Jaimini Bhagwati: Glass half full or half empty?

Can we afford to be complacent when we hear so often about violence and protection money rackets around the country.

It is about a week since the annual Budget was unequivocally welcomed by our stock markets and the US President's visit, which resulted in a path-breaking nuclear deal. There is a congratulatory buzz around us and it has become fashionable for externally-based observers to comment that India should not "underestimate" itself. At this stage, it would be useful to take a step back and consider, in broad terms, whether our development glass (index) is half full or half empty.

Let us begin by reviewing what has been said recently in the international weeklies Newsweek and The Economist. Newsweek and The Economist are not necessarily adequately objective or serious. However, perceptions matter and these publications probably influence public opinion at a popular level and hence it is a convenient starting point.

The March 6, 2006, edition of Newsweek carried a special report titled "India Rising" and the lead article of The Economist of February 25-March 3, 2006, was called "Passage to India". The Newsweek piece is more complimentary. It cites India's well-deserved positives e.g. a GDP growth rate of around 8 per cent, growing "middle-class", increasing competitiveness in a knowledge economy sense, young work force, the possibility of manufacturing picking up, and the relatively high level of corporate profitability. Another important factor that is cited in suggesting India as a favoured investment destination is its political stability.

The Economist refers to most of the positives mentioned in the Newsweek piece including "stability, democracy and demography". It, however, sounds a note of caution that India may be experiencing the typical "over-heating symptoms of an emerging-market boom" including "accelerating inflation and rampant stock-and-property market speculation". The article also refers to the social divisions in India and the uneven nature of our development. A resentful comment in The Economist article is that the sharing of American civilian nuclear technology with India would be "too generous". Some of the other recent international press coverage is premature since it conveys a sense that India has already "arrived". For example, Richard Cohen, in his article in The International Herald Tribune on March 1, 2006, says: "Bush follows Chirac to New Delhi this week""successive supplicants to one of the two new centres of Asian might" (emphasis added).

Foreign portfolio inflows, which have amounted to over $27 billion in the last three years, have fuelled the boom in our stock markets. These inflows are partly due to the potential for an attractive return on capital but are also a reflection of an international investment climate of higher capital flows to emerging markets. The causal factors include the relatively low long-term interest rates and lack-lustre performance of stock markets in developed countries in the last few years. Further, visiting India is a relatively low-cost hedging strategy for developed countries not to miss out on opportunities created by a rising Indian economy.

The volume of foreign direct investment (FDI) inflows plus reinvestments amounted to about $5.6 billion in 2004-05. From April-November 2005 FDI inflows have increased sharply compared to the same period in 2004, but we are starting from a low base, compared to China and Brazil. In this context, William Harrison, chairman, JP Morgan Chase, and co-chair of the US-India CEO forum, commented last week: "I think there is a lack of excitement about investing here because of factors like poor energy supply, roads, airports, ports, the core infrastructure, bureaucracy ... It is hard to get approvals, permits and in the legal system, the process is slow and cumbersome and it takes a long time for settlement of disputes".

The implementation problems that plague infrastructure projects in India, e.g. legal difficulties in acquiring land, lack of co-ordination across public utility agencies, and multiple rent-seekers, are well-known. It would be instructive to identify projects that have been inordinately delayed and to list non-project related impediments. This could be a practical way of focusing on ground realities that cause delays to complement studies on viability gap funding! We have all heard this and more many times and there are a number of ongoing initiatives to address infrastructure needs.

The Gini coefficients (a measure of income inequality) for India are better than the US, for example, but have not improved in recent years. It is evident that at best for about a third of the population the development glass is about half full but that for the remaining two-thirds the glass is not even a third full. It is not just an issue of uneven growth or the urban-rural divide. Even in better-off circles in urban India the wringing of hands about the murders of Manjunath Shanmugam and Jessica Lall is a reflection of the helplessness that people feel when confronted with rank injustice. Obviously, every democracy has its share of special interests, which "lobby" and prevail over public interest. However, money, position and particularly family (read feudal) connections seem to win more often than they should in an average democracy with a functioning justice system. It is worrisome just how physically vulnerable a teenage girl must feel in an urban slum or a member of an economically/socially disadvantaged minority in a remote village in India.

Incremental improvements due to the trickle-down effect of high levels of sustained growth and the bottom-up efforts, e.g. in the agricultural sector, may be adequate. However, can we afford to be complacent when we hear so often about violence and protection money rackets around the country? In the context of our future development, the dangers are more from the potential for social disturbances.

Our contemporary levels of cynicism are such that any suggestion to quantify the inefficiencies caused by the parallel cash economy, e.g. exorbitant pricing of real estate, lax regulatory enforcement, is usually met with a dismissive smirk. This issue is a topic of idle living room conversation when someone we know personally is at the receiving end. It is clear that electoral spending is mostly through cash transactions. And given the numerous quid-pro-quos involved probably there are no "technical" solutions to improve our electoral process such that it results in governance that can be adequately responsive at the ground level. It seems there is no alternative to peaceful issue-specific mass campaigns (as is happening in the Jessica Lall case) for us to move faster towards an India where everyone is assured of basic physical security and a glass that is at least half-full.

j.bhagwati@gmail.com