Top Stories from the Editorial/Opinion pages of the International Herald Tribune, 
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 to reform.
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 authoritarian China. 
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 self-aggrandizement.
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.