To Grow Faster, India Must Unshackle Industries from Government ControlsPublished: March 30, 2005 in Knowledge@Wharton
The Indian economy could be growing at double-digit rates, but for that to happen, local politicians and bureaucrats must work more rapidly to cut away red tape and privatize inefficient government-run firms, say two journalists with extensive experience covering the country.
"The story of Indian development in the 1980s and 1990s was one of thwarted opportunity," Clive Crook, deputy editor of the Economist magazine, told participants at the Wharton India Economic Forum held in Philadelphia recently. "When you speak to politicians and civil servants, you never get the sense that that country is in a hurry, whereas in China you do get that sense. India is willing to put up with far more than it should be in terms of bad policy and bad governance."
K. Venugopal, joint editor of Business Line newspaper in Chennai, agreed, pointing out that privatization already has sparked growth in many sectors. The telecom, airline and life insurance industries all boomed after being unshackled from government control. "Life insurance was recently opened up, and 13 new players have already entered that market," he said.
But a top Indian civil servant took issue with the journalists' analysis. Ranjana Kumar, chairperson of India's National Bank for Agriculture and Rural Development, argued that India isn't growing as fast as China because it's a democracy and that, unlike China, it can't simply order its citizens to do its will. "We can't work in the same way Shanghai does because, in India, people matter," she said. People, whether citizens or commentators, have to be patient with the ponderous, but just, processes of democratic decision-making, she added.
Unquestionably, all three of the panelists said, India's economy has reached a new stage, growing at about 6% to 8% a year, in contrast with its traditional growth rate of some 3%, which many derisively observed was "the Hindu rate of growth." Companies from the United States and Europe are opening offices there or outsourcing work to Indian firms. They are taking advantage of the skills and low wages of Indian computer programmers, engineers and physicians, among others. And these investments are spurring the development of local companies and the growth of investment capital. Eventually, this new wealth will trickle down to other sectors as newly wealthy entrepreneurs and workers consume and save.
But Crook and Venugopal say the Indian government and its citizens can hardly afford to be patient. Indian officials need to push development now or risk losing business to China and other fast-developing countries. If they did, the Indian economy could be growing at 10% a year, as China's is estimated to be.
A comparison of India's big airports with China's tells the story in stark terms, according to Crook. "Every Indian politician and bureaucrat should be made to go to Shanghai and feel ashamed to see a modern airport in a poor country. There's simply no excuse to fail to build airports that tell foreign investors, 'Look, we're open for business.' When you fly to Mumbai, the message is, 'Was it really a good idea to come here?' I can think of a dozen big western companies that would be willing to go to Mumbai and build a new airport. Why can't that be done? The reason is because of the obsession with control at the top in India."
W. Bruce Allen, a Wharton professor of business and public policy who moderated the panel, echoed Crook's remarks. "I've flown into Shanghai and Mumbai," he said. "When I got to Mumbai's international terminal, I thought, 'Could anything get any worse than this?' And the answer was yes, because then I went to the domestic terminal. Improvements have since been made, but that's the perception that outsiders get."
Deregulation and Its Effects
Results have been remarkable in industries where the government has loosened restrictions, Venugopal pointed out. The number of telephones in the country increased tenfold in the decade after the telecom industry was deregulated, he said.
Something similar transpired in the airline industry. In 1992, Indian Airlines, the country's domestic national carrier, flew 8 million passengers. Two years later, a private carrier called Jet Airways started operating. Today, it's considered the best airline in the country and, some people would say, the world. And the Indian airline industry as a whole now carries 33 million people a year. Still, Venugopal noted, Indian Airlines still occupies a niche. The government-owned national carrier may provide poor service, but its prices remain the lowest in the country. That has pressured private carriers to keep their fares reasonable.
In contrast, development has faltered in industries where the government has kept tight control, Venugopal said. An especially acute - and critical - example is the energy industry, which "is crying out for reform." Coal prices have been rising faster in India than international prices for the last decade, he noted. Worse still, the quality of the country's coal has fallen. "Between 1980 and 2002, there was a 20% drop in the energy you'd get out of a ton of coal," he pointed out. As a result, Indian companies pay more than they should - and more than competitors elsewhere - for electricity. "The electricity sector has been a state monopoly. The government has introduced a new electricity act, which promises to open up the sector, but there are still too many roadblocks."
Lest all these criticisms come across as too harsh, Crook pointed out that his home country, the United Kingdom, recently wrestled with the very same questions of political and economic reform that face India today. "I recognize the attitudes of government and bureaucracy from Britain," he said. "But in Britain, we had Margaret Thatcher, and Thatcherism represented an acknowledgment that the country had had enough of the old ways of being governed and particularly of the trade unions. Thatcher purged the system. There was a sea change. That's what India needs. Unfortunately, I don't see any sign of that. The country isn't yet sufficiently exasperated with the way it's falling behind countries like China."
Kumar countered that Crook's assessment exaggerated the true attitudes of Indian officials. Witness West Bengal, she said, a state that has been ruled by a coalition government led by the Communist Party of India (Marxist) since the late 1970s. "There's a lot of development, a lot of European firms, coming in there. This is supposed to be a communist government, but it hasn't said 'no' to investment." She argued that Indian officials running state industries know that they have to change and have begun to do so. "The message is loud and clear that you've got to be efficient. You've got to make profits. But nothing sensational is going to happen overnight. It's not a 100-meter sprint. It will take time."
Waiting, while it may be necessary, presents both problems and opportunities for India. The country, like much of the developing world, will soon face a serious demographic challenge, Venugopal pointed out. Today, it has some 485 million people in its working-age population and almost as many - 463 million - under the age of 20. By 2020, the young people will have moved into the workforce, but only about 160 million of the working-age Indians will have retired. That means the number of potential workers will have increased by 300 million.