Sonia's UPA is taking us to new 'Hindu' rate of growth

Trying to create a premature welfare state by throwing freebies all around is taking India back to the old Nehruvian Hindu rate of growth.

Vivek Kaul June 01, 2012 11:32:55 IST
Sonia's UPA is taking us to new 'Hindu' rate of growth

The late Raj Krishna, a professor at the Delhi School of Economics, came up with the term "Hindu rate of growth" to refer to the Indian economy's sluggish gross domestic product (GDP) growth of 3.5 percent a year between the 1950s and the 1980s. The phrase has been much used and abused since then.

A misinterpretation that is often made is that Krishna used the term to infer that India grew slowly because it was a nation dominated by Hindus. In fact, he never meant anything like that. Krishna was a believer in free markets and wasn't a big fan of the socialistic model of development put forward by Jawaharlal Nehru and the Congress party.

In fact, looking at the slow economic growth of India, he realised that the Nehruvian model of socialism wasn't really working. This was visible in India's secular or long-term economic growth rate which averaged around 3.5 percent during those days.

The word to mark here is "secular". The word, in its common every day usage, refers to something that is not specifically related to a particular religion. Like our country India. One of the fundamental rights Indians have is the right to freedom of religion which allows us to practice and propagate any religion.

But the world "secular" has another meaning. It also means a long term trend. Hence when economists like Krishna talk about the secular rate of growth they are talking about the rate at which a country like India has grown year on year, over an extended period of time. And this secular rate of growth in India's case was 3.5 percent in those decades. This could hardly be called a rate of growth for a country like India which was growing from a very low base and needed to grow at a much faster pace to pull its millions out of poverty.

So Krishna came up with the word "Hindu" which was the direct opposite of the word "secular" to take a dig at Nehru and his model of development. Nehru was a big believer in secularism. Hence by using the word "Hindu" Krishna was essentially taking a dig at Nehru and his brand of economic development, and not Hindus.

The policies of socialism and the licence quota raj followed by Nehru, his daughter Indira Gandhi and grandson Rajiv ensured that India grew at a very slow rate of growth. While India was growing at a sub 4 percent rate of growth, South Korea grew at 9 percent, Taiwan at 8 percent and Indonesia at 6 percent. These were countries which were more or less at a similar point where India was in the late 1940s.

Sonias UPA is taking us to new Hindu rate of growth

The Congress party's fascination for the Nehruvian brand of socialism continues. But, if economic growth could be created by just distributing money to everyone, then India would have been a developed nation by now. Reuters

The Indian economic revolution stared in late July 1991, when a certain Manmohan Singh (in an avatar different from the one who sits on the PM's chair now), with the blessings of PV Narasimha Rao, initiated the economic reform process. The country since then has largely grown at the rates of 7-8 percent per year, even crossing 9 percent over the last few years.

Over the years this economic growth has largely been taken for granted by the Congress-led UPA politicians, bureaucrats and others in decision-making positions. Come what may, we will grow by at least 9 percent. When the growth slipped below 9 percent, the attitude was that whatever happens we will grow by 8 percent. When it slipped further, we can't go below 7 percent was what those in decision-making positions constantly said. At a recent TV show, Montek Singh Ahluwalia, the Deputy Chairman of the Planning Commission, kept insisting that a 7 percent economic growth rate was a given. Turns out it's not.

The latest GDP growth rate for the period of January to March 2012 has fallen to 5.3 percent. I wonder, what is the new number Ahluwalia and his ilk will come up with now. "Come what may we will grow at least by 4 percent!" is something not worth saying on a public forum.

But chances are that's where we are headed. As Ruchir Sharma writes in his recent book Breakout Nations - In Pursuit of the Next Economic Miracles: "India is already showing some of the warning signs of failed growth stories, including early-onset of confidence."

The history of economic growth

Sharma's basic point is that economic growth should never be taken for granted. History has proven otherwise. Only six countries which are classified as emerging markets by the western world have grown at the rate of 5 percent or more over the last 40 years. These countries are Malaysia, Singapore, South Korea, Taiwan, Thailand and Hong Kong. Of these two, Hong Kong and Singapore are city-states with a very small area and population. Hence only four emerging market countries have grown at a rate of 5 percent or more over the last four decades. Only two of these countries, i.e. Taiwan and South Korea, have managed to grow at 5 percent or more for the last 50 years.

"In many ways the "mortality rate" of countries is as high as that of stocks. Only four companies - Procter & Gamble, General Electric, AT&T, and DuPont - have survived on the Dow Jones index of the top-30 US industrial stocks since the 1960s. Few front-runners stay in the lead for a decade, much less many decades," writes Sharma.

The history of economic growth is filled with examples of countries which have flattered to deceive. In the 1950s and 1960s, India and China, the two biggest emerging markets now, were struggling to grow. The bet then was on Iraq, Iran and Yemen. In the 1960s, the bet was Philippines, Burma and Sri Lanka to become the next East Asian tigers. But that, as we all know, never really happened.

India is going the Brazil way

Brazil was to the world what China is to it now in the 1960s and the 1970s. It was one of the fastest-growing economies in the world. But in the seventies it invested in what Sharma calls a "premature construction of a welfare state". Rather than build road and other infrastructure important to create a viable and modern industrial economy, what followed was excessive government spending and regular bouts of hyperinflation, destroying economic growth.

India is in a similar situation now. Over the last five years the Congress party-led United Progressive Alliance is trying to gain ground that it lost to a score of regional parties. And for that it has been very aggressively giving out "freebies" to the population. The development of infrastructure like roads, bridges, ports, airports, education, etc, has all taken a backseat.

But the distribution of "freebies" has led to a burgeoning fiscal deficit. Fiscal deficit is the difference between what a government earns and what it spends.

For the financial year 2007-2008 the fiscal deficit stood at Rs 1,26,912 crore against Rs 5,21,980 crore for the current financial year. In a timeframe of five years, the fiscal deficit has shot up by nearly 312 percent. During the same period the income earned by the government has gone up by only 36 percent to Rs 7,96,740 crore. The huge increase in fiscal deficit has primarily happened because ofthe subsidy on food, fertiliser and petroleum.

This has meant that the government has had to borrow more and this in turn has pushed up interest rates, leading to higher EMIs on loans. It has also led to businesses postponing expansion because higher interest rates mean that projects may not be financially viable. It has also led to people borrowing less to buy homes, cars and other things, leading to a further slowdown in a lot of sectors. And with the government borrowing so much there is no way the interest rate can come down.

As Sharma points out: "It was easy enough for India to increase spending in the midst of a global boom, but the spending has continued to rise in the post-crisis period...If the government continues down this path, India may meet the same fate as Brazil in the late 1970s, when excessive government spending set off hyperinflation and crowded out private investment, ending the country's economic boom."

Where are the big ticket reforms?

India reaped a lot of benefits because of the reforms of 1991. But it's been 21 years since then. A new set of reforms is needed. Countries which have constantly grown over the years have shown to be very reform oriented. "In countries like South Korea, China and Taiwan, they consistently had a plan which was about how do you keep reforming. How do you keep opening up the economy? How do you keep liberalising the economy in terms of how you grow and how you make use of every crisis as an opportunity?" says Sharma.

India has hardly seen any economic reform in the recent past. The Direct Taxes Code, initiated a few years back, has still not seen the light of day, but even if it does see the light of day, it's not going to be of much use. In its original form it was a treat to read it. Almost anyone with a basic understanding of English would have been able to read and understand it. The most recent version has gone back to being the "Greek" that the current Income Tax Act is.

It has been proven the world over that simpler tax systems lead to greater tax revenues. Then the question is why have such complicated income tax rules? The only people who benefit are CAs and Indian Revenue Service officers.

Opening up the retail sector for foreign direct investment has not gone anywhere for a long time. This is a sector which is extremely labour intensive and can create a lot of employment.

What about opening up the aviation sector to foreigners instead of pumping more and more money into Air India? As Warren Buffett wrote in a letter to shareholders of Berkshire Hathaway, the company whose chairman he is, a few years back: "The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down...The airline industry's demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it."

If foreigners want to burn their money running airlines in India why should we have a problem with it?

The insurance sector is bleeding and needs more foreign money, but there is a cap of 26 percent on foreign investment in an insurance company. Again this limit needs to go up. The sector is very labour intensive and has potential to create employment. The same is true about the print media in India.

The list of pending economic reforms is endless. But India needs much more economic reform in the days to come if we hope to grow at the rates of growth we were growing.

To conclude

Raj Krishna was a far sighted economist. He knew that the Nehruvian brand of socialism was not working. It never has. It never did. And it never will. But somehow the Congress party's fascination for it continues. And in continuance of that, the party is now distributing money to the citizens of India through the various so-called "social-sector" schemes. If economic growth could be created by just distributing money to everyone, then India would have been a developed nation by now. But that's not how economic growth is created.

All that the distribution of money creates is higher inflation which leads to higher interest rates and in turn lower economic growth. Also India is hardly in a position to become a welfare state. The government just doesn't earn enough to support the kind of money it's been spending and plans to spend.

It's time the mandarins who run the Congress party and effectively the country realise that. Our rate of growth of India's economy (measured by the growth in GDP) will continue to fall. And soon it will be time to welcome the new "Hindu" rate of economic growth. Sonia Gandhi and Manmohan Singh are taking us back to where Nehru left off. And how much will the new Hindu rate of growth be? Let's say around 3.5 percent.

Vivek Kaul is a writer and can be reached at vivek.kaul@gmail.com

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