The key theme of the latest edition of the British weekly The Economist is that India's growth prospects in the coming decade is nowhere near the 10 per cent growth that was assumed until recently. India's potential growth is probably close to half of that, which is the current 5.5 per cent.
While some of the slowing is due to global issues, the edition argues, much of the pain is largely self inflicted with politicians who won't reform unless pushed to the wall because of the Indian business class who prefer to bribe their way to corner national resources, because of the high cost infrastructure and woefully inadequate education system.
The author of the piece, Adam Roberts of The Economist along with CNBC-TV18's panel of experts consisting Professor Yogendra Yadav, the renowned political scientist and psephologist from the Center for the Study of Developing Societies, Dr Shankar Acharya, well known economist and former advisor to the Finance Ministry and R Gopalakrishnan, Director-Tata Sons, discuss Adam's charges.
Below is the verbatim transcript of the interview
Q: Tell us briefly what is your charge? Do you expect this to be the decade of disappointment?
Roberts: The argument in the report is that India is aiming too low. India doesn't have the ambition, the aspiration to go for a high growth economy. It has failed to take the steps needed to take in the last seven or eight years under this government to drive that high growth. Obviously, it is bad news that the world economy has slowed and there are all sorts of unfortunate influences from outside of India, but most of the problems that India faces today are self inflicted. They are caused by the politicians of the ruling party, but also the opposition and other parties failing to get to grips with the reforms that India needs.
We would argue that the reforms that were passed or announced a couple of weeks ago by the Prime Minister and that caused the big political fallout, the storming out of Mamata Banerjee, were welcome but are very small. Those reforms, putting up diesel prices, letting in foreign supermarkets that will make some difference to India's growth story is nothing substantial enough to drive big substantial growth in the next decade or the next two decades.
The political fallout from those limited reforms is very telling. If it is doubtful that this government can really do something more radical than it has announced so far then you have to ask the question of whether India would avoid a deep economic crisis in the coming year, is there going to be a downgrade of India's debt or a serious reduction in its potential growth rate in the long term.
Q: One of the charges that Adam makes is, India may be passing through an American style robber baron phase driven by commodity boom and a shift from a closed economy to an open economy. Gloomier commentators see an outright Russian style kleptocracy. Do you think that that is a very good description of India's political economy or large parts of it?
Yadav: Partly it is. It is because they are certainly equivalent of what may be called the primitive accumulation, which is happening by simply robbing people especially of natural resources. It is also true because there is a politician, bureaucrat, big business corporate nexus, which wants to grab resources without any procedures.
I don't find it completely accurate for the simple reason that unlike the two examples of Russia and the American phase, in this instance, in India, most of these scandals are coming out in open precisely because of certain things that have happened in the overall political institutional structures. We have the Right to Information Act, which has led to many of these disclosures. We have free and frank press which has brought these out and made political scandals out of it. Many of these scandals have emerged from the reports of the Comptroller General of India, which is a very welcome development of an institution which has stood up, not to mention the Supreme Court which has taken a strong position.
I think a fair position would require us to look at these scams not merely as an indicator of rising primitive accumulation or robber baron phase but also probably because they are more visible than before. Probably, there is more public anger than before and that probably distinguishes the Indian case from the American and the Russian case that he refers to.
Q: Apart from Adam, Raghuram Rajan, in his book, Fault Lines and several others who make the case that probably large parts of India Inc's wealth is really that of a 'rentier' that they have accumulated scarce national resources, be it spectrum, coal, mineral resources, even land and largely value added a little, but made a large amount of money because of the scarcity value of these national resources. Would you say that that is a large part of India Inc's wealth in the last 3 or 4 decades?
Gopalakrishnan: I am not able to agree that a large part of India's wealth creation from the industrial sector is coming through accumulation of natural resources, which are in short supply. It might be true to say so for the last few years, but certainly not if you take a 50 year's span of industrial development in India. I will say it is actually an inaccurate description unless you take a stock picture of what happened during the period of 2000 onwards when industrialists were better endowed with wealth and a lot of scarce national resources became available for industrial development.
If you think back to the 1900s whoever went to prospect for hydroelectric power for iron and coal mining were true pioneers. For at least 7 or 10 decades since then, it was very costly, and therefore, the question of saying they rob natural resources would be very inaccurate. If you look at the economic history of many countries, they all went through a robber baron phase. The robber baron phase is a bit like saying a human being goes through adolescence and it is something to take note of, it is something to be anxious about, but it is something to expect as natural. There are those hints in our economic development at this point of time, and that, I would agree with, has been the characteristic of the last decade.
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Q: There are a lot of questions about India's potential being nowhere near double digits. Do you think that because of the manner in which we have distributed national resources, we have wantonly led to a slow-growing infrastructure and a high-cost infrastructure? Would that charge be right that the very manner in which contracts are given out because of a nexus of bureaucracy and politicians, business infrastructure has become high cost?
Acharya: I think that's partly true. Certainly, as we know from the so-called Coalgate episode, it's mucked up the entire coal, electric power, energy kind of nexus quite badly. Not just the fact that coal block allocation has occurred the way it has, but also to some extent, the backlash, which has got things to a standstill. To some extent, that passion is repeated with regard to the 2G telecom scam where you had allocation going on certainly in a non-market and opaque way. I think these have made for problems, but we shouldn't completely exaggerate these issues.
If you take the telecom story in India, it really has been an extraordinary story. Now my worry is that because of the backlash to the 2G scam, things are going to happen, which will unnecessarily slowdown, what was otherwise, a very good story.
Q: What exactly do you understand by reforms? You say that India's politicians are averse to reform or are not congenitally reform-minded. They will reform only when pushed to the wall. What do you understand by reforms when you say not enough is done?
Roberts: We have seen from the history of reforms in India that the big reforms came in 1991 when India faced a currency crisis. We have seen some reforms since then, but in the last eight years or so, there have not been many reforms that have really driven the economic growth. I would say India needs to look at reforming its labour laws, to do more about land acquisition, to push on with its reforms of tax to get the free market deal with itself with the Goods and Services Tax sorted out.
There are a whole slew of factory reforms needed to allow investors to come in and build their factories to get their investment to be productive. What we are seeing at the moment are quite limited. It is about letting in some foreign investment into supermarkets and aviation, but that in itself, will not be enough to drive a rapid economic growth in the long-term.
Q: Would you say that it will be extremely difficult to get changes which perhaps China is able to manage more easily - urbanization changes, changes in property laws, a whole host of labour law changes, land acquisition changes. Are these far more difficult in India because politicians do not want to upset the apple cart?
Yadav: These are difficult. These are difficult in some cases because of self-inflicted injuries. There has been a terrible lack of poverty of political judgement that we have seen in the last three or four years. It is true that, in some cases, there is simply a lack of political will. At the same time, here are these nice recipes, which are waiting to be tried, and here are these politicians who simply don't know how to try it or don't have the guts to try it. I think it is inadequate. I would like to add to this a simple understanding.
Firstly, the idea that all the reforms are unmixed blessings for India is something which has actually not been proven by evidence. There is a need to differentiate between different kinds of reforms, those like the GST which are unmixed blessings, have to come and need to be pushed. You need to generate public opinion for those like reduction of subsidies, and for those like privatization of various kinds, the experience has actually taught that this have not worked to the advantage of the people.
In this debate in reform versus populism, we need to differentiate between different kinds of reforms. We need to have greater appreciation of democracy and its natural constraints. The real crisis, to my mind, is in the ability to communicate to the people the benefits of these reforms if they indeed are beneficiary. This should be done not merely by words, but by being able to demonstrate to people that they actually do benefit them.
Why is it that even now 20 years down the line the only great reform story that we remember is 1991 when people were kept entirely in the dark? Where is that reform story where people were consulted, taken on-board and a democratic consensus was built? All I am trying to say is unless you have that democratic consensus building for which you don't need to take that insincere socialist territory nor do you need to take this backdoor, which bypasses the people, is what we need to do. This is where the existing leadership has failed. The failure is not to implement readymade recipes. The failure is to imagine better recipes, which can actually bring some goods to ordinary people in a visible way.
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Q: Do you think that India's potential is nowhere near 10 per cent, and in the rest of this decade, getting there will be near impossibility? What chances would you give that we will get out of this 5-6 per cent and go to even 8 per cent, which was possible in the previous decade?
Acharya: I don't think we can abstract these growth rate numbers from the reality that we are in. In a very kind of empty technical sense, yes, the Indian economy can grow at 9-10 per cent in a sustained way. It certainly did for 6 or 7 years, as we know, last decade despite global conditions. Maybe it can grow it can grow at 8-9 per cent if everything else works. But I don't see the sort of political framework, in a broad sense, being supportive of the kind of reforms that are necessary.
You take them sector-by-sector be it fiscal consolidation or rational approach to the great challenge of urbanization that we face, or reforming our broken down education sector, whether it is about reforming our broken down electric power, and more broadly energy sector. I don't see the ability of Indian political formations at present to come behind in a strong enough way to push these things forward with the degree of sustained coherence and strength that is required.
If one looks ahead for the rest of this decade, it's probably wiser at least to expect average economic growth to fluctuate somewhere in the band between 5-7 per cent. If a lot of these good things what Yogendra Yadav calls 'recipes', I wouldn't use that term, I think they are just good economic policies are somehow able to be implemented, you can grow at 7-8 per cent perhaps even 9 percent. But I don't see the prospects of that happening at all easily in the foreseeable future, and certainly not, with the kind of situation where have a general election coming 1.5 years from now. Most people expect that the kind of government that will emerge from that election will be more fragmented, not less fragmented than the one we have today.
Q: As an industrialist, what is holding back India's growth? And what can unleash India's growth potential?
Gopalkrishnan: To comment briefly on the points made by Yogendra Yadav and Dr Acharya, I see a lot of merit in the argument that not much reform has happened in the last 8 years, and yet, during the period 2004-2009, India grew well.
Frankly, nobody concentrated on the fact and there was no reform because the tide was rising, all the boats in the ocean rose and India also rose. So the nexus between actual significant reforms and the economic growth was somewhat broken during the period 2004-2009. Like all human beings, we thought we must be doing something right, which was wrong in effect. What has happened after then is the opposite and we think we are doing everything hopelessly. I think both these are flawed because the pessimist and the optimist have both got it wrong.
Reform has to be seen in totality. There is a formula for what needs to be reformed is well known. I find it easy to remember the five vowels 'aeiou'; 'a' for agriculture, 'e' for education, 'i' for infrastructure, 'o' for law and order and 'u' for universal heath and then you can expand for each of this.
There is another aspect to it, which I think Shankar Acharya referred to, which I would like to allude to as well. That reform that economists and business people tend to think is, is couched in a largely political framework. You talk of electoral reform or Centre-State relationship or judicial reform. These are not receiving any attention at all. CII has put out a paper on electoral reform, which itself is based on the reports done by the various committees that have been appointed. I think we are looking at a much broader agenda. This broader agenda cannot be accelerated during this phase of what I call 'adolescence' that we are going through. Therefore, I tend to agree stating the point in a slightly different way from Dr Acharya that perhaps that 5-7 per cent is not way off the mark.
The great thing about India is that it follows the Kensium dictum that we will do the obvious after trying all other alternatives and we are running out of alternatives. I think we are heading, I hope not, at catharsis but we are quick learners. I hope we are getting to a situation where all these aspects will be tied together. Maybe the next decade maybe not so promising, as we might have wrongly thought five years ago, but I am very optimistic that we will get it right.
