The Hindu Business Line : It costs 32 p.c. of GDP for government to mess up economy

THE record of sorts achieved during the latest session of Parliament when the Finance Bill got passed without any discussion is nothing to feel proud of. So, when one finds that William W. Lewis has a chapter titled, "India: Bad Economic Management from a Democratic Government" in his book The Power of Productivity, published by The University of Chicago Press (www.press.uchicago.edu), nod is a better reaction than protest.

The author draws upon his McKinsey skills to look at "wealth, poverty, and the threat to global stability" and find answers to why "roughly five billion of the world's six billion people continue to live in poor countries" despite the heavy "infusion of capital and attention".

More capital is not the answer, nor improvements in education, stability in exchange rate or solvency of government. The key, he would argue, lies in moving from "a producer mindset" towards "increasing productivity through intense, fair competition and protecting consumer rights." That is because "goods produced have value only because consumers want them."

The prologue talks about the immensity of India study: "It turned out to be the largest project we conducted over the last 12 years." This involved more sectors than Russia had, plus agri as also dairy, "the largest employing sector anywhere in the world in absolute numbers of people", explaining why "Indians get much of their protein from milk and not meat."

Lewis talks of a development trap: Agriculture mechanisation has no incentive because farm workers are available in plenty at low wages.

Farm productivity will not happen "until enough jobs are created in manufacturing and service industries to drain the excess workers out of agriculture." There again, is a problem, because "India has by far the most restrictions and barriers on the development of the manufacturing and service industries".

Ten main conclusions that the author presents include some shocking findings: "Education is not the way out of the poverty trap. A high education level is no guarantee of high productivity." In contrast, he argues that you can train workers "on the job" to achieve higher productivity.

Disappointingly, hope does not lie with the "the elites, the educated technocratic, political, business, and intellectual groups". Because they are responsible for `big government', cautions Lewis.

"Particularly in the poorer countries, the elite license business activity, control international financial and material goods flows, promote unaffordable social welfare systems, and favour government-owned businesses." There is more: "Too often, the elites reward themselves richly."

Jumbo ministries and big governments cannot survive without high taxes. However, when a big chunk of the economy is `informal' and so untaxed, the burden falls on `legitimate businesses'. Lewis points out, "This is a burden today's rich countries did not have when they were poor."

Thus, `Big governments are destructive to economic development.' If only we could paste that maxim in every sarkari daftar! Cost of our government is 32 per cent of GDP. "When the US was at India's level of today, the US had virtually had no government."

Don't bet too much on business visitors who routinely go to poor countries because they rarely learn about the problems. "They go to Sao Paulo, Rio, Moscow, St. Petersburg, Mumbai and Delhi and stay in hotels and eat at restaurants that are indistinguishable from those in the rich countries.

The Oberoi hotel chain in India is perhaps the best hotel chain in the world." Often, such insulation from reality could lead to wrong business decisions. Take the case of Carrefour ("perhaps the best international retailer") that almost decided to enter Russia, determined to deal with "the red tape, bribery, and even threats to physical security".

But one hitch was that it pays taxes, while "the open-air markets" in Russia don't. "Carrefour decided not to enter Russia." To make things worse for us, "India has even more market distortions than Russia."

60 per cent of India's jobs are in agriculture but "Indian dairy and wheat farmers have a productivity of about 1 per cent of the US farmers'," notes the book. Of the remaining 40 per cent employment, about one-half is taken care of by the modern sector, such as steel mills and banks, where they practise division of labour, use capital equipment and reap economies of scale.

These have an average productivity of 15 per cent of their counterparts in the US. Rest of the employment is in the `transition sector' — manifesting as "one- to two-person operations with very little equipment", such as the street vendors, tailors and so on.

Productivity here is 7 per cent that of the US. Since this is much better than what is possible in agriculture, Lewis suggests job creation in `transition' as next in priority to focussing on the modern sector.

Modern sector's productivity "ought to be much closer to 100 per cent of US productivity", assures the author. So, what's keeping it down? Government policy. "It is not trying to control through central planning by telling everybody what to do. It is trying to control through regulation by telling everybody what they cannot do."

This distorts and diminishes competition, argues Lewis. Reservation of products for the small sector, and protecting retailing from foreign competition are also other negative forces he talks about. Government owns "40 per cent of the total business capital stock" though it chugs along at "often no more than 10 per cent of private sector productivity."

There is a special `immovable' problem too, that of unclear land titles. "The result is that there is huge demand for the very little land with clear titles," observes the author. "Not surprisingly, the ratio of land costs to per capita income in New Delhi and Mumbai is ten times that ratio in the other major cities of Asia."

What is the prescription for India, "an outsized example of economic development failure"? The book proposes penalising bad economic policy by not pumping in foreign assistance for development. To penalise us more we have our own elected representatives for whom ideological differences are closer to heart than the country's progress.

There is little hope, therefore, of any meaningful discussion of productivity issues in a Parliament that has already rubbished Budget debate and gone off on a long vacation.

Economics@TheHindu.co.in

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