The Economy As A Political Refugee

WHEN, at the India Economic Summit last week, World Economic Forum (WEF) managing director Claude Smadja told the gathered chief executives and decision-makers from across the world that it was high time India shaped up or else, he stirred up a hornet's nest. The first sentence of the no-punches-pulled speech: "One more time, India, or to be precise, Indian politicians, have reverted to their favourite hobby, that is, political diversion."

 "It is sometimes quite perplexing that many members of the Indian establishment don't seem to worry too much that if India does not move fast enough, does not put itself more in tune with what is happening in the rest of the world, it will be left on the sidelines," he said. "There seems to be this sense that even if the world were to bypass India, it will anyway have to come back because India is too big to be marginalised, and so it can afford to continue going at its own pace, continue its own ways of doing things. This mindset represents a real danger for the future of the country."

 Not only was the pace of economic reforms too slow, but political uncertainty was taking a severe toll, Smadja warned. And he stated, in so many words, that none of the three political alternatives at the national level—the Congress, BJP and the United Front—had the capability to take the reforms forward.

The next day, prime minister I.K. Gujral retorted that far from going bust, India's economy was set to take off on a high-growth trajectory. He reaffirmed that despite political uncertainty, economic reforms had been set on a definite track.

A day later, finance minister P. Chidambaram mounted another attack on Smadja's views by saying that regardless of which party came to power, it would be capable of carrying on with the reforms programme. "India has problems, but these are not insurmountable," he said. According to him, rather than the economy suffering, the political instability provided an excellent challenge to political parties to improve upon the present status of reforms.

Smadja's views appeared to have touched a nerve across political hues. While the BJP felt that Smadja's comments were uncalled for, the Left parties were of the view that the reforms process was being designed and shaped according to Indian needs and could not be judged by others as they looked at it according to their own needs.

Interestingly enough, Indian industry, despite facing a growth slowdown and a severe crisis of morale, has chosen to defend the country's reforms record.National pride has again quickly come to the fore. Apex chamber FICCI felt that the comments were superficial as Smadja was ill-informed about India's political, social and economic structure. An Assocham representative saw it as "an annual India-bashing ritual by multinational interests." Clearly, Indian businessmen felt that criticism by Indians of the government's pace and policies—as has been quite common—is OK, but not by foreigners.

Smadja's contention is that the Indian economy is losing momentum, and promise, as an investment destination. That the coming election is shaping up as a political contest where no single issue is likely to be the dominant factor. And the most crucial issue, economic reforms, is likely to be absent from the debate. That the fact that nobody is objecting to the reforms process is no guarantee that the priorities or modus operandi of the reforms will be the same once the new government settles in. While this is bad enough, the tardy progress made in implementing reforms decisions is making the world wary of India.

Gujral had a wholly different take on the matter. He felt that reforms did not have a textbook formula and had to be adopted according to a country's context. While most economic experts look only at fig-ures, it was important to take a look at the political, social and democratic structure of the country. In his view, the goings-on in India have to be seen totally in the Indian perspective as "a ringside view could often be filled with contortions".

SAYS Assocham president L. Laksh-man: "You cannot apply the same norms in India as you do in other countries. India has to see its own constraints and difficulties and carve out the policy format to suit these. In India, the theories have to be balanced between economic and social issues. One cannot neglect social development to give mileage to economic development in a country where a substantial portion of the population is still below the poverty line." In a parliamentary democracy, one cannot de-link economic and social sectors, this can happen only in a dictatorship, he says.

There is logic in this. India is uniquely placed among other fast developing countries. Unlike China, India is a parliamentary democracy where harsh and radical policies are often simply not possible. Unlike some other democracies in Asia—for instance Malaysia and Indonesia, where charismatic leaders have full control over polity—in India, political and public consensus is essential and in a country of complex views, interests and thinking, often difficult to arrive at. In Gujral's view, India's cautious approach to reforms was to insulate itself from crises that played havoc in Mexico and Southeast Asia: "This is a temporary phase. We have seen a GDP growth of about 7 per cent in the last two years and we are capable of growing by 7 to 8 per cent by the turn of the century. In five years' time, we would not only have taken off, the flight will be cruising."

What India needs now, he felt, is time: "The Indian mindset cannot be changed overnight." In his view, the decades-old attitudes, both political and bureaucratic, will take time to adapt to the new scenario. "Any transformation takes time. The West reached its present state after two centuries of liberalisation, while India is expected to do it in less than 10 years."

 But Percy Barnevik, chairman, Investor AB, and former chairman of Swiss-Swedish multinational ABB, too echoed Smadja'sfeelings. He felt that the slow progress of affairs in government circles was extremely frustrating: "The fundamentals are strong, but it is frustrating to see India still lagging behind."

Not every foreign speaker, though, shared Smadja's pessimism and Barnevik's impatience. Says WEF president Klaus Schwab: "India's economic future is definitely not gloomy. For India's size and its history and background of reforms, it is doing remarkably well. I am particularly optimistic about India." Also hopeful is WEF director Colette Mathur: "I feel that the fundamentals of the country are extremely strong and even if political parties come and go, new investment opportunities will continue to emerge as Indian companies are becoming more competitive and Indian people are leading a better life. "

Feels Fred Steingraber, CEO of management consultancy firm A.T. Kearney: "India is still one of the five potential hot spots for foreign investors. It's another matter that it has hit a bad patch now. We must remember that the challenges for the Indian economy are many. While a strong government is necessary for stable monetary and fiscal policies, industry should respond by concentrating on quality, re-engineering and innovation. If these are done, nothing can change the way the world now looks at India."

 What about the numbers? 1997-98 will see GDP growth dip to anything between 5 and 5.5 per cent from last year's 6.8 per cent. The fiscal deficit is expected to cross 5.5 per cent, export growth is at a 10-year nadir, the current account deficit, budget deficit and revenues are all expected to miss their targets and the government's fiscal amnesty scheme VDIS has also apparently not yielded the expected results. Add to this the burden of subsidies and the pay hikes for government employees. And something needs to be done very fast and very drastic about the infrastructure sector.

Bad news. But Schwab is hopeful. "It is not proper to say that the expected growth of 5 to 5.5 per cent is a low one. It might be low compared to what India achieved last year but per se, it is not a bad rate by any count," he says. He feels that India has the potential to become a major power and these temporary setbacks are but teething problems to becoming a global player.

Half-full or half-empty, a significant aspect of the WEF meet was that Indian decision-makers remained firm in both their resolve to continue economic reforms and to do it at their own pace. But is that pace fast enough? Half-full or half-empty?