument somewhere in my Bank of Baroda lecture is that if the government allows the Public Sector banks to modernize expand and so on you could retract the work forces, re-skill them, give them better jobs and it is not the jobs that are going to shrink, the jobs that are going to expand I remember how in the first Indian parliament heard about the computers somebody did stand up in 1960’s and said that all computers should be banned because computers are going to replace human labours and that put to be fallacies.

Computer is not going to replace labourers actually assist him in labourer and they improved its quality and improved its efficiency and it improves incomes but this again and again one has to educate one has to argue one has to confront that fallacies that there are been held by the political classes and it was possible once more to adopt to distinguish between there was something slightly economically more. But in a sense in the last few years it’s become very difficult because it halves to India Inc and to Bharat Ltd. of collision politics are getting enormous. They really are getting quite incredibly enormous and in-decision in distorted subsidies in slow growth which is not high now and I think again I don’t know how the Indian democratic system is going to tackle the costs of accommodation of the politics but they are absolutely enormous now just finally but I think traditionally the Indian Private Sector has been very cowardly, it was enslaved and infrontilised by government upon India becoming independent what was one of the largest Private Sector entrepreneur as it were class at independence of any economical country India is the largest number of major capitalists they were enchained infrontilised made to bend upon subsidies stop from doing what and they after all began to enjoy their slaves status they are like the permit licenses by no matter what they may say now and enjoying so much it took them in 10 years after the liberalization to get out of permit license but even now I find that CII and the FICCI, old entrepreneur corporate association are far too timid and always worried about daily confronting the government. The government would get back at them that sort of blackmail power every government has.

Every government has the power to wreck your plans, to throw obstacles in growth and that is actually a disgracement on the credit society and it is necessary to say that the idea in the democratic structure the Private sector fears that the public sector is going to get it at just for the in critical it actually major shame if its happening and I think its is upto the organized business interest to draw their own alternative growth strategy. In 1945 there was something called Bombay Plan, industrial drew up their own authority plans for industrial I think it is upto FICCI & CIIN people to get together and say we don’t like this 11 – 5 years plans or what it is we don’t like it. We would now propose the set of policies that should be pursued by the government and lay upon which are not only going to make India grow faster but it is going to elevate poverty faster and they should confidently say that there is no contradiction and firmly say there is no contradiction between high growth and poverty growth that poverty will not be removed by slow growth, poverty will not be removed by restricting the private sector from doing what it wants to do, poverty will not be removed by the government. If the government could remove poverty it would have after 60 years done something about it and therefore I think well.

I want to say the Future Direction of India Inc is to be confident of itself and be bold to actually argue that by standing upto global competition Indian private sector has proved its maturity, its proved it is right its proved it can take all the work and do well, what is now has is to take on some domestic Government structure and insist that really within the democratic traditions of India, Indian governments have to be much better delivering what they need to deliver then they have been and a kind of wastage and excessive corruption etc. is just not affordable anymore. Thank you.