Volume 10 Number 4
Can India's Reforms Help Her Poorest?
01 August 1997

As India celebrates 50 years of freedom, Michael Smith observes her economic reforms.

On the main highway climbing up through the mountains south of Pune, in western India, the traffic is nose to tail: trucks, buses, juggernauts, cars, bikes and bullock carts. Half of India seems to be on wheels these days, at least in and around the big cities. Drivers overtake on blind corners, in heart-stopping slow motion. India has the world's highest road traffic growth rate-and the highest accident rate. Inside the big cities, the cacophony of car horns punctuates the other noises of already overcrowded streets.

The world's eyes are on the Indian subcontinent this year as she celebrates 50 years of freedom from British rule. The world's eyes will be increasingly on the region as, during the next century, the global economic centre of gravity shifts increasingly towards Asia-not just to the 'tiger' economies of the Far East but also to the giants of India and China.

The much needed economic reforms in the world's two most populous nations, one still under totalitarianism and the other under a democratic system, are slowly shifting these ships of state, like the rudder on a supertanker. Trade barriers have been reduced and the two huge domestic markets have been opened up to international investment and competition. Western businessmen have rushed to India and China bringing with them a range of new products, from cars to computer software, Coca-Cola to consumer magazines, McDonald's to power plants. Last January, India hosted the largest ever delegation of British business executives to travel abroad.

What values will underpin these economic reforms? And can they really touch the lives of some of the world's poorest people? According to a recent academic study in Pakistan, the poorest of the Indian subcontinent are even worse off than those in sub-Saharan Africa.

The sheer scale of India's statistics seem overwhelming: a population set to overtake China's by 2005, at well over a billion; the underemployment of some 200 million rural people, fueling a mass migration from the countryside to the big cities; and the prospect of the largest urban population in the world-700 million people-within the next 20 years. The strain on already overcrowded cities will be horrendous.

The renowned Indian management guru MB Athreya forecasts annual growth in the 'emerging locomotive economies of the 21st century' of over 10 per cent in China and over 7 per cent in India. Speaking last year at the Caux Conference for Business and Industry in Switzerland, he said increased global competition would lead to faster innovation, and better quality products and services. He saw 'high investment opportunities' in the key areas of the infrastructure: power, telecoms, roads, ports and railways. (China's higher growth rate is in part thanks to her greater emphasis on infrastructure investment.)

But he also warned against environmental damage and excessive consumerism which would widen the rich-poor gap, cause alienation and emasculate local cultures. 'The extremes of total control or unfettered freedom to business have both been found wanting in the 20th century,' he asserted. 'Humankind has to find a new balance as we approach the 21st century.' Two cornerstones were essential: a pluralistic, democratic political system and a 'broadly regulated' and globally competitive social market economy.

In this new climate, international investment will certainly help, if the wealth generated can benefit more than just the urban rich and middle classes. India is increasing public expenditure on agriculture-by 13 per cent in last February's budget-and boosting rural development programmes.

But what is also striking to the foreign visitor is the social commitment that many large private business houses have to the welfare of their employees and to wider development programmes. The Tata group based in Jamshedpur, Bihar, has led the field in this, investing in housing, schools and hospitals for its employees and sponsoring hundreds of rural development schemes. Tata Engineering in Pune plants trees-and employs the wives of its workers to recycle the timber crates in which many of its components are delivered.

One of the biggest brakes on development, however, is corruption. The West is hardly blameless and too many Western businessmen are prepared to grease palms to get things done. But India is plagued by corruption, highlighted by the long-rumbling Bofors scandal dating back to the Congress government of the late Rajiv Gandhi. The Swedish Bofors field gun manufacturer paid huge bribes to Congress politicians and officials, it is alleged, in order to secure a $1.3 billion contract to supply the Indian army. A warrant is out for the arrest of an Italian businessman who acted as a middleman, and investigators say Rajiv Gandhi himself was involved. The mysterious assassination of the former Swedish Prime Minister, Olaf Palme, in 1986 may even have been linked to the deal.

Since the demise of the Congress Party's longstanding hold on power, India's independent supreme court and judiciary have been vigorously pursuing the corrupt, to government level, raising the hope of a new day in Indian politics.

The Bofors scandal has also focussed attention on business ethics. 'The debate is intense in India,' Athreya said at a Mahatma Gandhi memorial lecture last February. 'Several political careers have ended, slowed down or been threatened by a continuous stream of revelations. Civil service associations have identified corrupt officers.' Companies and their employees' associations have realized the importance of ethics and urged their members to uphold ethical practices.

Athreya sees business as 'the engine of innovation, constantly seeking more effective solutions to meet economic and social expectations'. Business, he says, 'should not only innovate for the sake of competition, profits and market shares, but also to enable civil society to meet changing expectations'.

There is still a long way to go for this to be achieved. The economic reforms 'are not ideologically driven but bankruptcy driven', New Delhi economics editor Swaminathan Aiyar says starkly. The public sector has been a bottomless pit. But, he adds, the government's reluctant pace of reform (this year's progressive budget notwithstanding) still leaves too many hurdles. Manufacturing permits are difficult to obtain and import tariffs, reduced to a maximum 40 per cent in the last budget, are still too high, slowing the pace of reform as surely as the ubiquitous speed humps on India's roads. The volatility of the stock market, corruption scandals and communal tensions also put off some foreign investors, if only temporarily.

Add to these the dead weight of a top-heavy bureaucracy, too orientated towards procedure and power rather than results (one of the worst legacies of the British Raj) and one can understand the frustration of eager businessmen. One complains that it took him over a year to obtain government clearance to expand his product range-a matter of only 'two or four lines on my licence', he says. Another businessman, V K Vishwanathan, Marketing Advisor at J K Industries, India's largest tyre manufacturer, adds, 'India lost 40 years because of the permit license raj.'

Gautam Thapar, Joint Managing Director of Ballarpur Industries, who in his mid-30s is a rising star among the younger generation of Indian industrialists, thinks that the economic reforms 'should have been far ahead of where they are today, especially in the area of infrastructure'. Power supply, in particular, 'is an area where foreign direct investment is most welcome'. Major cities regularly suffer power cuts and factories have to stop work.

There is also an artificial scarcity of funds, says Pune businessman Kiran Gandhi, General Manager of Human Resources at Thermax. The financial institutions are 'flush with money but afraid to lend it'. A lot of projects are postponed and investment is not taking place. Gandhi says there is a 'moral dimension' to the problem: 'Corruption has made banks very reluctant to make loans.' Bank officials who had previously taken kick-backs were now afraid to take risks.

Suresh Vazirani, Managing Director of Transasia Bio-Medical in Bombay, highlights a further problem. His company, which manufactures high-tech medical equipment for a world market, had enquiries worth US$8 million following a trade exhibition in Germany-the first time an Indian company had won such interest. But the orders were jeopardized when customs officials-notoriously corrupt-held up the import of vital component parts for two months.

Kiran Gandhi believes that, thanks to the judiciary, accountability and public morality are being restored, and that public confidence will follow.

There are, of course, striking changes for the better, especially in communications. Telephoning between the big cities has been transformed, thanks to automation, fibre optic cables and microwave transmission. Cell phones are more widespread and computers, using Bill Gates' and Indian software, are commonplace. India now has one computer for every 1,000 people. Microsoft is producing its Windows software in Hindi. E-mail and the internet are also available, though a country the size of India still needs many more access providers-especially as ease of access to information strengthens democracy.

Above all, international competition is challenging Indian businesses to greater quality and productivity. Most business leaders I spoke to welcome this. Far too few Indian business houses are global players, though the potential is there. Tata Engineering, for instance, has exported vehicles to 60 countries, from South America to Africa, and claims to have sold 2,000 pick-up trucks during their first year of sales in Britain.

Farhad Forbes, Director of the Forbes Marshall engineering group in Pune, which is involved in half-a-dozen joint ventures, says that it is a challenge for them to match the productivity of their foreign collaborators. Forbes's father, Darius, illustrates the dilemma from the experience of one of their group, Spirax Marshall. It employs men and women to assemble electronic circuit boards by hand. The rejection rate can be up to 6 per cent. But the UK-based venture partner makes them under automation at 60 times the speed and with only a 0.5 per cent rejection rate. This is hardly a level playing field.

Moreover, productivity gains can all too easily be at the expense of jobs, in a nation that desperately needs them. Darius Forbes says that with rural unemployment running at between 25 and 30 per cent, the only hope is to develop village-based cottage industries, such as garment-making, alongside traditional agriculture. These would find a vast market among India's middle class of 250 to 300 million people. With its huge purchasing power, 'our middle class is the main backbone and strength of the nation'.

Without an increase in rural employment, and a massive investment in the transport infrastructure to make this possible, the inexorable flight to the cities in search of work will continue. By 2001, India will have eight 'megatropoles', each with a population of over 20 million. The prospects hardly bear thinking about. It is the biggest challenge facing the whole economic reform process, and meeting it will be a key to a better life for India's poorest millions.
Michael Smith

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