Back in 1991, India was the world’s greatest aid recipient, a patently uncompetitive giant begging for alms. Economic reforms from 1991 onwards gradually made India highly competitive, enabled it to touch 9% GDP growth, and to be called a potential superpower.
Those days are gone. GDP growth has halved to 4.5%. India has become uncompetitive in several ways. Worse, the Indian political class has stopped even trying to compete globally. It focuses on subsidies, reservations and special measures for sundry vote banks, regardless of the implications for competitiveness. This will ultimately lead to bankruptcy, not inclusive growth (as claimed by Congress spin-masters).
India has a deep structural problem that is not even recognized, let alone redressed.
When India went bust in 1991, drastic measures over several years were needed to restore competitiveness. The rupee was devalued hugely, industrial licensing and MRTP clearance were abolished, trade was liberalized, import duties were gradually slashed from 300% to around 10% by 2005. Public sector monopolies like telecom and oil refining were opened up to the private sector, enabling the creation of the world’s fastest growing and cheapest telecom service, and the world’s biggest export-oriented refineries. Liberal foreign investment converted India into a global small car hub, Many multinationals like GE came in and made India an R&D hub. A liberalized private sector created the software/BPO revolution.
Merchandise exports rose from 5% of GDP to 15%. Service exports rose even faster, and India became a world leader in software. The rupee strengthened from Rs 50 per dollar in 2002 to Rs 40 per dollar by 2008. India’s rising competitiveness made it a potential superpower. That’s suddenly gone. In the last three years, GDP growth has plummeted, industry and exports have stagnated, the current account deficit has widened dramatically, and the rupee has crashed. A year ago this finally persuaded the government to embark on some reforms, but these have failed to revive the old dynamism.
Why? Because the new measures do not change the political mind-set of constantly ignoring competitiveness in formulating new policies and regulations. Politicians take competitiveness for granted, and just want to divide up the spoils of growth. Alas, neglect of competitiveness has meant a collapse of growth, and hence of the spoils too.
In his 1997 “dream budget”, Chidambaram declared India would steadily reduce its import duties to ASEAN levels. This aimed to make India competitive with the Asian tigers, not just in tax rates but everything else, converting India into the next tiger. This actually happened. But instead of recognizing this as a lesson for future policy, the UPA government since 2004 took fast growth for granted and stopped trying to compete. Manmohan Singh clinched a nuclear deal with the US, but passed a chicken-hearted nuclear law failing to include liability clauses that were global practice. Result: not even the Russians want to sell India new reactors.
India certainly needs new rules to safeguard the environment and tribals. But in formulating new rules and regulations, did anybody check whether our rules compared with those in competing countries? Alas no.We need a fairer land acquisition policy. But our new law mandates a social impact assessment and expert group clearance before any acquisition. Do competing nations have such time-consuming rules? Do they insist on 80% of land-owners consenting to acquisitions? Do they give workers, suppliers and other non-owners of land veto powers? Do they put the burden of rehabilitation on industries or the government?
Activist courts and NGOs have worsened matters, despite good intentions. The green tribunal has banned sand mining without environmental clearance. The result is a huge shortage of legal sand, which simply encourages illegal mining. A similar outcome is evident after ill-formulated bans on rock quarrying. It now takes 12 years to open a new coal mine. Not just illegal but even legal iron ore mining has been banned in some states. Do other Asian competitors have bans of this sort? If not, how does it affect India’s competitiveness?
Neither the courts, NGOs nor the politicians seem to care. A profusion of new rules and regulations are constantly churned out without any cost-benefit exercise to judge the impact on competitiveness. The latest Doing Business 2013 report of the World Bank says India has slipped from 131st to 134th position in ease of doing business. It stands 177th in ease of starting a business, 183rd in getting a construction permit; and 186th in enforcing contracts. Yet this damning expose of our uncompetitiveness produces no political will to change. We have a deep structural problem that is not even recognized, let alone redressed. Will India have to go bust again to concentrate the minds of politicians?