An Indian Entrepreneur Talks Growth, Regulation and Corruption: BY MUDIT JAIN & ATUL SINGH

 A seasoned industry leader explains how India was and remains a hostile environment for manufacturing. Due to onerous regulations, entrenched corruption, feudal bureaucrats and venal politicians, India has failed to industrialize in contrast to China.

udit Jain is a third-generation entrepreneur and a manufacturer of industrial chemicals in India. He discusses the causes of India’s unnecessarily sluggish manufacturing growth with Fair Observer’s Editor-in-Chief, Atul Singh.

The British ran India with a colonial bureaucracy designed to extract wealth, not to create it. When India won its independence in 1947, many Indians expected the dividend of independence to come in quickly. In some ways, it did — during the 1950s and 1960s, India expanded into nearly all manufacturing sectors, save for high tech and aviation. But the expansion did not survive the 1970s.

While India’s first prime minister Jawaharlal Nehru espoused many socialist policies, inspired by the then-successful Soviet Union, he was still relatively favorable to business. When his daughter Indira Gandhi assumed power, she lurched left and decimated business. During her reign in the 1970s, India became a socialist state ruled by officers of the Indian Administrative Service (IAS) and their underlings. These sycophantic officials imposed onerous regulation, high taxes and extortionate bribes, suffocating industry and squeezing growth.

Socialism killed Indian business

Under Gandhi, India nationalized key industries and heavily regulated the others. The IAS became solely in-charge of formulating and executing policy. Note that the IAS is the successor to the British Raj’s colonial Indian Civil Service (ICS). The original mission of the ICS was to collect taxes and deindustrialize India. After independence, control over the economy gave politicians opportunities for graft and rent-seeking. Together with their bureaucrat lackeys, they created a system that was altogether hostile to business.

The infamous license-permit-quota raj decimated business. In this Kafkaesque system, entrepreneurs had to run from pillar to post and grovel before bureaucrats if not bribe them. Approval from dozens of offices was necessary to do anything. After months and, at times, years of running around offices, entrepreneurs received licenses that were narrowly tailored to specific activities with strict limits on productivity. If their production exceeded the limits imposed by their license, bureaucrats levied hefty fines and extracted heavy bribes.

Gandhi was voted out in 1977 but the hodgepodge Janata Party that took charge was socialist as well and business did not get a break. India’s socialist DNA permeates all political parties, including the ruling Bharatiya Janata Party (BJP). Having tasted blood, politicians and IAS officers cannot let go of the commanding heights of the economy.

Politicians have to appeal to a poor and uneducated populace. So, populism akin to the Latin American variety is always a temptation. Until recently, labor unions were affiliated with political parties, making manufacturing tricky. 

Change because of external shock

Despite the economy growing at the proverbial Hindu rate of growth, India did not change course. In the end, an external shock changed the Indian system. In 1991, the Gulf War increased oil prices. By this time, the Soviet Union was on the verge of collapse and could not send cheap oil to India to bail its socialist de facto ally out. This led to a severe balance of payments crisis and India had no choice but to turn to the International Monetary Fund (IMF) and embrace market reforms.

The IMF forced India to liberalize its economy, lower its tariffs and open its markets. Many expected Indian businesses to fold in the face of foreign competition. Instead, India’s economy grew faster than ever before. It turns out that socialism, not Hinduism, was holding back the economy. Foreign investment and capital goods flowed into India. Manufacturing got a second wind after the first burst after independence. 

The boost of 1991 petered out for manufacturing in 2001 when China entered the World Trade Organization (WTO). India liberalized trade but did not lift restrictions on domestic business. The government also did not invest in infrastructure. This meant that businesses like Jain’s manufacturing operations could not keep up with their Chinese competitors. 

Rare Story of a Global Indian Manufacturing Success

Chinese manufacturers were able to make things with speed and scale. Chinese imports flooded Indian markets. Even as this economic tsunami was hitting the economy, India’s bureaucrats sat on files forever, demanded nonstop bribes and strangled business with red tape. High costs on inputs such as water, power and transportation made it far more expensive to manufacture domestically than import from China. As a result, many industries collapsed entirely. Liberalization internationally and overregulation domestically proved to be an unmitigated disaster for the manufacturing sector.

The toxic politician-bureaucrat nexus

After independence in 1947, India’s economic model was inspired by the Soviet Union. In this communist Mecca, experts did the economic planning and engineers implemented their plans. In India, economic planning and execution are both in the hands of an omniscient and omnipotent bureaucracy with IAS officers as feudal barons and politicians as de facto rulers. The IAS officers are invariably generalists, with little professional knowledge or deep interest in economic policymaking or the sectors they control. Bureaucrats occupy their position not because of expertise but because of loyalty to politicians and are answerable to no one.

Politicians continue to see business not as a driver of the economy but as a cash cow to squeeze for personal fortunes and election funds. In spite of the rhetoric about pro-manufacturing policies and promoting growth, the Indian system is still essentially one in which politicians dole out freebies to get votes and squeeze industry to pay the bill with heavy taxes. Ultimately, the poor are not helped either, because they see these taxes get translated into higher prices. They also miss out on manufacturing jobs and increased productivity because Indian industry is cut off at the knees and cannot compete with its foreign counterparts. Ultimately, neither the poor nor the entrepreneurs are enriched. Only politicians and bureaucrats laugh all the way to the bank. In India, this Batman-Robin duo is not robbing Peter to pay Paul, but instead robbing both Peter and Paul.

Businesses routinely find themselves compelled to make campaign contributions to politicians, lest they punish business owners with bureaucratic harassment. Such is the convoluted and complicated law of the land that it is impossible to follow it even after making superhuman efforts. So, bureaucrats can shut down any business for alleged breach of the law. As innumerable entrepreneurs and manufacturers know only too well, every bureaucrat inspector finds some grounds to find an infraction, leaving them a choice between a bribe and a fine. Inspectors can also arbitrarily shut down factories. 

The Indian system does not allow corruption inadvertently. It is corrupt by design. Today, Indians impose a new colonialism on their fellow Indians. Indian politicians and bureaucrats operate in a system designed for extracting wealth, not creating it.

Here Is Why Indian Manufacturing Is Struggling

Unfortunately, Jain sees no change on the horizon. If things continue as they have, India will fail to achieve a manufacturing boom that emulates the 1991–2001 period.

Jain believes that India must take a page out of Japan’s book and outsource decision-making power to professionals. Boards of experts should craft regulations in consultation with industry in the interests of long-term growth, not short-sighted political gains. It is good governance, not natural resources or comparative advantage, that made Japan an economic superpower. India can be an economic superpower too if it enlists policymakers with expertise who act in the national interest instead of petty self-interest.

Courtesy: https://www.fairobserver.com/podcasts/an-indian-entrepreneur-talks-growth-regulation-and-corruption/#

Indianise the British legacy - Indian Administrative Services: Dhiraj Nayyar

 

It may make sense to divide the IAS into different streams: administration, policy and regulation.

The merging of the Amar Jawan Jyoti at Delhi’s British-built India Gate with the Eternal Flame at the recently constructed National War Memorial a few hundred metres away has generated a loud debate on the legacy of colonial rule. There is nothing wrong in revisiting legacies; no nation can be forever a prisoner of its history. The one legacy of the British Raj which continues to have a hugely consequential say on India’s present and future is the Indian Administrative Service (IAS), which underwent a change in name (from Indian Civil Service/ICS to IAS) post-Independence but little change in substance.

Now, as the Centre and states do battle over a change in rules for IAS officers—both want a larger share of the country’s elite administrators—it may be worthwhile to revisit the purpose and role of the IAS, 75 years after Independence. The logic of a generalist, all India service made sense for the British as the main purpose of the colonial government was to control a vast and diverse country through a coherent and efficient (from their point of view) system of administration. Post-Independence, the value of the IAS was reemphasised by none other than India’s first Home Minister, Sardar Patel, who described it as the “steel frame”, which would hold united a partitioned, impoverished, diverse and democratic country while also setting the wheels of development in motion.

It would be reasonably safe to argue that, for both the British and the early governments of Independent India, preservation and control came first, welfare second and economic growth a very distant third. The instinct of preservation (of the status quo) remains embedded in the DNA of the career bureaucracy. This explains both India’s relative success post-Independence—in terms of continued democracy, territorial integrity, steady economic growth without implosion—as also its failure—to attain spectacular economic growth, to have a world class manufacturing base, to raise sufficiently its human capital levels. The system of government is simply not designed to disrupt or take risks.

The debate on civil service reform often gets overtaken by lateral entry, a clear point of resistance for the career bureaucracy. But a holistic discussion requires an understanding of what roles an IAS officer performs over her career. Very broadly, and for the sake of simplicity, these can be broken into three, each lasting around a decade. In one decade, usually early in their careers, IAS officers do precisely what they are trained for: administration. As SDM/DM or ADC/DC of one of India’s 700-plus districts they are responsible for law and order and for the administration of all the relevant government (Centre and state) social and economic programmes on the ground. In the second decade, officers are posted in state capitals where they do a mix of implementation and policy design. Unlike at the district level where they are akin to all-rounders, in state capitals they go to a ministry and are responsible for implementing schemes and designing state-level programmes in one sector. A third decade is spent at the Centre—as Director, Joint Secretary, Additional Secretary and Secretary—in ministries framing policies and working on regulation. This work is substantially different from administration/implementation. Career progression through these different roles is not linear, so officers go back and forth from district to state, and from state to Centre.

There is no doubting the abilities of IAS officers, all of whom have to sit through very competitive examinations to get in. But it could be the case that some have a greater competence in administration while others have a greater competence in policy and a third set in regulation. And in today’s highly complex and specialized world, individuals may have a talent for different types of policy: telecom is different from agriculture, which is different from trade.

So, at the very least, it may make sense to divide the IAS into different streams: administration, policy and regulation. India is moving increasingly towards a full-fledged market economy, so jobs at the Centre require policy and regulation experts. Administrators would instinctively look for a larger role for the government, which may be counter-productive. But the country needs competent administrators who can address the gaps that exist in physical and social infrastructure on the ground. And regulators need to know how to keep an arms-length from line ministries and perform their tasks with some “independence”. The three should not overlap. It isn’t just about skillsets but also conflict of interest.

Of course, there remains a strong case for an elite cadre of career civil servants. Lateral entrants can complement but not necessarily replace them. The country can actually have many more IAS officers, but they must specialize and train for the appropriate stream from the start of their careers. That would be a welcome merger of the IAS and 21st century India.

The author is Chief Economist, Vedanta.

Courtesy: https://www.impriindia.com/insights/reforms-in-indian-bureaucracy/