The Telegraph
Since 1st March, 1999
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- Only the middle classes can remove the hurdle of extreme opinion

The author is former director general, National Council for Applied Economic Research [email protected]

I.G. Patel, talking about the public enterprise system in India, once said: “When the extreme left meets the extreme right, they must be wrong.” The strange co-habitation in ideas between the extreme right and left wings of Indian political thinking occurs on many more issues than merely the public enterprises system. Both are against privatization, one because it is for swadeshi and the other because there is virtue in government ownership. But both pay lip service to “disinvestment”. Yet neither will distance government from management to improve performance.

The same groups have almost in unison opposed efforts in other directions that would have improved efficiency in government and macroeconomic stability. For example, they have opposed raising user charges for power, railway travel, even local telephone call rates. For the Right it will hurt their middle class constituency, and for the other, it will hurt the so-called poor. They oppose the opening up of the economy to competition through easier imports of foreign goods in the one case because this is believed to be of benefit to the “capitalist” West, and in the other case because it is against “swadeshi” interests. They are against reducing the hold of the minority of units (less than 2 per cent) of the small-scale sector in India on preferential policies to their benefit, like cheap credit, reservations of product areas exclusively for small scale, price preferences and other benefits.

They oppose an expanding role for foreign investment in India even in peripheral sectors like consumer products or retail trade. It is felt by both extremes that these sectors have a lot of self-employed people. So for the Right they represent the quintessence of swadeshi or self-reliance. For the Left they are the poor who must be protected. The foreign investor is seen as being big, with deep pockets so that he can undercut the poor Indian, and he is white, representing decaying culture and capitalism. These evil foreign investors do the self-employed out of employment.

Both oppose the closing down of perennially loss-making and inefficient companies owned by the government, like the Indian Iron and Steel Company and the opening up to the private sector of the production of so-called strategic products for defence use, now manufactured by inefficient government owned departmental enterprises that supply low quality products at high prices. Strangely they oppose this even for products like garments and shoes, not to speak of engineering and other high-skill products; raising tariffs for electricity in order to improve the viability of electricity suppliers over the country.

Reducing employment in government is a definite negative. For the Right, government employees are their natural constituency and not to be touched. For the Left, any reduction in numbers employed, even if they are inefficient and a drain on resources is to be opposed.

There are many other instances of this cohabiting consensus between the two extremes in the Indian polity. It has led to the near bankruptcy of all state governments. It has made the Central government overstaffed, procedure-ridden, and unable to take and implement decisions speedily. It has resulted in inordinate delays in project approvals and implementation in every sector. It has given us the tragic image of a nation that knows what needs to be done to match our progress to the quality of our people, but has never been able to get it done.

It has led to a growing revenue deficit, which has been a feature of Indian budgets since the Eighties. It has led external rating agencies to characterize India’s macro-economy as unstable. High internal debt and consequent high interest and debt repayment burdens are seen to be increasingly eroding the ability of governments at the Centre and the states to spend on investments in human capital and physical infrastructure.

The solutions are well known: cut the revenue deficit and reduce current government expenditures, distance government from productive economic activity, for example, by privatizing the public sector, reduce procedural red tape, over time eliminate open and hidden subsidies, cut the size of government, and so on. During the Nineties all these ideas have had lip service paid to them by every finance minister. But when it came to action nobody from any party has been able to push them through in a consistent and cohesive manner.

We therefore, have the repeated attempts at expenditure reductions through circulars, with blanket cuts on travel, training, advertising, at increasing revenues by denuding cash rich public enterprises of their liquid funds, and so on. For example, for years there has been talk of harmonizing taxes between states to make India a true common market, of replacing the leaky and inefficient sales tax system with value added taxation, eliminating octroi that leads to our town entry points getting clogged with idle lorries, raising the income tax slabs in keeping with the erosion in the value of the rupee, computerizing tax collections, and so on. But the implementation is glacially slow. For ten years finance ministers have budgeted for income from privatization but not achieved even a fraction of their budgets.

Modest subsidy cuts for fertilizers, food, water or electricity are introduced and soon rolled back because of the furore that the actions have caused. Downsizing government was last attempted when the office of the directorate general of foreign trade was to be abolished after the removal of export subsidies, import replenishment licences and cash assistances for exports. It could not be done. When one member of the last pay commission tried to link the proposed massive pay increases to reduction in the numbers employed in government, the bureaucracy stonewalled the proposal till other members removed this requirement. Finances of state governments and local authorities are still to recover from those extra costs, not accompanied by any improvement in efficiency.

The American president, Richard Nixon, appealed to the “silent majority” in the United States of America for support against his “liberal” opponents. There is a “silent middle” in India. I had propounded some years ago that there is a five tier pyramid of the Indian market structure, consisting of the destitute, the climbers, the aspirants, the consuming classes and the rich. More than 60 per cent of Indian households are made of the three classes in the middle. This is the true Indian “middle class”. Their interest is in more consumption of manufactured goods, better education opportunities and job prospects for their children, easily accessible health services, and more comfortable lives. They are not haters of the kind that V.P. Singh or the Vishwa Hindu Parishad or the extremist Muslim movements represent.

They are not looking for immediate transformation in their lives, but are satisfied if it appears that policies are moving them in that direction. This is our “silent middle”, more concerned about inflation, retirement, housing and income, possessing colour television sets and scooters, nice clothes, cosmetics for their women, affordable healthcare, easy commuting to work, and the intrusion of corruption into their daily lives. They need to be educated on why less government consumption expenditures, privatization, downsizing government, limiting many of the subsidies, and so on, are necessary if their concerns are to be satisfied. They must understand that there is no free lunch and if the government spends in one area, it will have less for other areas. We need mobilization of this “silent middle” in India. Only they can overcome the power of the small but vocal vested interests that support the ideological extremes.

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