Re-engineering India's Economic System:
Paving the Way to Entrepreneurship from Bureaucratic Planning
Text of a speech delivered at the Karnataka Chamber of Commerce, Bangalore, July 1996. This paper was submitted to the GOI by the Global Organization of People of Indian Origin (GOPIO)
Dr. Abraham M. George
It was just over 50 years ago that the Marshall Plan was put in place to revive the economies of Europe from the ruins of the Second World War. We know today what Japan has accomplished in economic prosperity in the last 50 years, and similarly what progress China has made in less than 25 years. Can we say the same thing about India more than half a century after it gained independence from the British rule?
Yes, India has made great strides in some areas, especially in agriculture and computer science, but our overall economic achievements have been mediocre at best. We are a nation that is still struggling with its past -- centralized planning, state-run bureaucracies, monopolistic practices, and so on that are largely responsible for the burgeoning corruption, curtailed entrepreneurship, and low investment.
Despite the accelerated industrial growth experienced this decade from recent economic reforms, most major investors around the globe do not yet see India as an ideal country for foreign investment. The competition for global capital will only get tougher in the years to come, and unless the political, judicial and economic environments are right, India will lag behind many other emerging nations. More importantly, the rising expectations of the middle-class, widening income and wealth inequalities between the haves and have-nots, and lack of opportunities for a great majority of its citizens will sooner or later result in social upheavals without bold changes implemented in the country's economic system.
How do we remedy the present situation quickly? Obviously the aim is to have long term sustained economic growth that would steadily raise the real standard of living of all its citizens. Uplifting the lives of the poor is a major priority. To accomplish this goal, we need to address many of the root problems that have prevented us from surging forward.
Entrepreneurship is the key to economic development; the entrepreneur is willing to undertake investment activity in a competitive economy, take financial risks, innovate, and introduce new products, all of which create wealth, employment and new capital for further economic activity. In order to understand what fundamental changes are needed for a country to unleash this spirit, we need to look beyond economics -- to the political, social, and national characteristics of our nation.
The lesson of central planning is that risk-averse bureaucracies are unsatisfactory sources of economic dynamism. A society is enriched when individuals can aspire, businesses can be independent of controls beyond legitimate laws, and when labor, religious, cultural and other mediating institutions voluntarily serve as buffers between the interests of the individual and the society in general. Something else grows as a result of this: there is a rapid diffusion of ideas, information and possibilities. The nation becomes politically, economically and socially strong. We need to create an environment in which individuals can aspire and have a fair chance to realize them.
The government has the responsibility to be directly involved in, and in some cases be the sole agent for, the production of certain goods and services, such as: the legal system, protection of consumer welfare from fraudulent and unfair practices, promotion of education, improvement of infrastructure such as roads and bridges, internal and external security, and similar activities for which the private sector may not be adequately suited. The government can also play an indirect role in industrialization through fiscal measures such as tax incentives for small businesses and investments in economically backward areas, monetary policy, and the forging of global economic relationships. But the government is a blunt instrument, not a precision tool -- a hammer, not a scalpel. It is good at big, broad strokes, such as waging war, but clumsy at intervening in the organic processes of a complex society.
The government must be humble enough not to try to solve all its citizens' problems for them, but strong enough to give them the tools to solve their problems for themselves. Government's role does not include directing the daily lives of its citizens; government is the servant of the people, and not the other way around. The pre-eminent mission of the government is to create the right environment for strong and fair economic activity that gives every Indian a real opportunity, but not a guarantee, to build better lives for themselves.
The government must immediately embark on an aggressive program of privatization. Government enterprises may be sold to both Indian and foreign firms and investors. It must be recognized that foreign capital is complementary to local capital, supplementing and at times replacing existing local resources, technology and business practices. Privatization is likely to result in increasing economies of scale, implementation of superior technology, quality control, higher worker productivity and better management techniques.
The private sector can replace inefficient, often subsidized, money-losing state enterprises with modern industrial plants that will serve the needs of the consumer as well as relieve financial pressures on the government. The successful experiences of Britain and France in the recent past are good examples of how privatization has led to the resurgence of those economies and their staying competitive in the global marketplace. Liberalization measures introduced by the Indian government in the 1991-94 period were also in the right direction, but subsequent economic reforms for the most part have only been marginal, lacking any bold initiatives.
In order to accomplish successful privatization, issues such as the appropriate financial strategy in the sale/transfer to the private sector, property rights and law, tax structure specific to private ownership, and politics related to various interest groups need to be carefully addressed. However, until such time the government is prepared to recognize that it has no role to play as an inefficient and non-competitive employer for "social reasons," other obstacles cannot be overcome.
Privatization must be complete (no partial ownership by government), and should occur in practically all sectors of the economy, including transportation, financial, and even defense industries, and should be done in a manner that creates competition. The burden of proof must be reversed, that is, the government should be the one who has to give compelling reasons, if any, for its ownership of a particular industry or service.
Monopolistic practices are widespread in India, and they have led to inefficiencies, poor quality, and higher cost to consumer. Sheltered from internal and external competition, monopolies feel less compelled to improve their product's quality or offer superior services, and the forging of cost reductions in the production process is given only secondary importance. Rapid technological change is closely linked to competition. Competitive pressures compel firms to pay close attention to the value offered by their products and to production methods. It is apparent that the problem is best overcome by operating as far as possible on an international rather than a national scale in a competitive environment.
Adherence to the principle of economic self-reliance that is rooted in a profound mistrust of global economic forces is dangerously misguided. Globalization is essential for India's economic success in the next century, and this must happen all across the board -- in manufacturing, service industries, and finance. This and this alone will assure continuous inflow of technology, efficient production processes, economies of scale, responsiveness to consumer needs, and fair pricing practices. In a competitive world, companies will learn to distill the essence of the various product, process and organizational innovations that are practiced in industrialized countries, and develop a unique synthesis of the most relevant factors applicable to the local situation for long term growth.
Small businesses are the bloodstream of any economy. The economic system must permit new ventures to compete and thrive amongst established firms. Small businesses that are constrained by their capital limitations must be given sufficient access to financing channels through such measures as government guarantees to support prudent private lending. When an industry consists of several large firms, each with its network of relatively smaller suppliers and subcontractors, and numerous other small to medium firms, all competing with each other to offer consumers superior products and services at the least cost, we assure ourselves a vibrant economy that is generally free of many of the constraints to its efficient functioning, such as price fixing, bribes, and fraudulent business practices.
Ownership of land is one of the biggest aspirations and incentives for most people. The economic success of Australia in a few years following the arrival of convicts from England over one hundred years ago can be attributed to the fact that they were able to own property and make it productive. State governments in India still own large areas of land, and if ordinary citizens, especially the poor, can be offered ways to "purchase" them and make them productive, we will witness a major economic miracle in the country in a short time.
There is a high degree of cynicism over the transparency and accountability of the Indian government at practically all levels. Corruption in government, perceived by the people, lowers respect for constituted authority. With erosion of belief in the even-handedness of public officials comes the need to cultivate special contacts, to develop enough "pull" to offset the claims of others. The amount of time and energy devoted to making these contacts is immense.
The opportunities for bureaucrat bribing are directly related to the scope of the government's intervention in transactions between private parties. Since such government policies as price controls, licensing restrictions, permits, subsidies, duties and other interventions in the way of socially beneficial exchange place burdens on transactions, they present clear opportunities for corruption by the granting authorities, and for businessmen to seek special favours.
Corruption usually results in closing competitive doors. When corruption is extended to judges and politicians, laws and judicial remedies are broken, threatening the very fabric of the society. If corruptive practices are to be reduced, their opportunities must be reduced through competition, less intervention by government, prompt judicial remedies, and effective enforcement of laws.
Restricting government activity to the enforcement of laws protecting the person and property of individuals, instead of trying to direct human activity, will not only get rid of many of the obstacles to economic growth but will also simultaneously eliminate the ability of political elite to manipulate markets for their own personal benefits. Provided there can be further relaxation of the bureaucratic and legal obstacles that clog India's commercial system, a class of entrepreneurs, designers, software engineers, consultants, lawyers and middlemen will emerge to play in the global marketplace and reap the benefits from the borderless world.
In addition to getting rid of unwanted regulations, there is a need to place checks on government agencies' ability to institute new regulations. A broad set of regulatory reforms must encompass paperwork reduction, elimination of unwanted regulations, and cost-risk justification before implementing new regulations. If a regulation is likely to result in a major increase in consumer costs or a significant adverse impact on competition, it should not be implemented.
The uncertainty resulting from the discretionary authority of government officials and the arrogance often associated with it, as opposed to the clarity provided by purpose-independent laws, necessitates the diversion of effort from the economic function of production to the political function of influencing the decision-making process.
Similarly, the legal uncertainty created by purpose-directed legislation -- laws to achieve certain social or economic goals -- constitutes a serious impediment to economic growth. For example, when the status of property is uncertain, when individuals are never sure whether their property will be seized or their use will be restricted by the state for "social equality," they are reluctant to increase the value of their possessions through investment. Legal uncertainty regarding property rights (such as the ability to vacate a tenant at the end of a rental term) seriously impedes the emergence of the extended order, since it limits the scope of exchange to those one can trust from personal knowledge alone.
Efficient economic activity presupposes clear laws, their effective enforcement, and smooth and swift resolution of disputes. Government must create an environment of fair and prompt legal remedies within which individuals and enterprises can seek resolution of conflicts. When legal remedies cannot be sought to redress injustice or to attain rights, there is no chance for an orderly universe. Just laws and their fair and equal enforcement are a necessary condition for the smooth and efficient functioning of any economy.
Equally important is the ability to attain justice within a reasonable time; justice delayed is justice denied. The Indian legal system is clogged with delays caused by a host of factors such that commercial transactions cannot rely on their legal enforcement through contracts and agreements. The failure of the justice system to adequately meet the commercial needs of the society is a serious impediment to economic growth.
Infrastructure represents, if not the engine, then the wheels, of economic activity. Reliable energy and water supplies, transport and communications are essential to the development of an efficient industrial base. Agriculture employs over 70% of the nation's population, but is still at the mercy of good monsoons. Resources allocated to infrastructure have not been properly used in the past. For example, facilities are not maintained properly; unreliable and outdated systems burden users with extra costs and time; infrastructure has often been built in the wrong places or using the wrong techniques. Furthermore, infrastructure services have often been run with terrible inefficiency.
The root of the problem is the pervasive involvement of the government in the planning, execution and operation of public projects. Infrastructure throws up all the traditional excuses for state action and often ends up as "natural monopolies". Lack of active private involvement, reduced competition and minimal consumer participation have all been the fundamental reasons for many of the failures in infrastructure development. Innovations in delivering infrastructure services, along with new technologies, point to solutions that can improve performance. This can be accomplished only through applying commercial principles of operation, increased competition, user involvement, and private industry participation. Removing barriers to cross-border flows of trade, technology and investment is probably the single best stimulant to developing good infrastructure.
Government has an important role to play in channeling adequate resources towards health and education. A majority of Indians still live below the real poverty level, with little or no access to proper health care. Preventive and primary health care, including adequate nutrition, is an essential service for all regardless of their income levels. While the nation attempts to generate employment mostly through the private sector, it must also address the basic needs of the disadvantaged that cannot still find a job. The concept of a "safety net" is still a social necessity, but it should not become a permanent feature in anyone's life, depriving the incentive to work and earn.
The literacy rate in India is presently below 50%. This explains only part of the problem; the labour force does not have the skill base to be productive workers in today's industries. Moreover, rural India is entirely dependent on agriculture, but their real incomes have not kept pace with those in the cities. As a result, more and more unskilled people are moving to cities from villages in search of job opportunities. The available labour force must be sufficiently educated and trained in those fields that are demanded by the private sector so that progress and employment are not constrained for want of knowledge and skills. It is not enough to have schools of higher learning, but basic quality education must be made accessible to all.
India possesses a potentially very rich resource: human capital. But the existence of masses of people becomes more useful economically when the society provides quality education to practically everyone, encourages experimentation and entrepreneurship, and consequently produces skilled workers, engineers, scientists, technologists and designers. In addition to colleges of higher learning, the educational system must provide more than the most rudimentary instruction offered in most villages; funds would be better employed in rigorous primary and secondary education, encouraging craft and technical subjects, and providing job-training programs more in line with the country's basic needs. An educational system that is marred by sub-standard quality, diffused focus, and uneven levels of access cannot generate the necessary human resources to equip a world class industrial base.
There is mounting evidence of the damage caused from population growth and modernization in India. Shortage of clean water, insufficient sewage facilities, toxic waste, and air pollution are few of the environmental problems facing India. There exists industrial regions whose air is so polluted that the visibility is poor even in cloudless weather; lakes and rivers are contaminated to the extent that the availability of safe drinking water supply is now threatened; millions of tons of topsoil are lost each year to erosion due to serious loss of forest cover; chemicals, trace and heavy metals and other pollutants have now entered the nation's food supply chain -- all these are happening at an alarming rate and in dangerous proportions. Unless and until we are prepared to assign equal priority to the preservation of our environment, and remedy the damage already caused, all too soon we will not have livable cities, and for that matter, nothing worthwhile to leave for future generations.
All these bring us to our ideas for improvement, our sense of priority, and to our needed collective action for a better country. As an NRI residing in America who frequently visits India, I live in two worlds, both equally dear to me. My sense of belonging to the country of my birth draws me to it with a perpetual emotional pull, wishing a better life for all its peoples. My training in economics and finance prompts me to think of ways to somehow solve the country's perennial problems, which are probably accepted as inevitable by most people living in India. But we cannot afford to give up on our future. I am an optimist who believes in the basic goodness of people and their desire for a better and just life. With that hope and on behalf of those NRIs who share my views, I venture to submit the following recommendations as a "call for action" by our elected representatives.
A CALL FOR ACTION
We, the People of Indian Origin, presently domiciled outside the territories of the Republic of India, express our profound desire to contribute to the betterment of its Peoples, and for such cause we hereby present, in all humility and sincerity, policy recommendations that we believe would assure a steady rise in the standard of living, sustained long term economic growth, fair and equal opportunity for all, and a healthy environment to live in.
To this end, we respectfully call upon present and future governments of India to embrace the reforms herein stated, and to undertake with urgency all legitimate measures at its disposal to implement them. We also urge the present government to initiate the changes called for in this document by first appointing independent commissions consisting of scholars and experts who do not represent special interests or constituencies that may have real or perceived conflicts of interest in making the necessary recommendations to the government. Finally, we respectfully ask the government to implement the recommendations of the commissions to achieve the goals set by them within a three-year period from the date undersigned.
Privatize most government owned enterprises that may otherwise operate under private ownership in a competitive environment, for their full ownership and in all sectors of the economy including transportation, financial, and defense related industries, amongst others without exception, in an orderly and competitive fashion that would assure their maximum value;
Introduce effective ways that allow ordinary citizens, especially the poor, to "purchase" government owned land and develop for productive use;
II. Elimination of Monopolistic Practices
Eliminate monopolies in the private sector, both national and regional, and strengthen anti-trust laws to deter non-competitive practices, and in particular, price-fixing and blocking of entry into markets by others;
Encourage entrepreneurship, and provide incentives for start-ups and small businesses in a free market;
III. De-regulation, Property Rights, and Judicial Process
Eliminate regulations that hinder the functioning of open and free markets, and reduce controls, subsidies, licenses, permits and other restrictions that interfere with competition;
Strengthen property rights and their protection against violation by all, including the government;
Assure the enforceability of commercial contracts and agreements through speedy judicial process;
IV. Physical Infrastructure, Health and Education
Promote bold initiatives in infrastructure improvements and maintenance in areas of transportation, communication, irrigation, and energy through private sector participation, transfer of foreign technology, and equity investments by multinationals;
Provide easy access to preventive and primary health care for the general population, particularly for the poor in both urban and rural areas, through private initiatives supported by government;
Invest aggressively in quality education at the primary and secondary levels, encourage craft and technical subjects, and provide job-training programs in line with the country's basic needs;
V. Protection of Environment
Establish a national environmental agenda, undertake a broad environmental clean-up program to reverse the damage already caused to land and lakes from contamination, and replenish forests lost to excessive cutting;
Enforce prudent and stiff laws to protect against deforestation, air and water pollution, toxic waste, and other environmental hazards that affect the quality of life.
Date: April xx, 1999
I realize that many may find these recommended changes too aggressive; however, these are time-tested principles that have succeeded in developed countries from their earlier years of economic progress. But how can we expect politicians in power to institute reforms that would curtail their own power? I also realize that policies are driven mostly by political considerations, and less so by ideal positive goals, and major changes within a nation rarely occur without a major shock, either from external or internal sources. Well, we need to bring about such a change with bold concepts, strong public opinion, and sheer determination.
These proposals are likely to face opposition from the public sector, and those who are beneficiaries of government programs, assistance, and favours. Many will say something like this: "These proposals are nothing new. We are doing most of them. What is the hurry?" If we continue such "business as usual" attitudes, we will have lost a great opportunity at a crucial moment in history when many countries around the world are making great strides. The time has come for all well-meaning citizens to ask what we are today as a people, and where we are heading. We must have the courage to act boldly and unselfishly in the national interest, and alter the country's course of history to realize a brighter future.