Modernizing the World's Largest Democracy
Indian Government Fails Its People
I am sorry to say that I do not feel that India’s government is properly serving its people. By adhering to old and seriously discredited socialist tendencies, India’s leaders are driving the country into an economic morass, while failing to adequately solve the most basic infrastructural issues. Much of the problem relates to the fact that Indian politicians cannot sell the changes that must be made to the people, although that sales job should be easy.
1. Subsidies on oil and gas are now costing the Indian people about US$480 Billion per year in lost purchasing power parity, because of inflation over 12% per annum, which is caused in large part by the government “printing money” to cover those subsidies. What would be wrong with removing the “across the board” subsidies and price controls, thereby allowing Reliance, for example, to launch all of those beautiful mini-market/gas stations they’ve just built across the country? That would, no doubt, also help employment. If there needs to be some help, in the short run, for the very poor, that can make sense until the economy becomes fully capitalist. Meanwhile, the middle class and the intelligentsia can afford the higher prices at the pump. From a political point of view, the “very poor” must understand how they can benefit from an economy and political system that does not rely on handouts for votes.
Indian politicians have often told me that the reason China has succeeded far beyond India is that China is a communist system, while India is the World’s largest democracy. This is bunkum! While China’s system is nominally communist, the Chinese largely believe in capitalism, and their results speak for themselves. India’s democracy is run by politicians and bureaucrats, who largely believe in socialism, not capitalism. That’s the sad truth. The other piece of bunkum is that China is “13 years ahead” of India in its “liberalization.” All you have to do is look back at China’s trade surplus with the USA in the 1980s, to see that the Chinese economy has performed consistently better than India’s, almost from the beginning of its liberalization.
2. Cut off the brakes on foreign direct investment. Let’s take an example: When the Japanese bought Rockefeller Center, in the mid-1980s, how did that hurt the American economy? Not one bit! The Japanese brought US$500 million into our economy to make the purchase, which presumably was largely used within our economy by the sellers, who were then American. That paid for all kinds of things, and added US$500 million to our economy, leaving the Japanese with a piece of dirt covered with granite, which they soon mismanaged, later selling the property for US$200 million, thereby leaving a net US$300 million in the economy. Further, the purchase of the property, though an American icon, did not make them American, any more than the purchase of the Chrysler Building by the Emaratis has made them American!
3. As a matter of fact, Indians (and almost anyone else) can purchase property anywhere in the USA, and no one asks them to see their passport! Indeed, Indians can do that over the internet, from India, without ever coming into the USA. We don’t mind! That’s just adding Indian money to the American economy. We like that! Now, the Reserve Bank of India would claim that that is “inflationary,” but that is because the RBI is somehow enamored with selling an inaccurate picture of what inflation is to the Indian population—politics, not economics! Indian inflation is a direct result of the policies of the Reserve Bank of India and the Government of India, and has little to do with FDI and what is happening in the rest of the World!
4. This week’s edition of The Economist has a story called “Up to their necks in it,” which says that there is only enough sewage treatment equipment in India to process 18% of the sewage produced (much of the rest leeching into India’s rivers), and that the actual performance is only 13%, because of power outages and maintenance issues in the sewage treatment plants. A friend of mine, who is interested in working with India, refuses to go back because he says, “India is an open sewer.” With statistics like that, who can argue with his assessment?
5. Why did the Government of India fail to sell the nuclear power deal across India? Whisper who dares! The Government barely kept it from collapsing this week, and it might yet collapse, because of the ridiculous behaviors of Indian politicians, the crying need for power notwithstanding. India has a critical power shortage, which everyone should know, and the failure to provide power to the sewage treatment plants is just the tip of the iceberg of the problem. I could go on and on about this, but I’d rather see some others respond and add their perspectives.
I sometimes have to remind my readers that I am only writing this because I love India, and have worked with India and Indians through much of my adult life. You could say I care! What I see, though, is an unjustified reticence among Indians to criticize the way the government is run; and to clean up the mess, on all fronts. If it therefore takes a foreigner to catalyze Indian opinion, then so be it. The People of India deserve better than what they have gotten from their leaders and their Government since Independence! All political parties are to blame!
1. Subsidies on oil and gas are now costing the Indian people about US$480 Billion per year in lost purchasing power parity, because of inflation over 12% per annum, which is caused in large part by the government “printing money” to cover those subsidies. What would be wrong with removing the “across the board” subsidies and price controls, thereby allowing Reliance, for example, to launch all of those beautiful mini-market/gas stations they’ve just built across the country? That would, no doubt, also help employment. If there needs to be some help, in the short run, for the very poor, that can make sense until the economy becomes fully capitalist. Meanwhile, the middle class and the intelligentsia can afford the higher prices at the pump. From a political point of view, the “very poor” must understand how they can benefit from an economy and political system that does not rely on handouts for votes.
Indian politicians have often told me that the reason China has succeeded far beyond India is that China is a communist system, while India is the World’s largest democracy. This is bunkum! While China’s system is nominally communist, the Chinese largely believe in capitalism, and their results speak for themselves. India’s democracy is run by politicians and bureaucrats, who largely believe in socialism, not capitalism. That’s the sad truth. The other piece of bunkum is that China is “13 years ahead” of India in its “liberalization.” All you have to do is look back at China’s trade surplus with the USA in the 1980s, to see that the Chinese economy has performed consistently better than India’s, almost from the beginning of its liberalization.
2. Cut off the brakes on foreign direct investment. Let’s take an example: When the Japanese bought Rockefeller Center, in the mid-1980s, how did that hurt the American economy? Not one bit! The Japanese brought US$500 million into our economy to make the purchase, which presumably was largely used within our economy by the sellers, who were then American. That paid for all kinds of things, and added US$500 million to our economy, leaving the Japanese with a piece of dirt covered with granite, which they soon mismanaged, later selling the property for US$200 million, thereby leaving a net US$300 million in the economy. Further, the purchase of the property, though an American icon, did not make them American, any more than the purchase of the Chrysler Building by the Emaratis has made them American!
3. As a matter of fact, Indians (and almost anyone else) can purchase property anywhere in the USA, and no one asks them to see their passport! Indeed, Indians can do that over the internet, from India, without ever coming into the USA. We don’t mind! That’s just adding Indian money to the American economy. We like that! Now, the Reserve Bank of India would claim that that is “inflationary,” but that is because the RBI is somehow enamored with selling an inaccurate picture of what inflation is to the Indian population—politics, not economics! Indian inflation is a direct result of the policies of the Reserve Bank of India and the Government of India, and has little to do with FDI and what is happening in the rest of the World!
4. This week’s edition of The Economist has a story called “Up to their necks in it,” which says that there is only enough sewage treatment equipment in India to process 18% of the sewage produced (much of the rest leeching into India’s rivers), and that the actual performance is only 13%, because of power outages and maintenance issues in the sewage treatment plants. A friend of mine, who is interested in working with India, refuses to go back because he says, “India is an open sewer.” With statistics like that, who can argue with his assessment?
5. Why did the Government of India fail to sell the nuclear power deal across India? Whisper who dares! The Government barely kept it from collapsing this week, and it might yet collapse, because of the ridiculous behaviors of Indian politicians, the crying need for power notwithstanding. India has a critical power shortage, which everyone should know, and the failure to provide power to the sewage treatment plants is just the tip of the iceberg of the problem. I could go on and on about this, but I’d rather see some others respond and add their perspectives.
I sometimes have to remind my readers that I am only writing this because I love India, and have worked with India and Indians through much of my adult life. You could say I care! What I see, though, is an unjustified reticence among Indians to criticize the way the government is run; and to clean up the mess, on all fronts. If it therefore takes a foreigner to catalyze Indian opinion, then so be it. The People of India deserve better than what they have gotten from their leaders and their Government since Independence! All political parties are to blame!
Replies to This Discussion
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Permalink Reply by Vishal Jethi on -
Mr Donald,
I agree with you that the Indian Govt. is a little tilted towards Socialism but..
1. It makes it easier for Chinese Govt. to take decisions because it does not have to worry about elections and votes.
2. its a sin to compare the US and any other economy as USD is the reserve currency for the whole world and so American central bank can keep on printing as much dollars as it wants or can have it through the deals you mentioned without worrying too much about inflation.Of late we have seen that with the rise of Euro things have started to change in US inflation is rising and if Iran decides to trade in Euro and some other countries follow situation will be a little different.
3. Allowing foreigners to invest and that too in real estate will certainly be inflationary in the current situation but then FDI's propell the growth of developing economies, India has seen tremendous growth in service sector but we need to grow in manufacturing where certainly FDI's should be encouraged.
4. Muncipal corporations in India have not done their job well (and that's the case with many other public oragnisations in India.) and I am not amazed to look at such figures. As I said FDI's propell growth of developing economies but they need solid infrastructure and this is one area where India is lacking.
again I do agree with you that the Indian Govt. is a little tilted towards Socialism after all managing the world's largest democracy is not easy...
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Permalink Reply by Donald ("Skip") Conover on -
Dear Vishal,
A few comments on your points:
1. Your point #1 is a standard cop out answer, which I hear frequently from Indian officials. There are such huge holes in the Indian economy, which could be fixed immediately with a little vision, that it does not ring true. There may be some fine points, where China has a modest advantage, but the Indian Government has to stop wasting time, when it can easily double the economy, if it just stops its foolish behavior.
2. The Federal Reserve has to be just as strict on inflation as any other central bank. We just learned the painful lessons India will now be learning in the 1970s. To the extent that inflation is reappearing, you can expect strong reaction from the Federal Reserve, since this is seen as its primary responsibility. The GOI and RBI seem to think that it is OK to take a backdoor tax from all Indians in the form of inflation, to they continue with their profligate ways. Subsidizing oil prices by printing money is utter foolishness.
3. FDI into real estate has *nothing* to do with inflation. It does have to do with economic growth. Inflation is caused when a central bank mismanages its money supply, which is what RBI is doing now. I do agree that India should grow in manufacturing; and everywhere else in the economy.
4. FDI sources would be happy to help with the necessary infrastructure, as the Shamshabad Airport, and many other airport projects prove.
The problem with the phrase "managing the world's largest democracy" is perhaps the heart of the problem. As Adam Smith said in 1776, economies don't require central planning. The "invisible hand" takes care of things just fine! An example, the best solution to high prices is high prices. We now have a downturn in oil prices because Americans are cutting back on their consumption. That happened without any draconian central government rules and regulations ...
Best regards, Skip
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Permalink Reply by Vishal Jethi on
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Dear Mr. Doanld,
1.I agree India needs a visionary leader at the top but with such political conditions taking a decision is very hard(eg. nuclear deal) whatever decision the govt. takes there would be some group opposing it.
2.With the best of the brains at the top (Dr. Manmohan Singh, Dr. P.Chidambram, Mr. Montek Singh) India is still not able to think anything except the monetory policies to kill inflation but when oil prices rise there is nothing much the govt. can do except reducing the duties on oil.
3.I think that FDI in real estate is just pumping money in the economy without much value addition (Job creation etc.) and hence it adds to the inflation just look at the current prices of real estate in cities like Mumbai, Bangalore, Hyderabad, Delhi etc.
4.I do not blame the FDI's for inflation it is only now that situation in our country is such that it will only add to it, Infact I believe that FDI's in India and especially in infrastructure would help India attract more FDI's in manufacturing(The phase that India had skipped as compared to other developed economies)
Your last point is true but if high prices stay high govt. will see the door.
Regards,
Vishal
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Permalink Reply by Donald ("Skip") Conover on
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Dear Vishal,
Many thanks for engaging in this conversation. Here are a few further comments:
1. That is the norm in politics the World over.
2. Relative cost of oil can be adjusted by a proper monetary policy. The RBI should not be trying to correct for a parameter, which only reveals inflation. It would be like trying to reduce body temperature with ice, because the reading is too high. It might bring a temperature down briefly, but it is not solving for the underlying problem.
3. The prices of real estate are not the problem. Indeed, many of them are low by global standards. High valued land still sells for about $5 million per acre in Hyderabad's Gachibowli area, while it is as much as $27 million in Manhattan--and keep in mind, India has quadruple the population on one third the space. FDI, when it is paid for real estate, goes back into the Indian system immediately. Even if the seller would not want to make an "investment" with it, by putting it in a bank, it goes back out to help the economy in general. I'm sorry to say that the reality is that Indian real estate prices are destined to go *much* higher, but that is neither inflationary, nor is it preventable (because of supply/demand issues). Yes, there has been a brief hiccough in real estate prices, but that is because of psychology, and not because of fundamentals. Indian real estate prices will inevitably continue to climb, and no hocus pocus about keeping the prices down so that the poor can afford it is going to be of any use. The best thing the government can do is recognize this reality, and bring in as much investment as possible to stoke the fires of the economy. Failing to do that, they deserve the consequences at the polls.
4. Yes, the current government may indeed see the door. They had 5 years to promote sensible and modern economic policies; they didn't do it, or at least not enough. They're still too slow to react to inflation, so things are going to get much worse before they get better. The next government will have to do better, or they too will see the door very quickly.
Best regards, Skip
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Permalink Reply by Prabhat Sinha on -
Hi Skip,
I see the sense in your observation and your rationale. But as I have shared with you before, and I come from a long career in media and advertising. Indians do not get influenced easily. In fact, a hard sell of a view makes them feel that there is a deliberate purpose behind any information or news or view that is 'hard sold'. A hard sell is seen as an act to coerce. If you want to sell a product long, it is advisable that you be a little gentle. Aggression would further delienate them. A case in point is Rajeev Gandhi's style of governance when he would want to showcase his policies - with the view that if the public was taken into confidence that his plans would indeed change the Indian conditions and environment far rapidly. He introduced mass advertising of Government policies. I know this well because one of my colleagues headed his advisory team, an established advertising professional. This move worked just in the beginning, but that practice got him an image of a person who took to the Indian Government as a corporate empire, and that was perceived as a 'dangerous' character for a national leader. That perception ended eating into his rather enviable popularity.
Whilst your views and observation may be just right, you require very different sets of skills to manage the Indian public. The bureaucrats take a long haul in dealing with the general public at district and state levels before they rise to the national level. They are only to aware about how the people respond and react. I can see why they are so slow in their actions and take a long time testing a plan before they launch it. The fact is Indians are not in a hurry. And if a leader is seen in hurry, he would be considered immature and impetuous, therefore unworthy of being trusted with larger responsibilities.
Even as recent as the BJP lost in the last elections - it was BJP's overrun on its campaign that killed its chances to get back into the Government. Not because the Indians did not believe in that story, but the Indians despised that 'show'.
In the business world too, companies that have taken the slow and steady routes are the ones that have survived longer games - Unilever, the Tatas, the Birlas...brands in chaste hurry to convert consumers failed to cover the depths of the market. I have worked with colleagues with their backgrounds in the Western markets. It was difficult to explain and make them understand this viewpoint. For me to suggest that people we meet in the urban, corporate environment would not reflect the same mindset of the Indian on the street. Just as much as I think it would be for you to get the sense of what I am suggesting.
I understand your passion for India and your aspiration to see the vast and diverse Indian skills deliver valuable results sooner than later, but ultimately people in business, politics or public service cannot take the risk of losing the patronage of the end beneficiary - in this case, a huge number of people with diverse interests, needs 'moods' and local leaderships. And which political leadership would want to take the wrath of people on the streets who can show their anger in dangerous ways. They would not care if they lose homes, lives or the next meal, if they believe that an issue affects their beliefs, faith and passion for the nation. In simple trade and business, you cannot converge people on the promise of scaling up incomes (except for a class of business/trade owners who are only a minority compared to the larger market), how is it possible to influence the minds of the larger public? Consumer studies cannot reflect a dependable view, and can often be terribly wrong. There are far too many sets and sub-sets for robust sampling, unless it is quantitative.
Some people would favour your thinking and suggest that somebody needs to overhaul the entire system, but most would know that such a person would lose the trust of the people before converting that overhaul into a benefit.
Regards.
Prabhat
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Permalink Reply by Donald ("Skip") Conover on
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Dear Prabhat,
As Abraham Lincoln once said, "You can please all of the people some of the time, and some of the people all of the time, but you can't please all of the people all of the time." Attitudes in India must change, and they must change relatively quickly (within a decade or two), or India is going to find itself in a much more seriously disadvantaged position vis-a-vis China. At some point it becomes a national defense issue.
Best regards, Skip
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Permalink Reply by Prabhat Sinha on
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Dear Skip,
How do you do this? Would an elected Government wait for at least a sizeable sum of the people to take the direction that you think is right for India? If it is less than sizeable, would the Government not fall flat on its face putting its policies behind a minority community. And I guess that is the challenge for the Government - not just the current party but I would imagine even other parties would work on similar lines in the current environment. It is perhaps the wrong side of democracy, but we have to witness this process and hope that if we have sailed along this far the journey ahead would be less challenging.
I often just wonder how even as an American you have such passion for India. I salute you!
Regards.
Prabhat
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Permalink Reply by Donald ("Skip") Conover on
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Dear Prabhat,
I don't think this is a matter for the Government per se. It is a matter for all intelligent Indians to discuss and debate! Once that happens, the changes will follow in due course, and quickly! This is one of the major reasons I have created this web site--in order to stimulate debate. I am trying to be a catalyst, to stimulate discussion among Indians themselves. If what I say is controversial, so much the better! This is why I hope you will mention this site to your friends. We'll know the process is working when this process is more than just a discussion between the two of us!
Most Indians I know just accept as a given that this is "The Indian Century." They've come to their conclusion the same way the Ostrich learns about the World, with its head stuck in the ground. All they have to do is look at a few comparative economic statistics, or watch the Beijing 2008 Olympics, to understand just how far behind India is. In the case of China, India is losing A LOT of ground every year, and this won't change until Indians stop patting themselves on the back for a job well done and get to work.
Thank you for your compliment about my passion!
Best regards, Skip
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Permalink Reply by Donald ("Skip") Conover on
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The RBI says inflation will be down to 7% by March 31, 2009, according to the Economic Times. Seeing is believing! While the RBI did raise rates at the beginning of August, their action still is not enough.
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