Tuesday, August 17, 2004

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India's crisis of governance

Gurcharan Das has a Financial Times op-ed (subsciption only) that points out the biggest constraint India faces in its economic development: its own government:

India's gross domestic product has been growing at close to a 6 per cent real rate for 23 years, making it one of the fastest-expanding major economies in the world. While this is slower than China, it is almost double India's growth rate of the preceding 30 years and double the rate at which the west grew during the Industrial Revolution. More recently, India's population growth has also begun to slow; in 1998 it was down to 1.6 per cent, compared to a historic 2.2 per cent annual growth rate. And literacy has begun to climb - it reached 65 per cent in 2000 compared with 52 per cent in 1990. Almost 190m Indians have risen out of destitution since 1980 and the middle class has more than tripled to about 250m. Had India's GDP growth continued to chug along at the pre-1980 rate, Indian incomes would only have reached the present US per-capita income level by 2250; at the current rate, they will reach today's American income levels by 2066 - 184 years earlier. This is not the same as convergence, but it is a valuable gain of 184 years.

The amazing thing is that all this growth is happening alongside the most appalling governance. In the midst of a booming private economy, Indians despair over the simplest public goods. The contrast between power and telecommunications is obvious to everyone. After a successful reform programme, we are in the middle of a telecoms revolution that is as profound as China's. The number of telephones has increased from 5m in 1990 to 75m and is growing by 2m a month. But power remains a "public good", as reforms have failed, and people whine about daily power cuts applied by the state monopolies.

No single institution has disappointed us more than our bureaucracy. When we were young we bought the cruel myth of the "steel frame" - a stable system that would provide continuity. We were told that Britain was not as well-governed as India because it did not have the Indian Civil Service. Today our bureaucracy has become the single biggest obstacle to development. Indians think of their bureaucrats as self-serving, obstructive and corrupt. Instead of shepherding through economic reforms, they are blocking them.

In the 1950s, the idealistic Jawaharlal Nehru, India's first prime minister, wanted a regulatory framework for his "mixed economy", but instead, in the holy names of socialism, the bureaucrats created a thousand controls and killed our industrial revolution at birth. In my 30 years in business I did not meet a single bureaucrat who really understood my business, yet each had the power to ruin it. Our failures have been due less to ideology and more to poor management.

Another Financial Times article by Edward Luce and Ray Marcelo highlights that these difficulties create macroeconomic as well as microeconomic difficulties:

India levies a 20 per cent import duty on refined oil products and 10 per cent on crude oil. Mr Chidambaram [India's finance minister] is expected to reduce both bands in order to keep a lid on rising domestic energy costs.

But finance ministry officials say Mr Chidambaram’s scope is restricted since too sharp a reduction in import duties would eat into the government’s revenues, which depend heavily on indirect tax collection.

Mr Chidambaram has committed to a recent law which mandates elimination of India’s revenue deficit the difference between current spending and taxes raised by 2008.

India’s overall fiscal deficit is about 10 per cent of gross domestic product. “We have a fiscal responsibility act which limits what we can do to reduce tariffs,” said an official.

At the state level, the Economist has an interesting story on the lack of accountability in Gujarat following the 2002 pogroms against the Muslim minority, and its aftereffects. And in Bangalore, poor infrastructure is causing leading IT firms to consider relocation.

posted by Dan on 08.17.04 at 11:55 AM


More ginormous hyrdoelectric projects!!!!

That will solve everything.

posted by: praktike on 08.17.04 at 11:55 AM [permalink]

Bring back license raj. That'll really bring the IT industry to its knee.

posted by: BigFire on 08.17.04 at 11:55 AM [permalink]

The most hopeful sign of an Indian economic revival is that in the dowry market, young Indian men in IT or in business command greater premiums than those who into the Indian Civil Service (IAS) :-)
Hitherto, and IAS job was very highly regarded, now private sector jobs are more sought after.

posted by: Sudhir on 08.17.04 at 11:55 AM [permalink]

My friend Sunil has talked a lot about the challenges facing India. The biggest problem is government corruption. It seems to almost defy solution, as it is so widespread.

The other big problem is an underclass that is envious of middle class success, and threw out the BJP, hoping to get more largess from Congress.

The underclass wants to be supported without work.

In some ways, we can be greatful for India's problems, because they would run over us, roughshod, if they could figure out how to solve them. My friend, Sunil, who is a US Citizen, would like to see us put up trade barriers, to protect our IT business (that is the field he and I are in).


Jim Bender






posted by: Jim Bender on 08.17.04 at 11:55 AM [permalink]

I have a question about this. Overly bureaucratic regimes are the kiss of death, but I hear a lot about shear corruption as the main drag on business. If each regulator has to get his own bribe before you move forward, then of course things are going to be bad.

My question is: how do countries make the shift from corruption as a daily occurance to corruption as undercover and often discovered? Are there examples of truly corrupt civil services decorrupting themselves of being decorrupted? How?

We know from our own history in the US that corruption used to be incredibly common (robber barons, etc.). How did that change? When?

posted by: Brennan Griffin on 08.17.04 at 11:55 AM [permalink]

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