It is a rare occurrence when someone agrees with me, so I might as well record it when it happens. Ramnath and I have managed to agree that privatization is not the most important reform measure. We also managed to agree on which one it would be. We both say that product market liberalization is the most important reform measure that we can undertake. For those who haven’t kept pace with the jargon, “Product Market Liberalization” in India means removing the restriction that some goods can only be produced by small scale units. There are around 700 of them, and this restriction is the single biggest roadblock that is stopping us from becoming a manufacturing powerhouse.
So Ramnath wants to know why the government is focusing on privatization rather than the other more important things. I know the answer to this, and I am afraid that the answer makes me very sad, because I’ve known this answer for more than 10 years, and it is high time it turned out to be wrong.
We are privatizing because, believe it or not, it is an easier reform measure to undertake than the more important ones.
It has always been like this. Among the first things that the government did was to reform the stock and currency markets, relax the complex industrial licensing laws and abolish import licensing.
What was common to the three? Well, all three were easy to accomplish for one reason or the other, the most important reason being that they have powerful interests in favour and none or weak ones against. No one was really against stock and currency market reforms, while many people were in favour. Most industrialists were in favour of abolishing those industrial licenses, and only bureaucrats would have been against. Given the circumstances at that time, the bureaucrats didn’t have much opportunity to make a stand.
As for import licensing, note that consumer goods are still heavily restricted. There is no economic rationale for that whatsoever. It just so happens that industrialists want to import raw materials, but don’t want customers to import finished goods, so that’s how things are.
There is also another thing that is common to them. They end up favouring foreigners over Indians. It wasn’t by design, mind you. It just happened that way because of the dynamics of the decisions. It is easier to just remove import restrictions than it is to remove the complex set of restrictions on Indian firms. Reforming the stock market and easing FII restrictions meant that foreign money could come in freely, but where could it go? Not into a manufacturing plant in the hinterland, because it was still difficult to set up one, so it went into software companies in the big cities, where the restrictions where minimal.
So that is how we got here. I’m afraid the performance of everyone involved in the process has been nothing short of disgraceful. Everyone supports reforms, but someone opposes every single reform measure.
Remember the Bombay club? They were for the reforms before they were against it. When the reforms started to pinch them, they decided that freeing up imports and easing FDI was not such a good idea after all.
Remember when the BJP used to be a pro-reform party? That was when it was making the eminently sensible complaint that we are going in for external liberalization before we liberalize internally. But when they came to power, they discovered that internal liberalization would mean that their unions and their small businesses would get hurt. Then it realised that internal liberalization was not such a good idea after all.
Also remember when Ford, GM etc. were such champions of free trade when they wanted to get in? But when it came to allowing import of second-hand cars, they suddenly turned into environmentalists. They decided that free trade wasn’t such a good idea after all.
Everyone, everyone has been behaving shamefully about the whole thing.
If a dispassionate observer had seen the reform measures that were being undertaken at that time, he would have predicted exactly what has happened since then. In fact, many did. The gradual, step-by-step opening was supposed to be a good thing from the point of view of eminent caution. It was supposed to be a continual experiment, the results of which would help us to take further steps. If this experiment succeeded, the argument went, we would feel more confident, and it would be politically more acceptable to take those steps.
As an experiment it has succeeded spectacularly. Where we reformed, we did well. We reformed the stock market, and the stock market is doing well. We allowed foreign investment and foreign investment flowed in. We liberalized the telecoms sector and now the poor have mobile phones.
Where we did not reform, we are doing badly. We did not liberalize the labour market and so organized sector unemployment is still high. We did not dereserve the small-scale sector and we are still lagging in manufacturing. We haven’t touched agriculture and farmers are still committing suicides.
This is as perfect a controlled experiment as you can ever get in the social sciences. If you want to test out the efficacy of a drug, you split a population into two, give one of them the drug and the other a placebo. If the group that receives the drug improves and the control group that received the placebo does not improve, we know that the drug makes a difference.
You cannot take the drug’s lack of effect on the control group to claim that it isn’t effective, can you? But that is exactly what I’ve been hearing for the past ten years that I’ve been following this debate. It is bad enough that we are conducting this cruel experiment – where the rich and the middle-class are administered the medication while the poor are given the placebo. What is worse is that we’ve been ignoring the results of those experiments on the ground that the supporters of these experiments wear supercilious smiles on their faces.
Let’s at least stop pretending that this is an experiment. It is not. No one is going to get persuaded by the results of these experiments, because no one cares for the results. No one is going to change his stance about any reform measure, because no one is honest about it being an experiment.
We get the reforms that the government can get away with. If anyone tried to liberalize the product market, they’d face the unions, the “small scale” industrialists, the communist parties in a shameful alliance with them, and the conscience of an entire nation that still feels guilty about abandoning Gandhianism.
If anyone tried to reform the crazy labour laws, they’d have to face the might of the entire unionized labour force.
If we sell off bits of PSUs, the communists would still oppose it, but the idea was that the opposition would be less as the workers’ jobs wouldn’t be immediately threatened. So selling off the PSUs was thought to be an easier bet than the other, more important reforms. But that was before Prakash Karat came and decided to take a principled stand instead of a self-interested one.
I am not very optimistic about the reforms. They aren’t going to move forward unless the economy gets into another crisis, and the way we are going, there isn’t much chance of that. It’s a pity about all those poor people though.