India's economic theory fashion cycles

'Make in India' could suffer the same fate as did privatisation and the command economy, says Ajit Balakrishnan.

A good place to start understanding that economic theories are subject to fashion cycles as fickle as choli sleeve lengths is in India's attitude to its public sector enterprises.

For the first decade after independence, public sector enterprises were seen as the only way a poor, Third World country with a low savings rate and under-developed capital markets could modernise.

These new publicly owned enterprises in electricity, petrochemicals, telecommunications, machine tools and so on would take us into the modern industrial world.

Then came the foreign exchange crisis of 1991 and the consequent change in economic theory fashion: "deregulation" and "privatisation" became the war cries.

Public sector enterprises were painted as anachronistic and badly managed, delivering low returns on capital employed.

In this era, the term "reform" (and its connotation of "modern") meant shouting out for the sale of public sector enterprises to private partners or at least selling a big chunk of their shares on the stock markets.

This apparent necessity for this massive swing from all-private (pre-Independence) to all-public (the two decades after Independence) back again to private (the two decades from the 1991 crisis to the global financial crisis) would have been believable -- but for the facts.

Sushil Khanna of the Indian Institute of Management-Calcutta examined the return on capital employed of all large corporate entities (those with annual revenue greater than Rs 100 crore a year), both in the private and public sector, for the 20 years ending 2010. He came to this astonishing conclusion: public sector enterprises in the manufacturing sector delivered a higher return on capital employed compared with their private sector manufacturing peers for the 1997-2010 period.

This is counter-intuitive for most of us (including me, I confess).

Then where did the public sector enterprises get their bad name? Professor Khanna's paper, published in the Economic and Political Weekly, says that much of it comes from the two airline companies (Indian Airlines and Air India) and the two telecom companies (Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd).

In the case of BSNL and MTNL, they were plunged into losses when the government transferred 340,000 government employees on the payroll of the department of telecommunications (DoT) to these corporate entities without funding their pension liabilities.

Thus, a good idea, the corporatisation of DoT into BSNL and MTNL, got marooned by a bad idea, not funding their pension liability at the time of their transfer.

The net result is that the only two entities who could have implemented India's high-speed broadband project have been hobbled, and India is consigned to remain at the bottom of the high-speed broadband rankings with a penetration of a mere one per cent.

Thus, an attempt to ride a good economic fashion tide, the corporatisation of departments of government, came to naught.

Economic theory fashions are worth riding, if not for anything else, then for the easy availability of international capital that such fashion tides bring.

But as the BSNL/MTNL example shows, the devil is in the details of the execution.

The "Make in India" mission mirrors an attempt being made in every country in the world to create jobs for the masses and, thus, is an economic fashion tide of our times.

Sudip Chaudhuri, in his presentation at Paris's Fondation Maison des Sciences de l'Homme recently, laid out some of the facts.

Manufacturing activities' share of India's gross domestic product, he recounts, is a mere 15 per cent, while China's is at 30 per cent; the annual rate of growth of manufacturing, which was 10 per cent in the 2000-10 period, has declined steeply since then and has turned negative recently.

Workers in manufacturing are a mere 13 per cent of all workers in the economy, compared with China's 28 per cent.

So if only we could get manufacturing firms to grow at a double-digit growth rate and get to the level that China has achieved, there would be plentiful jobs for the young men and women streaming out of our schools and plentiful tax revenues for the states and municipalities.

This is the basis on which the "Make in India" project is seen as our single biggest priority. But what details do we need to watch out for so that the details don't turn out to be the devil as the pension funding issue did for telecom?

The first thing to watch out for is that practically every policy initiative for economic growth seems to have a natural tendency to transform itself into an immense real-estate-cum-FDI-flow-promoting system, leaving in its wake vast tracts of public land in the hands of business houses; hundreds of thousands of dark, unoccupied apartments on the outskirts of major Indian cities; and an economy where the only sector that grows is the financial services sector.

Why this happens is a source of some mystery, but there may be some lessons in Professor Khanna's political economy analysis, which I cited earlier. Professor Khanna says that at the time of Independence, India had a relatively large middle class that had played a leading role in the anti-colonial struggle.

This group, soon after Independence, quickly enacted legislation that succeeded in sweeping away the dominant powers of that time, namely, the princes and large landlords that dotted our countryside.

This middle class then adopted the economic theory in fashion at that time: State-led industrialisation.

My guess is that this middle class had another and stronger reason to support State-led industrialisation: it opened unlimited job opportunities for themselves in the bureaucracy and in managing the massively expanded State and for their children coming out of the newly created engineering and other colleges.

Subsequent actions like the nationalisation of banks, insurance, mines and other key industries tightened the grip of the middle-class dominated bureaucracy on input prices paid by the private sector and the flow of credit to businesses.

This party went on in full swing till the State-led development theory fell out of fashion with the collapse of the Soviet Union.

We then saw the astonishing spectacle of the children of senior politicians and bureaucrats emerge as new businessmen in financial services and construction firms that now stood to gain in the privatisation and deregulation crusade.

The same middle class that had crusaded for State-led industrialisation now led the crusade for privatisation.

What we have to watch out for is that the crucial "Make in India" programme is also not transformed in this next turn of the economic theory fashion cycle, through similar political economy processes, into another vast real-estate-and-FDI-flow-promoting system, leaving at the end only empty tracts of public land in the hands of business houses.

Ajit Balakrishnan, founder and CEO of Rediff.com, is the author of The Wave Rider, A Chronicle of the Information Age. ajitb@rediffmail.com