01 March 2004	Monday	09 Muharram 1425

It was in the early 50's that Nehru formulated the economic model for development that India was to follow for the next three decades. The central plank of the model was import substitution, and this rested on four basic beliefs.

These were (a) centralised planning designed to boost industry, (b) a large public sector, (c) strong customs tariffs, and (d) a system of administrative permits through which the state could regulate the growth and diversification of the production capacities of private businesses.

This facilitated not only the development of an economic base that was insulated from the pressures of international competition, but also led to the emergence of a large middle class of civil servants and to the narrowing of regional inequalities.

The downside was low public sector productivity exacerbated by bureaucratic managements, and overstaffing that was politically expedient. Because businesses did not face competition from imports they were inefficient and their products overpriced and shoddy. The obsession with monopoly control restricted growth of businesses, which were consequently unable to benefit from economies of scale.

As pointed out by Christopher Jaffrelot recently in a wide-ranging article in Le Monde, it was Nehru's grandson Rajiv who began to open up the economy in the 80's but only gradually and with the help of foreign currency loans. However by mid-1991 India's foreign exchange reserve position had become so precarious that it had to seek help from the IMF. In return it had to implement measures for the liberalisation of the economy.

Consequently the system of administrative permits was abolished, state enterprises entered into joint ventures and there were reductions in import quotas and duties.

Although foreign investors may now own up to 100 per cent of businesses in the fields of hotels, pharmaceuticals, telecommunication and infrastructure (transport, energy), there has been no flood of foreign direct investment (FDI) to India. It totals about $50 billion, half as FDI and half as portfolio investment. China by contrast has attracted FDI of $500 billion in a much shorter period.

Low labour costs make India an attractive place for multinational companies manufacturing for export. Textiles though still account for 30 per cent of India's exports, and for 15 per cent of agricultural produce. However it is the information technology sector that has made the most dramatic progress.

India is the world's largest provider of IT services, ahead of the USA and Ireland. It commands 20 per cent of the world exports, and continues to grow at the rate of 30 per cent annually.

Because of a large English-speaking middle class which can handle call centres and other back office work in mock-American and British accents which are indistinguishable from the real thing, a great number of services are being transferred to India.

As a result services account for 4 per cent of India's exports as compared to 3per cent for China, where lack of familiarity with the English language is a major hindrance in the transfer to China of such work from the USA and the United Kingdom.

India is still resisting globalisation though. The breakdown of the Cancun meeting of the World Trade Organisation in September 2003 was to some extent the result of Indian resistence.

Successive governments have been dragging their feet over the privatisation of state enterprises. In 2003 the disinvestment of two major oil companies was deferred after a move for their privatisation was defeated in the Lok Sabha. Members of parliament are loth to support policies such as privatisation that inevitably result in massive layoffs and downsizing.

State ownership of business entities enables politicians to dispense patronage in the form of public sector jobs to their constituents. One of the biggest vote-catchers is the promise of a sarkari naukri.

Another hurdle to economic liberalisation is the scale and clout of the cottage industries in India. These have a monopoly over big business on almost 700 products, including the toy industry, and account for almost 50 per cent of all industrial production.

Here too the politicians are reluctant to call for removing the monopolistic position of the cottage industries for so many products, although their proliferation is a setback to industrial growth on a wider scale.

If big business were allowed the production of those products, or some of them, which are presently the exclusive preserve of the cottage industries, their output would become more competitive on the world market both in terms of quality and price.

The level of poverty in India has fallen in the past decade. The per capita income has grown since 1996 at the rate of 3.5 per cent year on year compared to an average of 3.1 per cent for the developing world.

About 35 million Indians are now earning more than US$1,200 per month and that figure is growing by 10 per cent every year. Nevertheless there are still more poor people in India than in any other country in the world. Approximately 430 million Indians live on less than one US dollar a day, and about half of them are confined to four states - Bihar, Uttar Pradesh, Madhya Pradesh and Orissa. The other states are developing at a much faster rate.

In Punjab 6 per cent of the population lives below the poverty line compared to 42 per cent in Orissa. Electricity consumption in Bihar is 141 Kwh per capita while it is almost seven times that in Gujarat.

Ninety one per cent of the Keralans are literate compared with 58 per cent in Uttar Pradesh. West and south India are growing three times faster than the northern and eastern areas.

Property in Mumbai is more expensive than in Tokyo and New York. But Mumbai is also home to the largest slum in Asia, where 600,000 people are packed into an area of less than two square kilometers. And yet Dharavi produces the finest leather goods that are exported all over the world.

The growing regional inequalities that Jawaharlal Nehru's model sought to eliminate have been widened by the programme of economic liberalization. The states that are growing the fastest are those that have exploited their physical and social assets and infrastructure in a bid to attract foreign investment. Geographical disparities in development could, in Jaffrelot's view, lead to a resurgence of regional tensions, which federalism and redistribution had eased.