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Number 1 positon in the world

Administrative Note:

Week's Agenda: Economy

A major IPI objective is to identify and spell out the "systemic" changes
required that will help take India to the number 1 position in the world in
economic achievement.  In this context,  the appended two articles which
have appeared  recently  in the Business Standard, I thought, should be of
considerable interest to all of us. The first is titled "Blossoming in a
foreign land"  by Deena Khatkate and the second "Prime Minister's seven
questions", by the eminent economist and former bureaucrat, Ashok Desai, who
is now a member of the Prime Minister's Economic Advisory Council.

Ram Narayanan
janaky@indiaintl.com or loraln@worldnet.att.net

Tuesday, October 6, 1998

Blossoming in a foreign land (by Deena Khatkate)

Indians have blossomed to their full potential in a social and economic
environment radically different from the one in which they were born and
grown, says Deena Khatkhate

An American wag once asked me why India should not be plucked from its
geographical location in Asia and transplanted to the American continent.
Reading about India's inefficiencies in economic management and the poverty
there, in contrast to what Indians have been achieving in industry, academia
and science in the US, he reasoned that the whole country would do well in a
different milieu.

This was, of course, a hyperbole, which however concealed the disturbing
fact that Indians blossomed to their full potential in a social and economic
environment radically different from the one in which they were born and

The other day, the Wall Street Journal, quintessentially a waspish paper,
carried a full-blown article on a soon-to-be steel baron on the world stage,
Ispat's Laxmi Mittal.

In a short span of some 15 years, this dashing dynamo changed the face of
every steel plant he touched, be it in Indonesia, Mexico, Kyrgystan, and now
the US. He took over what to begin with were lemons, overhauled their
organisation, introduced innovation and made them high-profile steel plants.

The Wall Street Journal went even further in foretelling that Mittal now had
few rivals and in a none-too-distant future he may well emerge as a new
messiah in steel technology, surpassing even the best in Japan.

The author of the article asked Mittal why he did not do in India what he
did elsewhere. Mittal's reply was crisp and sharp: "If I were to buy an
existing steel mill in India, I would have spent more than half of my life
in chasing the bureaucrats and the politicians. On the other hand, in every
other country where I transacted my business, it did not take me more than a
few months."

The inventor of Bose speakers, who wanted to set up a plant in the land of
his birth, has his own tale to tell, and it is no different from Laxmi

Mittal, of course, has hogged the headlines in the western press. But there
are hundreds of such young entrepreneurs blazing the economic horizon of
western countries.

A young couple, Raj and Neera Singh, has taken the high-tech cellphone
business by storm. Some eight years ago, both landed in the US from Kanpur
IIT with nothing but their brains. They worked their guts out in a small
apartment in Virginia experimenting with an idea of evolving a new cellphone
technology which would drastically curtail the cost.

They sold the idea to a telecommunication agency for a pittance. However,
realising the value of the invention, the agency provided them with
financial wherewithal. Now, the Singhs have turned out to be billionaires,
spreading their wings to the Federal government and major industries.

Sudhakar Shenoy, voted outstanding entrepreneur in the Washington area for
1998 for up-scaling information technology, is yet another star on the
firmament. Coming from nowhere, how could these Indians dominate the foreign
lands? It is not as if those who migrate are transformed into geniuses the
moment they enter the western hemisphere.

It is not merely economic Darwinism that drives the human spirit in western
societies. There needs to be an incentive-compatible system and the cost of
transacting business has to be minimum for the enterprise and the
entrepreneurs to thrive.

Under the first, inefficiency is punished and innovation is rewarded, while
under the second, the markets tend to function more efficiently. High
transaction costs, as Nobel Laureate Douglas North pointed out, are major
deterrents to the flowering of individuals and advancement of nations.

Individuals typically act on incomplete information, North argued, with
subjectively derived models that are infrequently erroneous. To overcome
that, information feedback is a prior condition for efficiency of outcome
which low transaction costs alone can ensure.

Sadly, India is cursed by the political state and the uncongenial social
institutions which tend to cumulate the transaction costs of doing business,
and it is that which renders the enterprise nugatory.

What is true of Indians in industry and commerce abroad is true, as well, of
Indians in academia. Just look at the luminous circle of front-rank Indian
economists: A K Sen, Jagdish Bhagwati, T N Srinivasan, and Avinash Dixit,
and their younger colleagues, Raj Sah, Dileep Abreu, or the management
scientist, Pankaj Gamavat, Amar Bhide, and Pralhad.

They all have thrived and reached the acme of their intellectual career in a
liberal and competitive academic environment where no favour is asked for
nor given. For every step in the ladder of promotion in the universities, it
is their achievement in the respective fields, acknowledged by their peers,
which was the decisive factor.

Not that all Indians who adorn the western academia are a superior breed.
Many in Indian universities are as gifted as those who have become
world-renowned scientists, but their early promise is betrayed, as is
evident from their minuscule contributions to respective disciplines.

The reason is simple. There is no incentive structure in place which draws
the best from the academic community. Once they enter the university as a
lecturer or a reader, their progress to full professorship is virtually
automatic. There is no anxiety about the tenure, nor any obligation to earn

The great astrophysicist, S Chandrasekhar, a Nobel Laureate, once said
ruefully that he could not have become the scientist that he was in India,
what with its patronage system, familial bonds, government interference, and
lack of objective standards of assessment, which patriotism, however
abiding, could not have exorcised.

Saturday, October 3, 1998

Prime Ministers seven questions

Ashok V Desai presents some quick answers that may help in pepping up the

The Prime Minister put seven questions to the industrialists he had called
for counsel. Their well-oiled machinery must be humming already; in a few
weeks they will come up with impressive answers presented in multicolour on
powerpoint. In the meantime, I will take a shot at giving quick answers
churned out by my single rusty brain.

1. How to rekindle the spirit of entrepreneurship?

You dont have to rekindle entrepreneurship; it is there in plenty. Instead,
remove the hurdles that waste the energy of entrepreneurs. Introduce
competition in the electricity market and let industries buy it from the
cheapest source.

Divorce railway tariff from the commodity carried and relate it to weight or
volume and distance. Remove checkposts from trunk roads, sell access to them
and use the sales proceeds to upgrade and widen them.

Simplify and unify taxes so as to minimise corruption. Abolish all
privileges that small industry gets on condition that it does not outgrow
the set limits. Remove licence raj in aviation, telecommunications,
automobiles -- wherever you have kept it and expanded it.

2. How to deal with the global meltdown?

First of all, get the exchange rate down. Exports are falling. Air travel
and hotel costs are so high that Indian tourists are going abroad instead.
The paper industrys raw material costs alone exceed the cost of imported
paper. Interest rates are far higher than abroad. Look everywhere; talk to
exporters, producers and importers. You cannot escape the conclusion that
the rupee is overvalued.

Second, as you bring the rupee down, reduce import duties on industrial
inputs to stimulate exports. Third, remove restrictions on foreign portfolio
investments; they will bring in foreign investment without the passing of
control to foreigners about which your government is so sensitive.

3. How to enhance industrial productivity and competitiveness?

First, make it possible for producers to tailor their labour force to
production. Change labour laws to make recruitment and retrenchment
contractual processes with no state interference. Give liberal subsidies to
voluntary retrenchment, retraining, and travel for seeking jobs.

Second, relax state-induced constraints on production -- electricity,
railways, telecommunications, air transport, ports, roads -- introduce
competition in these industries, and reduce the costs they impose on

Third, reduce interest rates; but for that you will have to bring down the
absolute fiscal deficit of the Centre and the states combined, not just its
ratio to GDP. Finally, while bringing down the deficit, reduce government
expenditure on subsidies and unproductive consumption, and shift it to
subsidising investment in infrastructure.

4. How to get on to a higher growth path?

Industry has considerable surplus capacity, and will grow faster if demand
for its products increases faster. Foreign demand will increase and foreign
supply will become more expensive if the rupee is brought down; so, devalue.

Demand for industrial goods will increase if investment in infrastructure is
raised: the governments should shift expenditure to infrastructure.
Agriculture will produce more if competition is introduced in the markets
for agricultural products, fertilisers, power and water: controls in all
four areas should be removed.

Electronic technology is simply waiting to be introduced into financial
services; all it needs is competition. Instead of killing thousands of
non-bank financial companies, the Reserve Bank should be licensing more
private universal banks. It should force banks into electronic banking and
cash transfer. Sebi should allow all stock exchanges to set up terminals
wherever they wish.

5. How to improve the governments communication strategy?

This assumes that you have something to communicate which is not getting
through. This is a common feeling of all governments. However, the fault
does not lie with the channels of communication: a good deal has to do with
the government.

First, the government must speak with one voice. This government needs to
become considerably more disciplined in making statements; the number of
spokesmen, the number of statements and the number of occasions on which
they are made needs to be more closely defined and controlled.

Second, there should be regular, predictable contacts with the media:
frequent, periodic press conferences are one possibility. Third, briefings
should be as broad as possible, and non-discriminatory. All politicians like
to play favourites amongst the media, but favouritism invariably reduces

Finally, the quality of government spokesmen needs to be considerably

6. How to foster the knowledge industry?

Get away from the government-funded, government-run, government-controlled
model, and introduce competition. You have banned direct-to-home television
services. Instead, negotiate with Murdoch. A DTH system could carry 200
channels; offer him a licence if he would give the government 100 channels.
Use these 100 channels to beam all education from primary school to
university. Lease them out competitively; let them operate as open schools
and universities. Let the conventional teaching institutions compete with
the broadcasting institutions. Set common examinations; stop subsidising
teachers and their employers, and instead subsidise students on the basis of
their examination results.

7. How to reach a growth rate of 7 per cent?

How ambitions have fallen! Manmohan Singh, a most cautious man, used to talk
of achieving 7-8 per cent growth; this Prime Minister aspires to reach
Manmohan Singhs lower limit. He should draw the implications of his
ambition of making India a global power -- anything less than 10 per cent
would be too low.

First, the country faces a far less favourable external environment than the
East and Southeast Asian countries did during their period of runaway
growth. Hence it will have to aim for efficient import substitution rather
than spectacular export growth; for this, a consistently undervalued
exchange rate and extremely low import duties are imperative.

Second, the impetus to growth will come from industrial profits; the way to
boost them is to reduce infrastructure costs -- costs of electricity,
transport, communications. Finally, India will have to rely far more on
domestic savings than the Asian tigers did -- especially if this swadeshi
government lasts. Reducing excess consumption by the Centre and the states
is the best way to release investment resources for productive industry.

-- End of included mail.

----- End of forwarded message from Puneet Singh, -----

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