Jagdish Bhagwati, Columbia University Professor, and senior Fellow in International Economics at the Council on Foreign Relations, is one of the distinguished economists who have formulated the intellectual case for economic reforms. The 72-year-old Bhagwati speaks to Shyamal Majumdar on what he calls the revolution of rising expectations in India. Excerpts:
What is your prescription for the Indian government?
First, politicians have to understand that growth can't be a passive, conservative "trickle down" strategy. It is a radical and activist pull-up strategy where considerable state effort is put into accelerating the growth rate so that poverty can be impacted. Growth does this by creating jobs for the poor and also adds to budgetary revenues that can then be spent on health, education and other social sectors.
We must also challenge the notion that the only way to manage agricultural security is by closing it to international trade. Opening up agriculture trade will not hurt the interests of 60 per cent of India's people, as the government believes. People do, it is true, need safety nets and adjustment assistance programmes and the government has to be innovative in providing that.
Privatisation may be difficult due to political pressures, but surely nothing stops the government from freezing subsidies to PSUs? Selling equities in small lots serves no purpose as it only helps the government get more revenue. Open up almost everything to the private sector, make sure you reduce import tariffs further. Competition matters and that is the main lesson of 1991.
On labour market flexibility, it is true firing has its downside, but not being able to fire has a bigger downside. Job security for workers is desirable, but that doesn't mean security in any particular job. So retooling and training is necessary.
Aren't these easier said than done in a democracy?
I think the election results in India reflected the success of the reforms in reducing poverty. As long as the economy grew poorly, poverty was barely reduced and we had a "non-revolution of falling expectations". But once the reforms began to deliver results, we had the "revolution of perceived possibilities", or the "revolution of rising expectations": the poor saw that they could improve their lot and now wanted more. And they had the votes.
Is the present government on the right track on reforms?
While Manmohan Singh is absolutely clear in terms of where he wants to take the country, the opposition to further reform comes from within the Congress Party itself. 1991 saw a displacement of socialist sentiments and of the proponents of the mix of policies. The discarded socialists have now come back and are allying themselves with the coalition partners outside the Congress Party to stall further reforms.
They have come back from the cold because the assumption which the Congress leadership seems to have bought is that it was the "neoliberal" reforms that led to a neglect of the poor in the rural areas, and, therefore, we need to reject the emphasis on these reforms and do rural development.
I do not buy into this thesis at all. Nearly all incumbent governments at the state level, whether BJP or Congress, lost. In short, the incumbents were being thrown out, whether they had been introducing modern reforms or not.
What are your specific worries?
The Congress Party is taking decisions which are almost like the earlier 20-point programme, garibi hatao, bank nationalisation and so on, which are full of sound and fury but mean nothing.
For a change, we have more money at our disposal, so why not spend on things that are more productive? Take the employment guarantee scheme. There is nothing wrong with shifting the state's attention to the rural sector. But such expensive schemes that are susceptible to stereotypical diversion into corruption will also do considerable damage by diverting funds from more productive rural uses. In the case of output-enhancing infrastructure projects, at least there is visible output.
Reservation in educational institutions will only help some high-grade institutions to sink without a trace. Even the ban on child labour is ridiculous in a country where poor children would die of starvation if they were not allowed to work.
When Manmohan Singh became PM you put a rider by saying you weren't sure that he had the guile of a politician...
Singh is perhaps the only Gandhian left in India in terms of personal integrity. Perhaps he gives in to coalition pressures, giving pro-reformers a sense of frustration. But I think he is less politically naive now, and is best suited for the job. The system is at least moving forward. After all, his reputation worldwide is a great asset for India.
Do you think India's 9 per cent growth target is feasible?
The growth rate reached after acceleration is sustainable. When we look at specific details, things have improved beyond our complaints. But reforms have to accentuate if we have to reach a double-digit growth rate. That's the only way to be able to spend more on social issues like health and education. I think the stark poverty in India can actually disappear in 15 years. Look at how a 3 to 4 percentage point growth has transformed the economy.
Are we ready for capital account convertibility?
We have to be very cautious. What is required is a 10-year profile of high growth, good financial discipline, a truly transformed economy and a very sound democracy. Your own people must have confidence in your economic strength. So I would set a 10-year time frame.