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India's worst enemy: itself
June, 05th 2008

A millennium of servitude, first to a medley of Afghans, Persians and Turkomans, and subsequently to the British, has created in India a state apparatus with near-zero confidence in the resiliency of its own people.

The country's policymakers have broadly perpetuated the restraint on freedom of action begun under colonial regimes. Even the half-hearted economic liberalization of the 1990s is now being rolled back since Sonia Gandhi assumed effective command of the government, and returned to the economics and politics of the Nehru family.

State-owned banks and oil companies are being bled into extinction by a policy of subsidies, high interest rates have dampened growth in manufacturing, and the rate of growth of exports has slowed. Even the service sector has witnessed a deceleration, thanks to an intrusive and unimaginative fiscal levy introduced in 2004, which has increased since then to 12.5 percent of value.

Today, the tens of millions of Indians active in service trades are taxed thrice, first by the service tax, then by the income-tax (close to 40 percent at its peak) and subsequently by high indirect taxes. The tax component in petrol, for example, accounts for 49 percent, even in the present era of super-high crude prices.

When in doubt, the response of Indian officialdom has always been to clamp down on its own people, further restricting freedom of action, and creating additional layers of decision-making. It is small wonder that even routine decisions often take years, while disputes settled in court seldom get completed before decades of expensive litigation.

The countrys 9 percent growth rate, despite this dysfunctional and oppressive governmental overhang, is testimony to the adaptability of India's people. Had the state given the same priority to economic growth that is seen in China, the Indian "elephant" would have been romping significantly ahead of the Chinese "dragon."

While both politicians and officials have an immense vested interest in perpetuating an essentially colonial system of governance, change may be coming from two directions.

The first is the just-completed redistricting of parliamentary constituencies, in which nearly 40 percent of the seats have been assigned to urban areas, double what they have been thus far. City dwellers are far less forgiving of sloth and bad governance than their rural cousins, and turnover within the country's Parliament can be expected to rise sharply.

Those in urban areas are also far less likely to vote on the basis of caste and faith, and more on issues related to performance. Once the next general election takes place in 2009, the new Parliament will, for the first time, have a majority of members with an electoral stake in the faster economic growth that only accelerated reform can deliver.

The other change comes from the partial economic liberalization introduced in 1992 by then-Prime Minister Narasimha Rao, who was the only prime minister not from the Nehru family to serve out a full term. While the current Prime Minister Manmohan Singh looks set to be the second, the difference is that while Rao was the acknowledged leader of his team, these days ministers report to the "real" prime minister, Sonia Gandhi.

An example of Singh's powerlessness is visible in the rising subsidy cost of providing petrol at rates that do not reflect the increase in crude costs over the past two years. The daily loss just to the top three state-owned oil companies is US$164 million and growing. Although the prime minister has sought to raise administered prices to a level reflective of costs, Gandhi has sat on the request for the past 11 months, making the demise of the state-owned oil companies inevitable.

As for the state-owned banks, they have thus far been slapped with "loan waivers" to farmers amounting to US$22 billion and counting, apart from around $46 billion in bad and doubtful loans, mostly to favorites of India's political and bureaucratic establishments.

The difference between the systematic looting of the exchequer that is occurring now and the same process in the past is that the usual populist slogans no longer carry much appeal, even in the rural areas. Although there has been public outrage against industrial parks, most notably in communist-ruled West Bengal, these have been because land belonging to peasants has been taken over by the state at less than 15 percent of the market price, and subsequently gifted to business entities at prices that stop well short of 25 percent of the market price, a substantial portion of the difference being paid clandestinely as bribes.

These days, those with expertise in setting up dummy entities out of the Cayman Islands or some such haven are much in demand, as politicians and officials seek to park vast amounts of currency in their possession. Naturally, India has been uninterested in chance disclosures, such as those coming out of Lichtenstein, presumably because several within the country's elite have undisclosed accounts there, often in the names of friends or relatives who have foreign nationality.

Although corruption exists in China, an examination of imports of machinery and defense equipment will show that equivalent systems get charged 30-40 percent more for India than for China, although these do not reach the levels seen in the Middle East, where most items are imported at prices special to the region, as British aircraft manufacturer BAE Systems can testify.

The cost of public works in India is usually double what local prices mandate because of the substantial bribe component concealed within each contract.

While much is made of the "free" Indian media, very little high-level corruption is actually exposed, due to the immense power of the income-tax department to harass those inconveniencing the elite. And because most Indian political parties are controlled by either a single family or a small group of leaders, voter choice is low. As a result, discontent is substantial, and likely to be expressed in the next election by the defeat of numerous incumbents.

However, until the "world's largest democracy" witnesses inner-party democracy in its political parties, and a media no longer going after minnows but against sharks, the country seems fated to perform well below its potential. More than any external threat, it is the evil wrought from within that holds India back.

(Professor M.D. Nalapat is vice-chair of the Manipal Advanced Research Group, UNESCO Peace Chair, and professor of geopolitics at Manipal University. Copyright M.D. Nalapat.)

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