Sunday, September 15, 2013
Long-term prosperity vs short-term populism
“Life can only be understood backwards but it must be lived forwards,” says an epitaph from the philosopher, Soren Kierkegaard. It rightly belongs on the grave of this dying UPA government that has destroyed our economy, with the traumatic collapse of the rupee its latest achievement. The epitaph reminds us that we must not ignore history if we want to lead a reasonably predictable life in the future.
One of the greatest lessons of history is that only an industrial revolution can make a poor nation prosperous. Every country has done it this way. Only thus can a nation hope to provide jobs for the millions of young people on the farms. But after two decades of reform, India’s economy is driven not by manufacturing but services.
Tragically, 90% of Indians work in the informal economy and even Ganesh idols are sourced from China. Our prime minister knew about this structural weakness when UPA came to power, and his government should have focused on making India a great manufacturing nation — by reforming rigid labour laws, investing in power, roads and ports, cutting red tape, and removing “inspector raj”— so that India does not rank 134th in the ease of doing business.
Instead, this government turned against industry. It brought retrospective changes in taxes, stopped hundreds of projects through red and green tape, imposed arbitrary penalties on companies and placed silly conditions when inviting foreign investment. Given this very unwelcoming and unpredictable climate, honest business people lost all faith in the system. Only crony capitalists remained faithful. And now, in the midst of one of the worst crises faced by our country, this government has championed two disastrous pieces of legislation.
It has proposed a new law based on the dreadful premise that acquiring agricultural land for industry is inherently coercive and bad. Under the new law, it will now take years to acquire land, as the land acquisition proposal even for small projects will have to pass through a hundred hands. This will ensure that India remains disadvantaged against its competitor nations and does not experience an industrial revolution.
Secondly, it has enacted a law on the ridiculous assumption that two thirds of Indians go hungry to bed. Hence, the state will now have to provide 80 crore Indians with grain at 10% of the market price when less than 2% of Indians claim to be hungry according to official surveys. Where will the colossal money come from when the nation is teetering on bankruptcy with its rating about to be downgraded to junk status? Two weeks ago Sonia Gandhi told Parliament that if there is no money for the food security bill, it would just have to be found. And if the public distribution system is broken, she said, it would have to be fixed. But how, she did not say.
We used to believe that even if India reformed slowly, it was reforming surely and there was no going back. Under this premise businessmen made huge investments after 1991 and this unleashed the gift of high growth, gradually making India the world’s second fastest growing economy. But this government sneered at this gift and has even undone some reforms. Despite some excellent moves by the finance minister in the past year, there is uncertainty and confidence remains low.
The coming of Raghuram Rajan at RBI has stemmed the rot somewhat. But it will take time to rebuild confidence that has been recently shaken by the fall of the rupee which brought huge collateral damage to the bond and equity markets. India can still create an industrial revolution if it remembers Kierkegaard’s epitaph. The rupee’s devaluation has once again presented an opportunity for export driven manufacturing growth. But it will require a deep commitment from the next government to create reliable infrastructure and transparent rules.
Meanwhile, the best that this government can do is to call early elections and put an end to some of our misery. Let people decide if they want to take the path of long-term prosperity or the path of short-term populist giveaways. One can never be sure in a democracy about the next government but it is in the nature of the human heart to hope for a better tomorrow.