Top Stories from the Editorial/Opinion pages of the International
Monday, September 29, 1997
Only India Can Rescue Itself From Its Own Foolish Behavior
By Gerald Segal International Herald Tribune
NEW DELHI - India is at risk of being its own worst
enemy. Just at the moment when many East Asian economies are faltering
and India has the opportunity to tout its availability as the new giant
tiger economy, New Delhi is doing its best to damage its new reformist
reputation. Higher import taxes to pay for higher salaries for 5.3 million
inefficient government workers is only the latest amber light on the road
Indian officials and intellectuals - as articulate and intelligent
a cohort as you will find anywhere in the developing world - say the problem
is that the outside world does not take India seriously and support its
reforms. But the reality is that until India takes itself seriously and
engages in far more sustained reform, the outside world will feel free
to ignore the world's second most populous country (and sixth largest economy).
Indians often produce a democratic alibi for their nation's
stuttering reforms. But new public opinion poll data, presented by the
political scientist Yogendra Yadav to an International Institute for Strategic
Studies conference, demonstrate that there is no constraint on reforms
from the public. In this, the world's largest democracy, the problem is
with narrow-minded bureaucrats, elite factionalism and the lack of bold
leadership. If Indian reforms are to succeed, they will have to take place
in something like an Italian form, where governments can change every year
and where the political traditions will always be more raucous than in
The real problem with the Indian reforms lies with the basic
compromise agreed on at their inception in 1991. As the Indian economist
Swaminathan Aiyar argues, India began to liberalize its economy and open
up to the outside world because of imminent bankruptcy, not because of
an ideological commitment to liberalization. In what passed for an economic
strategy, reforms would be matched by increased subsidies.
The result was a central government unable to afford the investment
in infrastructure, health and education that is so crucial to the success
of reforms in East Asian economies. Although India has demonstrated that
it can grow faster than the 4 to 5 percent so-called Hindu rate of growth,
it cannot climb above 6 to 7 percent until the government can afford more
productive investment in the underpinnings of growth.
India's success in attracting Western investment is far better
than conventional wisdom suggests. Remember that 85 percent of investment
in China comes from ethnic Chinese and that India does better than China
in attracting Western portfolio investment. In terms of enticing Western
investment, India is ahead of where China was six years into its reform,
in 1986. Indian savings rates are rising and investment is becoming more
efficient. The ratio of exports to GDP is also increasing. But Indians,
unlike Chinese, still do not accept that ''it is glorious to be rich.''
Their capacity for self-denigration is matched by China's capacity for
One positive feature of the stammering growth and weak central
government is that the states, particularly on the coast, are freer to
experiment and welcome foreign investment. Orissa and Andhra Pradesh are
pioneering privatization (called ''disinvestment'' in India) in the power
sector. Maharashtra invited P&O to set up a billion-dollar port, thereby
undermining conservative workers and officials at the federal level.
As a result of these successful reforms, the state governments
from various parties become stakeholders in reforms and carry their new
zeal to the federal level, thereby entrenching the reformist coalition.
But so long as central government subsidies (defined as the unrecovered
cost of services provided by the state) remain at 15 percent of GDP (as
high as in 1987-88) and tax revenue remains around 16 percent of GDP, virtually
the entire tax revenue is wasted on subsidies.
No foreigner is going to save India from its own foolishness.
The problem, as in the case of Russia, is in part an incomplete sense of
the failure of the old system. India, like Russia, perhaps never fell far
or hard enough to
know, like China, that it has no choice but to pick itself
up by its own bootstraps. No one owes it a living.
Perhaps the best thing for India would be another bout of bankruptcy,
if only to demonstrate to complacent politicians and bureaucrats that they
have to do much more. Their democracy, rule of law, federalism and use
of the English language are all necessary but far from sufficient conditions
for international economic success. Time is short. East Asia's woes provide
India with a window of opportunity, as international investors seek new
opportunities. The Indian stock market is up 18 percent this year, compared
to falls of 20 to 40 percent in Southeast Asia.
There is also a new willingness in the United States to take
India seriously. The Americans seem prepared to put squabbles over nuclear
weapons to one side and to encourage India to turn its back, at least for
the time being, on Kashmir, Pakistan and South Asia in general. There is
a recognition that only when India is richer and more confident because
of successful economic reform will it be able to be magnanimous and creative
in its home region.
The writer is director of studies at the International Institute
for Strategic Studies and director of Britain's Pacific Asia Program. He
contributed this comment to the Herald Tribune.