The kidnapping of India

A version of my piece below was first published onOctober 5, 2005, in the Asian Wall Street Journal (subscription link). It was also posted on India Uncut and the Indian Economy Blog

Imagine this scenario: someone kidnaps a child and, for decades, maims and exploits him. Then, in a sudden revelation, we learn that the kidnapper was once under the pay of a branch of the mafia that is now defunct. There is instant outrage, and everyone condemns the crime. “How could you have taken money from the mafia?” they ask.

This is, more or less, what happened this weekend when LK Advani, the leader of India’s opposition, demanded a “public enquiry” into “the biggest scandal of independent India.” He was referring to the recent revelations, in a newly released biography by a well-known former KGB operative, that much of the Indian government had been bought by the KGB in the 1970s.

“The Mitrokhin Archive II: The KGB and the World”, by former KGB archivist Vasili Mitrokhin, details an institutionalized corruption in India that the agency used to its advantage superbly. The book describes how the KGB paid bribes and retainers to members of India’s Left parties, as well as the ruling Congress party.

According to the book, politicians were by no means the only ones on the take, and the KGB had a number of newspapers and a press agency on its payroll in the early 1970s. But of course, it is the details about senior government officials that titillate. Many ministers in the government of Indira Gandhi, who ruled from 1966 to 1984, were under its pay, and suitcases full of banknotes would be sent to Mrs. Gandhi’s house to fund the Congress. The entire Indian establishment, it would seem, was up for sale.

The Left parties, predictably and amusingly, have denounced the book as a CIA conspiracy, while the Congress has maintained what Mr. Advani terms a “guilty silence.” Mr. Advani’s outrage, though, is misdirected. “The biggest scandal of independent India” is not the money that the Indian establishment under. Mrs. Gandhi may have taken from the KGB, but the inspiration it took from the Soviet way of doing things, and the pernicious ideas it borrowed, which condemned millions of Indians to a poverty that still persists, and vastly increased the powers of an already oppressive state.

Many of those policies are still in place – indeed, remained in place even when Mr. Advani’s party was in power – and India, like the kidnap victim of our earlier analogy, is still struggling to break free.

The Fabian Socialism that India embraced under Jawaharlal Nehru, India’s first prime minister and Mrs. Gandhi’s father, and the statist direction he took the country in could be put down to an ideological mistake that many of his generation made. But under his daughter the state became a conscious tool of oppression. Her government used ideology merely as rhetoric, and concentrated solely on accumulating power at the expense of the freedom of citizens.

Economic freedom was the first casualty. In 1969, Mrs. Gandhi nationalized all the big banks in the country. Gradually, this was followed by a series of draconian bills designed to suffocate private enterprise. The Foreign Exchange Regulation Act (1973) restricted foreign investment and imposed currency controls. The Industrial Disputes Act (amended by Mrs. Gandhi in 1976 and 1982) prevented companies with more than 100 workers from laying them off without government permission, thus distorting labor markets and providing a disincentive to industrial expansion.

The Urban Land Ceiling Act (1976) distorted land markets in urban areas, exacerbating the growth of slums. Mrs. Gandhi also reserved certain industries for small-scale companies, denying larger companies from benefiting from economies of scale, and pegging back labor-intensive manufacturing and preventing an export boom.

Mrs. Gandhi admired not just the economic policies of the Soviet Union, but clearly shared that empire’s disdain for democracy and political freedom. In 1975, after a judge found her guilty of election fraud in 1971 and ruled that she give up her seat in parliament, she declared a “state of emergency.” Articles 352 to 360 of the Indian constitution specify that when the country is faced with external or internal threats, the government can impose a state of emergency and assume what are, in effect, totalitarian powers.

The Emergency, as it is popularly known, lasted 19 months. Civil rights effectively ceased to exist, and people who opposed Mrs. Gandhi, including politicians and journalists, were summarily thrown into jail. It was a Stalinesque era. Mrs. Gandhi’s younger son, Sanjay, became notorious for his rampant behavior, bordering on the criminal and similar to that displayed years later by Saddam Hussein’s elder son, Uday. Among Mr. Gandhi’s pet schemes was a misguided family planning program under which thousands of young men were forcibly made to undergo vasectomies.

Mrs. Gandhi revoked the emergency in 1977, called for general elections, and was voted out of power. That was a tactical error, not a change of heart, and it came about partly because of self-deception. She truly believed that she enjoyed popular support, a perception partly based on the reports of intelligence agencies, who naturally told her what she wanted to hear. But the people of India have a short memory and little in terms of choice (and, some would argue, discretion). Mrs. Gandhi did come back to power in the next elections in 1979, using the ironic slogan, “Elect a Government that Works.”

It is tragic that Mrs. Gandhi is still evoked as a hero by members of her own party, and that her policies, which continue to cripple India, still find support. The liberalization of 1991, forced as it was by a balance-of-payments crisis, was partial and half-hearted. The License Raj that Mrs. Gandhi expanded with such autocratic zeal remains largely in place, as do most of the parliamentary Acts that shackled enterprise. Indeed, it is ironic that Sonia Gandhi, her daughter-in-law and heir to the Congress – not so much a party any more as a family heirloom – is commonly lauded as resembling Mrs. Gandhi. This is praise?

The strenuous denials of the KGB payouts and the furor over them repeat the same mistake that the Indian people have made for half a century now – of giving importance to intent over outcome. It makes no earthly difference now whether or not the KGB paid off the establishment in those terrible years. What matters is what the government of the time did, not why it did those things, and the molehill of intent is irrelevant besides the mountain of action. That mountain is in the public domain: the gradual stripping down, layer by layer, of personal and economic freedom. Most of that freedom has still not been restored, and the people of India just don’t seem to care. Even when it affects their own lives so intimately, economics is boring, a spy thriller is much more fun.

The myth of India’s liberalization

The piece below by me was published on June 16, 2005 as an Op-Ed in the Asian Wall Street Journal, titled “India’s Far From Free Markets” (subscription link). It was also posted on India Uncut.

Indian Prime Minister Manmohan Singh is due to visit Washington in a few weeks, and editorialists and commentators have already started writing about the emerging economic power of India. New Delhi’s decision to start liberalizing its economy in 1991 is touted as a seminal event in India’s history, the moment when it threw off the shackles of Fabian socialism and embraced free markets. It is the stuff of myth—and to a large extent, it is exactly that.

While part of India has benefited from being opened up to foreign products and influences, most of the country is still denied access to free markets and all the advantages they bring. India opened its markets in 1991 not because there was a political will to open the economy, but because of a balance-of-payments crisis that left it with few options. The liberalization was half-hearted and limited to a few sectors, and nowhere near as broad as it needed to be.

One would have expected India’s growth to be driven by labor-intensive manufacturing but, almost by default, it instead came in the poorly licensed area of services exports. The manufacturing sector, ideally placed in terms of labor and raw material to compete with China, never took off. India’s restrictive labor laws, a remnant of the socialist infrastructure that India’s first prime minister, Jawaharlal Nehru, put in place in the 1950s and 1960s, were politically impossible to reform. It remains excruciatingly difficult for most Indians to start a business or set up shop in India’s cities.

This is painstakingly illustrated in “Law, Liberty and Livelihood”, a new book edited by Parth Shah and Naveen Mandava of the Center for Civil Society in New Delhi, which documents the obstacles in the way of any Indian who wishes to start a business in one of India’s big cities. Messrs. Shah and Mandava write: “Entrepreneurs can expect to go through 11 steps to launch a business over 89 days on average, at a cost equal to 49.5% of gross national income per capita.” Contrast the figure of 89 days with two days for Australia, eight for Singapore and 24 for neighboring Pakistan.

But often, even this figure is just a notional one, and entrepreneurs find it next to impossible to get a legal permit to start a business at all. Street hawkers and shop owners in the cities often cannot get a license at all. (Even those who do have to comply with draconian regulations that offer so much discretion to the authorities that corruption is inevitable.) They survive by paying regular bribes to municipal authorities and policemen, which are generally fixed in such a way by this informal market that they can barely survive on what they earn, and cannot expand their business or build their savings. They are trapped in a cycle of enforced illegality and systematic extortion by authorities, which results in a tragic wastage of capital. It serves as a disincentive to entrepreneurship, as well as to urbanization, the driving force of growing economies.

Another disincentive to urbanization is how hard it is for poor people to get legal accommodation in the big cities. In Bombay, for example, an urban land ceiling act and a rent-control act make it virtually impossible for poor migrants to rent or buy homes, and they are forced into extralegal housing. The vast shantytowns of Bombay—one of them, Dharavi, is the biggest slum in Asia—hold, by some estimates, more than $2 billion of dead capital. For most of the migrants who live in these slums, India hasn’t changed since 1991. As that phrase from India’s pop culture goes, “same difference.”

India’s policymakers are aware of these anomalies, but it is an acute irony in India that any proposal to reform the bureaucracy has to first wind its way through the bureaucracy. Arun Shourie, a former disinvestment minister and a respected journalist, wrote in his recent book “Governance” that, “proposals for reforming [the] system are adopted from time to time, and decrees go out to implement the measures ‘in a time-bound manner.’ But in every case, the proposal is put through—some would say, it has to be put through—the same mill.”

It is in the nature of bureaucracies, Mr. Shourie points out, to endlessly iterate. He charts how the apparently simple task of framing a model tender document took the government more than 13 years, as drafts of it circulated between different committees and ministries. Anything even slightly more complicated, and with pockets of political opposition to it, like economic reforms, becomes almost impossible to implement. Dismantling state controls is only possible if there is political will and a popular consensus. None of these exist. On the contrary, there is a popular belief that the economic inequalities in India are caused or exacerbated by free markets.

The socialist left, a natural proponent of such views, believes that free markets are the problem and not the solution. India’s communist parties have blocked labor reform, opposed foreign investment and prevented privatization of public-sector units. They naturally have a vested interest in the “license-permit-quota raj,” as the web of statist controls is called. On all these issues they are supported, surprise surprise, by the religious right.

The Hindu right wing, led by the Bharatiya Janata Party and collectively known as the Sangh Parivar, also fears globalization. Its sustenance comes from identity politics, the impact of which is diluted by the opening up of the cultural mindspace to “foreign influences.” If people are busy chasing prosperity and gaining Western liberal values, they will naturally have less time to focus on “the Hindu identity,” and suchlike. Rabble rousers need the masses to be disaffected.

In between the socialist left and the religious right is the Congress, a party which occupies the center of the political space almost by default. Its position on issues is always malleable, and although it is currently the party of government, it leads a coalition that depends on the left for survival. The pace of reforms has not increased since it came to power last year, and is not likely to do so anytime soon. While the world focuses on the metaphorical bright lights of Bangalore, most of the country—indeed, much of Bangalore itself, which has been plagued by power and infrastructure problems recently—remains in darkness.