Sunday, July 25, 2004


Times of India, July 25, 2004

I didn't get the 20-page invitation cased in silver for Laxmi Mittal's daughter's wedding. I read about it in the papers, and like many, I was left with ambivalent feelings about the Rs 200 crore celebration near Paris. I told myself that he is, after all, a self-made billionaire and a British citizen and he can certainly do what he wants with his money. Yet, there are nagging doubts that something was wrong here.

A few weeks earlier, I had met some seriously rich American billionaires in Chicago. I was struck by their unassuming, modest manners and their desire to hide their money. They spoke little about their companies, more about their philanthropies. Their heart seemed to be in giving their money away rather than in making it. In this company it would have been coarse to talk about spending conspicuously, on a wedding for example. I was left feeling that seriously wealthy Americans, at least after the first generation, seem to have taken Andrew Carnegie's admonition to heart, "Anybody who dies rich, dies disgraced." Bill Gates, the richest of the rich, symbolises this ethic — he is busy giving away most of his fortune while he is still alive.

We have a saying in North India, haveli ki umar saath saal, (the life of a business family is sixty years). The first generation makes the money and naturally wants to flaunt it, like Laxmi Mittal. The second doesn't want more money; it wants power, which might explain Anil Ambani's curious decision to join politics. Born into money and power, the third generation dedicates itself to art, or more likely just squanders the fortune. The Kennedys, Rockefellers, and others illustrate this cycle. Thomas Mann, the great German writer, made the same point in Buddenbrooks, my favourite novel about a business family. In this saga of three generations, the scruffy and astute patriarch works hard and makes the family fortune; his son becomes a senator; but his aesthetic and physically weak grandson only wants to play the violin; thus, a grand family comes to an end. This rule also explains why business families break up in the third generation.

Dutch burghers amassed great wealth in Holland's golden age, but they spent it on social good as Simon Schama describes in his charming book, The Embarrassment of Riches. Similarly, most wealthy Jain families that I know are not ostentatious and devote their money to social uplift. Thus, they help to soften capitalism, making its unequal outcomes less offensive. Capitalism becomes acceptable if everyone feels they can become a millionaire. Our recent software millionaires prove this. They did not inherit wealth, nor did they have a family name. They rose because of merit, and reflect a new social compact for post-reform India, where talent, skill, and hard work have replaced inherited wealth. Inequality is accepted in Bangalore because it does not excite envy, but hope and aspiration.

I admire Laxmi Mittal for his business acumen. He has created enormous value and jobs around the world out of sick steel companies. I always wished he would invest in India, but he says he is afraid of India's red tape. If India is a hostile place to do business, I dearly wish that he would emulate Bill Gates and spend his millions in India doing good for the poor. It is this that will win him the respect of the world. Many men can get rich but only a few can be good. And, that is a legacy worth fighting for! Who wants to be remembered as the sad Indian Gatsby who dropped Rs 200 crores on a wedding?.

Monday, July 19, 2004

Biblio Essay - Medha M. Kudaisya, The life and Times of G.D. Birla,

Oxford University Press, New Delhi, 2003, 434 pages, Rs

Owning a dynamic, indigenous entrepreneurial group like the Marwaris would seem to give India a competitive advantage in the world economy, yet the Marwari has never quite won the respect from Indian society that he has yearned for. Most Indians know him as the furtive shopkeeper around the corner. Like the Jew in old Europe he is the moneylender of last resort, who charges extortionate interest and dispossesses widows of their land and jewellery when the loan is not repaid. Or he is perceived as the ruthless tycoon who did not stop at anything, including the pre-empting of licences during the hypocritical forty years of the Licence Raj.

The story of the Marwaris is a fascinating tale of how a tiny community from the desert sands of Rajasthan spread out to every corner of north, west, and central India, settling in thousands of villages and towns in the 19th century. With their enormous appetite for risk, Marwaris seized control of India’s inland trade, then gradually turned to industry after the First World War, and as recently as 1997 they controlled roughly half the nation’s private industrial assets. Although the profile of Indian business has begun to change with our success in information technology, but in 1997 fifteen of the twenty largest industrial houses were of vaishya or bania trading caste, and eight were Marwari. The question is what made them so spectacularly successful?
The answer to that question will not be found in Medha Kudaisya’s fine book, The Life and Times of G.D.Birla. There are hints, however. It had something to do with their wonderful support system. When a Marwari travelled on business, his wife and children were cared for in a joint family at home. Wherever he went in search of trade, he found shelter and good Marwari food in a basa, a sort of collective hostel run on a co-operative basis or as a philanthropy by local Marwari merchants. Ghanshyam Das (GD) Birla’s grandfather, Shiv Narian, the founder of the Birla Empire, settled in a basa when he first came to Bombay in the 1860s. When the Marwari needed money, he borrowed from another Marwari trader on the understanding that the loan was payable on demand, “even at midnight,” and he would reciprocate with a similar loan. At the end of the year, they tallied and settled the interest. He could count on community banks to insure his goods in transit and collect his dues when the goods arrived. His sons and nephews were apprenticed to other Marwari traders, where they earned their salary through profit sharing, learned business skills, and accumulated capital to start their own business when they were ready.

The Marwaris achieved their biggest successes in the British trading post of Calcutta. They smelled the chance for big money and they flocked there to become brokers and agents to the British (who called them “banians”.) Ramdutt Goenka was a typical example. He came to Calcutta in 1830. Starting as a clerk to a Marwari firm, he gradually became a broker to the major English firms. Nathuram Saraf began as a clerk in Ramdutt Goenka’s firm and he graduated to become a “banian” to other British firms. He opened a free hostel for migrants from the Shekhavati area of Rajasthan and GD Birla used to say that this hostel spawned many entrepreneurial careers. At night, the young apprentices would exchange stories of their commercial exploits of the day and draw lessons from them. Some of these stories became legendary. Passed on by word of mouth for generations, it was their version of Harvard Business School cases. The arrival of the Delhi-Calcutta railway in the 1860s quickened the migration to Calcutta and by the turn of the century, Marwaris had become dominant in the jute and cotton trade. During World War I, they made spectacular profits speculating in cotton, jute and hessian, and these profits laid the foundation for many industrial careers after the War.

Marwaris are socially conservative, and that too might help to explain their success. They took to English education much later than most other communities like the Bengalis or Punjabis, for example. But now their children routinely get MBAs and have a similar way of life as the young in other communities and as other young professionals. Nevertheless, they continue to be more religious and tradition continues to have a greater hold. Although professional executives run their businesses, most of them are from their community. Although they engage in the most sophisticated enterprises, their strength lies in the way they use old family networks and traditional accounting and financial controls. The Birlas, for example, continue to monitor the financial performance of their companies on a daily basis.

Medha Kudaisya’s The Life and Times of G.D.Birla is a sober, scholarly work, whose biggest strength is that it is among the first business biographies that is not a hagiography. It grew out of a PhD thesis for Cambridge University, and it is well researched, based for the first time on unrestricted access to Birla private papers. It offers a ringside view of the political and economic forces that have shaped our country in the 20th century, including the funding of the nationalist movement and the Congress Party. There are fascinating insights, for example, into the attempts at “reform by stealth” during the brief period that Lal Bahadur Shashtri was Prime Minister. GD Birla, more than anyone could see what “a precious opportunity had been lost” when Shastri died prematurely. I try to imagine, what sort of nation we might have been had the 1991 reforms begun in 1965! This has to be one of the tantalising ‘what ifs’ of Indian history.

Kudiasya poignantly describes the slow decline of GD Birla’s stature in national life after the death of his Sardar Patel, whose advisor and protégé he was. However, this did not necessarily reflect in the decline of his economic fortunes (with the exception of the nationalisation of Bharat Airways and his insurance company). Kudaisya describes in some detail how he moved with strategic foresight into basic industries after Independence, and the heartbreaking episode concerning the rejection of his Durgapur steel plant after so much work had gone into it. If his aluminium company, Hindalco, is anything to go by, he would have created a world class steel company as well. Today, after liberlisation, Hindalco is the lowest cost producer of aluminium and is one of our best companies. Just as Tata Steel is world class today; so too might have been Birla Steel; instead we are saddled with the unmanageable public sector company, Sail, which continues to struggle and keeps guzzling public money.

The best part of the book is the account of Birla’s growing relationship with Madan Mohan Malviya and Lala Lajpatrai and his growing involvement in nationalistic politics, culminating in his close relationship with Mahatma Gandhi. Equally noteworthy is how he suffered during the Indira Gandhi years when he was an easy target of any young, unscrupulous socialist (like Chandrashekhar) who wanted to make his mark in public life. Morararji Desai, in particular, comes out looking like an arrogant prig, happy to take the money of industrialists but without any grace or gratitude. Birla was too much of an old style Congresswallah; anyone else would have chucked up the Congress Party after Shastri’s death, when the rot began to set in, and joined the Swatantra Party.

Nehru was always suspicious of Birla, and not only because he had been Sardar Patel’s protégé. In Motilal’s and Jawaharlal’s case it was a caste prejudice, reinforced by the latter’s English education at Harrow and Cambridge, where he acquired the English upper class bias against trade and learned socialism from the Fabians. When he came to power in 1947, Nehru institutionalised the prejudice into the mindset of the national state. Lord Wavell, the British Viceroy in the 1940s, also shared the prejudice against Marwaris, who he thought were like the Lombards and the Jews in Europe. Nevertheless, he recognised G.D. Birla’s uniqueness and he paid him a huge compliment by preferring him to JRD Tata as Queen Mary’s companion for lunch in Bombay. JRD was then the young head of the largest and most respected business family, and Wavell wrote:

I think Queen Mary would find G.D. Birla better company than J.R.D. Tata if she wishes to invite one of them to lunch. Tata is a pleasant enough fellow to meet, but I have not found him communicative, and as a casual acquaintance he is much the same as any other wealthy young man who has had a conventional type of education. Birla has plenty to say, and whatever one may think of Marwari businessmen and their ways, he is well worth talking to. I think Queen Mary would have a very dull lunch with Tata and quite an interesting one with Birla.
Mahatma Gandhi, a bania himself, had no qualms about accepting money from Birla or other businessmen. Nor was he contemptuous of commerce like Nehru. He came from Gujarat, which had many ports and vigorous commerce, and where the merchant was held in higher esteem. Gandhi believed that a businessman’s wealth was not his own but held in trust for the rest of society. Today’s business titans of the new economy, men like Narayana Murthy and Azim Premji, oddly enough are closer to Gandhi’s way of thinking about the place of business and wealth in society. And fortunately, the old socialist attitudes to business are practically dead in the minds of the nation’s young, even though they linger in the minds of the ruling class, and this slows reform.

There are wonderful moments in the book, especially the descriptions of GD’s childhood in Pilani among women and without men, where Vaishnav religion pervaded the day. This religiosity never left him, and the Gita in particular was a great source of strength to GD during crisis. The men in the family were continuously away in Bombay and Calcutta, making their separate fortunes, and expanding the family’s wealth, and GD went to a local school, where there were no books and classes were held in the open air. In the end, of course, the education he received there was wholly inadequate, he realised, and he plunged into reading English books after he left Pilani. His proficiency in English placed him in a privileged position in the family firm from the beginning because he could negotiate with English brokers.
The weakness of the book—and it is a major flaw—is the inability of the author to tell us why GD succeeded in business. How did the Birlas succeed in making so much money? Why did they win when others lost? I found it frustrating that there is nothing to explain GD’s legendary ability to hire, train, and retain so many managers who ran his many companies when he was busy with politics? Aditya Birla inherited the same ability, and perhaps that is why he was GD’s favourite and he got the lion’s share of his empire. Equally disappointing is her silence on the division of the Birla companies. There was a real fight and it caused so much heartburning and she dismisses the whole thing in half a page.

The real failure of the book in the end is that it does not uncover the man within. This is not easily done, of course, because GD was (and Marwaris, in general are) secretive. Hence, he had thrown a challenge: “Certainly, no Indian can write my biography because biography isn’t an Indian skill,” he had said to Ian Jack of London Times in 1978. But it the job of biography ultimately, isn’t it—to uncover the man within?
It is true that Indians have traditionally not accorded a high place to making money. It is also true that a certain amount of antipathy to business exists in all societies. But Aditya, GD’s grandson, could not understand why the Indian public chose to target the Birlas as the ugly face of big business. He thought it unfair. After all, they had supported the nationalist movement for independence; they had invested huge sums in charities and philanthropy; they had maintained an austere and quiet life-style and reinvested their entire surplus rather than consuming it; they had come as close as anyone in the practice of Mahatma Gandhi’s idea of trusteeship—that the bania’s wealth belongs to the community and the businessmen is merely a trustee of this wealth during his lifetime.

In one of his letters, GD offered the following advice to Aditya when he was studying at MIT: “eat only vegetarian food, never drink alcohol or smoke, keep early hours, marry young, switch-off lights when leaving the room, cultivate regular habits, go for a walk everyday, keep in touch with the family, and above all, don’t be extravagant.” Aditya thought that his grandfather’s advice symbolised the ethic of the Marwari merchant, with restraint and austerity its defining tone, not dissimilar to the ethic of Protestant, Jewish, or Chinese business families. It captured the spirit of conservation that leads to accumulation. With all this going for them, why should the Birlas not be more esteemed?

Many think that the Birlas, were the great beneficiaries of the Licence Raj. They point to the Hazari Committee which had pointed a finger at the Birlas for pre-empting 20 per cent of all licenses awarded by the government between 1957 and 1966. From 20 companies in 1945 Birla companies had grown to almost 150 by 1962, and wasn’t this monopostic? I could not disagree more with this popular misconception. I believe the Birlas behaved in a rational manner, as any businessman would towards his competitor, and what was wrong was not the behaviour of the Birlas but the incentive system of the Licence Raj in that hypocritical, ugly world that ended in allowing our bureaucrats to kill our industrial revolution at birth.

Far from doing the Marwaris a favour, the Licence Raj made the Marwaris lose touch with the market. Competition is the great school where companies acquire skills. It is through intense rivalry in the market place that businesses learn to improve their products, hone their marketing skills, and improve their systems in order to become more responsive to the customer. The Licence Raj, by eliminating competition, distorted their behaviour and suppressed their business skills and made Indian businesses complacent and insensitive to customer needs.

When the economy opened in 1991 and markets became increasingly competitive, many old Marwari businesses were in trouble. Some of these will never recover, but for the others it has taken more than a dozen years after the economic reforms to become competitive. The shining example is the Aditya Birla Group, the direct inheritor of Ghanshyamdas Birla’s legacy, now headed by Kumaramangalam Birla. Its success is due to a great part to Aditya, who decided not to invest in India in the late sixties, when he realised the monster of a political economy that Indira Gandhi was creating, and which would not allow an honest enterprise to exist in India. He created instead a commercial empire instead in highly competitive South East Asia, which taught his managers competitive skills that came in handy when India finally opened up in 1991. Forty years of Indian style socialism fortunately was not able to destroy India's legendary entrepreneurship, although it did distort its behaviour.

Sunday, July 18, 2004

Jagdish Bhagwati, In Defence of Globalization

Oxford University Press, New York, 2004, 308 pages, $28.

This book has arrived not a day too late. A lot of rubbish has been floating in the air ever since May 13, when our election results came out. Silly ideas, discredited years ago, have been revived and assiduously marketed by the left, creating the illusion that India’s centre of gravity had shifted against the global market system. To those who are undecided in this battle of ideas Jagdish Bhagwati’s charming and highly readable, In Defence of Globalization, offers well thought out answers to the questions that have been raised over the past six weeks.
Jagdish Bhagwati is a distinguished economics professor at Columbia University, a former Adviser to the United Nations on Globalization, and one of the world’s authorities on international trade. He was one of the first persons to raise serious questions about the premises of Nehruvian socialism in the sixties. In his book with Padma Desai, India: Planning for Industrialization (OUP, 1970) he described how India was steadily degenerating into a “license raj”. A generation later, the same sorts of do gooders are blaming global capitalism for worsening poverty, for child labour, for degrading our environment, for cultural homogenisation and many of the world’s ills. In this book Bhagwati seriously takes on the bogus arguments of the anti-globalization movement and shows them for what they are--a threat to human development. He argues that globalization is not the problem but the solution, and he does it with wit and humour.

In recent weeks the Left in India has stridently argued that the economic reforms need a human face. Bhagwati shows that global capitalism does have a human face and he demonstrates its beneficial effects on poverty, child labour, women’s rights, and host of social issues. The left argues that growth by itself will not create enough jobs or alleviate poverty. Bhagwati shows that growth is the principal means of reducing poverty. He illustrates this with the examples of China and India.

Since 1980, China and India have been among the fastest growing economies in the world and both have reduced poverty spectacularly. China’s poverty ratio declined from 28 percent in 1978 to 9 percent in 1998, according to the Asian Development Bank. India’s poverty fell from 51 percent in 1978-79 to 26 percent in 1999-2000, according to official Indian data. In contrast, for a quarter century before this, when our growth was an abysmal 3.5 percent poverty, poverty had obdurately hovered around 55 percent. China had the same experience in its pre-reform period. As a result of high growth in Asia, Sala-I-Martin’s huge 97 country study, concludes that the poor in Asia as a whole declined to 15 percent of the world’s poor in 1998 (from 76 percent in the 1970s) while they rose in Africa from 11 percent in the 1970s to 66 percent of the world’s poor by 1998. Surjit Bhalla’s and Dollar and Kraay’s recent work has come to the same conclusion.

I had a sense of déjà vu as I noted Bhagwati demolishing the same arguments of the anti-globalizers that India’s reformers had faced in the early nineties when India began to seriously reform its economy. When we liberalised the rupee, the left warned us about a flight of capital, as rich Indians would run away with their money. The opposite happened, in fact, and our reserves shot up from $1 billion to $117 billion today. When our tariffs began to come down and import licensing was scrapped, the left prophesied that India would be flooded with luxury goods, and there wouldn’t be any foreign exchange to buy capital goods for our industry. Again the opposite happened; with declining tariffs, India became more competitive, and our exports grew.

When we lowered tax rates, the left forecast that our government would be reduced to a pauper; instead, government revenues shot up and income tax has consistently grown faster than our GDP since the reforms. When we liberalised foreign investment, the left predicted that predatory multinationals would swamp Indian businesses and our industry would be destroyed. None of this has happened, and Indian brands are thriving in many product categories. In fact, our worry is that we are not getting enough foreign direct investment. Forget China, countries much smaller than us—Vietnam, Malaysia, Thailand, Poland—attract far more foreign investment.

Given this terrible track record of the left, why should we should we now listen to it? It has been consistently wrong. It has always led us astray, and it now wants to bring back the sort of policies that made India, “the world’s greatest under-achiever” in the words of the Economist. Is it surprising that the markets continue to be spooked by the Common Minimum Program? I sometimes don’t know who is more likely to destroy our future--the lunatics of the left or the fascists on the right.

Saturday, July 17, 2004

Terrorism, Democracy & Capitalism

On Tuesday September 11th I was visiting my aged mother in a village in northwest India, at her guru’s ashram by the banks of the river Beas, when my son called from China. “Turn on the TV,” he said, and we began to watch in stunned disbelief the barbarous tragedy unfolding on the other side of the globe. The second tower of New York’s World Trade Center came down before our eyes. After the initial horror had passed, I felt like many Indians that perhaps now the world might begin to understand what we have been going through. For over a decade we have been victims of Taliban trained terrorism that has taken hundreds of innocent lives.

Ironically, the same dreadful Tuesday was the deadline given by faceless terrorists to force women in Kashmir to cover themselves in veils. Tailors in the valley had been busy for weeks, but they could not catch up with the demand for burqas. An innocent 15 year old girl, whose tailor failed to meet the 11 September deadline, found acid sprayed on her face as she was rushing home from school. She lost an eye and her pretty face was disfigured for life.

Two years ago Osama bin Laden had announced from his hideout in the mountains deserts of Afghanistan, “India and America are my biggest enemies and all mujahideen groups in Pakistan should come together to target them.” Why are India and America the prime targets of Osama and the Taliban? It is because they are the most pluralistic societies and share the same ideals and liberal values. America is the oldest modern nation, and India is one of the world’s oldest civilizations. They are the two largest democracies in the world. They are also the only two nations, as far as I know, where democracy has preceded capitalism.

Migrations of diverse people have created both America and India. America is a nation of immigrants and the historic wanderings of many peoples and tribes of Asia over thousands of years created India. America dealt with its diversity historically through the “melting pot”; India accommodated its migrant minorities through the caste system, which made it possible for a vast variety of people to live together in a single social system. Today, India and America have emerged as unusually open pluralistic societies and diversity is their most vital metaphor. Both present a challenge to fundamentalists, who are only comfortable in monolithic states with one religion, one language, and one mind. Indeed, India faces this problem with its own Hindu and Muslim fundamentalists. These societies are vulnerable to terrorists because they are so open.

The U.S. got democracy in 1776 but it did not embrace full-blooded capitalism until the early 19th century with the industrial revolution. India became a full-fledged democracy in 1950, with universal suffrage and extensive human rights, but it was not until 1991 that it opened up to a freer play of capitalist forces. For the rest of the world it has been the other way around. Suffrage and rights were gradually extended in Europe and they altered the capitalist institutions that had come up after the industrial revolution. This historic inversion has made all the difference, and it goes a long way to explain these two noisy targets of terrorism.
In the past half-century, Indians went to the school of democracy. They learned to change their governments periodically and peacefully; they gave free reign to their litigious natures and pushed the courts to the limit; they created a vigorous free press and more recently a lively electronic media; and they began to internalize the rule of law. As a result, diverse voices have risen, backward castes have come forward, a more pluralistic middle class has developed, and there is a greater balance of opportunity.

While they were at the school of political liberty, Indians however gradually lost their economic liberty to a domineering socialist state. Hence, they failed to create an industrial revolution, though the farmers did manage to create a green revolution. But this changed in 1991 and since then India’s economy has grown 6.4 percent a year (and 7.5 percent for three years in a row), making it one of the ten fastest growing economies in the world. More recently, population growth has begun to slow, and in 1998 it was down to 1.7 percent compared to an historic 2.2 percent growth rate. Literacy has climbed to 65 percent in 2000 compared to 52 percent in 1990, with women and the backward states registering the biggest gains. More than 120 million Indians have pulled themselves out of poverty in the past decade as the poverty ratio has declined to 26 percent. And India may have finally found its competitive advantage in its booming software and IT services.

If the economy continues to grow at this rate for the next two to three decades, then half of India (that is, the west and the south) should turn middle class in the first quarter of this century and the other half should get there in the second quarter. If growth accelerates to eight percent with greater reforms, then this happy day will arrive sooner. At that point poverty will not vanish, but the poor will come down to a manageable 10-15 percent of the population, and the politics of the country will also change. By 2025, India will see its share of world product rise from 6 to 13 percent, making it the third largest economy in the world. By then India and China will account for 39 percent share of global output, which is about equal to the present share of United States and Europe combined.

The curious inversion between democracy and capitalism means, however, that India's future will not be a creation of unbridled capitalism, but it will evolve through a daily dialogue between the conservative forces of caste, religion and the village, the leftist and Nehruvian socialist forces which dominated the intellectual life of the country for 40 years, and the new forces of global capitalism. These “million negotiations of democracy,” the plurality of interests, the contentious nature of the people implies that the pace of economic reforms will be slow and incremental. It also suggests that India might have a more stable, peaceful, and negotiated transition into the future than say China. Equally, it will avoid some of the deleterious side effects of an unprepared capitalist society, such as Russia. Although slower, India is more likely to preserve its way of life and it’s civilization of diversity, tolerance, and spirituality against the onslaught of the global culture.

Despite appalling governance, corruption, and the indecisiveness of their democracy, most Indians believe that their plural, democratic and capitalist society is worth fighting for, because it offers the promise of preserving and enlarging human freedoms, creating prosperity, diminishing poverty, and upholding the dignity of a human being, and it does it better than any other system that human beings have tried so far. Because India is unique in this, like America, it is vulnerable to terrorists.

Friday, July 16, 2004

Who is America fighting and why ?

It is a month since the macabre dance of death in New York and Washington and we are now in the midst of a war, but I am not sure that we understand what this is all about. People around the world are uncomfortable and insistently ask whom is America fighting? Americans are also confused. They want to know who are their enemies and why do they hate us? And hate so much that that a few young men defied the instinct to live and died for it. The trouble is that America is at war against people it doesn’t know, and having gone off to war, it can’t very well return without having won it.

President Bush says that it is a war against freedom. He says that democracy and the American way of life is under attack. In the present atmosphere of grief and anger this is easy for Americans to accept. But surely it doesn’t sound right? If it were true then the terrorists would have targeted the Statue of Liberty? Instead they targeted the Pentagon and the World Trade Center--symbols, not of liberty, but of American military and financial might.

As a citizen of India, a country that has eagerly embraced these same liberal, democratic ideals for a half century, I can say unhesitatingly that people overseas admire America for its open, free society. Nor are the American people the objects of hostility. The world admires and loves the incredible achievements of America’s scientists, artists, writers, and filmmakers. Last month people around the world were also moved by the courage of New York’s firemen and rescue workers.

Most Americans do not know that for over a decade we in India have been victims of Taliban trained terrorism that has taken hundreds of innocent lives. Two years ago Osama bin Laden announced from his hideout in the mountains deserts of Afghanistan, "India and America are my biggest enemies and all mujahideen groups in Pakistan should come together to target them." Since then I have wondered why he singled out India and America as his targets.
It is also tragic irony that faceless terrorists in Kashmir had set September 11—-the same dreadful day--as the deadline for what women could wear. Tailors in the valley had been busy making burqas for weeks. But an innocent 15-year-old girl, whose tailor failed to meet the deadline, found acid sprayed on her face as she was rushing home from school. She lost an eye and her pretty face was disfigured for life.

It is tempting to believe that India and America the prime targets of Osama and the Taliban because they are open, pluralistic, and liberal societies. Both have to constantly appease minorities and they present a constant challenge to fundamentalists, who are more comfortable in monolithic states with one religion, one language, and one mind. (Indeed, both Hindu and Muslim fundamentalists have this problem in India.)

Yet, I believe, it is wrong to blame freedom, democracy and the open society for the September 11 suicide attacks on America.

Powerful and large nations have always been envied. They are symbols of arrogance, distrust, and fear. When the powerful get into trouble there is an understandable feeling of glee—an expression of “well, they deserved it”. For example, Mexicans express this envious feeling towards their powerful neighbor to the north: “Too close to America and too far from God”. But it is difficult to imagine that such envious feelings were the recent events. There must be another reason.

It is easy to see this as a clash of civilizations. Islamic people are angry over America’s consistent support to Israel in the Palestine dispute. They are upset that half a million Iraqi children have died as a result of American economic sanctions. They are consumed by the irony that Taliban and Osama bin Laden are America’s creation from the forgotten days of the Cold War. Islam also has an old tradition of jihad against infidels, but the fact is that the average person in Islam is moderate, and not very different from average human beings. They do not hate America enough to condone the terrible tragedy of September 11, and American leaders have rightly pointed out this is not a war against Islam.

I could be wrong, and many Americans may find this unpalatable, but I think one has to look to the American government’s record during the Cold War to explain the present situation. One has to remember the millions who were killed in Korea, Vietnam, and Cambodia; the thousands who died in Lebanon in 1982 and the hundreds of thousands during Operation Desert Storm in Iraq; the countless millions who were victims of American government supported dictators in Haiti, Chile, Nicaragua, and El Salvador. It is this disregard for non-American lives that might begin to explain why America is so hated around the world.

The present administration is in a difficult situation. The world approves the legitimate hunt for Osama bin Laden and applauds the will to destroy terrorist networks. But the risk to America is that wars have their own logic and innocent lives are inevitably lost. Having once contributed to Afganistan’s tragedy by creating the Taliban, America does not want to be remembered once again for creating enormous human suffering among innocent people. That would be counter-productive, and only reinforce the antipathy that brought about the present situation.

Thursday, July 15, 2004

This is not only America's war

It is more than a month since the short, macabre dance of death in New York and Washington changed the world. We are now in the midst of a war, but many are uncomfortable and ask who is America fighting? Some are confused, and insistently ask why were they made targets of the September 11 attacks? They also wonder why is America disliked? And in this case, so hated that a few young men were willing to defy the basic human instinct for survival and die for what they believed to be a worthwhile cause.

I shall attempt to answer these questions from a non-American perspective. I live in India, a country that has eagerly practiced the same American liberal, democratic ideals for a half century. But most Americans are unaware that we in India have been victims of Taliban trained terrorism for more than a decade that has taken hundreds of innocent lives. It is tragic irony that faceless terrorists in Kashmir had set September 11—-the same dreadful day--as the deadline for what women could wear. Tailors in the valley had been busy making burqas for weeks. But an innocent 15-year-old girl, whose tailor failed to meet the deadline, found acid sprayed on her face as she was rushing home from school. She lost an eye and her pretty face was disfigured for life.

Two years ago Osama bin Laden announced from his hideout in the mountains deserts of Afghanistan, "India and America are my biggest enemies and all mujahideen groups in Pakistan should come together to target them." Since then I have wondered why he singled out India and America as his targets.

It is tempting to believe that India and America are the prime targets of Osama and the Taliban because they are open, pluralistic, and liberal societies. They are the two largest democracies in the world. They have to constantly deal with diverse minorities and they present a constant challenge to fundamentalists, who are more comfortable in monolithic states with one religion, one language, and one mind. (Indeed, both Hindu and Muslim fundamentalists have this problem in India.) Yet, I believe, it is simplistic to blame democracy and the open society alone for the September 11 suicide attacks on America. If it were only a war against freedom, as President Bush says, then the Statue of Liberty would have been the first target.

Indians have welcomed Bush’s global war on terrorism partly because it has strengthened our own government’s hand to fight terrorists here. Maulana Masood Azhar is India’s Osama bin Laden. He is the mastermind of Jaish-e-Mohammad, a Pakistan based terrorist group that claimed responsibility for the suicide bombing in Srinagar which killed 38 people three weeks after the attacks in America. Indians were relieved when America announced the freezing of this group’s bank accounts because of its links with Osama. Azhar believes in jehad like Osama, and India needs to go after him with the same vigor that America is going after Osama.
Until America declared a war on terrorism, the rapidly growing Indian middle class had been resigned to live with terrorism. It regards all forms of religious extremism with disdain—as something divisive and irrational that comes in the way of its “rational” preoccupation with a rising standard of living, upward mobility, and the peaceful pursuit of electronic appliances. The world has not realized how much India has changed since the 1991 reforms. Its economy has grown 6.4 percent a year for a decade (and 7.5 percent for three years in a row), making it one of the ten fastest growing economies in the world. More recently, population growth has begun to slow, and in 1998 it was down to 1.7 percent compared to an historic 2.2 percent growth rate. Literacy has climbed to 65 percent compared to 52 percent a decade ago, with women and the backward states registering the biggest gains. More than 120 million Indians have pulled themselves out of poverty in the past decade as the poverty ratio has declined to 26 percent. And the nation may have finally found its competitive advantage in its booming software and IT services. At this rate half of India (that is, the west and the south) should turn middle class by 2025, and India will see its share of world product rise from 6 to 13 percent, making it the third largest economy in the world.

This is the future that terrorism threatens and this is why the Indian middle class supports America’s war. However, many Indians are offended by the America’s historical indifference to non-American lives. America has historically propped up dictators in Latin America and backed tyrants in Africa and Asia, and this has led to the death of millions around the world. I wonder if this disregard for non-American lives explains why America is so disliked around the world.

Then there is the usual anti-Americanism, just as fashionable in our influential left wing and academic circles as it is in Europe and Latin America. These are the same people who are against economic globalization, technology, free capital flows and foreign influences. They charge that America is arrogant, hypocritical and is exporting an unhealthy consumerist way of life. However, this sort of anti-Americanism does not resonate with the common person, who loves the incredible achievements of America’s scientists, artists, athletes, filmmakers, and only last month was moved by the courage of New York’s firemen and rescue workers.

About 12 percent of India’s population is Islamic, and they are more ambivalent about America’s war. Our Muslims are more ready to argue the Palestinian case, and believe that America could have done more to restrain Israel. They are upset that half a million Iraqi children have died as a result of American economic sanctions. They are consumed by the irony that Taliban and Osama bin Laden are America’s creation from the cold war. We have a few Islamic fundamentalists as well, but the truth is that the average Indian Muslim is moderate but confused about what is happening. Hence, we have not seen Indian Muslims protesting against this war.

Amidst the confusion, uncertainty and fear--after all, Afghanistan is almost our neighbor--ordinary Indians understand that in the end this is a war against fanaticism and terror, and for civilized tolerance. They realize that in all wars some innocent people will be killed. But they also know from unhappy experience that almost every victim of terrorism is an innocent person. Thus, this is not an American war. It is also our war. But President Bush has to be sensitive as he prosecutes it. He needs to convince the world that non-American lives are just as precious as American ones. Otherwise, for all the good that America will achieve, the world will continue to dislike America.

Tuesday, July 13, 2004

India Shining (1984 – 2004), RIP?

Outlook, 12 Jul 2004

It is no use pretending. While the last general election brought some good news--especially, a well deserved slap to Narendra Modi’s fascist face—it also brought bad news. The hugely positive global sentiment in favour of India that had prevailed until mid May has received a setback. The clearest example is the dramatic slowdown in the growth in the nation’s reserves. Until the week ended May 7, reserves had been growing at the rate of US $750 million a week. This accretion to reserves had diminished to less than US $100 million a week. The rupee has also reversed its appreciating trend. Although this may, in fact, be good for exports, but the currency trend combined with the stock market crash demonstrates that sentiment has changed, and if this is not reversed quickly it will hurt new private investment in the economy, and longer term growth, competitiveness, and jobs.

Sentiments are fragile and often irrational, but they do matter. Entrepreneurs invest when they are feeling good and stop investing when doubts creep in. This is what has happened in India. Doubts have crept in, and the self-confidence that had fuelled investment during the past nine months has largely evaporated. Both Indian and foreign investors have once again begun to have doubts about India as a worthy destination for investment. Thus P. Chidambaram faces a heroic task. For no matter how much you tell investors that the fundamentals of the economy have not changed—that it is still the same sound economy as it was two months ago—market sentiments have a life of their own, and they do not always listen to reason.

Although the left tends to dismiss it, national confidence is a good thing. Ask any CEO and he will tell you that a sustained positive feeling among employees often separates success from failure. Ask a historian of Rome, and he will testify to its amazing power. Or of 19th century Britain, or Japan between 1960-1990, or even current day China—they will all bear witness to the clout of self-belief, which makes ordinary people do extraordinary things. This confidence has been jolted by this election.

Before relegating “India Shining” to history’s dustbin it is well to remember that it did succeed in one space, and there it succeeded spectacularly. The business class both in India and abroad bought the idea that India had become a serious player in the world economy and was poised to make a leap forward. This had generated tremendous excitement in the corporate world, both in India and abroad, and for almost a year I could feel a palpable optimism in my interactions with investors and business people. The offshoring controversy in America may also have fuelled it, and the foreign press certainly reinforced it. From a land of snake charmers India had suddenly become a serious competitor for the white-collar jobs of the developed world. I was abroad in February and March this year and never have I seen such a spate of positive views expressed by foreign commentators about India.

Right through the nineties, China had been the big success story. Quietly over the past couple years, however, India had somehow crept onto the radar of global media. Hence, during the past year every time China was mentioned India’s name was attached to it. Earlier this year the New York Times wrote in a front page story that China and India were going to write the script for the 21st century. But the more cautious rendition was usually “China and to lesser extent, India” as the Economist put it. This positive perception of India has diminished, if not ceased entirely, ever since the stock market crash. The Indian left may have contempt for markets, but investors watch markets, and since we are part of the global economy, investor sentiment will determine investment, growth, and jobs.

I ask myself, why has this sentiment suddenly changed when the fundamentals about our economy are the same? In part, I think it is because the Indian whining story has also affected the business community, which has concluded that India’s economic prospects were perhaps never as rosy as they had been led to believe. And the defeat of the BJP has reinforced this perception. In the process of trashing the BJP’s tall claims, the opposition unintentionally ended in trashing India, the country. Investors began to wonder if the story of India’s prospects were a bunch of tall claims, when the reality may have been that it was still the same “under-achiever” which the Economist has been portraying for years. I don’t think that Congress meant to trash the country, but this is how it ended, and our country became the victim of competitive democratic politics. Self-confidence has always been lacking in our society, especially in the business community. I don’t know what and how long it will take to rebuild it. We certainly have an outstanding economic team in place today, but as I said before, sentiment is irrational and elusive.

The well intentioned Common Minimum Program (CMP) of the new government probably did more to kill this spirit than anything else. The idea of reservations in the private sector, when the prospect of labour reform had died--this frightened managers who were engaged in the hard day to day work of running companies. As it is, they had to put up with a sub-optimal work culture with endemic absenteeism, and now this burden of reservations. It is a future just too awful to contemplate!

Businessmen have repeatedly expressed the view that they would happily pay to lift the poor if they had the slightest faith that the money would reach the poor. They agreed that the best way to lift the poor was through good primary schools and primary health care. Hence, they didn’t mind the proposed education cess. But they worried about the condition of our municipal schools: 93 percent of Bengali primary schoolchildren can’t write their names in Bangla; 30 percent of teachers are absent in Bimaru states, 50 percent don’t teach and most beat their pupils. Unless we first reform our schools (by giving parents’ associations a voice, for example, in the teacher’s pay) we would only be wasting the nation’s hard earned money. As it is, India spends around Rs 1 lakh crores on education (which is higher than most countries as a percent of GDP), but because of teacher absence and other inefficiencies, a third is perhaps wasted. That is a waste of Rs 30,000 crores!

“India shining” is a nice expression and it’s a pity that it got mixed up with politics. Since it is synonymous with India’s economic success, not surprisingly both the BJP and the Congress wanted to take the credit. The BJP claimed that its policies were responsible for the past year’s fine performance and the changed mood; the Congress argued that the economy grew faster under their man, Narasimha Rao. Both were right (and wrong). The truth is that India’s economy has been shining for two decades, growing around 6 percent a year, making it the fifth fastest major economy in the world.

After stagnating for centuries, our economy did finally pick up after Independence. It grew 3.5 percent a year between 1950 and 1980; but our population also grew 2.2 percent; hence the net affect was 1.3 percent per capita income growth (3.5 minus 2.2)—this is what we mournfully called “the Hindu rate of growth.” Things began to change with modest liberalisation in the eighties when annual GDP growth rose to 5.8 percent while population growth remained at 2.1 percent; thus, income per capita moved up to a more respectable 3.7 percent. This happy trend continued in the reforms decade of the nineties when growth averaged 6.2 percent a year, and population, in fact, slowed to 1.8 percent average; thus, per capita income rose by a decent 4.4 percent a year.

What these numbers mean is that if our per capita GDP had continued growing at the pre-1980 level, then Indian incomes would have reached current American per capita income levels only by 2250. But if our economy continues to grow at the present 6 percent rate, and if population grows at 1.5 percent, then we will reach American income levels by 2066. This is a gain of 216 years, and this is what “India shining” really means. And it is worth dying for! It means that it is finally possible to believe that we shall soon be able to conquer India’s age-old worry over want and hunger.

It is easier to explain why India was shining in the nineties. The brave reforms of Narasimha Rao’s government opened our economy, dismantled controls, lowered tariffs and taxes and broke public sector monopolies. And the economy responded magnificently. But how does one explain the pick-up in the 1980s? And here I think we don’t give enough credit to Rajiv Gandhi. He too opened the economy, albeit reticently and modestly—lowering marginal taxes and tariffs, removing the most irritating import restrictions, and liberalised industrial licensing through “broadbanding”. Although modest, these efforts seem to have had a bigger impact that even the sweeping reforms of the 1990s. Bradford Delong, an American economist, wrestles with this puzzle in In Search of Prosperity: Analtytic Narratives on Economic Growth, edited by Dani Rodrik of Harvard. The real miracle, however, is that all the governments after Rao surprisingly continued the reforms, albeit in a frustratingly slow way. Yet this elephant-like pace has made India one of the fastest growing major economies in the world. So, the lesson is that if you consistently reform in one direction in a democracy, it adds up. Since we haven’t had strong reformers at the top, like Thatcher or Deng, is it possible that the reform process has become institutionalised?

This “adding up” over time has enhanced our national confidence, and which to my mind is central to the notion of “India shining”. Thus, it is the Indian people who are shining as they have overcome all the obstacles put in their way by self-serving bureaucrats, politicians, monopolistic industrialists, left intellectuals and labour leaders—in short, all the vested interests of the Licence Raj. But for all Indians to shine, we must begin to seriously reform agriculture and education. This ought to be the agenda of this government.

This election has reminded us that left’s historic role is to make the right sensitive to the needs of the poor and to humanize capitalism in the process. Unfortunately, our left is bankrupt in terms of ideas, and thinks that throwing good money at old problems will solve them. Moreover, the left has not ditched its naïve faith in state control when our nation is groaning under the weight of red tape. This statism makes the left look stupid. In the end, the problems of India’s poor will not be solved by ideology but by good implementation. And this needs mental application. We have to focus on the “how”, not the “what”. It is easier to abuse the India’s bourgeoisie, but more difficult to come up with real answers to real problems.

Monday, July 12, 2004


Times of India, July 11, 2004

A lot of rubbish has been floating in the air ever since May 13, when our election results came out. Silly ideas, discredited years ago, have been revived and assiduously marketed by the left, creating the illusion that India's centre of gravity has shifted against the global market system.

The most dangerous of these is to extend reservations to the private sector. Let me illustrate with this thought game. Let's assume that this becomes a law. You are in the market for a new scooter, and just before visiting the Bajaj showroom a friend tells you that a quarter of Bajaj's workers were not hired on merit. Since you have a three year old daughter who is going ride at the back, you stop in your tracks. Since all Indian scooters suffer from the same defect, you are forced to buy an imported one. Soon Bajaj, Hero Honda, TVS and others will have to shut their Indian factories, start producing abroad (say in Thailand), and importing their scooters into India. Thus, Thai workers will gain from our reservations.

Not for a moment am I suggesting that a scooter made by a dalit is inferior. In fact, it is probably superior to one made by a brahmin (who has probably never worked with his hands). But you will suspect a Bajaj scooter if merit has been compromised in recruitment. Companies that employ nephews and nieces will always perform worse than those who hire the best. In our highly competitive global market, talented people are the scarcest of resources - ask any CEO, recruiting is his biggest challenge. If Infosys were to hire less than the best talent, it too will lose customers and market share.

A second problem is that jobs in the private sector are not for life, unlike the government. If a person doesn't perform she loses her job. So, if Bajaj were to hire on grounds other than merit, he will get into an endless cycle of hiring and firing people. Those fired will go to court, alleging discrimination. Thus, while Bajaj spends his energies on litigation, his foreign competitors will move ahead, improving products, distribution and customer satisfaction. Finally, our reservations have not benefited the poor. Studies show that they are monopolised by the creamy layer of the privileged among the backwards, giving the middle class backwards an unfair advantage. In fact, the politics of caste submerge the real problems of the poor.

This is not an academic discussion either. Maharashtra has already passed a law extending reservations to state-aided institutions (which some have interpreted to mean any company with a loan from a public sector bank). As a result, Rahul Bajaj has threatened to shift his factory from Pune. How can you advise anyone to invest in Maharashtra under the circumstances!

Although I am against reservations, I do think that there is a strong case for affirmative action. We should study the American model, where quotas are illegal, but institutions do attempt to achieve diversity. There are no short cuts in the end. The only way to genuinely lift the poor is through better schools and primary health centres. If our politicians had focused on education and health over the past 50 years, by now there would have been greater equality of opportunity, and we wouldn't need reservations. Instead, they chose to give subsidies and reservations, which didn't help the poor. Hence, India was ranked 134th out of 150 nations in the Human Development Index (2000). The worst indictment of Indian socialism is that in the end it did so little for the poor.