Deepak Lal: The coming PPP cum Reservations Raj

Since 1991, India's 'best and brightest' have found that they can best pursue their fortunes in India.

In my last column I had argued that, as by its very nature the basic instincts of the State are predatory, not least so in India, an important means of serving the common weal is to remove as many areas of economic life as possible from the arena of public action and the natural temptations for political corruption that thereby arise. One of the major philosophical differences between the Left and those who may be broadly classified as classical liberals is that the former has an inordinate belief in the benevolence of the State's agents, particularly if they are imbued with its avowedly altruistic beliefs. Classical liberals by contrast, recognising the fallen nature of Man, not least amongst the largely self-serving agents of the State, have always questioned this basic assumption of the Left about human nature. The recognition by the leader of the vanguard of the Left in West Bengal that capitalism is the only game in town shows a realisation that Man may not be perfect or perfectible by human agency.

Its own self-interest of remaining in power, therefore, requires a pragmatism which his colleagues supporting the UPA government at the Centre (who, like all courtesans, prefer to exercise power without responsibility) are sill refusing to envisage. They are matched in their cynicism by those fellow travellers in the governing party, who for their own self-interested political reasons are willing to damage the national weal by the destruction of institutions on which the future of the country ultimately depends, and, as always the case with the Left, with the avowed rhetorical aim of helping the poor.

Despite these dangerous underlying political currents, India has been fortunate in having a small group of canny Platonic Guardians, first in the civil service and now in government, who have over the last two decades miraculously steered India away from the economically disastrous soft Fabian socialism of the Nehruvian era. But the emergence of PPPs (public-private partnership), and the threatened rise of the reservation raj pose new threats to India's deserved emergence as a global superpower. It is to these threats and possible remedies that I turn in this and my next column.

It is important to recognise that both these threats to Indian prosperity arise from systemic State failures. The PPPs being set up for infrastructure projects""as in Britain""arise from a reluctance to privatise infrastructural services for essentially ideological reasons. But there is also a political reason. After the ending of the Licence-Permit Raj, PPPs provide new avenues for rent-seeking by politicians and complaisant businessmen. Consider the euphemistically termed viability subsidy to be offered to the private participants in these schemes. This purports to make good the difference between the prospective and privately acceptable rate of return on PPP projects from government funds. The cost-benefit studies, on which this divergence will presumably be based, can easily be turned into purely cosmetic cost-benefit studies by politicians. I can avow this from my past experience in setting up and undertaking such cost-benefit analyses""not least for the Planning Commission in the 1970s. Hence, there will in effect be unknown and unforeseen future charges on the public purse, albeit in the politically more palatable form of being largely off-budget. The UK experience in this respect does not augur well. As recently reported in the British press, many of the private companies which built the flagship new PPP hospitals have earned ex-post private returns of as high as 60 per cent because of the implicit or explicit subsidies given. The off-budget subsidies will of course ultimately have to be borne by the British taxpayer.

Similarly, as numerous commentators have noted, the recent rush to affirmative action for OBCs, though espoused in the name of social equity, is aimed to detach the OBCs from the Samajwadi Party to allow the dynasty to recapture its ancestral political base in UP. But as they all note, in this""as with Karl Rove's cynical attempt to capture the "grey panther" vote for President Bush through an expansion in Medicare""they are likely to fail. The consequences for India, as with so many of the past cynical short-term manoeuvres by the dynasty to maintain itself in power, are likely to be dire.

One of the major unintended consequences of the economic liberalisation initiated in the 1990s was that for the first time, since the economic failure of the Nehruvian dream became manifest, India's "best and brightest" have found that they can best pursue their fortunes in India""albeit after a brief sojourn abroad for study or training. One of the baleful effects of the Nehruvian settlement was that its economic policies damaged the prospects of their predecessors, who sought and succeeded in getting jobs abroad.

I have come to see the ability of a country to retain its most talented as one important signal that it is on the path to economic prosperity. Thus, when I used to travel to Sri Lanka for the World Bank in the 1970s, every morning I used to find a sheaf of CVs outside my hotel door from many highly educated Sri Lankan youths seeking employment abroad. This changed dramatically when the Jaywardane government began its programme of economic liberalisation in the late 1970s. Similarly, in my travels through the economic Alice in Wonderland of Latin America of the 1980s, there was a dramatic change in the number of CVs outside my hotel door as soon as governments began economic liberalisation and their young saw that they had an economic future in the country.

This has happened in India since the economic liberalisation in 1991, as many of its "best and brightest"""sadly still largely urban""have come to see the prospects of a fruitful life in India, while the next stage in this process, when many in the diaspora seek to return "home", is also occurring. This retention and return of human capital is the greatest prize that liberalisation offers, and it would be retrograde if the rush to reservations were once again to lead India's most talented to seek their fortunes abroad. Particularly, as unlike the 1970s, apart from this "push" factor there is also the "pull" factor of the growing demand from the developed world to recruit the world's best and brightest. The possible remedies for this emerging PPP cum Reservations Raj are the subject of my next column.