Friday, November 18, 2005

Politics is a drag on Progress

We need to recognise the failure of the socialist model
Aditya Puri
India's political and economic fabric is in the throes of change. Despite a political consensus on key reforms, the government has been finding it difficult to act on them. With the emergence of religion, regional power centres and old secular centrists as power blocs, politics is gaining the upper hand over economics and long-term interests.

To dispel the confusion over reforms, we need to recognise the failure of the socialist model. A socialist society aims to create an environment in which everyone has equal rights and opportu-nities, the underprivileged are helped and protected to a better life, economic activities are tampered with to meet the needs of the nation and abusive, selfish interests are subjugated. A goal and a society we should all aspire for. But is it possible to achieve this utopian society? If we carry this thought further, we must believe that desire for individual reward for individual effort is anti-social. Practically, however, it is only a minute percentage of people who are able to rise above their personal interest and needs.
The majority responds to the removal of material rewards by either losing their desire for hard work or their moral fibre, thereby stri-ving for illegal rewards. This results in low GDP growth, inefficient production, corruption, illegal wealth, wide disparities and the nation having no money for social causes. In today's globalised world, countries cannot survive in isolation, impose unnatural barriers, subsidise inefficiency, and not have appropriate infrastructure, edu-cation, health and employment generation capabilities. Capitalism has not been a roaring success either. But what is clear is that you cannot mix politics, economics, social benefit and strategic needs. Each must be tackled separately. We must have the most efficient economy possible and ensure that its fruits help the underprivileged.

We must have under government control items of strategic importance to the country. With this framework in mind, let us examine some of the government's key objectives and the opposition to them: GDP growth rate to be increased from 6 to 8 per cent, which will shorten the time in which the major portion of the population can live decently; and increased outlay on education, health and infrastructure. If these objectives are fine, then the means of achieving them must be acceptable. The main problem in achieving the 8 per cent GDP growth is the gap between what we save as a nation and the investment required to achieve a 8 per cent growth rate. There are two ways to bridge this gap: Foreign direct investment and reduction of dissavings and fiscal deficit. FDI will seek appropriate return, and therefore has to be in the mutual interest of the investor and the country. We must bury the bogey of foreigners controlling our economy.

Can a commercial organisation function outside the laws of the country? The issue of foreign exchange drain can be offset by gains in terms of employment, technology and reciprocity. It is a huge mistake to link employment or job security with getting companies to be efficient and promoting competition. Organised labour accounts for just 10 per cent of the labour force. We cannot hold the country's millions hostage to protecting non-productive employment of organised labour. Labour has and must have rights, but they also have duties. A honest day's work for a day's pay.

Labour laws fair to all is a prerequisite to creating investment and employment. Parts of the public sector are a negative contributor to our savings. Somebody pays for losses of public sector enterprises. It is imperative that these be turned around (if possible), sold or closed down. If current management cannot do it, we offer it to others: If they see value they will bid, or we close them down and salvage what we can. A reduction in deficit becomes important to make funds available for investment in education, health and infrastructure.

To this end, we need to move from a income-based tax bias to one based on consumption. Most countries have gained by moving to VAT. We also need to dump the bogey of taxing the well-to-do at a high rate, as this only results in evasion and corruption. We can reduce non-productive expenditure of the government, by targeting subsidies directly at the less fortunate. For example, the poor do not use LPG; cheap electricity subsidises the rich, who are heavy users of electricity; and the marginal farmer hardly uses fertiliser. Food procurement and distribution is a wasteful mess.
Ideology-based economics coupled with vested interests harm the common man while claiming to do him good. India has on its side GDP growth, good reserves, sound financial infrastructure, favourable demographics and a English-speaking population. The global economy is in transition and developments are favourable to us. We need to ensure that we do not mix politics, economics, social needs and strategic imperatives. Capitalism with distributive justice should be our maxim. The writer is Managing Director, HDFC Bank. THE TIMES OF INDIA : October 11, 2005

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