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Email this citationCIAO DATE: 10/00
India's Economic Reforms: Positive Developments, Underlying Concerns and the Big Picture
Narayanan Vaghul *
CASI Occasional Paper Number 10
November 1999
Introduction by Francine Frankel, Director, CASI
We are extremely pleased and proud to have Mr. N. Vaghul present our third annual lecture, which is also a part of our 1999 series on “India and the Global Economy.” Mr. Vaghul has been a banker throughout his career starting with the State Bank of India and then moving into the private sector where he was Chairman of the Bank of India and the Central Bank of India. Since 1985 Mr. Vaghul has been Chairman of ICICI which, under his leadership, became a major financial conglomerate, spinning off a number of new enterprises. These enterprises include a number of “firsts"—the first credit rating firm in India, the first venture capital firm in India, and the first over the counter stock exchange in the country. ICICI, in addition, has entered into a collaboration in investment banking with JP Morgan, which has floated a mutual fund and opened branches over the whole country as a commercial bank. It is a bank that is getting more heavily involved in financing infrastructure in India which is a critical need for the second stage of India’s economic reforms.
Mr. Vaghul is also the Chairman of the Foreign Investment Promotion Council that has been constituted by the Government of India. He has held teaching appointments, currently at the Stern School, New York University, and has acted as Consultant to the World Bank, the International Finance Corporation, and the Asian Development Bank. A person of immense business experience, he also has a special interest in human resource development. And now as times change, ICICI also has emerged as the leading edge user of information technology. It is a tribute to Mr. Vaghul’s vision and leadership that ICICI is the first corporation to be registered on the US Stock Exchange. He is truly what he has been called—a visionary and an institution builder of India’s modern economy. I am privileged indeed to invite Mr. Vaghul to speak to us today.
Opening Remarks
Thank you Francine for your kind and generous introductory remarks. I must thank the Center for the Advanced Study of India for the kind invitation they extended to me to deliver this talk today. I have been coming to this country regularly for the last 25 years and I must say that each time I come, I am growing fonder and fonder of this country. Invariably, I go back enriched and invigorated with a tremendous amount of stimulus which I receive from here, both from American friends and my Indian colleagues who are able to give me an entirely different perspective, not only of global issues, but of the issues facing the country. I particularly enjoy my visits to the University of Pennsylvania, which presents the best of American and Indian minds.
The last few months have been an immensely satisfying experience for some of us who have been working assiduously to promote Indo-US relations. I have been talking with several American friends for the last several years about how these two countries, great countries which have so much in common, are strangely drifting apart from each other politically, for reasons which have never been really clear to me. Except for a brief period during the Kennedy era, the relationship between India and the US on the political plane had never been robust. But this has transformed dramatically during the last few months. What may be the reasons for this transformation? The other day, Frank Wisner, a former US ambassador to India, attributed it to the strategic shift in US thinking with regard to South Asia. This may well be true or it may be due to the growing realization on the part of the Indian Government that it is time we build an enduring and constructive relationship with the United States, which is important, not only for the region, but also for the country. Whatever may be the reasons which have compelled this change in relationship, the outcome is a morale booster for those who have been seeking to promote Indo-US relations. I am sure that President Clinton’s visit to India early next year will help in fostering and cementing this relationship and will pave the way for increased US business involvement in India.
US business was always aware of the immense potential that India has, but it has always shown an ambivalent attitude for a variety of reasons. Part of it is political but much of it is due to the difficulties of doing business in India because of the hassles that the system poses. I am sure that with the political hurdles now gone, the ball is squarely in the court of India to make the environment hospitable for US business interests. I have no doubt that increased collaboration on the business front will further pave the way for a mutually rewarding relationship between India and the United States.
Positive Events in India: Politics and the Economy
I have been a frequent traveler overseas, but this is perhaps the first time I have been away from my country for three months at a stretch. I have been teaching at New York University for the last three months.
| I see a distinct change not only in the news that is flowing out of India but the way in which the US media is presenting it. India has started appearing on the US radar screen, perhaps for the first time in the last 50 years. |
The first major event that has taken place in India is the 1999 election which has just concluded and which has resulted in the formation of a new government. There were many who believed that these elections that were taking place every year, as a sort of annual ritual, created an apathy in the minds of the Indian people and there were fears that the turnout during the last elections would be minimal. When the final count became available, the turnout was found to be as high as any of the previous elections, well over 50 percent, perhaps closer to 60 percent. What is much more heartening is the fact that the turnout in rural areas and the turnout by women and minorities have been much higher than the average. This shows that Indian democracy has taken deep roots and this is excellent news for many of us.
| The fact that in a country with not more that 50 percent of the literacy level of the United States, voter turnout can be equal to that of the United States, indicates that the functional literacy in India is quite high and the resulting political consciousness will ensure an enduring democratic framework in the country. |
The second positive news is the formation of a stable government after nearly three years of unstable coalitions. It is very tempting to hail the formation of the stable Government as a reflection of the political maturity of the Indian people. This is how most politicians would like to interpret the election results. I am happy about the fact that there is a stable coalition now, and that the Government is not at the mercy of one or two individuals. But at the same time, I find it difficult to accept that this is due to any clear mandate from the people for a stable coalition. The people have voted the way in which they had voted in the past two elections and the resultant “stability” is more a reflection of the arithmetic rather than the chemistry of the electoral process. What has really happened is that the BJP has been able to forge alliances with key regional parties which have enabled it to come to power. Congress, for a variety of reasons, could not come up with a similar strategy.
| What has really happened is that the BJP has been able to forge alliances with key regional parties which have enabled it to come to power. Congress, for a variety of reasons, could not come up with a similar strategy. Otherwise there have been no major shifts in the way in which people have voted, barring certain states. |
For example, it is tempting to view the election of Chandra Babu Naidu in Andhra Pradesh as proof of the wisdom of the people in opting for a dynamic and progressive leader, notwithstanding the fact that he avoided the temptation of following the populist measures initiated by his predecessor. If despite all the unpopular measures initiated by him, such as withdrawal of prohibition and subsidies, he could come back to power, one is justified in viewing this development as a signal to the other politicians that one need not resort to populism to win the elections. But a careful scrutiny of the poll results would indicate that there are at least 50 seats which he could win with only a bare majority of 1500 or so. If Mr. Naidu had not forged an alliance with the BJP, it would have been doubtful whether he would have really won. Power in a democracy hangs by a slender thread and the last election is an illustration in point. As in the past, local, caste and communal issues continue to dominate in the elections but the outcome has fortunately turned out to be very positive. To that extent I am happy about the news that has come from India. But at the same time it will not be wise to read too much into what has happened.
The third point that is very heartening is the fact that this Government, as soon as it came to power, started making statements which are music to my ears. In fact, they have proposed what one calls a “Hundred Day Agenda." There is realization on the part of the Prime Minister and the various ministers that the issue has definitely shifted from promises before the people to one of governance. Unless they are in a position to govern the country properly, unless they are able to bring about prosperity for the average citizen, there is no likelihood of the Government either continuing in office or getting reelected. This realization has very clearly dawned on the Government. And this is getting reflected in a variety of statements which are being made by the Prime Minister and his cabinet colleagues. The Prime Minister has set the ball rolling by saying that the Government was quite prepared to make hard decisions. This theme was picked up by many of his cabinet ministers who have come out with similar statements. The Finance Minister has stated that his first and major task will be one of reducing the fiscal deficit. He was willing to state publicly that significant privatization of public enterprises has become imperative.
| ...the government is really keen in pursuing reform measures aggressively. It is already seriously at work in giving finishing touches to the second-generation reforms. Most of the pending legislation such as the Insurance Regulation Bill, Telecom bills etc. have been cleared by the Cabinet for tabling in Parliament. |
These are all excellent statements and indicate that the Government is really keen in pursuing reform measures aggressively. It is already seriously at work in giving finishing touches to the second-generation reforms. Most of the pending legislation such as the Insurance Regulation Bill, Telecom bills etc. have been cleared by the Cabinet for tabling in Parliament. This is excellent news and this is the third bit of good news that we have been getting from the country.
And there is a fourth bit of news which is coming from the country that is also music to my ears. For the first time in my memory a political consensus is emerging on the economic issues. This is not a “lip service” consensus but is specific in the sense that the consensus will be reflected in legislative support to the Government.
| For the first time in Indian parliamentary history, we are likely to see a bipartisan approach with respect to the economy even though we have been talking about it for a very long time. Of course, Communists and other Leftists are unlikely to go along with any of the reform measures because that is their stated objective and we do not expect them to shift their attitude. They form only about 10 percent of the Parliament and their opposition would not affect the passage of reform measures. |
Yet another piece of good news is that after a gap of three years, the economy is also on the mend. We have been receiving reports for the last three to four months which indicate that the deep recession haunting the economy for the last three years at last seems to be coming to an end. The level of business confidence among the industrialists in India seems to be very high. Several factors have contributed to this uplifting mood. Firstly, industrial production seems to be rising. It has already touched about 6-6.5 percent. Secondly, the GDP is likely to go up significantly if not by 6 percent as the Government estimates, but certainly over 5 percent. Thirdly, with respect to many industries, the outlook has changed dramatically. The steel industry, thanks to the increase in global prices of steel, is coming out of the woods. For the first time, cement prices are going up and the cement industry is looking up. The paper industry is also reportedly doing very well. Textiles are doing a little better than before. Fast moving consumer goods have been posting a growth rate of over 30 percent per annum. The news from the automobile sector, particularly heavy commercial vehicles, is equally cheerful. The growth in commercial vehicle sales is one of the leading indicators of the economic recovery and this is one of the main reasons that the level of business confidence is upbeat.
The stock market which was lackluster all these years seems to have suddenly come alive. Even though during the last few months, for a variety of unrelated reasons like the Y2K problem and the keenness on the part of foreign institutional investors to book their profits before December, the stock market has been stagnant overall, the mood of the stock market seems to be one of bullishness. To a large extent the bullishness is contributed to by information technology and pharmaceutical stocks which are going through the roof, as they are in this country. Inflation is at a historic low, ranging between 2-3 percent, and we have been able to keep it at that level for quite some time now. And more importantly, the exchange rate of the rupee is quite stable. The foreign currency reserves position is very comfortable at over $30 billion. Of course this is not a great figure, given the size of the Indian economy, but this has to be seen in the context of barely $1 billion reserves, which we had in 1991.
India seems to be all set to take full advantage of the emerging revolution in the internet. What this knowledge revolution that is sweeping across the globe really means for every one of us, we still do not know. But we have an instinctive feeling, a gut feeling, that this internet revolution is going to change our outlook, the way of our life and the corporate structure in a manner which we have not seen during the last 50 years. It is very clear that the technological revolution which has taken place around the globe during the last 50 years, which has been hailed as an unparalleled achievement since the dawn of human consciousness 10,000 years ago, is going to pale in significance compared to what is going to take place during the next five years thanks to this knowledge revolution.
We, in India, missed the industrial revolution of the 19th century because we were not masters of our own destiny.
| We, in India, missed the industrial revolution of the 19th century because we were not masters of our own destiny. We missed the semiconductor revolution in the 20th century because we were engulfed in an ideological darkness of our own creation. However, we are unlikely to miss this knowledge revolution because we seem to be tailor-made for taking advantage of this revolution. |
Serious Underlying Concerns
I wish I could stop my lecture at this point so that we could savor this rosy and optimistic picture of the future. But unfortunately, along with this optimism which I have seen, there is also a shadow which has been cast on the Indian scene, the shadow of certain very serious underlying concerns.
| I expect the rural areas to leapfrog in technology and embrace the new revolution to rid itself of illiteracy, poverty and backwardness. The small farmer in India, the rural villager, the illiterate villager, is going to wield his cellular phone, he is going to send messages through e-mail and he is going to order his fertilizer via e-commerce. |
The first and major issue or concern that we have is the growing fiscal deficit in India, which is often understated. For example, the officially stated policy is to contain the deficit within 3-4 percent of the GDP. The reported deficit in 1991 was over 8 percent of the GDP, which was brought down in a little over two years to about 6 percent.
| The deficit was supposedly brought down to about 5 percent in 1997-98 but thanks to Kargil, even the official figures during the current year turned out to be more than 6 percent. But if the true deficit is computed, taking into account the deficits of both state and central governments and government undertakings as well, it could well be closer to 10 percent. What this means is that we will be entering the 21st century as one of the few nations with the highest fiscal deficit on record. |
The second major item is the administrative expenditure. Unless there is a political will to reduce the bureaucracy it is difficult to make a significant dent in this item of expenditure. The third item is the huge amount of subsidies that are being doled out in the name of poverty alleviation and the fourth is the defense bill.
With respect to all of these things, there are going to be claims by the Government in the next five years. The Government has made a statement that it wants to increase the expenditure on the social sector from 1 percent of the GDP to 6 percent, and it is a very heartwarming statement indeed. Previous governments have ignored this sector for long, thereby damaging the long-term future of the country. The increase in expenditure on this account will be welcomed by all thinking people in the country. The defense bill will have to go up because after all, the Government is committed to protecting the nation’s borders and the Defense Ministry’s pleas in this regard cannot be lightly dismissed.
How then can the deficit be brought down? There are no easy answers. The Government needs to do something radical and I wonder whether it can muster the political will to do things radically different. This is going to be a very serious concern for the Government.
The second major concern that the Government is facing is the issue of privatization. We have 30 percent of the economy under the grip of the state sector, a very inefficient state sector, which is not only a drain on the public exchequer, but also acts as a sort of damper on the overall industrial efficiency of the country.
| The Government has yet to address the key issue of making the public sector globally competitive and ridding itself of inefficiency. This is not possible so long as the Government, through its political and bureaucratic set up, is in control of the management of the enterprises. There is a need for a fundamental shift in the mind-set for the Government to vacate the management and put the private sector or professionals in charge. |
Unless the Government makes a political decision to exit 100 percent from all state undertakings, a structural transformation cannot take place. The Government has to realize that its duty is to provide a facilitating environment and regulate where necessary, but not manage enterprises. The process may take 3-5 years, but at the end of it, the Government can not only garner enough resources to put itself in a more favorable financial position, but also impart to the industry competitive efficiency. Admittedly, the problems of privatization on this scale will present some critical issues. The resultant retrenchment of surplus labor will have to be managed and this may prove tough, particularly in the absence of a social safety net. But by ducking the issue, the Government will only end up in postponing the evil day.
The third area of concern is infrastructure. The Government seems to believe that by opening the doors of infrastructure to the private sector, they could easily solve the problem of poor and inadequate infrastructure in the country. In 1991, the power sector was thrown open for 100 percent foreign investment. The communication sector has been made competitive and has been thrown open to the private sector with significant foreign investment. Now roads and ports have been opened up. And in the airports also they are inviting the private sector to participate. On the face of it, it looks as though the Government has taken a series of policy measures in order to welcome private participation in infrastructure, and that the ball is now squarely in the court of the private sector. But a careful analysis would show this to be only partially true.
In 1991, when the power sector was opened for foreign investment, over 100 proposals for generating more than 100,000 MW of power were received and promptly cleared by the Government. The Government wanted to put eight projects on a fast track basis because the requirement of power was so immediate that it could not brook any delay. In order to facilitate the speedy commissioning of these projects the Central Government came forward to guarantee return on equity and repayment of debt of the foreign sponsors. Eight years have passed and barring one or two, the rest of the projects have not taken off the ground. Whatever may be the proximate reasons for the delay in these projects, the underlying cause is the inability of the Government to bring about appropriate changes in the pricing of power. Until 1991, the Government has always looked at utilities as a sort of social service, which has to be provided to the community at an affordable cost. Commercialization of power and other utilities cannot take place unless pricing is linked to cost. When the Government was managing it as a monopoly, it could provide free power to agriculture as a populist measure, cross-subsidizing it with a higher rate to industries and other consumers. The Government did not only not bother about a return on investment, but was quite unconcerned about mounting losses in the State Electricity Boards. Obviously, there was no way in which this could be perpetuated in the private sector. This was the key issue and the inability to resolve this issue was the underlying cause for the delay.
The fourth concern is one pertaining to the financial sector. The problem in the financial sector is one of state ownership of 90 percent of the financial sector, but this is only part of the problem. The financial sector is very much behind in technology compared to its counterparts in East Asian countries, and the position of public sector banks is even worse compared to private sector and foreign banks within the country.
| The financial sector is very much behind in technology compared to its counterparts in East Asian countries, and the position of public sector banks is even worse compared to private sector and foreign banks within the country. Unless there is reform in the financial sector we will find ourselves in a serious mess shortly. |
Then there is the problem of Non-Performing Assets. Reliable estimates of the exact amount of Non-Performing loans are not available, but even those in authority who say that the actual figure is lower than what analysts point out, do not deny that the problem is large enough to cause concern. We have so far not been able to come to terms with this problem. Time does not permit me to go into greater detail on this issue but suffice it to say that we have on hand a serious problem, which could have the potential of destabilizing the economy.
With regard to the industrial sector, we have in principle accepted globalization, but have yet to take measures to cope with the challenges posed by this process. By being a party to the WTO, we have thrown open the country to international competition and we have agreed to a time-bound schedule by which tariffs will be brought down. But we have not been able to equip domestic industry with the necessary wherewithal to take on this international competition. As a result, what is happening is that domestic industry is emerging as a powerful force to block the reform process, not so much overtly, but through a variety of subtle moves and lobbying. While a section of industry is hoping that the globalization wave will somehow roll back, there is also a good section of the industrial community that is quite prepared to take on the challenge. These people clearly see the writing on the wall and believe that even if the Government wants to support domestic industry, they would not be in a position to do so because there are international commitments which the Government has entered into. Fortunately the IT and the pharmaceutical sectors, which are widely believed to be the emerging industries of the next century, have truly globalized themselves and are poised to lead the industrial sector from the front.
Next in line is the concern arising out of neglect of the social sector. We have been looking at these reform processes as essentially involving transformation of economic policies. We have been talking about globalization, opening up of the economy, moving into a market economy, dismantling the permit and license regime, but we have not really applied our mind fully to the concept of social sector reform. It gives me a scary feeling that ignoring social sector reform is going to cost us dear in the years to come.
| We are one of the few nations, which are entering the 21st century with the highest illiteracy rate, perhaps more than 50 percent, and the highest infant mortality rate. Our infant mortality rate is 65 per 1000, higher than the global average and a population growth still around 1.8 percent is unacceptably high for a country with a large population like India. Not only that, with respect to our ability to provide access to safe drinking water and our ability to provide health and hygiene to a vast majority of our masses, we are way behind. |
We have not placed the necessary emphasis on primary education. We have been counting the number of graduates who have been coming out of the universities and have been loudly proclaiming from the housetops that India has the third largest scientific and technical manpower in the world. But at the bottom level, at the primary education level, we seem to have missed the bus.
| The recent cyclone is a good example of the result of our neglect. The cyclone in Orissa could be called a natural disaster, but this natural disaster was accentuated to a large extent by human indifference and human inaction, and to a large extent the immensity of the calamity is due to the inability of the government to provide reasonable comfort and security to a large number of people who are living in the coastal areas. |
And finally, to this list of concerns I must also add our inability to create an institutional and legal framework which would guarantee Indian citizens the ability to enforce their rights guaranteed under the constitution. The citizen has no means by which his rights can be enforced because the two segments of democracy, the executive and the judicial, display unbelievable weaknesses. One I suppose is very slow and stodgy. The other is inefficient and corrupt. Between these two, an inefficient and corrupt executive and a very slow moving judicial system, the citizen’s rights have become merely paper rights. This is not only true of the basic rights of the citizen to liberty, to education, to earn a living and not to be discriminated against on grounds of sex, caste or religion. This is more true in the business sector, where the person who enters into a contract, like a bank with a borrower, has little chance of getting judicial backing for its speedy enforcement. Our inability to reorganize the judicial and executive systems is costing us very dear from the point of view of our ability to put through effective reform measures. I mentioned earlier that many of my American colleagues are bitterly complaining that the reason why they cannot do business in India, despite the vast potential that Indian business can really offer, is the hassle that has become an integral part of the Indian scene. Given this situation, I fear that whatever we might do on the policy front, unless the executive and judiciary also move in step, it is not going to be possible for us to move ahead.
| Between these two, an inefficient and corrupt executive and a very slow moving judicial system, the citizen’s rights have become merely paper rights. This is not only true of the basic rights of the citizen to liberty, to education, to earn a living and not to be discriminated against on grounds of sex, caste or religion. This is more true in the business sector, where the person who enters into a contract, like a bank with a borrower, has little chance of getting judicial backing for its speedy enforcement. |
Let me come to the third aspect of my speech. Some of you might be wondering what it is that I am driving at. I began with presenting a rosy picture of India and then proceeded to lay out some strong underlying concerns. Am I going to confine myself to presenting a balance sheet of the country, like a good accountant, leaving it to you to quantify and formulate conclusions regarding whether the country has a positive net worth as well as growth prospects? Certainly not. I believe that if the underlying concerns are properly addressed, India can realize its potential in a substantial measure. Also, with respect to each of these concerns, the solutions are obvious and those in authority know it only too well. But there is a psychological block, and this block arises because of misplaced apprehensions. I want to turn to this in the last part of my speech. Three issues seem to be critical in this context.
Before I outline the first issue, let me give you an example. You have seen how children play with puzzle pieces. Mothers love it as they believe that this is an excellent learning experience for children. There could be 10, 20 or 50 puzzle pieces which the child puts together to complete the game. The child is able to do it reasonably comfortably, and when the pieces are put together, a picture emerges, a picture of an animal or something with which the child is familiar. The child could make out where a particular piece should go, depending on the part of the picture that is printed on the piece— the head or tail as the case may be. Suppose you give the child 50 pieces without a picture and leave it to the child to assemble the pieces. The child could be at it for several hours and days without figuring out which piece goes where. He might succeed in putting a few pieces together, but the chances of him ever completing the game are remote.
This is what is happening in India today. I wonder whether the people who matter have any idea of the big picture. People are looking at reform as an ad hoc issue, one of introducing insurance regulatory bills, of opening up the economy to foreign enterprise, privatizing this and privatizing that. But what is the big picture that we have in our mind? Do we have a vision of India? Do we have a clear picture of where we want to go, what we want to do? That picture is missing. When that big picture is created in the mind, one can see the strong interlinkages that are there between the various reform pieces. For example, one cannot deal with the fiscal deficit unless one deals with privatization. By merely talking, the fiscal deficit cannot be brought down.
| I wonder whether the people who matter have any idea of the big picture. People are looking at reform as an ad hoc issue, one of introducing insurance regulatory bills, of opening up the economy to foreign enterprise, privatizing this, and privatizing that. But what is the big picture that we have in our mind? Do we have a vision of India? Do we have a clear picture of where we want to go, what we want to do? That picture is missing. |
One objective of privatization is to make industry competitive, globally relevant. The second one is to bridge the fiscal deficit. We have to look at privatization as a major exercise of generating enough revenue to retire the public debt and give the much needed elbowroom to deal with other pressing demands. The present process of disinvestment in profit making monopolies in order to make minor adjustments in the budget deficit becomes thus an irrelevant reform measure. Unless there is a mindset shift, it is difficult to move ahead with privatization reform. The privatization puzzle piece has also a third link, the one that connects it to the competitive efficiency of the private sector. If 30 percent of the economy is performing at much below optimum level, it will act as a drag on the remaining part and will bring it down along with it.
| Over 50 years of experience has amply demonstrated that we cannot tackle the problem of population growth unless we also tackle the problems of infant mortality, health and female literacy. Unless we succeed in developing the big picture, we will find it difficult to identify the various linkages. This, to my mind is the first critical issue on which we need to concentrate. |
Secondly, unless we are in a position to communicate this big picture to the various interest groups, we are going to go nowhere in implementing the reform measures. Who are the various interest groups? Whenever any reform measure comes up to the stage of implementation some interest group comes along to block the whole reform process. For example, regarding privatization, the labor unions try to block the move ostensibly on the ground of ideology, but really due to fear arising out of loss of jobs and the absence of a social safety-net. Reforms in the power sector are similarly blocked by an ill-informed farmers’ lobby which clamors for continuance of free power. On globalization of trade and industry, the domestic industry rises in protest. We have very clearly identified interest groups and unless the political system is in a position to manage these interest groups, it will not be possible for us to push ahead with the reform process smoothly. It is good that we are moving towards a legislative consensus, thanks to the bi-partisan approach of Congress. But ultimately, it is not the legislation which is going to matter. The legislation has to be implemented and the implementation will call for a larger public consensus. Unless we mobilize all sections of the people in favor of the reform, we run the risk of the reform process being stalled at several steps. We have an excellent precedent in the country of the Mahatma trying to mobilize the nation to fight the British Empire and he used salt as the focal point for such mobilization.
The problem is that during the last 50 years, we have forgotten the language of the masses. Politicians no doubt know how to sway masses through populist slogans, but this language is false, unreal and illusory. Those who advocate the reform process, who have the big picture in mind, find it difficult to communicate with the masses, because they do not know their language.
| Those who advocate the reform process, who have the big picture in mind, find it difficult to communicate with the masses, because they do not know their language. You cannot talk to the poor about privatization, fiscal deficit or globalization. It will not make any sense to them. But unless the common man in the street is able to identify himself with the reform process, we will find that the reform is going to be very difficult. This is the challenge before all of us. |
The third critical issue relates to the reform of the judicial, institutional and executive processes. The corruption which we see in the country is the result of our total indifference to this crucial aspect. We have for long ignored the issue of corruption, and have learnt the art of rationalizing or defending it, calling it a global phenomenon. Has it not happened in Indonesia? Has it not happened in Korea? Has it not happened here? Has it not happened there? But still have these countries not achieved development? By rationalizing and defending it, we have let the cancer penetrate deep into all walks of life. It is not only corruption; there is also the denial of civic rights. We pass an Untouchability Act in the legislature, but merely because an Act is passed, untouchability has not disappeared in the country. We pass a constitutional provision, namely that women should not be discriminated against but that does not change the basic societal framework in which women continue to be depressed and women continue to be discriminated against. We need to bring about a reform in the grass roots executive system so that the common man is relieved of the burden of corruption in his day-to-day life. Corruption at the grass roots level can easily be removed if the citizen is aware of his rights, if the citizen is informed of his rights, and the citizen has a means of enforcement of these rights. This should be the basic objective of the reform of the judicial and executive machinery.
I have often heard it stated that if only the depressed groups come to power, this problem could disappear. The ascendancy of some of the political parties representing these classes in the recent elections is seen as a positive development in this context. I wonder whether this is true. In Tamil Nadu, the Dravidian movement, which created a wave of social awareness in the depressed classes, came to power in 1967 and has been in power for the last 30 years or so. I do not think it has been able to remove the injustice that is being done to the depressed classes.
| Corruption at the grass roots level can easily be removed if the citizen is aware of his rights, if the citizen is informed of his rights, and the citizen has a means of enforcement of these rights. This should be the basic objective of the reform of the judicial and executive machinery. |
Finally, let me end my speech by giving expression to an underlying fear I have about the fallouts of the reform process. I am referring to the emergence of greed in society, propelled by what I believe is a mistaken notion as to what the market economy is all about. Becoming personally wealthy is seen as the sole parameter of achievement. Wealth creation is not wrong. In fact, if Bill Gates is revered today it is because of his wealth creation. He is revered because he created wealth not only for himself, but countless others through a legitimate process. Today, in India, a person like Narayan Murthy is being put on a pedestal because he was able to create wealth for hundreds of thousands of shareholders and for himself and his employees in a legitimate way. That does not amount to greed. Without wealth creation you cannot generate income, you cannot progress in society. But greed is different. When wealth creation becomes selfish, individually-oriented and not society-oriented, it becomes greed. The dividing line is somewhat thin.
Sitting in New York, I often get scared about the emergence of greed even in American society. The great leaders who propelled capitalism into the 20th century, people like Ford and Carnegie, had an entirely different idea of money. They were motivated by a much larger purpose of life, a much nobler purpose. That is why capitalism has endured. There have been lots of ups and downs during the last two hundred years, but still capitalism continues to be a magna carta for the developing nations. But today, the Wall Street smarts are rewriting the game of capitalism and this is what makes me feel scared. Unless we know how to manage and control this demon, it has the potential of destroying society and civilization.
Please do not mistake me for a pessimist. I am as much a robust optimist as anybody else. By listing these problems, by focussing on these concerns, I am not for a moment taking a defeatist attitude. The problems are there, but I am confident that we can take on this challenge and move towards a robust future. Thank you very much.
Question and Answer Section
Francine Frankel:
That was a wonderful overview of the reasons why some of us alternate, given the particular day, between enormous optimism, deep pessimism and then this feeling that if we do understand these problems, we are halfway toward a solution. I think you have illuminated for us the major questions which confront India today.
Jitendra Singh, Associate Dean, Wharton School of Business:
I resonate very strongly, Mr. Vaghul, to what you have been saying. I would just like to recount a very brief incident that happened this summer. I was traveling in northern India in May and at a prominent hill station I was sitting at the home of the Divisional Commissioner. She erroneously assumed I was a supporter of her point of view. What she said in effect was "all this talk about reform that comes from Delhi overlooks that ministers come and go, prime ministers come and go, and basically we are the people who run the country. And you know, files can get lost for years on end." And I was just totally astonished by the cynicism from such a senior person. I pick out this incident to say how on track you are, that unless we can actually take hold of the constituents, size up who are the different constituent parties that actually oppose deeper processes of implementing change, we really will not be able to make any headway. I wonder if you have any thoughts on that.
Mr. Vaghul:
I entirely agree with you. This has been my refrain for quite some time—that we tend to get excited about Congress cooperation in Parliament and legislation coming in. This is a good thing that is happening, the bipartisan approach, but unless that is supplemented by equal action at the ground level, nothing will happen. At the ground level, we need an executive machinery for supporting it. I greatly admired one politician in South India, popularly known as Rajaji, and I do not know how many of you have heard of him. And this person, in the 1960’s, had said that the only way you can remove corruption is to go to the root of the problem, not try to deal with it at the periphery. Just by punishing a few corrupt people, by putting them in jail, one cannot remove this corruption. What should be done is to go to the root of the problem and the root of the problem lies in the patronage structure, which we have developed—namely that you have to go to the bureaucrat for getting things done. The citizen is kept at the mercy of the bureaucrat. I believe that at one level, we need to dismantle the various structures we have created which facilitate this whole process of corruption. At another level, we should initiate social reform so as to create social awareness on the part of the people.
Gargan Sharma, Wharton School of Business:
Mr. Vaghul, for the past 50 years, India has been taking small steps going towards the vision that some politicians do have. Do you think that there is a need to have a big change, almost like a storm that happened in Korea or East Asia? Maybe that would be strong enough to push India in the right direction and at the right speed.
Mr. Vaghul:
I do not agree with you that the trauma which East Asia went through did them any good. They seem to have forgotten the lessons they have learnt in the trauma and they are back to normal business again, because the economy seems to have rebounded faster than they expected. Now that the economy is on the rebound, East Asia is no longer going to devote its attention to the structural problems that caused the crisis. I believe that it is not necessary for us to go through a similar trauma in order to come out healthier. The 1991 trauma, which India went through, was no less when compared to the trauma of East Asia. And the reason why we shifted tracks is only because we came very close to defaulting on our debt obligations. And that hurt our self pride to such an extent that we changed our tracks. But that has not taught us very much. Within 2-3 years, as our economy moved into the 7 percent gear, we forgot all about the crisis, and the structural deficiencies which caused the crisis, continued to remain unattended.
Dr. Vinod Bhutani, Pennsylvania Hospital:
I am a physician and there is an epidemic going on in India. Children are dying in the hundreds of thousands because of lack of healthcare. Is anything being done about it? Don’t you think the answer lies in the empowerment of women?
Mr. Vaghul:
The empowerment of women according to the political system lies in passing the Women’s Reservation Bill in Parliament. But I believe this is hardly going to make any difference to the situation. Nobody is talking in terms of problems that are contributing to infant mortality here and now. Today’s mortality rates that are taking place in rural areas are due to denial of health and hygiene to the various people. I believe, in matters of health and education, it is time for citizens to act without waiting for government initiative. I have been propagating what I call a tri-partite relationship between non-government organizations, the Government, and by enlightened citizens of the country including corporate citizens, to come forth in order to deal with these problems. Thousands of babies die in India every year only because of diarrhea which could be easily prevented. With a little care, it should be possible to prevent many of these mortalities. And so we are trying to attack this problem of educating rural women. Like that, we need to identify areas where the citizens could act. Frankly, the Government is going to be overwhelmed with a lot of problems. I believe that enlightened citizens should pick up this gauntlet and work out ways of solving the problem.
Mohan Pandey, Student, Wharton School of Business:
In terms of younger people like us who are probably going to be working in the private sector, what role do you think the private sector plays, in terms of changing the whole system, or talking the language of the masses?
Mr. Vaghul:
In this particular aspect, there is no difference between the public sector and the private sector. If you are interested in India, you could be an Indian, you could be an American, you have a job to do. That job you have to define for yourself. That job could be a job of translating what you do to the masses. Or the job could be one of, as I said, involving ourselves in the social sector. There are lots of people in India with views which are similar to the ones I have. I was not speaking on my behalf. I was speaking on behalf of hundreds of people who share my views, that it is time for us to act on the social sector. So when all of us meet, sit together and talk, we come up with ideas on how exactly we can intervene. You can participate with your ideas. You can participate with your contribution, whatever it is. You can define the role yourself. And the language—I want to give you one more example of this language. I told you the language of Gandhi, who used the language of the salt. When you go back to our ancient heritage, the language of the Gita is a very important illustration of what I have been saying. Prior to the Gita, there were the Upanishads. The Upanishads were in a mystic language, which only a very few learned people can understand and grasp. And then came Gita which popularized the whole teachings of the Upanishads and put it in a language which is accessible to a large majority of the people and the Gita became acceptable to large masses. And that is why the transformation of Indian society began in the 5th century, propelled us into the height of superpower status by the beginning of the first millennium. When I talk of language I have something like this in my mind even though I am not yet clear as to how we really devise a language which can appeal to the masses of today. This has nothing to do with the public or private sector. Any citizen who has a right mind and who believes that he has a role to perform, can play that role.
Devendra Peer, Devendra T. Peer & Co., P.C:
Is there any likelihood of a bipartisan approach in the development of the “big picture” you referred to and communicating this picture to the large masses of the country in a language that they can understand?
Mr. Vaghul:
I do not know the answer. But I have a dream. I have a fundamental right to dream and that fundamental right I will exercise and I will keep on dreaming. I will keep on working for that to emerge. Whether it emerges or not, I really do not know. Today I believe that people who offer advice, people who offer prescriptions, should be willing to soil their hands also. We cannot sit in an arm chair and then give advice and say that it is for you to take it or leave it. Those of us who have a role to play, we would like to play that role. I know that the efforts are in my hands, but certainly I cannot predict whether the results will be there. But I am sure that at some point in time, whether induced by trauma, or whether induced by conviction, people will have to bring about a change of this sort.
Mr.V. Prasad:
Do you see the financial sector in India moving away from asset based financing to cash based financing in the near future?
Mr. Vaghul:
You can see the tremendous transformation that has come about in the way in which financing is being done now. We are no longer talking in terms of giving loans. We are now handing out financial solutions. And ICICI I believe is no longer in the business of lending money. They are in the business of financial solutions. The transformation which the internet and e-commerce is going to bring about in the financial sector is mind-boggling. I used to wonder sometimes whether ICICI would retain its present character in the next two or three years time. We are on the verge of very dramatic changes in all sectors, and particularly in the financial sector. So this change which you are talking about—a shift from asset based financing to cash flow financing—would pale in significance compared to the massive changes that are going to take place in the whole financing mechanism.
Mr. Raghu:
To what extent can the private sector contribute to the emerging changes in the country? Leaving aside the long term vision of social change, in the immediate future what can they really contribute?
Mr. Vaghul:
I have a really simple answer for you. I am one who believes that if everybody does his job efficiently, society will take care of itself. So the private sector’s role is to run its business efficiently, to run its business with optimum capability, to adopt the right governance practices, to adopt the right technology, to realize that knowledge cannot be borrowed but created. The private sector’s role is very clearly one of ensuring global competitive efficiency. This is a simple and direct answer to your question.
Note * Mr. Narayanan Vaghul is the Chairman, Industrial Credit and Investment Corporation of India (ICICI) and is visiting professor, Stern School, New York University. He delivered the Annual Lecture on November 11, 1999. Back
