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Rising sun, setting economy: some lessons from the Far East for India

Japan is the second largest economy in the world. Till the other day it was the byword for ‘‘miracle’’. Today it is in i...

Japan is the second largest economy in the world. Till the other day it was the byword for ‘‘miracle’’. Today it is in its third, and deepest, recession in a decade. And there are two ominous portents: first, the country is just not able to pull itself out of the morass: reforms are announced, but the Government is just not able to see them through; second, entire chunks of its economy are getting hollowed out — Japanese firms are shifting their factories to China.

Both features should make us sit up: banks and financial institutions lending by directives and by connections rather than on economic calculus. The intertwining of booms in real estate and stock markets and investment – and the domino effects when one collapsed. A political class so riven by factions, so delegitimised and enfeebled by corruption that it is not able to execute the obvious correctives: the public exchequer just cannot afford the huge highway and other construction projects so characteristic of Japan, but the political system has got so dependent on and enmeshed with these that for all his efforts, Prime Minister Junichiro Koizumi is just not able to either privatise or cut them to affordable dimensions. Similarly, the banks and other financial institutions are on the verge of bankruptcy, what has to be done in regard to them has for years been crying out for attention, proposals have followed proposals, but the political and economic establishment is just not been able to do anything of substance.

A decade of floundering, of announcing reform programmes and not being able to carry them through, and the result is for all to see: a nation, the very synonym for miracles till yesterday, is drained of confidence today. But is even one of the features that has brought Japan to the present pass not to be seen in India — to say nothing of the scores of others that stare at us in India and are not to be seen in Japan?

Japan’s banks and financial institutions are guided mainly by connections; its political class riven by factions and enfeebled by corruption; it has suffered a decade of announcing reforms and not being able to carry them through. Sounds familiar?

We keep chanting, ‘‘But the fundamentals of the Indian economy remain strong.’’ But had the ‘‘fundamentals’’ of the Japanese economy weakened when it began sliding a decade ago? Indeed, Argentina is in a tailspin today: its entire banking system has had to be shut down. Had its ‘‘fundamentals’’ collapsed before it swung out of control?

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Things go wrong little by little, one by one. A society gets accustomed to progressively worse particulars. The political and economic establishment does not correct course in time. Japan, Indonesia, Argentina…

The Chinese whisper

The second feature — the hollowing out of its industry with Japanese units shifting to China — should alarm us just as much. When I drew attention to this in Japan, and asked ‘‘But aren’t you feeding a python?’’, everyone — from bankers to industrialists to the highest persons in public life — agreed. ‘‘But what can we do?,’’ they remarked. ‘‘We can’t force our industrialists not to shift: labour costs in China are one-tenth what they are here. And the Chinese workers work so much harder. They are so disciplined: each of them knows that, should he need to be replaced, there is an inexhaustible supply from the countryside. Even if we could force Japanese companies to continue here at home, someone else will set up factories in China to produce those very things, and out-price us in Japan itself.’’

Then what is the way out?, I would ask. Each said, ‘‘There is only one way: continuous innovation.’’ In Singapore, the response was identical: ‘‘That is a very important question you ask,’’ the highest leaders said. ‘‘There is only one way for us. We just have to keep moving higher and higher on the technological ladder.’’

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A Singapore minister told me of his Indian experience: In China, he met two officials who had all the answers and took all the decisions. In India, he was directed to the land department where 3 different officers had different information on the same rules

Having become a financial hub, having sped ahead in information technology, including hardware production, Singapore is racing to take the lead in biotechnology: in across-the-board applications of it — life-sciences, pharmaceuticals, as well as agriculture. The response of many of our industrialists to challenges, I am sure, is identical. But the reflex of too many is to ‘‘run to Mummy’’, in this case to the Government: witness the wails for ‘‘anti-dumping duties’’ that went up last year as Chinese goods began surfacing in our markets. But if we can’t compete against Chinese goods in India, how are we going to compete against them in far-away markets like Europe and the US?

Moreover, in today’s world we just cannot institute the levels of duties that would protect our units: with Chinese labour costs being so low, with their work force putting in labour of a kind that our trade unionists would scream is inhuman exploitation, with capacity utilisation in a slew of Chinese state-owned enterprises having fallen so low that they just do not care to recover any of their fixed costs today, what level of duties would protect our units from their goods? And were we to enact duties that high, they would become an uncontrollable spur to smuggling. All of us, but specially our industrialists, must confront this reality today.

My profit, your loss

Another feature holds us back. The ‘‘core competence’’ of many of our industrialists is their skill in manipulating the State apparatus — a skill that they deploy with single-minded perseverance to keep their rivals down, to keep competition at bay. In my current charge, I get to see every other day the doggedness with which some of our industrialists strain to keep others down, and the skill they deploy in inventing ‘‘grounds’’ why the other fellow should be disqualified. I also get to see how deep and extensive is the reach of these persons within the State apparatus: indeed, one of the delights for a journalist to have the sort of assignment that I have today is that so many industrialists themselves show up their ‘‘family tree’’ to me every other day — of course, I keep good sketches of what I am shown!

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‘‘Core competence’’ for many of our industrialists means manipulating the State apparatus. As minister, I get to see every other day the doggedness with which some of our industrialists strain to keep others down

This factor — this obsession with keeping the other fellow down, in particular by using the State apparatus — has been as much of an impediment to faster privatisation as any other, indeed to reform in general. Can it be that each of us will hold the other back, and yet, as a collective we will advance? Out-do others, instead of holding each other back. Out-do others in winning the approbation of the consumer than in bending personnel of the State to your ends.

There is another respect in which habits have to be reversed. How can the Finance Minister continue to lower tax rates if the resultant tax collections fall below the mark? How can financial institutions keep afloat if industrialists convert loans into ‘Non-performing Assets’? Have many of our industrialists not used the BIFR to escape their obligations — to creditors, to labour?

The point has been put well by our seers: dharmo rakshati rakshita – Dharma, protected, protects. That is just as true of the political, economic, social order. When we abide by the rules of the order, the order protects us. But when we violate the rules, when we bend them this and that to serve our immediate, parochial ends, the order is rent asunder. In the end we are ourselves left defenseless, we have no shield against the wolves. Rule abidingness — that is a value that all of us — industrialists as much as anyone else — must live.

Institutions of the State are much worse off than, and in much more urgent need of being turned inside out, than industry. Three features in particular have been brought home to me during recent visits. Investors come to a country or turn away, other countries will exert to cooperate with us or will look elsewhere, not so much because of internal rate of return calculations their accountants churn up on specific projects, but by the general repute of a country. And India’s reputation today is of a country in which things will get blocked one way or another.

Committee raj

Singapore has to fly on two wings — China and India, one leader of Singapore after another said. That is why it is important for us that India grows rapidly, that relations between Indian and Singapore grow stronger. Look upon Singapore as your Hong Kong, your Shanghai.

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Why is it, then, that Indo-Singapore economic relations just don’t take off, our High Commissioner asked one of Singapore’s key decision-makers. Well, I will tell you, the Minister replied. This time the main proposal is to set up a ‘‘joint study group’’ to explore ways of strengthening economic cooperation. But a ‘‘joint task force’’ was set up two years ago to study the prospects for a free trade arrangement between our countries. It has had precisely one meeting. You see, we want the closest cooperation, he continued. We have been striving to interest you in it. When you want us round, just whistle. We will come running. But till then, you will understand, we have other things to do. That was the message — indeed, those were the very words.

Another Minister had, in a previous assignment, been in-charge of constructing the IT-park in Whitefield outside Bangalore. He had also been in-charge of a corresponding project that Singapore undertook in China. What was the difference, he was asked. In China I was met by two officials, he explained. They had all the answers, they took all the decisions. And what they decided, got done. In India I was directed to the land department. There I met three officers. Each had his own version of the regulations we would have to traverse. And then for a year-and-a-half the whole thing got stopped because a gentleman who had a small plot behind the proposed site went to court: he was rearing bees for honey, and argued that his activities would be impeded, that the land should have been acquired under one Act rather than another…

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In Japan, I was reminded that a Secretary had announced that there would be a ‘‘single window’’ in his Ministry to solve the problems that Japanese investors faced from time to time. Don’t ask what has happened since, I was told. Two years ago we announced that we would give assistance of $10 million to Cambodia. It has not been possible to disburse even this meagre amount: two ministries have been discussing whether the grant element in the assistance would have to be limited to ‘X’ or could be raised to ‘X+Y’ — a change that wouldn’t register as even a flea-bite on our exchequer.

Nor is the failure to give effect to decisions the lapse of this government or that, of this department or that. Indeed, such things have become endemic to our system of governance — they persist whichever party or individual is in office. On the other side, as they persist, investors, even governments have concluded that whatever we say, whatever grand plans we announce, whatever ‘‘vision’’ and ‘‘policy’’ statements we launch, in the end things will get bogged in some swamp or the other. More than anything, it is this impression we have to turn around. And that is one of the main considerations that we should bear in mind as we block reforms, as we bend finance ministers to roll back their announcements. It isn’t just that that particular reform gets derailed, a reform that is desperately needed. It is that that reputation — of a country encoiled in a system that will, in the end, not allow it to deliver on its announcements — gets reinforced.

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(To be continued. Based on the author’s address at a plenary session of the Confederation of Indian Industries’ annual meeting held recently in New Delhi)

First published on: 07-05-2002 at 12:00:00 am
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