Satyajit Das: The Great Pretender – India’s Economic Past & Future, Part 3: Political Atrophy

By Satyajit Das, derivatives expert and the author of Extreme Money: The Masters of the Universe and the Cult of Risk (2011). Jointly posted with Roubini Global Economics.

In the aftermath of the global financial crisis, optimists hoped that the BRIC (Brazil Russia India China) would drive the global economic engine. But China’s economic growth has slowed to its lowest rate in three years. Brazil’s economic growth has fallen from around 7.5% to under 3%. Russia’s economy is heavily dependent on oil and energy prices. India also has stalled. This 3-part paper looks at the development and future trajectory of the “I” in the “BRIC”. The third part looks at the India’s inability to confront its current problems.

India’s growth has slowed to around 6%, high by the standards of developed countries but well below the levels required to maintain economic momentum and improve the living standards of its citizens. The demographics of a youthful population, the large domestic demand base and the high savings rate all remain positive. But increasingly, corruption and political atrophy threaten to overwhelm its future prospects.

Corruption Capital …

Petty corruption by poorly paid local officials has been common in India for decades. The real problem is a deep-seated and endemic corruption on a large scale, highlighted by scandals surrounding the issue of telecommunication licenses and also sales of coal assets.

A 9-month investigation by the auditor and Central Bureau of Investigation found that the Ministry of Communications and Information Technology sold licences for the use of spectrum for mobile telephony bandwidth at below market prices to telecoms companies in 2008. The report found that 85 of the 122 licenses were granted to companies that “suppressed facts, disclosed incomplete information and submitted fictitious documents”. The sale cost the Indian government and citizens lost revenues of around US$39 billion.

More recently, a draft report by the auditor accused the government of selling coal assets to major Indian industrial corporations at below market prices, resulting in a loss of (up to) $210 billion in lost revenues. There are even accusations of manipulation of the auction of licenses in the new Indian Premier league, a T20 cricket competition.

Commentators now compare some Indian businessmen to 19th-century American robber-barons.

Using corrupt means to access power and acquire influence over politicians, businesses have advanced their interest in several areas. They have secured rich natural resources, especially land and minerals. They have ensured a favourable regulatory framework and restricted competition, especially foreign competition, where possible. The unauthorised biography of Dhirubhai Ambani, the founder of the Reliance Empire now split between his sons, euphemistically notes his skill at “managing the environment.”

The problem involves both businesses and politicians. Historian Ramachandra Guha tells the story of a burglary of a prominent Indian Politician which only yielded the miscreant a gold sovereign and Rupees 800 (about US$ 20). Today, the haul might be better.

The retired head of India’s anti-corruption watchdog stated that as much as 30% of his compatriots were corrupt. Favours, bribes and even shares of business are now commonly demanded in return for assistance in securing contracts.

A 2009 Newsweek article, “The House in Ill Repute,” recorded the history of some members of the Indian Lok Sabha, the lower house of parliament. Under new laws pushed through by a group of college professors after years of fierce resistance from dozens of political parties, candidates for the Lok Sabha were required to disclose their assets and criminal records. The disclosures recorded that 128 of the 543 winners had faced criminal charges, including 84 cases of murder, 17 cases of robbery and 28 cases of theft and extortion. One member faced 17 separate murder charges. As Indian law only bars convicted criminals but not alleged criminals from running for or holding office, even convicted criminals can continue to hold political office pending the hearing of appeals, a process that can take up to 25 years in India.

Insecure India …

India’s economic challenges are compounded by internal and external insecurity.

In the title of his 1990 book A Million Mutinies, writer V.S. Naipaul pithily captured India’s internal political disputes. Today, about a third to a half of India is affected by the Naxalites, a violent Maoist insurgency which has been active for over the 50 years. Active in remote forested areas which are coincidentally rich in mineral resources, the movement has prevented development and also tied up substantial government resources.

More peaceful separatist movements abound in many parts of India, with ethnically distinct groups seeking their own separate State. Over the last 30 years, many Indian states have been sub-divided to accommodate these movements at great national expense.

The threat of religious conflict between Hindus and Muslims is ever present. The Chief Minister of Gujarat, frequently touted as a candidate for future Prime Minister, is unwelcome in many countries that refuse to grant him a visa because of his alleged involvement in sectarian violence.

Ongoing border disputes with Pakistan and China and the instability of AfPak (Afghanistan and Pakistan) dictates large defence expenditure. This is compounded by regional competition with China for influence requiring the capability to project military power into the Indian Ocean and also South East Asia.

In 2012, Indian defence spending is forecast to be US$41 billion, around 1.9% of GDP or the 9thhighest in the world. Financing this spending diverts resources away from other parts of the economy.

Political Atrophy…

Political paralysis is a major impediment to economic development. Successive governments of every political persuasion have failed to undertake meaningful reforms, necessary to foster growth, employment and development.

Required changes in land and property laws have not been made. Problems in acquiring land are a factor in 70% of delayed infrastructure projects. The land acquisition process under a 19thcentury law requires changes, which remain unlegislated almost 3 years after amendments were proposed.

Reform of tax laws, including introduction of a direct sales tax correcting cumbersome difference between individual states, have not been completed. Changes to mining and mineral development regulations to allow proper, environmentally controlled exploitation of India’s mineral wealth have not been made.

Other crucial areas remains unaddressed – rationalising unwieldy and economically distorted subsidies, implementing economic pricing of utilities, promoting foreign investment in key sectors or reforming agriculture, especially the wasteful and inefficient logistics system for transporting produce to market. Reform of labour markets and privatisation of key sectors has not been progressed.

Dealing with corruption and reforming government process for the grant of licenses or property rights also remains incomplete.

India’s political system is an obstacle to change. Complex coalition governments are a barrier to decisive action. The current government failed to implement its plans to allow limited entry of foreign retailers as a result of protests from its own coalition partners as well as the opposition. The government also failed to get a key anti-corruption bill through parliament.

The current governing Congress led coalition and the BJP led opposition is weak, both crippled by corruption scandals. All parties are dominated by political monarchies (such as the Nehru-Ghandi dynasty) or by geriatric politicians who cannot or will not embrace change.

India’s fabled democracy is an increasingly ossified domain, where a complete inability to make hard decisions or undertake reforms makes government futile if profitable for some.

The Great Pretender…

In good times, Indian economic weaknesses were covered by moments of positive actions and good luck. But the economy faces increasingly difficult times ahead as the luck has run out.

Indian disappointing response to the challenges is to disavow the problem or to look for short cuts. The overall tendency is for “spin,” ignoring the fundamental failures. The country seems unable to face the truth and undertake fundamental long term changes.

In the 1980s, Indian sociologist Ashis Nandy observed that “in India the choice could never be between chaos and stability, but between manageable and unmanageable chaos”. The observation is relevant today as India deteriorates through its failure to carry through crucial reforms exacerbated by corruption.

Without urgent changes, India may never be able to live up to its promise, remaining always the Great Pretender.

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About Lambert Strether

Lambert Strether has been blogging, managing online communities, and doing system administration 24/7 since 2003, in Drupal and WordPress. Besides political economy and the political scene, he blogs about rhetoric, software engineering, permaculture, history, literature, local politics, international travel, food, and fixing stuff around the house. The nom de plume “Lambert Strether” comes from Henry James’s The Ambassadors: “Live all you can. It’s a mistake not to.” You can follow him on Twitter at @lambertstrether. http://www.correntewire.com

28 comments

  1. PaulArt

    Amazing. Does Das have ANYTHING good to say about India? Going by his reading of India one would have to conclude that most of the MNCs like Intel, HP, GE, Honeywell etc are all fairly dumb to have moved so much of their R&D operations and jobs to India. While much of what Das writes is true he is guilty of treating rural India as the same as urban India. Anyone who knows something about India knows that these are two completely different worlds. Take the Naxalite issue for example, when was the last time the Naxalites caused a problem in any major city? This is a completely one sided tarring and feathering of India by Das. He has predictably fallen prey to the ‘West is best’ disease that afflicts all immigrants from the Third World who move to the West. Ignoring Nehru’s foresight in choosing a mixed economy instead of a pure Capitalist one is a monumental miss by Das. Capitalism deteriorates quickly into crony capitalism in young democracies, it was because of this that Nehru chose the Socialistic model of development. One does not know where to begin to weep for Das.

    1. Curry

      What he’s saying about India applies to the US, I don’t hear any championing of Western Corps over Indian ineptitude. Corruption knows no borders, capital seeks the cheapest bang for the buck and buys off the local Gov’mint. This is why the magic of hyderdad appealed to the MS, GE, Honeywell mafia. Who incidentally receive guranteed subsidization from the ‘Murican gov’mint.
      Look at the US housing crisis, Banksters bought off the whole schmear – FBI, to Justice. Not sure what the hell you read but it wasn’t this article. Ya moran.

      1. jake chase

        I agree. I found the main post terrifically amusing. It could have been written by a half dozen starry eyed college professors. What does Das think capitalism and development are, apart from inside deals, environmental rape, obscene corruption, political bullshit? Unlike the US, Indian ‘entrepreneurs” are not in a position to exploit anyone outside its borders. That leaves who? And all these ridiculous ‘growth’ numbers. The only thing really still growing around the world is economic cancer. Das should stick to books on derivative trading. On that he is worth reading.

    2. Francois T

      “Amazing. Does Das have ANYTHING good to say about India?”

      Well…since he obviously does not work for the Ministry of Tourism of India, he is not compelled to do so now, is he?

  2. Clive

    PaulArt, Hi. you make some valid poins. But be careful in which “friends” you pick for India. When you say:

    “Intel, HP, GE, Honeywell etc are all fairly dumb to have moved so much of their R&D operations and jobs to India…”

    … you are of course quite right. However, these rapacious, exploitative arbitragers of international labour are, in essence, nothing better than pimps looking out for their next bevvy of crack whores to sell on to their lucky johns. Do you seriously think that if India attempts to break out of the middle income trap and seek to get better participation in sharing the profits they are helping to create that these benevolent altruists will say “yes, of course…” ?

    Sorry to disillusion you, but they’ll be off to the next cheap labour hotspot in the blink of an eye — or else threaten to do so unless the country gives into their demands for “reforms”.

    India, as Satyajit is urging, needs to get it’s act together, stop relying on this 1%’er-to-1%’er crony-capitalist love-in and generate real, sustainable trnasformation of it’s laws, it’s governance and it’s political system.

    For me, I wish it well. But it won’t achieve anything until it can unhook itself from the teat of the worst excesses of Western corporatism.

  3. Dennis

    Amen to that! Speaking for just the southern region of India, state of Kerala, their adoration of the western culture and allowance of multinational corporatism to come and invade their way of life is truly sad to witness. The ways of the west is old and stale, yet India chooses to accept the west’s soon to be worthless money in order to assimilate a part of their culture because in their view that equals growth. It will lead to an accelerated, weaker business cycle and in turn a faster demise. Take opportunity to dictate a new approach to this world. All the potential can go to waste if you cannot break free from the past.

    Das is right in saying corruption is the #1 issue facing India and their obstacle to taking this great country to the next level. PaulArt, the truth is sometimes tough to hear.

  4. russian mafia

    After traveling extensively to ‘corrupt’ latin American countries, I realized that India was far worse than what I was made to think while living there. When I was in Peru, a supposedly corrupt country, its government fell due to exposure of corruption and president ran to Japan. The supposed corruption was a tape, where president’s strong man was video-recorded for taking bribes. A much larger scale of corruption was exposed in India around that time, but nothing happened.

    Also, the quality of life I enjoyed in south America, even when living among the poorest in the society, was far better than the poor or supposed middle class in India.

    India is a disaster waiting to happen. I am skeptical about wisdom of US companies setting labs in India. After all, they are run by the same cadre that made Lehman sink, isn’t it?

  5. Aquifer

    “the Naxalites, a violent Maoist insurgency which has been active for over the 50 years. Active in remote forested areas which are coincidentally rich in mineral resources, the movement has prevented development and also tied up substantial government resources. …… Problems in acquiring land are a factor in 70% of delayed infrastructure projects.”

    Ah yes – and why does one suppose movements such as the Naxalites are active in these “coincidentally” rich areas – could it be because the gov’t is trying to evict/wipe out the indigenous folk who live there to “acquire” the land in the name of “exploitation of India’s mineral wealth” aka “development” of the resources? And that the “infrastructure” e,g. dams, results in the mass displacement of these folk?

    “promoting foreign investment in key sectors or reforming agriculture,”

    Ah yes, like the infiltration of Monsanto’s GMOs leading to thousands of farmer suicides when they went into debt they couldn’t pay ….

    “…….Reform of labour markets and privatisation of key sectors has not been progressed.”

    Greece, anyone?

    The more i read this guy, the more it seems to me he is just another neo-liberal spouting the party line …

    Again – read Arundhati Roy ….

    1. ctct

      reads like an old World Bank ‘development’ paper… coming soon… a more efficient capitalism!

      1. Aquifer

        Yup! Although i am not so sure how “old” such a paper would be – I hear noises that the WB is “reforming” but have yet to see any indication ….

        Seems the only “reform” suggestions coming out of the WB nexus come from former WB officials who now preach the opposite of what it does – they saw it from the inside and know, to put it charitably, it doesn’t work, for the little guy ….

  6. Aman

    The fate of any country is decded by the choices people make..what kind of people are there in the country decides all… Everything else is just a reflection of what people really are..

  7. Hellga

    Once upon a time, Western agriculturalists realized how much Indian people relied on milk, and we’re dismayed at the low out of Indian cows. In order to fix this, they decided to help by bringing over European and American breed such as Holsteins and Jerseys, which produced five to ten times the amount of milk.

    These cows faltered, died, and bankrupted farms and families. They required massive amounts of fresh grain and whole hay to survive, let alone thrive and produce so much milk. The Indian cows had been bred to survive on meager grass on the side of the road, and whatever else they could scavenge.

    Yes, it’s nitpicking this article, but please don’t effing modernize India’s agriculture. When you change subsistence farming to ‘modern’ farming, what you’re really doing is taking food out of the farmer’s pockets and putting it into the pockets of multinationals that sell the pesticide, pesticide resistant seeds, and chemical fertilizers needed to grow the ‘improved’ crops. Then, the farmers slowly go bankrupt buying this crap, they sell their land to agricultural conglomerates and end up working in factories.

    In some ways, to extrapolate, the LAST thing India needs is modernization.

    1. Aquifer

      Thank you! India was a food exporter, so i understand, before the introduction of “modern ag”, now it is an importer – if folks want to help ag in India listen to Vandana Shiva – Navdanya and not Satyajit Das – “derivatives expert”

    2. May

      Indian farmers are follooing a unsustainable path anyway by abusing groundwater and also by misusing fertilizer so soil fertility is getting worse. Some experts are even saying at this 70% of the land will become infertile. That is if the groundwater isn’t sucked up first. None of these farmer are given any water recycling facilities or use drip ag technology on a large scale.

  8. F. Beard

    Without urgent changes, India may never be able to live up to its promise, remaining always the Great Pretender.

    You mean become like the West that has STILL not learned to do capitalism ethically?

  9. Anand

    While the essence of the article has shed lot of insights to improve in india. I agree that these needs to be looked upon seriously.
    I am unable to understand what kind of bad investments has india made compared to rest what is sighted is yes there is ambanis new tajmahal, Please check the rest of the world my friend there are several crazy people who have blown their money on even more petty things,

    There are several intelligent derivative economies which bet, trade, fool the rest of the world that world would be dysfunctional without derivatives. Please check their books.. you will see their india is far way ahead

    I fail to appreciate his views on this line While Its ok for apple and microsoft to invest in equally corrupt inefficent and bankrupt municipalities , it becomes unholy and stupid for investing in soe by state controlled banks. Do you want india to invest in west to finance reckless spending.

    I think indian real estates have far more realistic value compared to several so call biggies. Indian banks bad debts.. ?, Please check your facts lot of stories about so called chinese banks who lend to india and what is their debt levels. On any day indian banks have better risk management then several west and chinese banks.

  10. NV

    Two things

    1. Satyajit Das – You got the knack of stating the positive also in a negative way.

    2. For all who posted the Arundhati Roy story on capitalism – this article is a verbal diarrhea of sorts. There is no structure, headings or anything to follow thru her point of view. Ambani, Jindal, Adivasis, Bretton woods, NGO foundations . She needs a good editor.

    1. Ms G

      NV — stick to reading Power Point slides — a lot easier to follow than long-form journalism. Free advice.

  11. Paul Tioxon

    Well, it looks like a wholesale rejection of Das Kapital.

    http://kafila.org/2012/05/27/india-asks-google-to-remove-2-items-every-3-days/#more-12938

    “Google’s just released fourth biannual Transparency Report says that between January and June 2011, India asked it to remove 358 different items from various Google-owned web services such as Orkut and YouTube. Google complied in 51% cases. The requests were made by various central and state government departments through 68 different requests. The fourth such report, it goes against communications minister Kapil Sibal’s claims that internet companies are not willing to “self-regulate”.
    Worryingly, the report also confirms the allegations that what bothers government officials the most about the internet is not defamation or hate speech but government criticism.”

  12. PaulArt

    Someone above asked the question, whats up with this series by Das? Well, it seems that our well meaning friends at NC made that mistake which many of us fall prey to, i.e. unconsciously extrapolate the narrow expertise of a person to areas in which his knowledge is nothing more than a hill of beans. I made the same mistake myself. I was so enamored of Das’s intellect that I forgot that he could be out of his depth here. I was expecting a mature, calm and dispassionate analysis of India starting with Nehru’s bold experiment with the ‘Mixed Economy’ model. All I got instead was, ‘SOCIALISM!’. Derivatives and Financial gobbledygook might be up Das’s street but putting together a piece on his home country is something he should not step into without some inflatable flappers. This reading of his intentions is giving him the benefit of doubt mind you. The recent flight of foreign direct investment from India makes no sense except when you see it as a temporary symptom of investors getting the vapors because of the global impasse going on right now. Where has capital been running to in the last 10 years? Places where there is no regulation and where you could bribe your way into anything. India is one of those on top of that list. If oil prices come down with a thud in the next few months it could all turn on a dime. Das’s prognostications on India are no different from the Tea Party take on our deficit. Economy tanks, revenues fall, deficits increase and immediately there is a shout of ‘we are going over a cliff!’. Lets face it, Das tore of his whiskers, we know who he is now. He was imprudent not to wear his neo-liberal whiskers well when he wrote this piece. He has been outed. Jai-Hind!

      1. Ms G

        What a failure of the imagination. He could start a nonprofit in any number of villages or towns or city slums to set up small businesses, houses, clinics. Or forget the nonprofit — he could set up a bank where he gives out his money for free to anybody except corrupt government officials and businessmen. His ROI may not be in rupees, lakhs or dollars, but his karma would be off the charts.

        1. K

          Do you still have any money left after your monthly budget? Please donate it and possibly work for “well-meaning” people for free. What is money but an incentive for humans to work. Please stop suggesting communist crap. No nation has survived,yes including Cuba, on communist stories. Please note that if we need to lead a communist life, we should all become hunters/gatherers. You ready ?!

  13. brmr

    Half knowledge is dangerous.

    A lot of economists study ” Wealth of nations” by adam smith while ignoring the basis for that i.e ” Theory of Moral sentiments”

  14. Lune

    You make some good points about challenges India face, but overall, I think you’re looking at India through western eyes.

    Firstly, you’re right that corruption is a huge issue, not necessarily because politicians these days are more corrupt than say 20 years ago, but because the amount of money involved in the greatly expanded economy of today is much higher. FWIW, the improved economy has also energized the population to try to combat this corruption. Witness the recent agitation for the lokpal bills. Also, just the fact that the telecommunication and coal corruption issues have received such major attention is an improvement from the past. These are baby steps, to be sure, and it’s not yet clear which side will win out, but it’s not all doom-and-gloom.

    OTOH, I think you’re correct about the political paralysis. Indeed, I think this is a bigger problem than corruption, and getting worse. At least if politicians were effective in implementing policy, they might be worth the billions in bribes that they squirrel away in Swiss bank accounts. But the splintering of parties into regional parties, caste parties, and even cult-of-personality parties, means coalitions are at best unable to address important issues, at worst, unable to stay together at all.

    That said, the policy proposals you recommend seem straight out of IMF shock doctrine, so I’m actually quite happy that political paralysis has prevented India from implementing them. Let’s see:

    1) promoting foreign investment in “key sectors”… such as finance, banking, insurance?
    2) “Reform” of labor markets i.e. breaking unions?
    3) Privatisation of key sectors. Speaks for itself, really.
    4) Agricultural reform. I’m assuming so that inefficient individual farmers can be made to leave the countryside and flee to the slums of cities that are unable to provide meaningful employment to the millions of destitute already there, all so that corporate agribusiness can take over since they’ve proven they’re so much more environmentally responsible and sustainable than illiterate farmers.

    Furthermore, on some issues you don’t seem to account for history. Take for example land acquisition. After independence, land reform was a huge issue, and laws were passed to break up the old feudal system of rich landowners owning thousands of acres of land with serfs to work the fields. This was not an unreasonable concern: witness the largely intact feudal system of Pakistan (which didn’t effectively undertake land reform). This is the reason why acquiring large parcels of land is quite difficult in India.

    Despite this, a series of laws *have* been passed in India to allow land acquisition for economic development. It’s actually the *abuse* of these laws (For example, setting up bogus Special Economic Zones, or SEZs) and the seizure of land by powerful businesses that has led to large-scale resistance such as the Naxalites you mention. Very few people in India are enamored of Marxism or Maoism: despite being one of the few democracies that doesn’t ban marxist and communist parties, they have limited electoral success outside of a few states. But most Indians equally don’t like being thrown off their ancestral land because some corrupt businessman has bribed a politician into designating his farm as part of a BS SEZ…

    Similarly, while there are significant challenges to India’s security both internal and external, in comparison to its recent history, India is much more secure than it was, and getting better. India has fought multiple wars with its neighbors. But the development of a credible nuclear deterrent means war with either Pakistan or China is less likely now than it was a few decades ago.

    Internal security has always been an issue for India, and I’m not sure the naxalites are more of a threat than Kashmiri insurgents, or Sikh separatists in the past (who were strong enough to assassinate a Prime Minister).

    This isn’t to minimize India’s substantial security concerns, but to place them in historical context to see whether they really pose the existential threat you seem to imply.

    At any rate, your argument seems to boil down to the fact that India isn’t the U.S., and doesn’t seem to be in any hurry to remake itself in that fashion (although I think it has the corruption and political paralysis part down cold :-). Given the substantial flaws we’re now seeing in the Western system of political economy, I’m not so sure that’s a bad thing…

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