Where are Rajiv G's legatees?

(First published in India Today, 20 February 2012, "Upfront" column).
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In the capital markets (and the private sector more generally), it is widely accepted that India’s economic success of the past 20 years was achieved despite the infirmities of the state. Yet, the leadership of the Congress party is intent on deepening a statist agenda.

Congress leaders assume that NREGA contributed to their electoral victory in 2009, and are sure that the Food Security Bill is the ticket to re-election in 2014.

While NREGA is a great tool to spread largesse to political intermediaries (and ensure a modest trickle to the poor), it hugely distorts the rural labour market, makes most labour-intensive industry unviable, and has contributed to the upward pressure on wages and prices that the RBI struggled (and failed) to contain in 2010 and 2011.

At a time when the fiscal deficit over the past 12 months has risen to 5.7% of GDP (a full percentage point higher than promised in the Budget for FY2011/12), the Food Security Bill will cause more permanent damage to the fiscal balance than anything since the muddled implementation of the Fifth Pay Commission recommendations in 1997.

More perniciously, the Bill will effectively kill the operation of the free market in food-grain, severely hurting India’s farmers (who want to be able to export their surplus grain, not be obliged to sell it to the state, which will then attempt to sell it at far below cost to 75% of India’s citizens). Thankfully, Agriculture Minister Pawar is openly opposed to this asinine scheme, which would thoroughly undo the gains of the Green Revolution (1965-1973).

The 1991 reforms (and those of 1999-2003) freed up the organized corporate sector, and unleashed its untapped potential. But the vast unorganized sector (farmers, small vendors, service providers, artisans, etc.) remains subject to a License Raj that allows babudom the freedom to harass and exploit the poor in urban areas – while the Essential Commodities Act constrains farmers from getting remunerative prices for their produce.

India is now in the midst of a once-in-history Demographic Dividend (that began around the year 2000, and will last until 2035). As the dependency ratio steadily declines, the national Savings rate rises, increasing the proportion of National Income that can be invested, thereby boosting productivity (the ultimate guarantor of prosperity). This is the virtuous circle that China (1978-2012), Japan (1950-90) and South Korea (1965-2010) benefited from in the past.

But a liberalized economy able to create jobs is the key to ensuring the rising national savings rates that are central to this virtuous circle. The Arab economies (Egypt, Libya, Syria, Saudi Arabia, etc.) show the dangers of a jobless demographic transition. Unlike India’s or Indonesia’s youth bulge, the Arab one manifests itself in lofty and rising youth-unemployment rates, providing the timber for a revolution of unmet expectations.

The current Congress leadership’s myopic agenda threatens to take India increasingly toward the West Asian (and north African) rather than East Asian economic trajectory.

Ironically, the liberalization of India’s economy actually began under Indira Gandhi in 1980 (albeit haltingly), when she agreed to take a US$5bn loan from the IMF (the Fund’s largest loan ever granted to any country until then). This was repaid before time, but Rajiv Gandhi substantially expanded those reforms in 1985, beginning with a reduction in income-tax rates, lower import duties and modest de-licensing of industry.

In 1991, the Congress election manifesto (drafted at Rajiv Gandhi’s behest) contained a radical program of economic liberalization, most of which was eventually implemented by PV Narasimha Rao’s government.

The 20th anniversary (in July last year) of Narasimha Rao’s economic reforms went uncelebrated by the Congress party, despite the fact that Rao’s finance minister is now our Prime Minister. Ironically, the party led by Rajiv Gandhi’s widow and son is running away from his own legacy.

Instead the Congress continues to embrace the ideological legacy of the Indira policies of 1969-74, which led to economic stagnation and inflation rates of over 20% (that persisted through 1974 and until mid-1975). They inevitably caused a politico-economic crisis that brought Jayaprakash Narayan and Morarji Desai out of political hibernation to head movements in Bihar and Gujarat that gathered nationwide support, eventually ousting Congress from power in March 1977.

Indira was more pragmatic (and pro-business, exhorting “more work, less talk”, etc.) during the Emergency, and in her final term as PM (1980-84), when India’s economy pushed onto a higher-growth trajectory (5.5% annually, rather than the 3.6% average annual growth in 1950-79).

The lesson that Rajiv Gandhi drew from his first five-year term was that a more liberalized economy would generate more growth (and jobs). Belying the export pessimism of the past, India’s exports (of goods and services) have expanded more than 12-fold in the past 20 years. That is partly Rajiv Gandhi’s legacy, just as much as it is Narasimha Rao’s. What a pity that Rajiv’s legacy has been buried by his party, in pursuit of a headlong plunge into statist policies that now threaten the future of India’s economic miracle.