Retreat of the Elephant?
India’s economic liberalisation that began in the early 1990s — and which completes two decades of high growth this summer — appears to have lost its steam, ironically under the auspices of a man who had actually initiated it. Is the honeymoon over?
It seems India’s economic boom has started losing steam under the very person who initiated it in the early 1990s. First, the economy slowed down. And, then came the report of foreign investors no longer regarding India as their favourite destination, preferring even Islamabad over New Delhi.
Why has the country failed to sustain its growth story?
The sluggish economic performance is understandable given the fact that India is beleaguered by a series of scandals tumbling out of government closets. There, however, is more to it than government inaction. For answers, one needs to look into the very process of economic reforms that began in the summer of 1991. It was the economic crisis of the early 1990s that forced the Indian Government to introduce a number of economic reforms as a precondition for receiving IMF loans. These were aimed at trade, industry, infrastructure, disinvestment, FDI, among others.
The reforms unshackled India in many ways. Its GDP growth rose from an average of 3.1 per cent in the past to an average of 7 to 8 per cent in the last one decade. This high economic growth helped the middle class emerge to a size of 350 million, making the country one of the biggest markets in the world. The economic liberalisation revitalised the dead or almost dying private sector, which today constitutes almost 20 per cent of the Indian economy. The country’s savings rate also showed great improvement, shooting up from 22 per cent to 35 per cent in two decades.
Yet, the reforms remained half-baked. In fact, the moment the economic crisis vanished, India went back to its traditional way of functioning. No wonder, crony capitalism continues to prevail in many sectors. And, there is no talk of administrative reforms. It is ironic that while India has avoided large-scale institutional changes, high economic growth creates a requirement for precisely this. For each doubling of GDP, the way government functions needs to be reformed. And, unlike the West, whose GDP doubles every 25 years, India has seen its GDP doubling every decade! The result has been a sharp gap between our existing state structures and what the country needs. Is it, therefore, any surprise that India ranks 134th among 183 countries in providing conducive environment to business, according to the Doing Business series of the World Bank/International Finance Corporation!
Also, the country needs a change in labour laws. Out of a workforce of more than 400 million, 92 per cent are in the informal sector. They are without capital, assets, insurance or any safety net to fall back on. Unless there is a social safety net, the labour laws cannot be changed to facilitate an easy hire-and-fire policy in factories.
The telecom example
The Indian telecom sector has been a liberalisation success story. It also exemplifies the unique characteristics of Indian liberalisation, the strengths and the weaknesses.
The Indian telecom revolution was also ushered in after 1991, leading to the phenomenal growth of mobile phones. More Indians have mobile phones today — about 860 million — than they have access to sanitation and toilets.
But there is a twist in the tale. The Indian telecom story wasn’t as successful as that of Pakistan. Islamabad had seen spectacular growth in 2005-08, compared to India’s slow but steady advance, so slow that it was overtaken by Bangladesh for a brief moment. But, of course, slow is a relative term. To those observing it in isolation, the Indian telecom sector seemed like a rocket. It was indeed a rocket, but so were its peers.
Pakistani telecom growth in 2005-08 was the result of policy reforms put in place in 2003-04 under the Pervez Musharraf regime and implemented under the leadership of a Major General who led the Pakistan Telecom Authority during that period. The policy reforms included:
- Auctions for the 4th and 5th GSM licences that yielded $291 million apiece
- A licence-renewal policy that reduced uncertainty for the investors, thereby protecting the investment climate, while also correcting the problems caused by ad hoc licencing in the past
- An exemplary universal service policy that created a company with its own board of directors, comprising four from Government including the minister, three from the private sector, one representing the consumer interest and the CEO as ninth board member.
The effective implementation of well-designed policy in Pakistan led to good performance. Foreign Direct Investment (FDI) into the sector increased massively. From a negligible $6.04 million in 2002, it increased to $1905.06 million in 2006 (over 50 per cent of total FDI coming into the country) and $1824.25 million in 2007 (close to 40 per cent of the total). Increased investment resulted in improved sector performance in terms of connectivity, low prices and greater choice.
The spurt of investment generated by the reforms allowed Pakistan to pull ahead. But it was like a wind-up toy. The power of big-bang policy reform lasts only so long. What is needed for long-term, sustained growth is stable, competent implementation by a regulatory agency that exercises discretion in a responsible, competent manner. Here the appeal-heavy, procedurally complex Indian system is superior.
The loss of momentum for Pakistan started in 2008, and by 2010 India was again ahead. The tortoise overtook the hare. Not because it took a nap, but because it lacked persistence.
India’s policy framework was inferior to that of Pakistan: It was a patched together series of compromises among various interest groups, especially those entrenched within BSNL/MTNL. Pakistan conducted a transparent auction. India has vacillated and sown the bitter harvest. Pakistan handled the licence renewal cleanly, eliminating uncertainty for the operators and realising enormous revenues for the exchequer. India is just beginning to address the first licence renewals without a clearly stated principle in place. India’s Department of Telecommunications collects too much money in universal service levies, gave most of the money, especially in the early years, to BSNL, and is now unable to get rid of billions. Pakistan’s USF (Universal Service Fund) company has succeeded in disbursing around 90 per cent of the fund without favouring any operator, and supporting green technology as a bonus.
Yet, India is pulling ahead. It is pulling ahead because it is fundamentally a consultative, democratic polity. Democracy cannot produce the clockwork efficiency that a well-functioning dictatorship can; but neither will it produce quasi-democratic dysfunction that follows the rare, brief interludes of efficient authoritarianism.
But is this patched together workaround system optimal? No. The collective self-flagellation that is known as the 2G scam has surely gone on for too long. Bad things were done. Someone falls on the sword or is pushed to the sword, remedial actions are taken and life must resume.
Every religion has a way of dealing with death that is instructive. One must grieve, but not forever. In Buddhism, we have an alms giving after seven days and then in three months. These are markers for resuming normal life. If one were to wallow in grief after three months, remedial action has to be taken. Religious rites in the old days; anti-depressants these days! Sadly, there seems to be no equivalent for a nation. The agenda setters appear to have lost all sense of proportion. Only some of us appear to remember this is not the first time a Telecom Minister behaved this way, despite the Sukh Ram verdict being given as recently as in 2009 for money illegally amassed in the 1990s from this very industry.
The danger is that the media-stoked angst can depress investments and delay decisions in a fast-moving industry. Now is when India needs another big burst of investment to kick-start the broadband revolution. Despite its difficulties, India is well ahead of its large neighbours in broadband, and extremely well positioned to leap ahead because of the issuance of 3G frequencies last year.
Yet, for this advantage to be realised, investment is required. Is the collective funk caused by endless talk of scams and licence cancellations the prescription for investment?
Reflections on the whole
Reform is a difficult thing to do. While researching the subject as an academic in the United States, the difficulties of implementing reforms seemed so illogical, given what seemed to me the obvious dysfunctions of the status quo in our countries. The infrastructure sectors were so poorly managed; the inability of the political ‘principals’ to get the ‘agents’ running the government-owned integrated monopolies to do the right thing so self-evident; and, the benefits that would flow to the public from introducing competition on the one hand and privatising the dysfunctional incumbents so obvious. Why could this not be done?
It was only after I was invited to return to Sri Lanka to engage in the hurly burly of reform, first as a regulator and then as a policy implementor, that I understood how difficult reform is. The vested interests are truly entrenched. They have no cause but that of defeating reform (and the reformers). The beneficiaries of reform are amorphous and unaware. There is no support from them.
The iron triangles that I used to teach about in the abstract I found were not only real, they had sharp edges too. The few successes we achieved were because of speed; the opposition simply did not think we would move so quickly. But that advantage does not last too long. They have time; they learn.
Observation of the workings of TRAI, one of the most consultative Government entities in our region, has yielded another model of how to get reforms done: Reform by exhaustion. The Access Deficit Charge (ADC) was so obviously wrong. It was a naked transfer of money from the new entrant private mobile operators to the incumbent BSNL. Once it was put in place, it could have gone on forever. But it was literally talked down. Multiple consultations were held at great cost to all and finally the ADC came down to zero.
For whatever strategy to work, leadership is necessary. Reform of Government is, after all, like repairing a moving ship in mid ocean; the option of pulling into dry dock is not available. It’s even worse. The repair is not limited to the ship; it must also include the crew. Those supposed to do the repair, are also in need of repair. This simply cannot be done without leadership. Rule by law, not by (wo)men, is a glorious ideal. But reform has always to be by (wo)men, and not by laws and structures. Some human being has to make the laws, cajole the stakeholders, form the alliances and fight the court cases.
So what has gone wrong with the Indian dream of liberalisation two decades on? It is good that these questions are being asked, but they must be kept in perspective. Sri Lanka started on the reform path in 1978, well before India. While planning mavens in India rejected mobile telephony in favour of Government-led technology development, Sri Lanka welcomed 100 per cent foreign-owned mobile operators as early as 1989.
India’s growth rate is still the highest in the region and the telecom sector could, if a few things are done right, define technological development in broadband for the masses. It is clearly ahead of its two large neighbours. Just a few things need to be done: Free up more spectrum; issue it transparently. Quickly address the problem of uncertainties caused by licence renewal. Phase down the universal service levy and move its administration to a company with equal public-private control. It is okay to learn from Pakistan.
The writer - Rohan Samarajiva – is CEO of LIRNEasia, a regional think tank based in Colombo that is active in 11 countries, including India