Sunday, December 23, 2012

Stop talking, start doing

Ratan Tata is a reticent man. He is 74 and retires this month as chairman after guiding his group to be the country’s number one, $ 100 billion, in revenues. He commands respect not only from his 450,000 employees but from the entire global business community. He is courteous and complains rarely. But earlier this month he spoke out in anguish. “Government inaction is driving investment away from the country,” he said, and this was forcing groups like the Tatas to seek opportunities abroad where you don’t have “a seven or eight year wait to get clearance for a steel plant.” The finance minister, P. Chidambaram, echoed this view, reminding us that over 100 mega projects had been stuck for years because of a lack of approvals. Clearly, this failure of the government is greatly responsible for bringing India’s economy to its knees. 

Not only CEOs but ordinary Indians have been voicing the same complaint for years. Why should it take 12 years to build a road or 10 years to get justice in our country? Our public debate is filled with talk of corruption, about the right to information, of democratic answerability but almost no one speaks about the need for quick decision making or enhancing the capacity of our weak, soft, and ‘flailing’ state. No amount of CAG’s disclosures or ranting about the Lokpal will improve the state’s ability to act or strengthen our crumbling institutions. Is our obsession with accountability and transparency making us forget that the state was, in fact, created for collective action?

Accountability is, of course, important. Over the past decade, campaigns by activists supported by intellectuals have brought significant gains, such as the Right to Information Act. The pressure exerted by Anna Hazare’s movement backed by the media have raised awareness of corruption in high places and even helped in the arrest of powerful people. We are rightly proud of these achievements which have strengthened our democracy. But these laudable steps have not significantly improved services of the state to the citizen. Cases are still stuck in the courts; roads are built at a snail’s pace; police will delay registering an FIR unless influence or money is exchanged; it takes 117 approvals and 7-10 years to build a power plant. The list goes on.

Oddly enough, the push for democratic accountability may have weakened our already feeble state. The average official, always faint hearted and timid, is now even more afraid of putting his pen to paper. This is the other side of our fight against corruption. The modern democratic state has to balance the ability to deliver services on time with accountability to the people. Other democracies have also faced this problem of balance but they have found a way to cope by reforming their institutions. All institutions, in fact, must aim for a balance between accountability and action. A company could not survive if the CEO spent the whole day listening to shareholders. A school would not be effective if its principal spent his time only listening to parents. Already scorned as a “nation of talkers and not doers”, India needs to shift its focus to action.

There is a great deal to be hopeful about India’s future. It is stable, open, and amazingly tolerant. Its economic reforms have put it on a promising path of rapid growth. It is breeding outstanding companies which are more innovative than most in Asia. Its middle class is growing rapidly and its poor will benefit from a more effective welfare system based on cash transfers. But India’s soft underbelly is a soft, weak state, whose institutions of governance—the bureaucracy, the judiciary and the police--are in desperate need of reform. This is one of the reasons why its economy has hit a wall as it approaches the $ 2 trillion GDP mark.

Ratan Tata and P. Chidambaram have focused on one symptom of the disease—paralysis in decision making at the centre. But even the solution--the recently formed cabinet committee on investment—invites scepticism. The issue is not ideological—a big versus a small state. India needs to achieve an effective balance between our government’s ability to act and be accountable to the people. 

Thursday, December 06, 2012

To equate capitalism with greed is a mistake

On an evening in early October , the announcer at one of our premier news channels screamed 'greed' while describing the misdeeds of the latest victim of Arvind Kejriwal. Earlier that day, Mr Kejriwal had accused Robert Vadra of receiving favours from the real estate company DLF Ltd. In the next breath, the announcer explained that crony capitalism was at the root of the problem. 

Indeed, not a day goes by when someone does not employ the word 'greed' to describe capitalism. They say that if envy is the sin of socialism , greed is the sin of capitalism. Capitalism is sometimes called a 'system of greed' and is this perhaps a reason why capitalism is finding it difficult to find a comfortable home in India? India is an open, tolerant, liberal democracy, but why is it unable to institutionalize free markets? Why does India have to reform by stealth? Corruption, for example , will not be beaten with a big, new authoritarian bureaucracy, as antigraft protesters want. It will diminish only when discretionary powers are wrested from dodgy bureaucrats and politicians and turned over to transparent, competitive markets. 

To equate 'capitalism' with 'greed' is a mistake. We tend to confuse self-interest in the marketplace with selfishness or greed. At the heart of capitalism is the idea of exchange between ordinary, self-interested human beings, who seek to advance their interests peacefully in the marketplace . Adam Smith called this 'rational self-interest' . It is the same motive that gets one to jump out of bed in the morning or makes one carry an umbrella if it rains—nothing selfish about that. To be human is to be self-interested , and this is what exchange in the market place entails. 

Greed or selfishness, on the other hand, is an excess of self interest and often transgresses on the rights of others. It is present in all of us, but we find it easier to see it in others and difficult to see it in ourselves. Greed can motivate theft, entail himsa—hurting anotherwhose opposite, ahimsa, is a virtue that Mahatma Gandhi extolled. But the other side of greed is ambition, a positive thing, and when rightly directed, is life-affirming . Herein lies the conundrum of human existence: that the same inner forces that result in a vice can just as easily become virtues that can motivate the well-being of our species. 
Those who believe that capitalism has been forced on us by the imperial West are also wrong. Friedrich Hayek, the Noble laureate, called the market a spontaneous order—it is natural for human beings to exchange goods and services, and this is how every society evolved money, laws, conventions and morals to guide behaviour in the marketplace. These are natural products of human endeavour. Competing and cooperating in the marketplace existed in India before the West was imperial or modern. 

Whether we like it or not, India is headed in the direction of some sort of democratic capitalism. After two decades of reforms, hardly anyone in India wants state ownership of production, where the absence of competition corrodes the character even more, as we know too well from the dark days of the 'license raj' . Our animus against capitalism has diminished after communism's fall as people increasingly believe that markets do deliver greater prosperity, but most think that capitalism is not a moral system. They continue to believe that morality must depend on religion. 

Although the market is neither moral nor immoral, human self-interest usually brings about good behaviour in the marketplace. A seller who does not treat his customers with fairness and civility will lose market share. A company that markets defective products will lose customers. A firm that does not promote the most deserving employees will lose talent to its competitors. A buyer who does not respect the market price will not survive. Lying and cheating will ruin a firm's image, making it untouchable to creditors and suppliers. Hence, free markets offer powerful incentives for ethical conduct, but they must be backed by state institutions that enforce contracts and punish criminal behaviour . If the market has an inbuilt morality, why are there so many crooks in the marketplace? The answer is that there are crooked people in every society, and this is why we need effective regulators, policemen and judges. We should design our institutions to catch crooks and not harass innocent people as we do so often. 

The other cause of our grief is to mistake being 'pro-market' with being 'probusiness' . To be 'pro-market' is to believe in competitive markets which help to keep prices low and gradually raise the quality of products . Competition also means that some businesses will die because they are poorly managed and cannot compete. Kingfisher Airlines and Air India should be allowed to die and not be bailed out by the government . Thus, being pro-market leads to 'rules-based capitalism' ; 'pro-business' often leads to 'crony capitalism' . Not to have explained this difference has been the great mistake of our reformers and this has led to the false impression that the reforms only make the rich richer. Crony capitalism exists in India today because of the lack of reforms in sectors such as mining and real estate. To get rid of crony capitalism we need more rather than less reform. 

The doom-mongers , who claim that we are now resigned to live in an age of decaying moral standards, are also wrong. Yes, the new Indian middle class is permissive and indulges enthusiastically in har mless pleasures. Yes, it is materialistic , consumerist and capitalistic. But these impulses are not to be mistaken for greed. Only when one's pleasure hurts another does it become a matter of the law and then, of course, it must be punished. The shared imagination of the new India with its harmless pleasure and victimless vice should not be condemned. Think of ours as a society in transition . Mass wealth is profoundly disturbing but once there is enough, India might again return to its old character of renunciation. 

Instead of religious rules, young Indians are motivated by duties to fellow human beings rather than to gods. Those who accuse them of shallow materialism ignore the injustices that prevailed when religion held a monopoly on morality. They overlook real ethical progress with regard to sexual and caste equality that our secular society has begun to deliver. So, the next time Kejriwal makes an expose and the TV screams 'greed' , do not fall into the trap of believing capitalist culture is morally sick or that we should return to a moral order rooted in socialism or religion.

Sunday, September 09, 2012

The loss of inheritance

The approach of another festival season raises the old question of the place of myth and classical culture in our contemporary lives. This is not an idle question—it forces one to confront the difficult problem of what it means to be fully and richly human. For millions of young Indians who have risen in recent years and are now part of the confused, upwardly mobile, post-reform internet generation, the question has a new urgency. With a degree of prosperity has come the luxury of being able to face up to one’s inheritance, even though the answer might be frightening.

Akhilesh Yadav, the young chief minister of Uttar Pradesh, is typical of this generation. Unlike his father, Akhilesh finds no votes in the old bashing of English and “angrezi hatao andolans” especially when English medium schools are flourishing in the poorest Muslim mohallas of U.P. Yes, young Indians are more relaxed about the place of English in their lives, and gone is the earlier anxiety over “Indian-ness” or the belief that one has to read and write in one’s mother bhasha to be authentically Indian. Moreover, no one could have imagined the intellectual ferment that would come with the flowering of Indian writing in English. Yet, despite the new cosmopolitanism, Akhilesh and his generation cannot conceive of exchanging it for a riotous celebration of Dusehra, Diwali, and Ramzan, even though the significance of the festivals has receded from their consciousness.
What will shock Akhilesh Yadav and his friends in the political class is the sobering truth that an Indian who seriously wants to study the classics of Sanskrit or ancient regional languages will have to go abroad. “If Indian education and scholarship continue along their current trajectory,” writes Sheldon Pollock, the brilliant professor of Sanskrit at Columbia University, “the number of citizens capable of reading and understanding the texts and documents of the classical era will very soon approach a statistical zero. India is about to become the only major world culture whose literary patrimony, and indeed history, are in the hands of scholars outside the country.”

This is extraordinary in a country with dozens of Sanskrit departments in all major Indian universities, along with network of maths, pathshalas, and vidyapeeths. The ugly truth is that the quality of teaching in these institutions is so poor that not a single graduate is able to think seriously about the past and critically examine ancient texts. They are parrots who can only repeat words without converting them into true knowledge. Politically motivated appointments have also ruined the few centres of excellence that once existed at Pune University, Deccan College, and the Banaras Hindu University. Fifty years ago, India had great scholars like P.V. Kane, V.S. Sukhthankar, S.N. Dasgupta, S. Radhakrishnan and many more. The tradition of pandit learning is also disappearing. Where is India’s soft power when there are fewer and fewer Indians capable of interrogating the texts of Kalidasa or the edicts of Ashoka?

The gift of economic growth is that for the first time parents are beginning to be freed from earlier middle class insecurities and their children are beginning to take risks in the pursuit of unusual careers. One of these is driven by a natural curiosity about one’s past. The proud discipline of making sense of ancient texts is called philology which is practically dead in India. But as academic salaries have improved in recent years, it is increasingly possible once again to make a scholarly career. No one, however, will be able to study in India unless our institutions improve. Akhilesh Yadav and leaders in other states have in their power to stop the rot and reform our third rate institutions so that young Indians can one day help to recover our historical memory. 

To be worthy of being Indian does not mean to stop speaking in English. It means to be able to have an organic connection with our many rich linguistic pasts. To be truly ‘whole’ is to realize that mythical themes are universal and portray eternal truths of mankind, and can help us to cope with life at different stages. What separates man from beast is memory and if we lose historical memory then we surrender it to those who those who will abuse it.

Sunday, August 12, 2012

Don't turn Gurgaon into a Faridabad

It was the same question on everyone's lips. Aggrieved Suparna Prasad Dev asked, "If 50 policemen were at the scene, why didn't they act when a hundred Maruti workers brutally attacked managers and killed my husband?" When the police did finally act, it was too late. The factory was in flames, almost a hundred managers were bleeding, many injured seriously. Awanish Kumar Dev, head of human relations, was dead.

There are many lessons in the recent tragedy at the Maruti-Suzuki factory at Manesar in Gurgaon district. One of them is that labour trouble is not only a management's or a union's problem but a vital concern of the state. Haryana has not learned this lesson. It destroyed the vibrant industrial town of Faridabad more than a generation ago due to poor industrial relations. It is now bent on scaring industry away from Gurgaon as well. Last year's unrest at Maruti resulted in Rs 2,500 crore loss. This is a shockingly high figure-half a billion dollars-for any company to lose anywhere in the world from industrial trouble. For Suzuki, whose Indian operation brings in half its global profit, it is appalling. For a Japanese company to be continuously in the news for labour unrest is extraordinary when Japan has taught teamwork and industrial harmony to the world. Suzuki should ask itself if it has the right persons in charge.

The role of the state is less obvious. In the 1970s, Faridabad had an active municipal government, fertile agriculture, a direct railway line to Delhi, and a host of industries. Gurgaon at the time was a sleepy village with rocky soil and pitiable agriculture. It had no local government, no railway link and no industries. Compared to Faridabad, it was wilderness. Thirty years later Gurgaon has become the symbol of a rising India. Called 'Millennium City', it has dozens of shiny skyscrapers, 26 shopping malls, seven golf courses, countless luxury showrooms of the world's most famous brands. It has 32 million square feet of commercial space and is home to the world's largest corporations. Its racing economy is reflected in fabled apartment complexes with swimming pools, spas and saunas, which vie with the best gated communities anywhere. How did this happen?

Gurgaon's disadvantage turned out to be an advantage. It had no municipality and was more or less ignored by the state government. This meant less red tape and fewer bureaucrats who could block its development. Seeing its stupendous rise, people began to ask, why do we need a government at all - with corrupt politicians and unresponsive bureaucrats? When they saw prosperity spreading across the nation amidst governance failure, they cynically claimed, "India grows at night when the government sleeps." But the Maruti incident teaches that India also needs to grow during the day. It needs an effective state. An alert police could have prevented the tragedy. Rational labour laws would have stopped Maruti from hiring contract workers, whose status and benefits are at the root of the worker unrest. If red tape and corruption are the downside of Faridabad's governance model, then the problem with Gurgaon's laissez faire model is the lack of basic services-it has no functioning sewage system; no reliable electricity or water supply; no decent roads or public transport.

A sensible company in India will not hire a permanent worker today because of our senseless labour laws. Instead, it hires contract workers to which it denies long-term benefits. Meant to protect workers, the laws have harmed them. They are the main reason why India has not been able to create a manufacturing revolution and create more jobs. The spread of contract labour has reduced the bargaining power of unions as well, who now represent less than 4% of India's workers. Nowhere in the world has so much harm been done by a piece of legislation.

The lesson from the Maruti story is that India cannot forever grow at night. It must have an effective state which upholds the rule of law and grows during the day. Neither Faridabad's nor Gurgaon's model of governance are the right ones. Haryana should ponder over the vigorous competition that exists between the states for investment. It will lose out to the states that offer better governance.

Sunday, July 08, 2012

Will ‘tyranny of cousins’ decide who’ll rule in ’14?

Andimuthu Raja, former telecom minister, having spent 15 months in jail under trial in the 2G spectrum scam, received a hero’s welcome in Chennai a few weeks ago. The ecstatic crowds burst firecrackers for a man who was largely responsible for his party's defeat in Tamil Nadu’s election, demolishing India’s image in the eyes of the world, and bringing the government of India to its knees. Even bigger celebrations are planned next week when he visits his Nilgiris constituency and his hometown, Perambalur. What explains Raja’s popularity is the ‘rule of life’, which may actually decide who will be Prime Minister in 2014.

Justice V R Krishna Iyer of the Supreme Court made a distinction between the ‘rule of law’ and the ‘rule of life’. In a judgment in 1975, he used this distinction to uphold the election of a Muslim candidate who had won supposedly by appealing to his Hindu constituents that his mother was Hindu. It was a sectarian appeal and contrary to the law. But Justice Iyer gave greater weight to the primordial, irrational realities of social relations in day-to-day life. In his mind, this sometimes trumped the higher, rational ideals embodied in the rule of law and the Constitution. To do otherwise, he felt, would mean not listening to the voice of the people.

Justice Iyer was wrong —it is dangerous for a judge not to uphold the rule of law. The judge was articulating, however, the ever-present tension between a universal ‘rule of law’ and an insular ‘rule of life’ at the heart of India’s democracy. The human DNA is imprinted with a natural propensity to favour family, friends and community. These loyalties invite corruption and nepotism in the absence of strong incentives in favour of impartiality. The social anthropologist, Ernest Gellner, labelled it ‘tyranny of cousins’. The historian David Gilmartin equates the ‘rule of life’ to sva-dharma, duties to one’s family, caste and community. In contrast, the rule of law is akin tosadharana dharma, duties which reflect the higher, universal ideals of the Constitution.

The great achievement of our Constitution was to create strong incentives to behave impersonally in public life. But India’s political parties have become family firms. They are overflowing with relatives and cronies, thus undermining the impartial principle. This is at a time, ironically, when our best companies are managed by professionals from outside the family. Almost a third of India's parliamentarians in 2009 had a hereditary connection, according to Patrick French in India: A Portrait. Every MP under the age of 30 had inherited a seat; more than twothirds of the 66 MPs under age 40 were hereditary; every Congress MP under the age of 35 was hereditary. Because of the ‘tyranny of cousins’ merit does not prevail. Since there is no democracy inside any party, the inheritors often behave like feudal lords. Napoleon would have called these mediocrities “hereditary asses, imbeciles, and this curse of the nation.” This is why it is so difficult to come up with a leader for 2014.

The hope for the 2014 election may, however, lie with some of our best performing states (such as Bihar) whose leaders did not inherit the mantle and came up through merit. But Sukhbir Badal, heir to the Akali Dal, put up a spirited defence of dynastic leaders. Soon after his party retained power in February 2012, he said, “I have lineage and this is a huge plus, but the post is not hereditary. If I fail to deliver, I will be voted out the next time.” Yes, the distinction between legacy and dynasty is useful, but it’s not enough consolation. India’s “tyranny of cousins” has drastically reduced our options for merit-based leadership in 2014.

Raja was asked if he was surprised by the hero’s welcome he received in Chennai. “No”, he replied, “It was natural”. As natural, perhaps, as passing along hundreds of crores of ill-gotten money allegedly to the Karunanidhi family. Katherine Hepburn’s advice in The African Queen was really meant for Raja rather than Humphrey Bogart. "Nature is what we are put in this world to rise above," she said. Leaders of all our political family firms might ponder over it.

Tuesday, May 22, 2012

Free Markets - The Indian Way

Gurcharan Das
The Man: Gurcharan Das's second career as a writer and public intellectual is more noticed and in some ways far more influential than his first as a professional manager. It spanned 30 years, and across six countries and included a term as CEO of Procter & Gamble India. His writings drew from his experience and also from his wide reading. He tells us that individuals could be immoral but the institution of the market itself is deeply moral.

The Oeuvre: His first book India Unbound captured the country in economic transition and became an instant best seller. In Difficulty of Being Good, his most recent book, he turned to Mahabharata to find answers for some of the pressing ethical questions.

X-Factor: A beautiful writer—wise and pragmatic.

The Message: There is a purpose to economic activity, and the pursuit of money is justified so long as it leads to the good life.

The Hypothesis
Human beings may be immoral and will behave badly whether in a socialist or a capitalist society or under a democracy or autocracy. But the institution of the market itself is deeply moral and has its underpinnings in the Indian notion of dharma.

So What?
Dharma is a frustrating word and not easy to translate. Duty, goodness, justice, law and custom have something to do with it, but it is chiefly concerned with doing the right thing, both in the private and the public life. The market system depends ultimately not on laws but on the self-restraint of individuals. A sense of dharma provides that restraint for the vast majority of people who tend to behave with mutual respect in most societies.

Although two decades have passed since the reforms of 1991, when Indians began their love affair with free markets, capitalism is still trying to find a comfortable home in India. Like most people, Indians believe that the market is efficient but not moral. I have come to believe, the opposite. Human beings may be immoral and will behave badly whether in a socialist or a capitalist society or under a democracy or autocracy. The institution of the market itself is deeply moral and what has convinced me about its ethical nature is the classical Indian notion of dharma. At the heart of the market system is the idea of exchange between ordinary, self-interested human beings, who seek to advance their interests peacefully in the marketplace. The reason that strangers are able to trust each other in the market is, in part, due to dharma, which is like an invisible glue that is based on underlying shared norms and which gives people a sense of safety when they cooperate and transact.

Supplier, customer, and employee—all business relationships depend on a certain behaviour which one could call the behaviour of Dharma. When people behave according to that, the business runs well. Very often companies cut corners, squeeze their suppliers. They will be the ones that will lose their employees, their suppliers. If they are not honest to their customers then the repeat purchase of their products will not happen. The whole market system depends on this shared belief that we will all do the right thing. There are companies who default on their debt obligations and it would seem they can do it repeatedly. But ultimately they pay the price. Their multiples [of stock price] are low and investors are wary of putting their money into the company’s equity.

The idea that an ancient Indian idea might offer insight into capitalism’s nature is, on the face of it, bizarre. I was exposed to Western ideas when I was in college, and I assumed unthinkingly that ‘capitalism’ came from the West. I read Adam Smith, Marx, John Locke and others, who introduced me to the liberal tradition. But I realised my mistake later in life when I happened to read the two thousand year old Sanskrit epic, Mahabharata. The epic is obsessed with the notion of dharma, and as I tried to come to grips with it I realised that there might also be non-Western roots for the ideas of liberty and market capitalism, and the liberal tradition might, in fact, be universal.

Dharma is a frustrating word (even for Indians) and not easy to translate. Duty, goodness, justice, law and custom have something to do with it, but it is chiefly concerned with doing the right thing, both in the private and the public life. It derives from the Sanskrit root dh, meaning to ‘sustain’ and ‘hold up’ like a foundation. It is the moral law that sustains an individual, society and the cosmos. From its root ‘to sustain’ dharma carries the connotation of ‘balance’—it is the balance within each human being, which is reflected in the balance and order of the cosmos. When individuals behave in accordance with dharma there is order, balance and trust within society.

Dharma is especially suited for understanding the dynamics of the market place in particular and of public policy in general, because it does not seek moral perfection. It is based on a pragmatic view of human beings—it views men to be sociable but imperfect, with strong desires and passions that need to be restrained by dharma. For example, the king’s dharma is to nurture the productive forces in society: ‘The king, O Bharata, should always act in such a way towards vaishyas, ‘merchants’ and ‘commoners’, so that their productive powers may be enhanced. Vaishyas increase the strength of a kingdom, improve its agriculture, and develop its trade. A wise king levies mild taxes upon them.’ [Mahabharata XII.87] Practical advice indeed, for otherwise, the epic adds, they will shift to the neighbouring kingdom.

Sunday, April 08, 2012

The government is not above the rule of law

It takes a lot of doing to make the economy fall from a 9 per cent growth rate two and half years ago to 6.1 per cent in the quarter ending December. A fall of one per cent means the loss of almost 15 lakh jobs and so there is a lot of pain, mostly inflicted by the UPA government. Corruption scandals also refuse to cease. But the real tragedy is that the rule of law, one of India’s strengths, is crumbling.

This government undermined the rule of law when it overruled the Supreme Court in Vodafone’s tax case. It decided to change the law retroactively and tax similar deals going back to 1962. It was unfair when it announced in this Budget to make Cairn, India’s largest producer of petroleum, pay $90 a ton in tax suddenly when other private companies are paying $18. As it is, India’s reputation has suffered ever sinceenvironmental permissions were re-opened after they had been granted officially. But when Maharashtra Hybrid Seeds Company was arbitrarily denied a license in 2010 when it had had toiled for a decade to develop Bt Brinjal, the world’s scientific community was aghast. The company had completed 25 environmental bio safety studies through independent agencies, rigorous field trials by two Indian agricultural universities, and all protocols to the government’s satisfaction. Finally, there is much sympathy for Norway’s Telenor, which became the unwitting victim of the Supreme Court decision to cancel licenses given out corruptly--no wonder Telenor is claiming $14 billion in damages from India.

Citizens look to the state to reduce uncertainty in their lives. The state does this through a robust rule of law. As it is, there is great uncertainty in an entrepreneur’s life, which is why three out of four businesses fail. But the UPA government, instead of making life predictable is the main source of uncertainty. It has weakened the rule of law; corruption is a symptom of this weakness. Some think it was inevitable: the rule of law was a foreign import of the British; after they left it began to wither. When officials began to think they were above the rule of law, it collapsed.

The rule of law is based on a moral consensus, expressed daily in the ‘habits of the heart’. People obey the law not only because they fear punishment but because they think it is fair and it becomes a habit and a form of self restraint. While Indian habits may not be quite as liberal as English habits, India always had a rule of law expressed as ‘dharma’, which gave coherence to people’s lives, reduced uncertainty and provided self-restraint. For this reason the founding fathers of our Constitution often invoked dharma in their speeches. The great P.V. Kane, who won the Bharat Ratna, called the Constitution a ‘dharma text’. In pre-modern times, dharma restrained the power of the state via raja-dharma—it was higher than the king whose duty was to uphold it. Some of the UPA’s ministers would do well to ponder this thought.

It may seem bizarre to invoke tradition when that tradition was responsible for so much unjust hierarchy and social injustice. But the rule of law originated in religion almost everywhere. In the West, it emerged from Christianity. Long before modern European states, Pope Gregory I established laws for marriage and inheritance. The Church also discovered the old Justinian code, which became the basis of civil law in continental Europe. Frederic Maitland says the rule of law gained higher legitimacy because it emerged from religion; thus, no English king ever believed that he was above the law. Indian kings had the same conviction about dharma. In the same way, the rule of law is central to Muslim civilization.

The ideal of a ruler guided by ‘dharma’ exists in the Indian imagination even today, thanks to the extraordinary continuity of our civilization. When the vast majority on the sub-continent is deeply religious, it is not inappropriate to turn to tradition to seek that moral core that can restrain public officials and citizens. Fusing tradition with modernity could help restore the moral core in a meaningful way in support of the modern rule of law to re-invigorate India’s democracy.

Sunday, March 11, 2012

Don’t be my favourite friend, be my most favoured nation

With time we come to realize that the only reliable pleasures in life are the smaller ones. The big sources of happiness--success, fame, marriage and religion—often fail us. Among the smaller enjoyments are things like friendship and humour. What is true for individuals can also apply to nations. Instead of nationalism and military grandeur, a modest delight in trade is more dependable, and this was underscored by a happy piece of news on February 29th.

Prime Minister Yousuf Raza Gilani told Pakistani reporters, "People have not understood MFN. It means ‘most favoured nation’, not ‘most favourite friend'. Pakistan will now merely treat India as it treats a hundred other countries.” Gilani was defending his cabinet’s historic decision to open up trade with India. Having thrown its doors open to 6850 products, it will remove all restrictions to trade by year end, and pave the way for granting India Most Favoured Nation status. Although there was no risk of India becoming most favourite friend, ‘sabse pasand mulk’ as the Urdu press put it, there were 6850 reasons to be happy in both countries.

This beleaguered civilian government in Pakistan continues to amaze us. Not only is it battling on all fronts--war in Afghanistan, hounded by its Supreme Court, hostility of its own army, grave problems with the United States—it has gone and asserted a fine civilian conception of its national interest. By not insisting on Kashmir as a pre-condition of trade liberalization, it has proved gutsy, reminiscent of Narasimha Rao’s bold liberalization in 1991 when he was pushed against the wall.

It is better not to be euphoric when it comes to Pakistan. Still, the announcement was a healing balm for an India which has suffered unending bad economic news—much of it self-inflicted—over the past twelve months. The strategic significance of this opening is huge—it will energize free trade area in South Asia via SAFTA, which has suffered so far through Pakistan’s intransigence. If the experience of North American Free Trade Area (NAFTA) is any guide, SAFTA could transform millions of lives on the sub-continent.

Presently India-Pakistan trade is a paltry $2.6 billion, less than one per cent of their respective global trade. It should quickly climb to $ 10 billion by 2015, still modest compared to $ 60 billion trade between China and India. To make the deal a success, India will have to buy more from Pakistan; presently the trade is heavily skewed in our favour--Indian exports are $ 2.3 billion to Pakistan’s $ 0.3 billion. India has 80 per cent of South Asia’s GDP, which makes our neighbors suspicious. Dominance brings responsibility and India will have to be more generous— as Germany is in Europe today; large-heartedness should replace our traditional policy of reciprocity if we want a peaceful South Asia.

In this case India has played its cards well. It gave Pakistan MFN status way back in 1996, without insisting on reciprocity. Unilateral liberalisation works because lower trade barriers help one’s own people. Besides, a government’s first duty is to its consumers; afterwards, to its producers. As one of the world’s more productive economies, India like Germany has only to gain from free trade. The major threats to trade liberalization are Pakistani extremists, who are dead set against this deal; the other is bureaucracy and red tape, which could easily stall this reform by keeping a tight lid on visas, for example.

Much credit goes to Prime Minister Manmohan Singh, who has persisted in engaging patiently with Pakistan’s weak civilian government. He took a lot of flak for his moderate stand at Sharm-al-Sheikh. By assuming that Pakistan’s civilian government was as much surprised by 26/11, he reposed faith in Gilani, whom he saw as a moderate, modern Pakistani and strengthened his hand against the army and the extremists. There is a clear lesson here: do not see a nation as a monolith and look for opportunities in unlikely places.

For the moment, India and Pakistan do not have to be favourite friends. They should be content to be good neighbours and trade with mutual respect. They will be rewarded in the end for trade multiplies connections between human beings and brings prosperity, stability, and peace.

Sunday, February 12, 2012

Think of the spectrum like the village commons

In a shock ruling ten days ago, the Supreme Court cancelled 122 mobile phone licences that had been deceitfully awarded in 2008. The ruling sent the telecom industry into chaos, confirmed dreadful corruption in the government’s decision-making process, and damaged the reputation of our nation in the eyes of the world—especially foreign investors. There was much euphoria inside the country, however, for justice had seemingly been served.

The Supreme Court also instructed the telecom regulator (TRAI) to auction the illegally gained 2G spectrum, as it was done in the case of 3G spectrum. “While transferring or alienating natural resources, the state is duty bound to adopt the method of auction by giving wide publicity so that all eligible persons can participate,” said the Court judgment. Auctions are certainly a better way to allocate a scare resource than first come first served, but what Mr Raja did was, of course, preposterous — he subverted the “first come first serve” policy by changing rules mid-way; he allocated spectrum out-of-turn in a non-transparent manner, and that too at 2001 prices, thus creating the biggest corruption scandal in India’s history.

But is auctioning the best way to allocate radio spectrum? Although it is scarce, should it used as a money making device by government? Since water is scarce, should it be auctioned? No. The risk in an auction is that “animal spirits” of entrepreneurs forces them to bid very high, which is then reflected in high tariffs, and this forces the poor out of the market. Thirty one countries have used spectrum auctions and many have regretted it for this reason. India is, perhaps, the world’s most successful telecom market with the lowest tariffs in the world. Hence, it has the highest number of subscribers who are poor. The credit for this goes to the previous government which had the courage to change policy from high license fees to revenue sharing between the telephone company and the government. If the state had been “duty bound to hold an auction”, cell phones would not have reached the poor.

In the ideal world, radio spectrum would be like sunshine which is not owned by anyone or any government but everyone enjoys it without any cost. But unlike sunshine, spectrum is finite and hence it has been historically controlled by governments. It is widely accepted that government allocation is inefficient and leads to corruption. Ronald Coase, the Nobel Prize winner, exploded the myth long ago that governments should control spectrum to prevent airwave chaos. Today many experts think of spectrum as a common grazing ground around a village, which is open to everyone to use freely. They claim that new spectrum sharing technologies allow a virtually unlimited number of persons to use it without causing each other interference--this eliminates the need for either property rights or government control. This is why the United States has gone ahead and designated a 50 MHz block of spectrum in the 3650 MHz band as a “commons”.

If the spectrum were a “commons” nobody would own it nor need to auction it. A telecom company would merely register with an authority, which would assign it a spectrum frequency for its use. When the company reached the limit of its spectrum, the authority would release it some more. Just as a villager pays a nominal tax for maintaining the commons, depending on how many cattle he grazes, each cell phone subscriber would pay a nominal fee, say a paisa per minute, towards upkeep of the spectrum. It would be form a part of the monthly bill, and transferred by the phone company to the authority. Just as a village needs rules to prevent over-grazing, there would be rules in maintaining spectrum to avoid a “tragedy of the commons”. The rules would be transparent, monitored in real time, and no one would be able to corner the spectrum.

Unfortunately, the Supreme Court judgment has come out so heavily prescriptive in favour of auctions that future governments in India will be shy to adopt a better alternative. Technology is developing very rapidly and soon the world will be ready for an “open spectrum” regime, but the Court’s inflexible judgement will inhibit the Indian government in doing the right thing. A pity!

Sunday, January 08, 2012

A liberal but strong state is need of the hour

The mistake is to think that the current paralysis in decision making in Delhi is limited to politicians. Gutless bureaucrats, risk averse at the best of times, have done as much damage. India’s economy has sound fundamentals and is today one of the world’s strongest, but its confidence has been badly shaken by a weak state that cannot enforce its own laws, let alone enact its legislative agenda. Partly to blame is the Anna Hazare movement which has led to contempt for state institutions. Around the world, the Left wants a large state and the Right wants a small one, but what India needs is a liberal but strong state that will, at least, implement its own laws.

The other mistake is to believe that the Indian state has weakened in the past two decades as a result of coalition politics. Truth is that India has always had a weak state and its history is a story of political disunity and warring kingdoms. Even our strongest empires were far weaker than say, the Qin Dynasty in China which built the Great Wall to keep out invaders. (That those invaders ended up in India in a chain reaction is another story.) The historian, Chris Bayly, describes how early European travellers to India were struck by the energy, colour and sophistication of the bazaar compared to the decadence of its rulers.Although historically weak, at Independence India inherited strong, robust institutions of the state—a professional police, bureaucracy, and judiciary. These are now in decay and the gap between ideals and reality has grown. It should not take seven years to build a road that takes two elsewhere; neither should it take 19 years to get justice; nor 23 years to build a dam. Poor governance and its cousin, corruption, are symptoms of a weak and soft state.

However, India has historically had a strong society, which prevented tyranny by the state. An Indian was defined by his village, caste and family, not by the state (as in China). The law—dharma--also emerged from society, not the state, and was later codified in Dharmashastras. But that old society is now changing. As Adam Smith predicted in The Wealth of Nations, the growth of markets would lead to a division of labour and new social groups would emerge. Open access to markets and job mobility would undermine traditional social authority, replacing it with more flexible, voluntary groups. Two decades of high growth is doing that and Anna’s movement reflects how it. The country is evolving from a traditional to a modern civil society. This is a positive thing for a modern democracy needs a vigorous civil society to keep it honest.

The past twenty years of capitalist growth have made India one of the world’s fastest growing economies. The contrast between a successful private economy and a weak, public order has led to the impression that India might be able to manage without a strong state. But markets do not work in a vacuum. They need a network of regulations and regulators to enforce them. In the past two decades good regulators have definitely contributed to India’s economic success. The telecom revolution was partly ushered by its first regulator (TRAI) under Justice S. S. Sodhi and B.K. Zutshi, who were strong enough to withstand pressures from the Telecom Department, which wanted to weaken private mobile companies. Stock exchanges have been strengthened by SEBI, the capital market regulator. The Reserve Bank’s oversight of banking has improved and matured. The insurance and pension regulators have also earned their spurs. On the other hand, power regulators in the centre and the states are mostly spineless, self-serving, retired babus, who have failed to implement Electricity Act 2003, and prevented a power revolution in India.

A ‘strong state’ usually carries a bad odour, conjuring up authoritarian images of Nazi Germany or Soviet Russia. A ‘liberal, strong state’ is, however, not oppressive. It is efficient, enabling and tough against law-breakers. It punishes the corrupt swiftly. But it also protects liberties and dissent and enjoys legitimacy among the governed. A strong civil society is needed to hold such a state accountable. More than ever, Indians today need to make a liberal case for such a strong state.