The Indian Economy Blog

August 28, 2005

Reading Dr Manmohan Singh’s Interview

Filed under: Politics — Atanu Dey @ 2:23 am

It is always instructive to learn what our policy-makers are thinking. Prime Minister Dr Manmohan Singh is especially edifying since he is at the helm of the ship of the Indian state. I therefore recommend the recent interview (Aug 16th, 2005) of Dr Singh by Rajat Gupta published in the McKinsey Quarterly. (Reuben reported the interview earlier here.)

Dr Singh is a competent and well-respected prime minister. He is also an economist by training and actually earned his “Dr.” title (unlike some pretenders that shall go unnamed here.)

Allow me to highlight some of his responses. He states:

The first and foremost priority is to finish the unfinished task which the founding fathers of our republic set out for us at the time of our independence: to get rid of chronic poverty, ignorance, and disease, which have afflicted millions and millions of our people.

Recognition of the true state of affairs is a good beginning. I would only wish to stress that persistent chronic poverty, ignorance, and disease are consequences of flawed strategies that the founding fathers in their great wisdom imposed on the nation. The ills that India suffers is an enduring legacy of the policies that they espoused.

I point this out not out of meanness of spirit but out of a pragmatic concern that unless we recognize that, we may continue to embrace those policies out of ignorance and reverence for the founding fathers. For instance, the socialist labor policies. When asked about it, Dr Singh said:

First of all, we must make a distinction. When we talk about labor reforms, we are essentially talking about 10 percent of our labor force, which is accounted for in the so-called organized sector.7 Outside this 10 percent, for the 90 percent we are a completely flexible labor market. The normal laws of the market take precedence. Even within this organized sector, the problem is most acute in the public sector. In the private sector, most people tell me that they can find ways and means of working out voluntary agreements with the trade unions, whereby necessary labor flexibility can be introduced. In the public sector, we have rigid laws, and therefore there is this problem.

I find it curious that Dr Singh downplays the problem of flawed labor policies on the grounds that only 10 percent of Indian labor is in the organized sector. He further narrows down the deleterious effect to apply to only the dysfunctional public sector firms. No, it is not curious, it is downright astounding that one can even excuse the labor policies on the fact that the organized sector employs only a very small percentage of the total labor force.

Having most of the labor force in the organized sector is a requirement for a healthy economy. The imposition of mindless labor laws leads to a small organized sector and this hampers economic growth. Then dismissing the damage caused by those labor laws on the grounds that the organized sector is small is beyond comprehension. (See Kaushik Basu on Why India Needs Labor Law Reform.)

Moving on, here is Dr Singh’s take on job creation.

Jobs have to be created in all sectors of our economy. Agriculture still accounts for 60 percent of our labor force, and I believe that we will need a second green revolution to increase production and productivity, and in the process, I hope, we will create more jobs. But essentially over a period of time, our salvation lies in getting people to move out of agriculture. Services today account for 50 percent of our GDP. There are lots of people who tell me that services cannot move far ahead of what’s happening in manufacturing, and that worries me—this imbalance. I feel we have to do a lot more on manufacturing because, ultimately, services respond to what’s happening in the production sector.

Maybe he was just speaking loosely. But I get a very uneasy feeling when the PM speaks loosely on matters that have grave consequences.

We have 60 percent of our labor force in agriculture and that is a terrible thing. Roughly speaking, six Indians labor to produce food for 10 Indians. That leaves only four Indians free from producing food to do other things, from programming computers to manufacturing stuff to shop keeping. The last thing you want to do is to create more jobs in the agricultural sector. Indeed, the goal should be to reduce jobs in the agricultural sector by increasing productivity (even as production increases.)

It is trite but true that fundamentally it is all about production of stuff when it comes to economic well-being. And manufacturing is the best known method for producing stuff. If India has to move beyond being a subsistence economy, it has to manufacture stuff. Dr. Singh got the last part right — services are secondary.

To manufacture stuff, you need human capital, not just machines and land. For that, a broad based education is the primary necessity. While a handful of IITs and IIMs are well and good for the elite that go there, it does precious little for the 99.99 percent of the people.

Dr. Singh notes:

The IIMs and IITs, the regional engineering colleges, they have served us well. But ultimately, if the educational pyramid is not right there are limits to getting dividends. Therefore we are making, for the first time, the most determined effort to ensure that all our children—particularly children coming from disadvantaged families, particularly the girl child—in the next four or five years have the benefit of minimum primary schooling. But that will generate demand for upgrading the quality of our secondary schools. We have not given that much attention toward upgrading our secondary-school system, and that is our next step. After what we have done in the last one year, primary education is well looked after. What we have now in place is a system which will ensure that all our children who are of school-going age are in primary school. But the secondary-school system will require a major effort, and it worries me.

My question is: what took the government so long to realize the importance of primary schooling? And if this recognition is not new, then why have they failed for half a century in that most basic of tasks? It is not as if the task is impossible. The country can be made 100 percent primary school literate in 5 years. So by 1955 we could have had a fully literate society. Yet, half a century past that date, we are no where near 100 percent literacy.

Moving on, Dr Singh identifies “big thrust” areas. Central planning horrors loom.

I am thinking of identifying areas where we need big thrusts forward. For example, steel is one sector where we are thinking about investing large amounts of money. Our own domestic steelmakers are very bullish in investment in this area. We’ve got the [South] Koreans involved in building a steel plant of 12 million tons’ capacity.

Old habits die hard. Nehruvian socialistic planning is hard to give up. It is not steel that the government should be focusing on. The private sector is quite capable of producing steel in all the required quantities. The demand for steel is a derived demand. People don’t want steel. People want stuff that may involve steel in the making. So you don’t start off by saying that our target is to increase steel production. That is putting the cart before the horse. You start by saying, for example, that we will build a modern efficient rail transportation system. The steel needed will magically emerge. Surely an Oxford trained economist would get that.

Dr Singh:

If I have any message, it is that it is our ambition to integrate our country into the evolving global economy. We accept the logic of globalization. We recognize that globalization offers us enormous opportunities in the race to leapfrog in development processes.

I don’t know what “accepting the logic of globalization” means. Perhaps it is a good line to throw out. But I have serious reservations about his idea of leapfrogging development processes. Development cannot be leapfrogged any more than you can go from being seven years old to being an adult, whether you accept the logic of globalization or not.

Development requires a bunch of things, none of which are optional. For instance, we have to have a stuff. Can’t leapfrog that. We need to have institutions such as a functional legal system. (More about this in the next column.) Can’t leapfrog that. You get the point. If there is a short-cut to development, I would be most interested in learning about it. Perhaps I will write to Dr. Singh to explain.

The entire interview is fairly predictable and standard issue. No great insights or shocks. The most memorable line for me is the following:

I have full confidence in the patriotism of our Left colleagues to believe that in the final analysis of what is good for India, they will also be on board.

I too am confident of the patriotism of “our Left colleagues”. And that’s precisely what gives me the heebie-jeebies and scares the bajeesus out of me. The Left colleagues are patriotic to the core and owe their undying allegiance to China and USSR (non-existent though it is.)

Dr Singh ends on a positive note and so shall I:

I think, overall, India is today on the move. The economic reforms that our salvation lies in—operating an open society, political system, an open economy, economic system—this has widespread support. Fifteen years ago, a Congress government launched this economic-liberalization program, integrating India into the world economy. Since then, three governments have come and gone, but the direction of economic policy has been, year after year, toward more liberalization. The pace may be slow, may not be as quick as some people would want, but the direction is unmistakable. India’s future lies in being an open society, an open polity, a functioning democracy respecting all fundamental human freedoms, accepting the rule of law and, at the same time, to emerge as a successful, internationally competitive market economy.

I am glad that it was the Congress government that launched the economic liberalization program. We just need to remember that present liberalization implies a past illiberal state which was the sole handiwork of the same Congress government. Taking the credit for liberalization and congratulating oneself is akin to boasting that one is a great proponent of women’s emancipation because one has recently slowed down–but not entirely stopped–the daily beating of one’s wife.

Well, I guess I can never take credit for stopping beating my wife; I never started. And that is the good news.

13 Comments »

  1. As usual, Atanu hits the nail on the head and calls spade a spade. Manmohan Singh, at best remains an ineffectual prime minister. His interview is to speak through the media what his government wants to achieve- though there are no signs of it in the past 1 year.

    Frankly, taxes have gone up; and so is the cost of the dialy living for the “common man” that Sonia so effusively sheds her tears for. Ask anyone and they would testify that we are in for worse times than before- it isnt the Shining India anymore that BJP would have us believe.

    Plus, the education sector is in shambles.

    What is the rationale for the Rural Employment Bill? 35000 crores down the drain? For what? The would line the same people’s pockets anyway who are at the helm of affairs.

    Mr Singh, if you have any sense of self respect, you ought to resign. Thats the message loud and clear. No use being summarily being replaced by Madam ji mid way and have her son in your hot seat. Congress would not leave any stone unturned to keep the facade of dynasty alive.

    Comment by Abhishek — August 28, 2005 @ 12:59 pm

  2. The doctrines of import substitution and economic planning were very strong in the post-War era, what with the demonstrable space age success of the Soviet Union, while memories of the Depression lingered in the capitalist world. So Nehru’s policies could not be said to be unique during the time – all over Asia and Latin America (where Raul Presbisch’s thinking was very popular) these doctrines reigned supreme. Dismantling of these policies happened only recently in India, and the results have been spectacular. The example is inspiring to other reform-minded developing countries, because India has shown that sustained growth is possible in a democratic setting, despite reforms being stymied by special interests, populism-pandering, political compromise, a grinding legal system, and poor infrastructure.

    Comment by Roehl Briones — August 28, 2005 @ 10:20 pm

  3. For more on the steel issue here is an interesting article…

    http://in.rediff.com/money/2005/jul/04spec.htm

    Singh made special mention of a huge POSCO steel plant being set up in Orissa. From what I gather in the article it seems that POSCO will have exclusive access to iron-ore reserves, and will be allowed to export as much as 30% of them for use in their South Korean plants. In exchange, it appears POSCO will help make infrastructure improvements, specifically mentioned was the development of Paradip port.

    On the larger issue of whether Singh’s treatment of steel as a major thrust area is a good idea, I think it may be justified. The argument above assumes a closed system, ignoring the fact that steel can be imported to meet demand if the domestic steel industry isn’t capable of doing it. India does not want to be in the position of exporting its large iron ore reserves and in return receiving finished steel from higher wage nations.

    Comment by Walker — August 29, 2005 @ 4:29 am

  4. Abhishek, while I appreciate your comment, I wonder if we would not land in the fire from the frying pan if Dr Singh were to resign.

    Roehl, I am all for excusing Nehru for his screw-ups based on the recognition that he did not know any better. But then one cannot eat the cake and have it too; if he screwed up for whatever reasons, then his legacy should not be celebrated with such gusto as if he was god’s gift to India and as a consequence his progeny and their assorted consorts continue to mis-rule with impugnity for ever.

    Walker, whether the country should be in the steel manufacturing business or not is a matter that is best determined by the market and not by bunch of semi-literate bureaucrats in the government. The Indian steel industry is quite capable of making the investments required to produce the steel needed by domestic and foreign markets. If India is a low-cost producer of steel, the private sector can be depended uopon to use the raw materials (domestic or foreign) and meet the Indian market’s needs. If India is not a low-cost producer of steel, then again importing the steel needed would be the appropriate response. Once again going the planning route that has proved so disastrous in the past cannot but be a sign of insanity (where insanity is characterized as doing the same thing as before and expecting a different result.)

    Comment by Atanu Dey — August 29, 2005 @ 5:00 am

  5. Atanu, the Indian steel industry is no longer under state-run, so this is not an issue of classic central planning. Nevertheless if the industry is to enjoy success in international markets the government can’t just sit on the sidelines — laissez-faire has never been a successful strategy in steel. For one, the government has a role in providing for adequate infrastrucure (power, rail, ports, etc.). The industry could also benefit from reliable supplies of the necessary inputs, and the government has a role in securing these supplies. Of course, maintaining a regulatory environment which allows the industry to prosper is also essential.

    Comment by walker — August 29, 2005 @ 2:27 pm

  6. (continued)…..Having made the point that, on some level, government involvement is necessary for success in the highly competitive steel industry, I am equally willing to concede that government involvement is far from a guarantee of success. There is no question that individual governments vary in their degree of effectiveness. The constraints of politics and ideology along with problems like corruption or a lack of competence can make the government ineffective as an ally of industry.

    Comment by walker — August 29, 2005 @ 9:53 pm

  7. Walker, I do agree that the government has a role in providing adequate infrastructure. The question is what role and which infrastructure and what is adequate. For instance, the power sector is dismal because of government involvement in generation, transmission and distribution. Only recently some private sector participation is being allowed in some states because even the government could not continue to deny that they are incapable of providing power.

    Roads, and ports, and railways: again, dismal performance. Regulated monopolies is the way to go in some cases and in some others have competitive private sector players.

    I am not opposed to the involvement of government per se. What I am against is the involvement of the Indian government in business. Suppose I am sick and a quack shows up at the door with snake oil. If I reject the ministrations of that quack, you cannot conclude that I am against medicine or against treatment by competent doctors.

    Since it is impossible to fix the government (which would require a mature democratic set-up which in our case we do not have), I think the alternative in this second-best world is to keep the government as far away from business as possible.

    I agree wholeheartedly with the last sentence you wrote above: The constraints of politics and ideology along with problems like corruption or a lack of competence can make the government ineffective as an ally of industry.

    Comment by Atanu Dey — August 29, 2005 @ 10:40 pm

  8. Maybe we did not have a wise persons during the freedom struggle. Forgot not we are a free democratic country unlike our neighbours. Even Russia is learning democracy. It is a very hard statement on the founding fathers. Think about the literacy rate, infrastructure, poverty, treat from other countries, communication, industry, agriculture, etc., at the time of independence and some of the tough years that followed. It is not that the founding fathers lacked vision, they had vision for India. Without that vision the freedom we enjoy today would not be possible. It is the people of India who are slowly waking up, not any political party.

    Comment by Mohan — August 30, 2005 @ 11:01 am

  9. wondering! have all the global media entities come together to form a cartel. How is it that Knowledge@Wharton, Mckinsey Quarterly, Business Week all together — almost at the same time, come up with issues on India (also China here too)..

    there should be someone looking at the controls at each of the media houses, and the interests playing there…

    Comment by Chirantan — August 30, 2005 @ 5:24 pm

  10. Mohan, I suppose when you write “Without that vision the freedom we enjoy today would not be possible,” the “we” means you and those who get educated and have money to spend and read blogs. Surely that same statement cannot be made by the around 50 percent of children below five who are malnourished, nor by the 250 million or so who live below a poverty line that is set so low that you are always chronically hungry at line, leave alone below the line. How one can defend the founding fathers of this country on the grounds that they had vision when so many hundreds of millions of lives are lived in dehumanizing poverty is quite beyond my comprehension.

    I attribute it to a striking failure of imagination and empathy. The feeling is “Since I am OK, those who set his system in place must not be too bad.”

    Comment by Atanu Dey — August 30, 2005 @ 10:47 pm

  11. Atanu –

    “I attribute it to a striking failure of imagination and empathy. The feeling is “Since I am OK, those who set his system in place must not be too bad.””

    The above is what REALLY worries me. The lack EMPATHY.. It has strong repurcussions. People don’t feel others pain… so don’t do much for them and they stay that way. Then its downhill after a point

    APATHY baffles me to no end. I did a post on the poor being left out of the equation in the marketing of a product that I felt should be looked at in only the commercial angle. Comments to the post were not that encouraging. I felt the same too “failure of imagination and empathy” is Prevalent.

    The post is here http://blogontheweb.com/navin/archive/2005/07/02/76233.aspx

    Comment by navin — August 31, 2005 @ 6:26 pm

  12. I like this website very much. I think I am hooked to the no-ad, no-nonsense approach and the clear crisp commentary that you guys provide. Keep doing the good work!!!

    Comment by Siddharth Taparia — October 23, 2005 @ 6:30 pm

  13. Siddarth — we appreciate your compliments… still early days.. long way to go, but a promising start.

    A lot of the blog’s value lies in the comments — aergo, the comments are as deserving. Bahut khhub..

    Comment by Prashant Kothari — October 24, 2005 @ 1:37 am

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