The Telegraph
Since 1st March, 1999
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- Blaming reform is the last refuge of socialists running out of ideas

The author is professor of philo-sophy and of law and governance, Jawaharlal Nehru University

Mani Shankar Aiyar’s article, “Discrediting reforms” (March 12), is a good example of the kind of misplaced causal analysis that has been detrimental to sound economic policy. He is correct in pointing out that the performance of the economy during the Nineties, in terms of growth, has not been as spectacular as defenders of reform claim; he is also correct in pointing out that promised goodies like foreign direct investment have not materialized and that the state has left certain sections of the poor vulnerable. But he is entirely wrong to conclude that all this is due to reform rather than a lack of it.

First, some perspective. India’s growth rate was high in the late Eighties as well before reform started, but that growth was unsustainable and led to the financial crisis of the early Nineties that triggered reform in the first place. Second, the Nineties is the only decade in which India, even with its slow economic growth, has grown consistently more than the average of the world economy; the period from the Fifties to the mid-Eighties saw India’s share of world gross domestic product actually declining.

Third, even the most obdurate leftists are conceding that the Nineties has seen among the more spectacular reductions in the number of people below the poverty line and not all of this reduction is statistical jugglery; certainly more people have been lifted out of poverty than four decades of so-called socialism. There is still, as Mr Aiyar suggests, a problem about the fate of the poorest of the poor. But their woes are more due to a dysfunctional state and bad governance than reform itself.

There is nothing in the reform process that prevents the government from distributing food to the needy, just as there is nothing that prevents us from increasing expenditure on health and education. The problem, rather, is that the entire system of food subsidies is not about the poor, it is about subsidizing farmers. That is why the government keeps food prices higher for the poor than they need be. In many states, such as Rajasthan, which experienced drought, the level of government apathy was the main cause of food not being distributed rather than the ideology of reform.

Our entire food policy is not an indictment of reform; it is a case for why reform is needed. This policy is dictated by a combination of vested interests and apathetic government. The attack on subsidies is an attack on those interests; the purpose of taking the government out of running things it should not (like public sector enterprises) is to make sure that it attends to those things it should, like feeding the poor.

Mr Aiyar rightly notes that we have not received much FDI. But he fails to ask the question, why not' Why do people think India is a bad place to do business' And do we really expect growth of any kind if we continue to be bad for business' Poor infrastructure, unclear policy directions, hostile ideological environment created by a combination of shrill swadeshis and ossified socialists, bureaucratic delay, onerous labour laws, arbitrary rules regulating the size of industry, the list could go on. Even Indian business does not find investment pleasant. China attracts more FDI not because it is socialist.

As an aside it is interesting that in Mr Aiyar’s piece there is the constant equivocation between socialism and authoritarianism. China attracts investment because of the economic resources of overseas Chinese, because it has better infrastructure, because its labour costs (for justifiable or unjustifiable reasons) are less and because, despite corruption, there are fewer inordinate delays. And China also grew, not because it was simply authoritarian or socialist, but because it was open to foreign trade. We started our integration into the world economy much later.

In so far as reforms were meant in part to create a good environment for business, they have hardly begun. Lowering trade barriers, dismantling the licence quota raj has reaped some dividends, but these are only a part of the reform programme. The real hard work is yet to be done and it is odd to criticize a reform that hasn’t happened.

Government deficit is, as always, threatening to hamper growth. The government spends most of our money on interest payments, on loans accumulated during our great days of socialism, on subsidies, which Mr Aiyar as a politician should know, do not go to the poor, and on itself and its unproductive investments. The idea of reform ought to be to make sure the government does not spend money unproductively. If on an average, public sector units are giving no more than a two per cent rate of return, it does not take a genius to figure out that closing these enterprises and putting money in a bank where you get a seven per cent return is economically a sounder policy.

Of course not all PSUs need to be privatized and this government can be faulted for not moving faster on the government’s unproductive assets. If we reduce fiscal deficits, all of us benefit. The organized sector’s clout over labour laws means that employment generation has been hampered. And if the government were not as sprawling as it is, doing everything from running bad airlines to regulating culture, we could reassign its energies to its core functions apart from defence: protecting the most vulnerable, providing social services like health and education (on which even the World Bank argues the state should increase expenditure), and capital investment in infrastructure.

Where will the money for this come from' By making sure that all those vested interests which coolly hide behind the garb of “socialism” and have had a stranglehold on the state, rich farmers, government employees, politicians, do not use the state for their private ends; and the state itself does not use our money inefficiently on itself. If this is what reform is about, we have not even started; and while Mr Aiyar is correct in thinking that the market will not do everything, he ought to be a little more attentive to state failure as well. Our problem is politics, not reform

Our real problem is fear and resentment: we irrationally fear entrepreneurship and try to control it, we irrationally fear foreign investment (though why we find it more threatening than all the great foreign debt we incurred because of our magnificent socialism, I have no idea). Our politics is guided by a politics of resentment: underlying Mr Aiyar’s case against reform is the sense that since a policy has not immediately benefited everyone, it ought to be cast away.

Our socialists often are an odd combination of Brahminism and envy. Like Nehru, they have a contempt for “Bania civilization”, a distaste for commerce and a love for the state, they resent the idea of people getting rich, and they have a congenital suspicion of individuals exercising freedom in economic matters. China gave up on these fears and resentments long ago. The case for reform is that it will help the poor and has already done so, much more than the economic system that trapped us for decades. That it has not done nearly enough is a warning that ought to be heeded.

But remember this. As Burke once rightly said, “It is a general popular error to imagine the loudest complainers for the poor to be the most anxious for their welfare.” The “poor” in Mr Aiyar’s argument are a strategic invocation; few of his ideas will actually help them. And to blame reform for poverty and other economic ills is to act like the man in the old fable, who searched for his key under the lamppost not because he had lost it there, but because there appeared to be light there. Blaming reform is the last refuge of socialists running out of ideas.

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