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'Aid has made us a nation of beggars'

Jairam Ramesh is an economist and a Congress leader, but commands respect even from the Bharatiya Janata Party.

He is the Secretary of the Economic Affairs Department of the Congress, the Deputy Chairman of the Karnataka State Planning Board, Economic Advisor to the Government of Chhattisgarh and Member of the Economic Development Council of Rajasthan. He is also on the Economic Advisory Council of Andhra Pradesh. He is also on various key government committees.

He has earlier been Advisor to the Finance Minister during 1996-98, Advisor to the Deputy Chairman, Planning Commission 1992-94 and Advisor to the Prime Minister 1991. He has served in the Planning Commission, Ministry of Industry and other economic departments of the Central government.

He has been entrusted with numerous special assignments like reorganising India's international trade agencies in 1990 and for implementing the technology missions during 1987-89 and for analysing energy policy during 1983-85. He was also on the official delegation to the WTO meeting in Seattle in 1999.

He has authored a number of key government reports in areas as diverse as energy, technology, capital goods, industrial policy and telecom. He was a key player in the team that formulated and implemented India's economic reforms in 1991 and 1997.

He serves on the boards of a number of public institutions in India and abroad. He has been a founding member of the Indian School of Business promoted by McKinsey in Hyderabad and is a member of the International Council of the New York-based Asia Society.

He studied public management at Carnegie Mellon University during 1975-77. He spent a year at the Massachusetts Institute of Technology (MIT) studying technology policy, economics, engineering and management as part of the newly-established inter-disciplinary technology policy programme.

He spoke to Ramesh Menon on a wide range of issues ranging from the World Economic Forum to the pathetic quality of political leadership in India. Excerpts:

From an economic point of view where do you think does India figure in the larger picture?

India is in a peculiar position. It does not invite international headlines from an economic point of view. It is hitting headlines only for its nuclear confrontation with Pakistan. This is a tribute to the way India has managed the external sector: that India is not in the same crisis basket as Argentina, Turkey, Russia Brazil or any other emerging market economies.

What about China?

India and China are the only two countries that which have insulated themselves particularly well against external shocks. The reason is very simple: India and China maintain controls on inflows and outflows of capital and much of the debt of the government sector is borne by the banking sector. The fact that the Indian rupee is not convertible on the capital account for domestic residents has acted as a shock absorber. So India does not get international headlines.

In 2001, the world economy did not get into recession. It was largely because both China and India posted economic growth rates in excess of 5 per cent.

In a way, it is business as usual in India though it has dropped off the radar screen, as we are not a crisis-prone economy. Even Enron being consigned to the dustbins of history, did not draw many international headlines as far as India was concerned.

The World Economic Forum is a good talkshop. My view is that all these meetings add to global warming. There is a lot of hot air. In terms of actual impact, there's very little for India. It has been marginal in India's liberalisation and globalisation efforts. It is a good introduction point. It is a good holiday for Indian businessmen.

Is it India's fault that it has not been taken seriously?

You have to understand that there are very real tensions in Indian policy-making. We have been cautious and we have been prudent. We also had inertia. But the fact is that we have been cautious and prudent and it has paid off. We are not like Argentina or Brazil; we have posted a steady growth rate of around 5.5 per cent which is lower than what we ought to do.

In modern macroeconomics, there is something called the Impossibility Theorem: that a country cannot have a stable exchange rate, independent monetary policy, and free capital flows all at the same time. Any country has to choose two out of these three. India had chosen independent monetary policy and stable exchange rate and paid a price for it in terms of not having capital inflows of the type that have gone into Argentina -- which got $90 billion in the nineties. But look at where it is today.

Capital flows can soon become capital flaws. India has avoided that. In retrospect, the way we have managed our exchange rate is a remarkable success story and has not been adequately noted in the international press.

Today our foreign exchange reserves are at $50 billion. Of course, we have unsustainable fiscal deficits. Our problems have something to do with internals of the economy. We are not exploding externally. We are imploding internally.

The world is focussing on economic slowdown and terrorism. India has been affected on both fronts. Do you think India could get to isolate states that harbor terrorists or sponsor terrorism?

India has not been affected dramatically by the global economic slowdown because of the exports account for only ten per cent of the GDP. We are not affected like Malaysia or South Korea or other emerging markets. It is true that investor sentiment is down and business confidence is down.

The fact that India is going through a growth recession has nothing to do with the external world. India's recession is largely because of its internal dynamics. But India has an interest in the revival of world economic growth.

We do have a problem of cross border terrorism with Pakistan. But it is not just Jammu and Kashmir, but the long arm of the ISI. Pakistan is the world leader today in export-oriented terrorism, and ISI is like its blue chip company for terrorism.

India and the United States have formed a new alliance. The military agreement between American Secretary of Defence Donald Rumsfeld and Defence Minister George Fernandes who spent a lifetime tilting the American windmill would not have been possible had it not been for September 11 and December 13.

These two events have brought these two countries closer. Of course, it has increased the pressure on India to find a solution to Kashmir. The fact is that India has gained because we have a friendly government in Afghanistan. Its land will no more be used for terrorist activities in India. We have a friendly relationship with America, which has greater leverage over Pakistan. India has gained immensely geo-politically after September 11.

Do you think the WEF meeting may result in more joint ventures, contracts..?

No. I think this is a misreading of the Forum meeting. I cannot think of any fallout of the meeting as far as India is concerned. It is good for small economies. It is good for new leaders like Hamid Karzai. It is basically networking. You get to project your point of view. It is a feel good kind of feeling.

In recent times, the WEF has tried to build a bridge with anti-globalisers. The soft power of the WEF is more important than the hard power.

Is the WEF meeting then a waste of time?

It is the influential and the beautiful who meet there. All the movers and shakers are there. In the seventeen years that I have tracked the World Economic Forum, I have not seen any great gains for India. It is just a place for thinkers to meet at and learn. Basically for politicians and businessmen, it is an opportunity to get the wider picture and expand their intellectual horizons. There is nothing more than networking. For countries like India and China, it does not mean much. It is a useful exercise. That is all.

Can India utilise this forum to strengthen trade ties with other nations?

India has to focus on building bilateral linkages with the United States for instance. Apart from strengthening multilateral institutions like the World Trade Organisation, India has to have a bilateral dialogue with the American traders, European trade negotiators and so on. I do not think the WEF provides this opportunity or it can play a useful role in this regard.

And trade?

In trade, particularly after Doha, India's image has emerged as an obstructionist. We need to rebuild our bridges with American trade negotiators. We need to recapture our credibility within WTO forums. Unfortunately, our trade minister did not go to the World Economic Forum. He should have gone there and repaired the damage done to India particularly after Doha.

Had September 11 not taken place, the damage to India's stance at Doha would have been much greater. After that a lot got forgiven and forgotten. But India's stand at Doha along with France was completely negative and went against India's interest. If the Indian finance minister could talk to his American counterparts about the fact that our stance in Doha had more to do with domestic politics than international economics, it will be a positive step forward.

The trade minister, had he gone to the WEF meet, could have made the point that often in open democracies, domestic politics overrides international economics. It is there even in the United States. Why is the US protecting its steel industry? It has everything to do with domestic politics.

Democracies work in this way…?

Both United States and India are plural democracies. Democracies work in a very messy way. They work one step forward, two steps backward. Democracies pander lobbies. But the image of India after Doha suffered a great damage among trade negotiators. It needs to be corrected.

The WEF has charted out a policy to overcome the overall slump in the global economy. What India-specific activity do you see?

The best pill that the global economy can get is growth in the American economy. A substantial chunk of the world economic growth anywhere between quarter to two-fifths comes from the US growth alone. Especially so, as Japan is mired in recession. Economic revival in the United States becomes critical. The WEF needs to underscore the revival of growth in the United States. Ultimately, it depends on US consumers.

It will be a confidence-building measure…?

It will build confidence. The sooner the United States revives, the better. Others will also boom after that. Earlier, all countries that went through a financial crisis recovered as the American economy was booming. The continued growth and openness of the American market is absolutely essential for economic growth. The Japanese economy has completely collapsed and it is not playing the kind of regional or global role it used to play in the seventies and eighties.

Whether growth in China or India will have global impact remains to be seen. With China joining the WTO, there is a major change in the economic scenario. Chinese markets will open. Will China take over from Japan and become a regional or global locomotive also remains to be seen.

The US and Japan are trying to cut back on official development assistance. Do you see this as an impediment to foreign investment in India?

No. I have always believed in trade, not aid. In India, the policy has been aid, not trade. Aid has made us a nation of beggars. I would love to see development aid come down to zero. India should behave like a modern, self-confident economy, which believes in trade.

India gets around $2.5 billion of Official Development Assistance. Japan and Germany are the two big donors. Of course, there are things like the Metro in Delhi which is being constructed with the Japanese aid. But instances like the Metro should be the exception not the rule. Foreign donors leaving the country would be good. We should look at domestic funding for good NGOs. India's biggest problem in the last forty years has been having aid and not trade mentality.

The US has said that if the Dabhol plant dispute is not resolved soon, foreign direct investment flow to India may be hit…

I do not agree with this. How can you make a bilateral relationship hostage to one issue? It is true that the Americans have consistently raised the Enron bogey. On Enron, we were guilty of not fulfilling contracts. I thought the Enron deal was not in India's interests. But once you sign a deal, you have to honor it while renegotiating it in your interests.

Enron was a special case. India is a country which respects sanctity of contracts. India should move quickly on it. It is a world-class, modern plant producing clean power. Very soon, the Tatas, BSES, GAIL or Shell should take it over and run it. I hope the government moves fast on it. That is 2000 MW of clean power for India.

But US Ambassador Robert Blackwill said that many investors feel that contracts have no sanctity in India.

Blackwill, frankly, exaggerated it a great deal. The investor community knows that India was taken for a ride by Enron. They also know that India runs its power sector very inefficiently. There is enough sophistication in the world to realise that one Enron does not make the Indian summer.

To what extent does the WEF help India showcase itself as an attractive foreign direct investment destination?

Increasingly, states of India have had an opportunity to showcase themselves directly. The story of India is well known. What is less known is the story of emerging Indian states. It is a good opportunity for India as politicians and civil servants who are notoriously poor communicators learn how to use Power Point and communicate. This is a good training ground for them. Chandrababu Naidu is one Indian politician who has used the WEF to the hilt. He has built a community for himself. He has networked well.

How would you rate India on a scale of 1 to 10 as a possible FDI destination?

As far as labour-intensive manufacturing is concerned, India has many disadvantages losing out to China. But as far as knowledge-based industries are concerned, India has had an upper hand.

It is not that you need separate policies for foreign investment. Any policy good for promoting investment in India will be good for foreign investors. If you have a pro-growth policy, foreign investment will automatically come.

Do we have that?

We do not have world-class infrastructure. Many R&D and technology companies are coming to India. But as far as manufacturing is concerned, India has lost out in the global game. It is because of poor infrastructure, rigid labour laws and small-scale industry reservation. How can you get big players in?

How would you compare India with China as an FDI destination?

The figures speak for themselves. China gets 20 times the foreign direct investment that India. India got $20 billion through FDI since 1993 after opening its markets. That is not bad. But the Chinese invest more and export more. Till 1980, India and China were par to par. In fact, in the fifties, India was ahead of China. Only in software exports, is India ahead of China today with $6-billion exports, while China just has $600 million.

But in all other areas, Chinese have outstripped Indians. They are a super economic power today, while India is middle-ranking economic power.

But on a scale of one to ten, if one was to look at political democracy, India would get ten and China, one. In terms of social diversity, India would get eight and China, one. In terms of economic development, India would get three and China, eight.

What are the concerns of investors on India?

Infrastructure. And that is not just power, roads, customs, regulations, communication and labour law. People know that India is a market and has skilled manpower, but we have not been able to put our act together as far as infrastructure goes.

Has the Indian reform process attracted more investment?

The Indian reform process has been successful in the external sector. It has prevented India from collapsing. But we are nowhere near an eight per cent rate of growth. In the 80s, our average rate of growth was around 5.5 per cent. In the 90s, we reached 6.5 per cent. In the last five years there has been a dramatic fall in growth. We have a long way to go.

The final goal of the WEF, when it was founded was to help Europe counter US industrial power. To what extent can India use the WEF for a similar exercise?

These are all networking possibilities and for building friendships. I do not see the WEF as a political tool. The WEF is a place where you must be seen as your absence is noticed.

India feels that industrialised nations do not provide a level-playing field to developing countries in globalisation, especially by erecting various trade barriers…

The real barrier is domestic policy. We could have become the world's largest cotton exporters. But because of our stupidity, we lost. The reality is that domestic policy barriers stunted growth and not external barriers.

India is amongst the countries which get the lowest points in technology and macroeconomic institutions. Do you think India needs to invest more in R&D?

The rankings are bogus. In India everything is compared to the large population so you will always have less number of telephones per 1,000 people. What we need is to make regulatory institutions more transparent.

Indians are comfortable with bazaar economy where they can shout out loud and bargain and not a market economy, which needs rules, institutions and transparency.

Lack of political will, widening fiscal deficit and a dying power sector are said to be hampering India's growth.

The problem is a big one but is being addressed in a homeopathic fashion. Ultimately, it is the question of political leadership, which counts. The question of political leadership is pathetic in India. Compare it with China, which has a remarkable leadership. They are committed, knowledgeable and driven. Till we have a culture change, we will fail on development.

Why does India continue to remain poor despite the fact that its overall macroeconomic indicators are promising and it is among the top 10 performing economies in the world?

Poverty is pervasive in India. But then we are talking of Uttar Pradesh, Orissa, Bihar and the northern states. The southern states are much better off. Rajasthan and Madhya Pradesh have done well in the nineties. Uttar Pradesh has become ungovernable. UP and Bihar have become failed states. Orissa and Assam are failing states.

The new millennium may see manufacturing become the domain of a few technologically rich manufacturers in the industrialised world. Where does India fit in?

Manufacturing will be a monopoly of China in the developing world. They have done it with a vengeance. India has had to pay a price for it. India has a great potential in agriculture and in software we have a competitive edge. There are parts of India where the political leadership is taking things forward. But there are others where they are taking it backward.

Can India enhance the tempo of sustained growth to curb poverty and unemployment through its second-generation reforms?

We have to invest more. We have to control the alarming fiscal deficit. We have to generate resources for investment. We should invest in physical and social infrastructure.

Bur we need a government for this. If a government is more interested in rewriting history books and building a temple, we are doomed. We have a human resources development minister who is obsessed not with India's future, but with its past.

Do you think the globalisation process followed by the developed world has been fair?

The globalisation process has been beneficial to India. If we have not exploited any opportunity, it is not because of the developed world, but because of our stupidity. India has avoided the risks of globalisation, but has not exploited it like it should have.

Will the Afghan war affect investment in India?

Internal social turmoil will affect India. Tourism has so much scope. If we can get tourists, that can be a great achievement. India has to make itself a destination.

What do you think needs to be done to make India a new model of sustainable growth in Asia?

I am very skeptical of India becoming a model. We just have to get down to governance and do it. We have great achievements in terms of democracy. We need to remind ourselves that the political and social miracle of India is as revolutionary as the economic miracle of China.

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