'Reform by stealth, the originalsin of 1991, has come back to haunt us'

India badly needs a second generation of economic reforms. But that doesn’t seem to be happening. “What makes reforms more difficult now is what I call the original sin of 1991. What happened from 1991 and thereon was reform by stealth. Never was an attempt made to articulate to the Indian voter why we are doing this. What is the sort of the intellectual or the real rationale for this? Why is it that we must open up?” says Vivek Dehejia, economics professor at Carleton University in Ottawa, Canada. He is also a regular economic commentator on India Ink, The New York Times’s “first-ever country-specific” online content offering. In this interview, he speaks to Vivek Kaul.

How do you see overall Indian economy right now?
The way I would put it is, if I take a long-term view, a generational view, I am pretty optimistic. The fundamentals of savings and investments are strong.

What about a more short-term view?
If you take a shorter view of between six months to a year or even two years ahead, then everything that we have been reading about in the news is worrisome. Foreign direct investment or FDI is drying up. The savings rate seems to have been dropping. The economic growth we know has dropped. The next fiscal year we would lucky if we get 6.5% economic growth.

How do we account for the failure of this particular government to deliver crucially needed second-generation economic reforms?
The India story is a glass half-empty or a glass half-full.  If you look at the media’s treatment of the India story, particularly international media’s, they tend to overshoot. So two years ago we were being overhyped. I remember that the Economist had a famous cover where they said that India will overtake China’s growth rate in the next couple of years. They made that bold prediction. And then about a year later they were saying that India is a disaster. What has happened to the India story? The international media tends to overshoot. And then they overdo it in the negative direction as well. A balanced view would say that original hype was excessive. We cannot do nor would we want to do what China is doing. With our democratic system, our pluralistic democracy, the India that we have, we cannot marshal resources like the way the Chinese do, or like the way Singapore did.

Could you discuss that in detail? 
If you take a step back, historically, many of the East Asian growth miracles, the Latin American growth miracles, were done under brutal dictatorial regimes, be it Chile, Taiwan, Singapore or Hong Kong. They all did it under authoritarian regimes.

So the India story is unique. We are the only large emerging economy to have emerged as a fully fledged democracy the moment we were born as a post-colonial state and that is an incredibly daring thing to do. At the time when the Constituent Assembly was figuring out what are we going to do now post-Independence, a lot of conservative voices were saying, ‘don’t go in for full-fledged democracy’ where every person, man or a woman, gets a vote because ‘you will descend down into pluralism and identity-based politics and so on’. Of course, to some extent, it’s true. In a country with a large number of poor people, which is also a fully fledged democracy, the centre of gravity politically is going to be towards redistribution and not towards growth. So any government has to reckon with the question: where are your votes? In other words, the market for votes and the market for economic reform do not always correlate.

You talk about authoritarian regimes and growth going together…
This is one of the oldest debates in social sciences. It is a very unsettled and a very controversial one. For any theory you can give on one side, there is an equally compelling argument on the other side. So the orthodox view in political science particularly more than economics was put forward by Samuel Huntington. The view was that you need to have some sort of political control, you cannot have a free-for-all, and (you need to) marshal resources, savings rate and investment rate that high growth demands.

So Huntington was supportive of the Chinese model of growth? 
Yes. Huntington famously was supportive of the Chinese model and suggested that was what you had to do at an early stage of economic development. But there are equally compelling arguments on the other side as well. The idea is that democracy gives a safety valve for discontent, unhappiness or popular expression to disapproval of whatever the government or the regime is doing. We read about the growing number of mysterious incidents in China where you can infer that people are rioting. But we are not exactly sure because the Chinese system also does not allow for a free media. Also, let’s not forget that China has had growing inequalities of income and growth, and massive corruption scandals. The point being that China, too, for its much wanted economic efficiency, also has kinds of problems which are not much different from the ones we face.

That’s an interesting point you make…
Here again, another theory or idea can help us interpret what is going on. When you have a period of rapid economic growth and structural transformation of an economy, you are almost invariably going to have massive corruption. It is almost impossible to imagine that you have this huge amount of growth taking place in a relatively weak regulatory environment where there isn’t going to be an opportunity for corruption. It doesn’t mean that it is okay or it doesn’t mean that one condones it, but if you look throughout history, it’s always been the case that in the first phase of rapid growth and rapid transformation, there has been corruption, rising inequalities and so on.

Can you give us an example? 
The famous example is the so-called American gilded age. In the United States, after the end of the Civil War (in the 1860s) came the era of the Robber Barons. These people who are now household names — the Vanderbilts, the Rockefellers, the Carnegies, the Mellons —were basically Robber Barons. They were called that, of course, because how they operated was pretty shady even according to the rules of that time.

Why are the second-generation reforms not happening?
What makes reforms more difficult now is what I call the original sin of 1991. We had a first phase of the economic reforms in 1991 when we swept away the worst excesses of the licence-permit raj. We opened up the product markets. But what happened from 1991 and thereon was reform by stealth — reform by the stroke of the pen, and reform in a mode of crisis. There was never an attempt made to articulate to the Indian voter why we are doing this. What is the  intellectual or the real rationale for this? Why is it that we must open up? It wasn’t good enough to say, ‘Look, we are in a crisis. Our gold reserves have been mortgaged. Our foreign exchange reserves are dwindling.’ Again India’s is hardly unique on this. Wherever you look, whether Latin America or Eastern Europe, it generally takes an economic crisis to usher in a period of major economic reform.

So, is the original sin still haunting us?
The original sin has come back to haunt us because the intellectual basis of further reform is not even on anyone’s agenda. Discussions and debates on reform are more focused on issues like ‘the FDI is falling’, ‘the rupee is falling’, ‘the current account deficit is going up’, etc. Those are all symptoms of a problem. The two bursts of reform that we had first were first under Rao-Manmohan Singh and then under the NDA (National Democratic Alliance; 1999-2004; Vajpayee was then Prime Minister, and Yashwant Sinha and Jaswant Singh were successive finance ministers in his Cabinet).
If a case had been made to build a constituency for economic reform, then I think we would have been in a different political economy than we are now. But the fact that didn’t happen and things were going well, the economy was growing, that led to a situation where everybody said, ‘Let’s carry on’. But now we don’t have that luxury. Now, whichever government comes to power in 2014, it is going to have to make some tough decisions that their electoral base isn’t going to like necessarily. So how are they going to make their case?

So, are you suggesting that the next generation of reforms in India will happen only if there is an economic crisis?
I don’t want to say that. Again that could be one interpretation from the arguments I am making of the history. It will require a change in the political equilibrium and certainly a crisis is one thing that can do that. But a more benign way the same thing can happen without a crisis is the realisation of the political actors that, ‘Look, I can make economic reform and economic growth electorally a winning policy for me.’ But India is a land of so many paradoxes. A norm of the democratic political theory in the rich countries — that is to say, the US, Canada, Great Britain and the like — is that other things being equal, the richer you are, the more educated you are, the more likely you are to vote. In India, it is the opposite. The urban middle class is the more disengaged politically. They feel cynical. They feel powerless. Until they become more politically engaged, that change in the equilibrium cannot happen.

What about the rural voter?
The rural voter at least in the short run might benefit from an NREGA (the Mahatma Gandhi National Rural Employment Guarantee Act) and will say, ‘You are giving me money and I will keep voting for you’. We have all heard people say they (rural people) are uneducated and ignorant. No, it’s not like that. He (the rural voter) is in a very liquidity-constrained situation. He is looking to the next crop, the next harvest, the next ‘I-got-to-pay-my-bills’.  If someone gave him 100 days of employment and gives him a subsidy, he will take it.

How do you explain the dichotomy between Manmohan Singh’s so-called reformist credentials and his failure to carry out economic reforms? 
One of the misconceptions that crops up when we look at poor economic performance or failure to carry out economic reform is what cognitive psychologists call fundamental attribution bias. Fundamentally attribution bias says that we are more likely to attribute to the other person a subjective basis for their behaviour and tend to neglect the situational factors. Looking at our own actions, we look more at the situational factors and less at the idiosyncratic individual subjective factors.

So what am I trying to say? What I am saying is that it has become almost a refrain to say that Dr Manmohan Singh should be an economic reformer. He was at least the instrument if not the architect of the 1991 reforms. There are speculations being made in what you can call the Delhi and Mumbai cocktail party circuits, whether he is really a reformer. Was it Narasimha Rao who was really the architect of the 1991 reforms? Is Singh a frustrated reformer? What does he really want to do? What’s going on his head? That in my view is a fundamental attribution bias because we are attributing to him or whoever is around him a subjective basis for the inaction and the policy paralysis of the government.

So is the government, more than the individual at its helm, to be blamed?
Traditionally, the electoral base of the Congress party has been the rural voter, the minority voters and so on, people who are at the lower end of the economic spectrum. So, roughly speaking, they are the beneficiaries of the redistributive policies. Political scientists have a fancy name for it. They call it the median voter theorem. What does it mean? It means that all political parties will tend to gravitate towards the preferred policy of the guy in the middle, the median voter.

Was Narasimha Rao the real architect of the 1991 reforms?
Narasimha Rao must be given a lot of credit for taking what was then a very bold decision. He was at the top of a very weak government, as you know. And he gave the political backing to Manmohan Singh to push this first wave of reforms more than that would have been necessary, just to avert a foreign exchange crisis. And then he paid a price for it electorally in the next election. This, again, is the intangible element in the political economy — that short of a crisis, it often takes someone of stature to really take that long-term generation view. It means that you are not just looking at narrow electoral calculus but you are looking beyond the next election. That’s what seems to be missing right now. Among all the political parties right now, one doesn’t seem to see that vision of, ‘Look, this is where we want to be in a generation and here is our roadmap of how we are going to get there.’

Going back to Manmohan Singh, you called him an overachiever recently, after the Time magazine called him an ‘underachiever’.
The traditional view — and certainly that was widely in the West at least till very recently — has been that it was Manmohan Singh who was the architect of the India’s economic reforms. But then, how do you explain the inaction in the last five, six, seven years?

The revisionist perspective would say, ‘No, in fact, the real reformer was Narasimha Rao to begin with.’ The real political weight behind the reform was his. And Manmohan Singh did what any good technocratic economist should have been able to do, which is to implement a series of reforms that we all knew about.

My teacher Jagdish Bhagwati had been writing about it for years. In that sense, maybe Manmohan Singh was given too much credit in the first instance for implementing a set of reforms. If you look at his career since then, he has never really been a politically savvy actor. We have this peculiar situation in India since 2004 where the Prime Minister sits in the Rajya Sabha, the upper house. That kind of thing is not barred by our constitution but I don’t think that the framers of the constitution envisaged this would be a long-term situation.

It is a little like the British prime minister sitting in the House of Lords. I mean that practice disappeared in the nineteenth century. He has not shown from the evidence that we can see any ability to get a political base of his own to be a counterweight to the more redistributive tendencies of the Nehru-Gandhi dynasty. And that’s the sense that in somewhat cheeky way I was using the term ‘overachiever’.

Do you think he is just keeping the seat warm for Rahul Gandhi? 
It increasingly appears to be that way. If that is true, then it suggests that we shouldn’t really expect much to happen in the next two years. 

Does the fiscal deficit of India worry you?
If you look at some shorter- to medium-term challenges, then things like fiscal deficit and the current account deficit are things to worry about. Again, other things like the weak rupee, the weak FDI data, things that people tend to fixate at... — but those at best are symptoms of a deeper structural problem. The deeper concern is the kind of reform that will require a major legislative agenda such as labour law reform, for example, to unlock our manufacturing sector. And managing the huge demographic dividend that we are going to get in the form of 300-400 million young people. They will have to be educated.

But is there a demographic dividend?
That’s the question. Will it become a demographic nightmare? Can you imagine the social chaos if you have all these kids just wandering around, not educated enough to get a job, what are they going to do? It’s a recipe for social disaster. That, according to me, is going to be a real litmus test. If we are able to navigate that, then I don’t see why we wouldn’t be on track to again go back to 8-9% economic growth. I want to remain optimistic at the end of the day.

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