India Unbound
DAS, GURCHARAN
BY GURCHARAN DAS ears later, my grandfather admitted that he was a little sad to see the British go. He called to me as I was trying to sleep on the upper berth of the Frontier Mail, "It is...
...India was bankrupt...
...As we drank our buttermilk, Sat Pal turned to agriculture...
...The Brahmins say that the maddening traffic, the pollution, the noise, and the pace does not bother them...
...The English began by robbing and plundering soon after they took over Bengal in 1757...
...The law did not permit it...
...they set up the Foreign Investment Promotion Board, which established a record of speedy clearances under A.N...
...When the clerk who was doing exceptionally well, but he was vetoed by the union leader...
...Productivity plummeted...
...For the next summer, his aunt in Madras had arranged a job for him in a computer company...
...He had decided this when "I saw it in TV, where this man, Bilgay [sic], has a software company and he is the richest man in the world...
...Although the industrialists recognized the need for foreign capital and technology, they wanted it to be under the strict control of the state...
...It was illegal to manufacture beyond the licensed capacity...
...I am going to Bangalore for several reasons...
...They simplified the vast network of multiple excise duties...
...Traditional handmade textiles disappeared in Europe and the rest of the world...
...Britain taxed the Indian farmer heavily, he said...
...He asked Varma to be his principal secretary, and had him dig up the old proposal.Varma was delighted...
...By 1914, India had the world's largest jute industry, the fourth largest cotton textile industry, the largest canal system, the third largest railway network, 2.5 percent of world trade and an experienced merchant class hungry to become industrialists...
...In a closeddoor meeting, the new finance minister, Manmohan Singh, told the opposition leaders that foreign exchange reserves were down to two weeks of imports...
...The Indian intelligentsia was mesmerized by the apparent success of the USSR...
...In high school we had all read that Columbus had gone in quest of the riches of India and found America instead...
...In 1956, the Industrial Policy Resolution reserved seventeen industries for the public sector, including iron and steel, mining, machine tool manufacture, and heavy electrical plants...
...The gravity of the crisis hit the leaders only when they realized that part of the nation's gold reserves had been flown to London to provide collateral against the $2.2 billion emergency IMF loan...
...Our lawyers thought our solution was "perfectly legal, although innovative," but they added,"It seems too good to be true...
...He justified it in the name of equity and regional balance...
...In a society where everyone is programmed to think that "my success can only come at the expense of your failure," and "I can only get more land by taking it from you," the government is "mother and father," protecting me from my rapacious brother...
...After a pause, he added, "Yes, the English were arrogant, but it was a cheap price to pay for a hundred years of peace, good government, railways, irrigation canals, and the best law and order in the world.You may call me antinational, but this is how I feel...
...He tried to promote a female Without realizing what they had done, the Indian capitalists had dug their own graves...
...Welcoming me into his austere two-room home, that remained were with the Europeans, who transferred them to England...
...On the contrary, it is a nice change from their old suburban temple life...
...The ministry lost months reviewing the same data before it sent an application to an inter-ministerial licensing committee of senior bureaucrats who were equally ignorant of entrepreneurial realities...
...An untrained army of underpaid, third-rate engineers at the Directorate General of Technical Development took months to vet thousands of applications, then finally send them for approval to the administrative ministry...
...Sat Pal's marriage to her was something of a coup, I thought, when she must have been coveted by so many...
...In fact, it had once been fabulously wealthy and this had set the Europeans on their voyages of discovery...
...There had been no radical change in personnel...
...In a matter of minutes, Narasimha Rao and Manmohan Singh seemed to be destroying the License Raj...
...All were rejected...
...They regarded the banks as "monopoly capitalists," controlled by a handful of big business houses, who made loans only to their loan turned bad, the political bosses disowned any knowledge of the loan or the recipient...
...Rich countries were supposed to specialize in the knowledge industries of 38 THE AMERICAN SPECTATOR N Summer Reading Issue 2001...
...Our company's salesman in Bengal was a bit of a hero during the 1980s because his sales were consistently rising, especially in Haldia, where a state fertilizer plant had been set up...
...The trade union representative decided who did what, who got promoted and who was transferred...
...They had not publicly admitted that the Nehru-Indira Gandhi path had failed...
...But Rao faced a long-brewing economic crisis caused partially by the profligate, short-term commercial borrowing resorted to by Rajiv Gandhi's government since 1985...
...I am going to Bangalore for several reasons...
...Forty years of socialism was not able to destroy India's real strengths...
...By 1700, according to the respected historian, Angus Maddison, India had 22.6 percent share of the world's GDP (when the whole of Europe had 23.3 percent...
...To our amazement, the answer from the library and the lawyers was "yes...
...The inefficient, heavy-industry-based public sector delivered appaling returns...
...I asked...
...A new generation of historians has emerged, however, who have challenged this account...
...There was opposition from 36 THE AMERICAN SPECTATOR N Summer Reading Issue 2001 finance ministry officials, but Manmohan Singh stepped in and overrode their objections...
...They genuinely believed that Britain's laissez-faire policies had aborted India's industrialization, and they were willing to put up with an interventionist state...
...Why don't we delicense cars and a whole lot of other things as well...
...Although we saved and invested, the returns were poor...
...The loan takers were often cronies of the political bosses and did not intend to repay the loan...
...Rich countries were supposed to specialize in the knowledge industries of 38 THE AMERICAN SPECTATOR N Summer Reading Issue 2001 arly in information technology...
...True, the machines of Britain's industrial revolution wiped out Indian textiles, they said, but this was no different than the rest of the world...
...it dismantled import controls, lowered customs duties, and devalued the currency...
...Thousands of well-paid workers boosted demand for our products.A sparkling new companypaid township had come up with bungalows, flats, wide roads, a school, a dispensary, and a hospital, even a subsidized store...
...The commercial spirit is not limited to the cities...
...Varma and other senior officials sitting at the back could not believe their ears...
...On returning to his office in Udyog Bhavan, Chidambaram called in his bright deputy, Montek Singh, and asked if he was up to dismantling the trade side of the License Raj.What had taken more than forty years to build, the two men set out to demolish in eight hours...
...Some years later we would find out that tiny Hong Kong earned more from its exports than the whole of India...
...He was told that such and such a person was to be treated as a member of the "deserving poor...
...The Gandhians loved the protection for cottage industry...
...These were supposedly industries of "strategic importance" that required "investment on a scale which only the state could provide...
...Now, it may have found it in the knowledge sectors, particularly in information technology...
...It began with the Industries (Development and Regulation) Act of 1951 which required an entrepreneur to get a license to set up a new unit, to expand it, or change the product mix...
...It has become one of the fastest growing economies in the world-having grown at a smart 6.4 percent a year during the decade of the 1990s...
...They introduced screen-based trading on the stock markets and dematerialized the shares...
...Over the last 50 years India has struggled to find its leading sector...
...After a human bomb killed Rajiv Gandhi in May 1991, a wave of sympathy carried the Congress Party to victory...
...Our sales force heroically tripled the outlets that carried Vicks to roughly 750,000 stores...
...British colonial rule "de-industrialized" India, and from an exporter of textiles, India became an exporter of raw cotton...
...They accepted a vast area of state control-in fixing prices, limiting dividends, controlling foreign trade and foreign exchange, in licensing production, and in allocating capital goods and distributing consumer goods...
...Rajgopalan, got so excited he ran to Bombay University to check if the ingredients in Vicks VapoRub could be found in the thousand-year-old Ayurvedic texts...
...After 1850, Indian entrepreneurs did in fact begin to set up modern textile mills...
...Technically the Ayurvedic classification also permitted us to pay a lower excise tax...
...Second, its population growth has begun to slow down for the first time in decades-against a 2.2 percent growth rate it had come down to 1.67 by 1998...
...Varma's leadership...
...S The tragedy of modern India is not cronies.Years later, I chanced to meet the manager of one of the rural branches of these nationalized banks, on the night train between Delhi and Amritsar...
...The government devalued the Indian rupee by 20 percent over the first three days in July...
...In India even the capitalists were socialists...
...It has not opened agriculture...
...The dusty wheat fields of Punjab rushed wildly by in the light of the full moon...
...By 1875, India started to export textiles again and slowly recaptured the domestic market...
...A small group of officials spent the next few days finalizing the policy...
...It was cheaper not to produce...
...Everyone was paid, including a bonus, and even overtime in some cases...
...For the past fifty years, the Birla companies had monitored performance of their numerous enterprises across the globe on a daily basis...
...It was an entrepreneur's nightmare...
...In 1896, Indian mills supplied only 8 percent of total cloth consumed in India...
...While Prime Minister Narasimha Rao speaks nine languages," said Time magazine's Rahul Jacob, "he has not made a loud enough case in any of them for the liberalization that is his government's most notable achievement...
...In my experience, successful Hindu entrepreneurs can be both extremely religious THE AMERICAN SPECTATOR 0 Summer Reading Issue 2001 31 fled as Ayurvedic rather than as Western medicines-how would that help...
...Because many Indian industries had been under severe price controls in the socialist raj, companies had been forced to become low-cost producers in order to survive...
...Ominously, they were willing to accept "important limitations on the freedom of private enterprise," and they agreed that "rights attached to private property would naturally be circumscribed...
...They opened banking, airlines, electric power, petroleum, and cellular telephones, among other businesses, to the private sector...
...Our commercial castes have enormous financial acumen, an austere lifestyle, a propensity to take calculated risks, and an ability to accumulate and manage capital...
...It had not solved the problems of India's creaking infrastructure...
...The nation did not internalize the drastic need for restructuring...
...We promptly applied to the local Food and Drug Administration office.To our great delight, the regulators gave us a new registration...
...We looked at each other in disbelief...
...The party chose Narasimha Rao as prime minister because he was seventy, quiet, dull, and he threatened no one...
...Her father worked for the BBC...
...He was not a Deng...
...They have started a software company...
...He remembered that A.N.Varma had championed delicensing in a large number of industries during an earlier government...
...Our Bengali finance manager picked up the thread: "If that were possible, then we might escape price control...
...The investment rate also rose from 17 percent in 1960 to 23 percent of national income in the 1980s...
...All this should have brought about an industrial revolution.Why didn't it happen...
...If the British were such good rulers, why is India so poor...
...They eliminated miles of red tape, months of delays, and the hassles, anguish, and corruption that the Indian state had built up over decades...
...At the time of the default it was the bank manager's head on the chopping block...
...In many cases the basic entrepreneurial decisions, such as the choice of technology and the size and location of plants, were taken away from risk-taking busi34 THE AMERICAN SPECTATOR 0 Summer Reading Issue 2001 nessmen and made by bureaucrats...
...Our Marwari company secretary added another brick to the castle in the air: "We might also escape from the clutches of the chemists and distribute our products in all sorts of stores...
...Once it cleared the licensing committee, it was sent to the minister for final approval...
...By the end of the Eighties threequarters of the state-owned companies were losing money...
...And this went on for years...
...Manmohan Singh concurred, "In that case, let's open everything except for a small negative list related to security and the environment...
...However, the factory never produced a kilo of fertilizer...
...Third, literacy growth doubled in the nineties-from its historic climb of 0.7 percent a year to 1.4 percent-hence, literacy rose from 52 to 65 percent during the decade, with the biggest gainers being women and the backward states...
...Rao's government opened the economy to foreign investment and trade...
...Only a loan from the IMF could bail us out, he said...
...I am, however, skeptical of easy cultural or geographic explanations...
...The subsidy was, however, linked to a byzantine system of licensing and bureaucratic controls...
...Sat Pal nodded...
...He quickly realized that not only did he have to do this in order to help fix the government's finances, but here was an opportunity...
...Anyone who lived in India in the 1970s and 1980s felt the horrendous shortages of coal, cement, steel, telephone service, electricity...
...That same year, 1969, Indira Gandhi's government enacted the Monopolies and Restrictive Trade Practices (MRTP) Act which crippled private industry for a generation...
...But Rao felt that it did not go far enough...
...We began to invest aggressively in marketing and advertising...
...Under Indira Gandhi, India withdrew further from world trade, raised tariffs and taxes, and became one of the worst-performing developing countries...
...The private sector did not perform because we had emasculated it with massive controls...
...wo south Indian temple priests sit peacefully beside me waiting to get on the Jet Airways flight from Madras to Bangalore...
...They freed large industrial houses from the control of the MRTP Act, which had hindered expansion and investment...
...Foreign investment began to double each year, and it rose from $150 million to $3 billion by 1997 (and would have been much higher but for our failure to deregulate the power and telecom sectors properly...
...Gold is the ultimate symbol of trust and honor in India, and that we had pawned it to stay afloat amounted to national humiliation...
...After the minister's approval, the investor had to seek approval for the import of machinery from the capital goods licensing committee...
...The worst one, in 1896-97, killed an estimated five million...
...Raju told us that this was his summer job and it paid $12 a month-enough to pay for computer lessons in the evenings in the neighboring village...
...Neither he nor his staff decided who qualified for a loan...
...Tax rates came down from 56 percent in 1991 to 40 percent by 1993 (and further to 30 percent when Chidambaram became finance minister in 1997...
...The local politicians invariably made this decision...
...On the 4th, Manmohan Singh told P. Chidambaram, the new commerce minister and a Harvard MBA, that we must abolish the expensive export subsidy...
...He wanted to delicense more industries and give foreign investors majority share in their Indian subsidiaries...
...Large business houses set up parallel bureaucracies in Delhi to follow up on their files, organize bribes, and win licenses...
...Our after-tax profits rose from 1 percent to 12 percent of sales, and we became a blue chip on the Bombay stock exchange, as our share price rose from $3 to $40 within 18 months.We were careful not to ruffle the government or get too greedy...
...The Ambanis had single-handedly created the "equity cult" in India by building a base of more than two million shareholders-one of the largest for any company in the world...
...Today, ten years after the reforms, India is a changed country...
...Without realizing it, the Indian capitalists had dug their own graves...
...All infrastructure was state-controlled.A strong politician could build a power plant in his area even when the shortage was in another area, or build a railway line for rural voters when the more industrial areas needed it...
...She too was an ardent activist, and a member of the state legislature...
...ut our triumph was made possible only by a loophole in the increasingly tight network of government controls...
...He served us good South Indian coffee and vadas...
...It wanted big steel plants and not small factories which made clothes, shoes, toys, and bicycles-the sorts of things that the masses could use, and which might have been exported...
...There was no national soulsearching about the causes of our poverty disease...
...Taking it as assent, he asked, as though thinking aloud, "If we are going to open up, why not go the whole hog...
...One of them is to visit Infosys, Bangalore's revered software company...
...Of what use am I?" he asked me sadly...
...It was a great blow to or a_ 30 THE AMERICAN SPECTATOR 0 Summer Rea Sat Pal painted for me the then-conventional explanation of India's poverty...
...If a foreign collaboration was involved, an inter-ministerial foreign agreements committee also had to give its consent...
...Britain thus impoverished the Indian masses...
...But India was not always poor...
...Could we expand our distribution to food shops, general stores, and street kiosks...
...wo south Indian temple priests sit peacefully beside me waiting to get on the Jet Airways flight from Madras to Bangalore...
...Sat Pal quoted Sir William Bentinck, "the bones of the cotton weavers were bleaching the plains of India...
...No, the blame lies squarely with the productivity of our investments...
...By contrast, China's stateowned firms employed 40 percent of its industrial workers...
...Fifty-five percent of the Indian industrial workforce was on the rolls of public-sector companies in 1990...
...They placed a cap on government borrowings and opened capital markets to international portfolio investors, whose investments rose to $11 billion by the end of the decade.At the same time, they allowed Indian companies to borrow abroad...
...Fifty years later Indian textile mills would also destroy them...
...Socialists welcomed the emphasis on a heavy industry and the expansion of the public sector...
...And so our agriculture lost its capacity to generate savings, and a series of famines followed...
...My flight is soon called...
...In 1830, India enjoyed -world's industrial production while Britain's share After a long pause, my grandfather admitted tV that you must speak to your uncle, Sat Pal...
...I am going to run a computer company," said Raju...
...In 1944, the giants of Indian business produced what came to be known as the "Bombay Plan" for rapid and self-reliant industrialization...
...Most scholars and economists at the time confirmed his analysis of India's poverty...
...Why is India so poor...
...Our finance manager rushed to the lawyers to confirm that the Ayurvedic system of medicine enjoyed special government patronage...
...I asked...
...What will you do when you grow up...
...Finally the PM took a radically liberal industrial policy to the cabinet...
...It had practically abolished the License Raj, but it had not done anything about "Inspector Raj"-or the army of inspectors who make life hell for an Indian entrepreneur...
...The reformers virtually abolished industrial licensing...
...After independence, Sat Pal became a respected labor leader, loved by the workers and feared by industrialists...
...Industrial growth (not economic growth) plunged from 7.7 percent per year between 1951 and 1965 to 4 percent between 1966 and 1980.The problem was not lack of investment...
...India's savings rate rose from 6 percent in 1950 to 18 percent in 1980...
...In that case," I said, "now that we are free and England has lost its colonies, India will become richer and England will become poorer, right...
...Their foreheads are smeared with horizontal stripes of paste, both wear starched white dhotis, with cell phones dangling...
...conditions which were guaranteed to strangle it...
...The underlying assumption remained that business was dishonest, and that "to ensure honesty and eliminate profiteering, private business should operate under strict government control...
...It had not begun the reform of education and health, the two areas of the greatest opportunity...
...In such a society S the madness of governmental controls was a natural development...
...The minister of state for industries, Ranga Kumaramangalam, was not a reformer then and Manmohan Singh had to lobby hard to get him in the boat...
...Narasimha Rao turned out to be a reluctant liberalizer...
...Gandhi nationalized India's fourteen largest banks...
...Indeed manufacturing output did grow 5.6 percent a year between 1914 and 1938, well above the world average of 3.3...
...On a visit to Pondicherry from Madras a few years ago, I stopped at a roadside village cafe, where 14-year-old, low caste Raju was hustling between the tables...
...However, we had to first put our house in order...
...Our R&D manager, Dr...
...Swedish economist Gunnar Myrdal attributed it to contempt for manual work, lack of punctuality and ambition, low aptitude for cooperation, and superstition, brought on in part by India's enervating heat...
...They have started a software company...
...They worked like maniacs and by seven o'clock they had a dramatically liberalized trade policy...
...The transformation of the world from an industrial to a knowledge economy means that jobs, exports, and economic activity with the highest value added will come from the knowledge sectors of the economy, and countries that participate vigorously in these sectors will be rewarded with a growing and higher standard of living...
...The bank manager, moreover, did not run his own office...
...Rao failed to do so because he himself lacked deep conviction...
...THE AMERICAN SPECTATOR N Summer Reading Issue 2001 37 Neither was he a Thatcher, a Salinas, a Mahathir Mohamad-or even a Menem, a Keating, a Rawlings, or a Vaclav Havel-all of whom, in their own way, were able to translate their liberal measures into a language that the citizen understood...
...Any surpluses "If the Brirtish were such gooi rulers, why is India so poor...
...And now India's economy seems more socialist than China's (post reforms...
...When Rao presented the new industrial policy, he heard no complaints...
...But without exception, they were rich...
...The most bizarre and damaging of the creeping controls was the licensing system...
...Fourth, a 110 million Indians rose out of poverty as the poverty ratio declined from 36 to 24 percent-this is almost the same pace as China's in the 1980s...
...We, thus, killed at birth any hope for an industrial revolution...
...This is a question that has haunted two generations of Indian leaders...
...This was because the devaluation had achieved the same objective of competitiveness for exporters...
...Economist Isher Ahluwalia estimates that the productivity of Indian manufacturing declined half a percent a year between 1960 and 1985...
...Their Lancashire mills threw millions of our handloom weavers out of work...
...Without tariff barriers, Indian consumers also shifted to cheaper English mill-made cloth...
...Nehru's Second Five Year Plan called for investment in a large public sector (at the expense of the private sector), in heavy industry (at the expense of consumer goods), and a focus on import substitution (at the expense of export promotion...
...Nehru, the prime minister's cousin, who was also a senior civil servant at the time, admitted in his autobiography that "with the benefit of hindsight it seems totally absurd that a country wanting to develop its industry should prescribe for its establishment that we made mistakes in the 1950s but that India did not change course in the 1960s and 1970s under Indira Gandhi...
...hopes of prestige and wealth were shattered...
...These constituted significant strengths and provided a basis for competitive advantage as India joined the global economy...
...However, they had no work because soon after the factory was built it was discovered that the company was unviable...
...The Brahmins say that the maddening traffic, the pollution, the noise, and the pace does not bother them...
...Sat Pal was far from alone in his thinking...
...B.K...
...Freddie Mehta, a director of Tata Industries, told me in 1989 that the Tata companies made over a hundred proposals for new business projects or to expand existing ones over the twenty THE AMERICAN SPECTATOR E Summer Reading Issue 2001 35 years since the MRTP law...
...We became the only country in the non-communist world where the production of goods sorely needed by people was punishable by law...
...Fully 70 percent of the employees in India's "organized sector" (that is, firms employing more than ten workers) received their paychecks from the government...
...Vimla, my uncle's attractive Kashmiri wife, entered the room with two steel tumblers of buttermilk...
...It had not introduced labor reforms-it is still impossible to lay off a single worker even if there is no production...
...According to the law, no one could fire a worker for not working...
...Any group with combined assets above $26.7 million was declared a monopoly and effectively barred from expanding...
...The smallest village has found it...
...In business terms, the nation's leading sector reflects its competitive advantage...
...My uncle Sat Pal had always been my grandfat of a brilliant career for him until one day, to his hol Pal had become a Marxist...
...Yet, with all their achievements, there was much left undone.The government had not begun to privatize the public sector, which was bleeding the economy...
...When the Gulf crisis came and oil prices went through the roof, we found we had no money to buy oil...
...The result was enormous delays, sometimes lasting years, with staggering opportunities for corruption...
...But we deliberately continued to pay tax at a higher rate...
...Our textile exports plunged from world leadership to a fraction of what they had been...
...They opened the country to foreign investment, allowing "automatic entry" in 34 industries and majority foreign ownership...
...The president swore in the new cabinet on June 21, 1991...
...He was a sincere young man, deeply concerned, and he wanted to unburden himself about his day-to-day problems...
...It is still not possible to close a private company even when it is bankrupt...
...Next, Rao wanted to dismantle the industry side of the License Raj...
...My flight is soon called...
...Their foreheads are smeared with horizontal stripes of paste, both wear starched white dhotis, with cell phones dangling...
...in 1945, on the eve of Independence, Indian mills supplied 76 percent...
...If the entrepreneur did finally make a success of his enterprise, he was again in trouble...
...One of them is to visit Infosys, Bangalore's revered software company...
...Barring a few exceptions, no one in the political class-bureaucrats or politicians-was truly enthusiastic about the changes...
...He called to me as I was trying to sleep on the upper berth of the Frontier Mail, "It is certainly nice to feel the fresh breeze of freedom, but you must remember, my son, that India had been the best-governed country in the world for a hundred years...
...In the financial sector, they reduced the high reserve requirements of banks (designed to give the government cheap funds) and let interest rates on government securities be determined by the market...
...In their charmed leftist circle, Vimla was admired for her good looks, deep convictions, and glamorous background...
...Moreover, they had gained enormously from high tariffs on imported goods since the 1920s...
...d Max Weber blamed the caste system...
...On the contrary, it is a nice change from their old suburban temple life...
...it virtually abolished licensing controls on private investment, dropped tax rates, and broke public sector monopolies...
...As a result, growth picked up to 7.5 percent a year in the mid-nineties, inflation came down from 13 percent to 6 percent by 1993, exchange reserves shot up from $1 billion to $20 billion...
...Hopelessly low prices meant the state power companies did not have the funds to invest in new plants...
...My father's English boss used to blame India's poverty on the otherworldly spirituality of Hindu life...
...The central government's fiscal deficit came down from 8.4 percent of GDP in 1990-91 to 5.7 percent in 1992-93...
...After independence, the goal of democratic socialism was embraced by a wide consensus...
...Chidambaram's first reaction was that this would be political suicide for a new minister...
...Cabinet meetings in India are quiet affairs and there is little open debate...
...Yet they could not close down...
...I still remember how my leftist friends were euphoric that day in 1969 when Mrs...
Vol. 34 • July 2001 • No. 6
