August 15th, 2009: State Of The Nation

India has always held great promise. At the time of independence in 1947, India had one of the largest foreign exchange reserves in the world and was responsible for almost 2.5% of global trade. But 45 years of a socialist economy mixed with old style crony capitalism brought the country to near bankruptcy in the 90s.

We are a trillion dollar economy today. The liberalization initiated in the early 1990s has sparked unprecedented growth, opportunity and wealth creation. Government revenues have doubled in just the last 3 years. India’s consumer demands are increasing much faster than the economy pointing to a newly created consumption economy. 70% of India’s population is less than 36 years old and the country is home with 20 percent of world’s population under 24. The statistical snap shot of India today is compelling.

However, it’s still difficult to get a fix of where we are as a nation. On one hand, we are a nation of confident professionals and entrepreneurs. On the other, a large number of people live in abject poverty and deprivation that sometimes is worse than sub-saharan Africa. On one hand we have Politicians who wax eloquently about a bright future and on the other we have governance deficit of a kind that makes you despair about our democracy.

I see us as a nation of work in progress – described better as either a job half done or left half incomplete.

A few weeks ago, I watched an obviously distressed stock analyst/broker type on one of the Business channels putting a spin on the falling markets. His spin was that this was short-term and investors should look beyond this because (get this!) the Indian economy had structurally moved to the next level, therefore long-term growth was a slam dunk and a given. This treatise has been bandied about a lot on the back of a deadly combination of rheoteric/euphoria – that we have to come to believe that growth and prosperity is in some way our destiny and growth will continue regardless and as recent events are showing - this is so wrong.

To complete India – the work in progress, there is a lot that needs to be done. This cannot be solved just by the usual ‘reform’ strategy of opening up to foreign investment. Reform isn’t just about private capital. There is much, systemically and institutionally, that has to be done if we are to get to a reasonable sense of prosperity and dignity for most, if not for all our people.

The most critical issue is our politics, governance agenda. Despite a liberal media and a robust democracy, the process of governance remains one of the most debilitating issues for our nation. I have said this before – that the most important stumbling block is our politics. The mal-governance and politics of our country is crippling the growth of institutions that should otherwise be respected and nurtured. There is no incentive for any institution to perform, because there is very little public debate and recognition of excellence in government. As proof I point to the Padma awards – while you have the usual collection of friends of government (industrialists, journalists etc) there is no regulator, no serving bureaucrat or any PSU head. Does this mean that there’s no one in government that does good work or is it just that there is no need to recognize them? The executive branch today of government – State or Center is way behind the rest of the country – in its approach, its technology and its results, and in recent times, the entire process of governance has been reduced to a race of spending – and as all of us will agree –profligate spending is no substitute to real governance and governance reforms.

The consequences of this is very visible to all of us if we bother to look –

1. Government and Governance is being reduced to legislation and spending, with almost no attention to details of the important areas of institution building and efficient delivery. More and more government seems to be playing to the gallery and media rather than real Governance – the Right to Education bill recently is a classic case of legislation without adequate homework or ground work,.

2. Public spending is inefficient and institutionalizes corruption. Government programs - the big black hole into which tax payer money gets shoveled into, ostensibly to eradicate poverty and/or help the poor – despite obvious evidence that this black hole is a very leaky one and little reaches the target.

3. Economy is still not competitive - due to lack of true competition – due to cartels and the like – due in turn to non-functioning regulators or cosy government-corporate nexus. Despite ‘liberalization’ many parts of the economy continue to remain closed to competition in the name of politics, Public sector investments, Security (different reasons used at different times), and we are an uncompetitive and high cost economy due to the transactions, red tape, compliance and litigation.

4. As recent disputes in the Gas sector are spotlighting, our economy is being increasingly dominated by a number of companies that have too cozy a relation with Government and increasingly on politics and Government. This trend is unhealthily growing stronger and pervasive.

There are the real structural changes that have to be tackled if we are to have a sustainable tryst with our economic destiny to borrow from Pandit Nehru’s speech on this day 62 years ago.