In India’s Long Road, Vijay Joshi takes his reader on an insightful journey through seven decades of economic history, pointing out what went wrong and how it could be made right.
India’s Long Road: The Search for Prosperity by Vijay Joshi is an insightful journey on how to take the Indian economy to a sustainable and higher growth trajectory. The superbly crafted book also details complementary reforms. It is an easy-read for generalists, while specialists can also benefit from the wealth of analysis. Apparently, Joshi and T.N. Ninan were to co-author one book. I am glad they chose to write separate books; readers can now benefit from two different perspectives.
Macroeconomic stability – low inflation and restrained fiscal deficits – is underlined in the book as a necessary precondition for sustained growth. The author emphasises that just because the government funds or should fund welfare programmes in education or health, the corresponding services do not necessarily have to be provided by the public sector. The book ranks India’s continuing shortcomings, such as the woefully slow growth of higher productivity employment opportunities in the formal sector and the crying need for eliminating wasteful and misdirected subsidies. It also scrutinises post-independent India’s performance annually and from one decade to another. I think that it may be easier to figure out the road ahead by re-examining the policies adopted by India’s game-changing past prime ministers.
Lesson from independent India’s past
As the first prime minister from 1947 to 1964, Nehru’s contributions to lay the foundations of a sound democracy have stood the test of time. The book labels post-independent India’s economic policies as autarkic. Nehru can be faulted, with the benefit of hindsight, for restrictive economic decisions. However, there was trade pessimism in international circles in the 1950s, demonstrated in the Prebisch-Singer hypothesis, for instance. Milton Friedman visited India in 1955 and his most prescient criticism was that plan allocation for primary education was inadequate. My sense is that in terms of lasting negative consequences, Nehru’s mistakes were more in the realm of foreign policy than economic decision-making.
The analysis in the book of the immense damage done by steps taken during the Indira Gandhi years is spot on. Gandhi, with a populist turn to the left, nationalised banks and passed the highly restrictive Foreign Exchange Regulation Act (FERA) in 1973. She also introduced Clause 5B in the Industrial Disputes Act during the emergency in 1976 making it almost impossible to close larger firms. Although reservation for the small-scale sector was first introduced in 1967, it was during Indira Gandhi’s reign that the number of reserved items was increased substantially. This, as the book points out, inhibited growth of Indian firms to internationally competitive levels and was anti-employment, since it prevented the organised sector from growing. It is also during this era that coal mines were nationalised. In fairness to Indira Gandhi, I must mention her most significant achievement, which was to help create Bangladesh.
Rajiv Gandhi brought in the Sick Industrial Companies Act in 1985 and set up of the Board for Industrial and Financial Reconstruction. As the book indicates, this discouraged fresh investment since ailing companies were not allowed to close.
Transformational economic reforms, including doing away with licensing and overvalued rupee exchange rates, authorised by Narasimha Rao (India’s first accidental prime minister from 1991 to 1996) are explained in the book. Another recent book, titled Half Lion: How P.V. Narasimha Rao Transformed India by Vinay Sitapati, chronicles Rao as a circumspect Indira Gandhi loyalist who retooled himself to find favour with Rajiv Gandhi. Perhaps Rao wanted to remain in contention for another term after 1996 and hence did not try to amend labour laws or reduce ill-conceived subsidies.
As Joshi’s book mentions, Atal Bihari Vajpayee took several steps between 1999 and 2004, including repealing the draconian FERA, building of roads in rural areas and unleashing the telecom sector. It was also during his years as prime minister that capital markets were liberalised and, to an extent, ceilings on pensions, insurance and FDI were raised. The book does not mention his strategically significant decision to make India a declared nuclear power. In my view, Vajpayee’s government deserves credit for skilfully getting around the opprobrium of the developed West post the 1998 nuclear tests.
Manmohan Singh, India’s second accidental prime minister from 2004 to 2014, had little authority on politically sensitive economic decision making and took few steps on the lines of the recommendations in the book. For instance, despite Rao bringing the rupee down substantially, the rupee was allowed to rise again above its real effective exchange rate between 2010 and 2013. The Goods and Services Tax legislation to make India one market could not be passed. There was no reform of state electricity boards (SEBs) or distortionary subsidies. No substantive steps were taken to dismantle the monopolies engendered by the Agricultural Produce Marketing Committees. Land acquisition legislation became even more complicated under Singh’s watch.
As the book suggests, the current Modi government needs to raise longer maturity lending and implement power sector reforms. We need to be mindful though, in the case of public sector banks and SEBs, of the “hole in the bucket” and Henry’s reluctance to fix it!
The book’s suggestion to provide universal income support through cash-based transfers is highly commendable. However, this is dependent on reducing subsidies on fertilisers, electricity, water and the waste associated with the Food Corporation of India and the public distribution system. This would depend on enlightened political will to weather out the storms which will be created by current underserving beneficiaries, of which there is little evidence at central or state government levels.
Clearly, there can be no dispute on the book’s suggestion that the government’s stake in public sector undertakings and public sector banks should be reduced. My take is that board-driven corporatisation and genuine competition have to be the primary objectives. The passing of the bankruptcy code by parliament should help. However, interminable delays in our courts could continue to prevent competition-enhancing outcomes.
As the book points out, lack of governance and policing in India has periodically resulted in mega-sized corruption. Additionally, as we all know, rampant petty corruption impacts those at the lowest socio-economic levels the most. However, there are frequent reports of financial or intellectual dishonesty in developed democracies as well – the LIBOR fixing scandal in London, for example, or the metronomic regularity of out-of-court settlements on financial sector fraud charges in the US. Tony Blair still maintains that the UK’s support for US’s invasion of Iraq was justified, despite the conclusions of the Chilcot report to the contrary. In contrast, Vajpayee had the good sense to keep Indian troops out of the Iraq conflict, despite L.K. Advani’s exhortations to do so.
Space constraints prevent consideration of other perceptive suggestions made in the book, including on urbanisation, the environment and trade agreements. To conclude, I would say that sound and consistent ground level implementation is critical to the success of the reforms suggested in this must-read book on India’s “search for prosperity”.
Jaimini Bhagwati is currently RBI chair professor at ICRIER. He has earlier been India’s high commissioner to the UK and head of corporate finance at the World Bank.