Connecting The Two Indias

Much has been made of the theory that there are “two Indias” – one that is experiencing rapid economic growth and progress, and the other that is being “left behind”, so to speak. The political rhetoric of these two images of India does find some resonance with an ever-increasing middle class which is usually at odds to explain this newly-found prosperity.

It has also never been more important to understand what caused the shift from anemic rates of economic growth to sustained economic performance, and more importantly, hope and positivity about the future – so much so that India is now witnessing a reversal of the brain drain, with the best talent flocking to it. This reverse brain drain will partly address the human capital needs that India will have as it moves to the next cycle of innovation-driven growth.

Most people agree that it was economic liberalization that unshackled India’s potential, but not all recognize what that means. The process of economic liberalization started in the summer of 1991 under Prime Minister P.V. Narasimha Rao and was carried forward by successive governments through that decade. Under the NDA Government led by Prime Minister A.B. Vajpayee, the liberalization push reached a new high. Government-owned companies were sold off for the first time in India’s history.

Much of the corruption we are witnessing in the housing finance sector would be eliminated if India’s financial industry allowed a more expansive role for private players, for corruption and government discretionary powers go hand in hand. Take away discretion, and corruption too would be eliminated.

The first step that should be taken to bridge the two Indias is to offer connectivity so that they can talk to each other. Roads and telephones, and increasingly high-speed Internet access and low-cost civil aviation, are the basic building blocks and tools required for the formation of what economists term “social capital”, without which we won’t be able to break the cycle of extremism and discrimination based on identity and religion. Bihar Chief Minister’s Nitish Kumar’s resounding victory should be seen in this context.

Have you wondered why the religion- and caste-based politics of the 1980s and 1990s is losing currency in the new, emerging India? Part of the reason is increased access and connectivity that is binding the nation together like never before. Today, Indians can travel across the country via road or air, explore the cultures and diversity that make India so unique and interact with fellow citizens from other parts of India. Never before has this been possible for an “ordinary” Indian before in our history, and it has an immense qualitative impact on creating a common sense of nationhood.

Roads, telephones, the Internet and aviation enable people to do business with and talk to each other. This basic infrastructure forms the bedrock on which economic development can take place, and development alone is the panacea for religious and identity-based extremism.

This too is driven by governance and public policy. During the NDA term, over 4.5 crore telephone connections were made in 5 years, compared to 2.3 crore the previous 50 years. The Highways Ministry built over 25,000 km of roads and highways, compared to less than 600 km (that’s not a typo) in the previous 50 years. In 2003-2004, for the first time India’s GDP growth rate exceeded 8%, a feat the then-Leader of the Opposition had termed “Mungeri laal ke haseen sapnay”, in response to the Government’s projection.

Today, 8% growth is considered to be a given and India’s true potential stands at 12%-plus.

Since 2004, the liberalization process has come to a virtual standstill. We cannot bridge the two Indias merely by populist economics of taxation and redistribution – what we need is massive amounts of wealth creation and liberalization to harness our demographic dividend.

A few days ago, editor of Outlook magazine Vinod Mehta was on television describing India as having a free-market capitalist economy. This is typical of the discourse in the mainstream media – nothing could be further from the truth. I have said before that there are large, important sectors of the economy such as railways, banking and mining that are still nationalized. Till they remain in the grip of the government, our economic performance will be constrained and we’ll never eradicate poverty and identity-based fundamentalism.

India has only taken baby steps towards a market-based economic system. There is no doubt that there are a large number of Indians who continue to suffer glaring poverty, but the cure is not less liberalization but more.

The longer our government delays liberalization and the more excuses it invents, the longer India will continue to be poor and the more fuel identity fundamentalists will gather. Only markets can connect the two Indias and transform the poorer India into a prosperous India, not government largesse.

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Does India Need A Telecom Ministry?

Telecom Minister A. Raja finally resigned yesterday after what seemed like doggedly denying wrongdoing and corruption in 2G spectrum allocation. The media has been jubilant about having an impact on the Government, claiming credit for exposé after exposé that has forced ministers to quit.

But something has been lost in translation – is it good for Indian citizens if the government maximized revenue at all costs when allocating spectrum to telecommunication companies? What is the purpose and role of government, and how should the government allocate public property such as spectrum, land or mines when rights to it are not properly defined?

We need to look at the history of the mobile telephony boom in India to answer these questions. In 1998, India had a tele-density of 1.8%, or less than 2 out of 100 people had telephones. In old movies, it’s common to see people shouting into the phone to be audible to the person on the other end. “Trunk calls” had to be booked well in advance, and were unaffordable for most Indians. International calling was prohibitively expensive.

Today, India’s tele-density number stands at over 60%, and calling rates are among the lowest in the world. The sheer magnitude of growth is mind-numbing – India has added twice as many telephones as the total population of the United States in only 10 years. How was this possible?

Contrary to what Rahul Gandhi would have us believe, the New Telecom Policy of 1999 opened the floodgates for explosive growth. The Government at that time did not choose revenue maximization via licence issue, but went for revenue-sharing to nurture a market where investment was considered highly risky. India in 1999 was not the magnet for capital it is today. In fact, the outgoing Telecoms Minister has also praised the 1999 New Telecom Policy. The Government back then also cut taxes on the import of mobile phones and made it easier for companies to procure communications equipment.

Which brings us to the next question – if one puts aside for a moment charges of personal corruption against the Minister, was Raja’s policy of not maximizing revenue a flawed one? We should remember that the purpose of the government is not to maximize revenues at any cost, just because it can – government should be a facilitator of private enterprise and a regulator of markets. We should be concerned when the Finance Minister says that he has an infinite appetite for taxes.

It seems like Raja issued licences at a heavy discount and engaged in under-the-table dealings to enrich himself. Aside from personal profiteering by Raja, the policy of carrying on the 1999 New Telecom Policy was more sensible relative to maximizing the government’s revenue. A case can be made that since many of the risks in the telecoms sector have now been mitigated, Raja should have pursued a revenue-neutral policy, offsetting capital raised via auction with tax breaks given to telecommunication companies, if one agrees that the purpose of the policy is to increase telephone accessibility to obtain full tele-density as soon as possible.

Commentary that the 3G and broadband auctions raised vast sums of money for “the people of India” and the “national exchequer” is hogwash, because that money has been taken from the people of India in the first place. In fact, lower-income groups and the aam aadmi now likely have been priced out as consumers of 3G data services, because the Government made it very expensive to start up. Even entrepreneur Sunil Bharti Mittal has said that the 3G auction design was faulty.

The consumers of cellular and broadband services and shareholders of telecom companies have paid the money to the Government of India. Please don’t believe anybody who says Raja caused a loss to the “national exchequer”,  because that money would probably have come from YOUR pocket! The contention that government knows better than citizens what they should be doing with their money is paternalistic and false.

It’s important to understand this because just the way India did not have enough telephones 10 years ago, there are many other products and services which the economy requires and consumers will demand. There are also fundamental needs such as access to health care and finance. The government simply cannot provide for all these products, services and needs given the speed and efficiency with which they have to be delivered besides the himalayan scale. Younger people cannot recall the days when it took years to get a telephone connection. Sectors such as retail, banking, rail transportation and mining could use a healthy dose of liberalization, and that’ll pave the way for entrepreneurs to step in.

Raja deserved to go because of what is likely serious personal impropriety. Before panning Raja for not taking enough money from the people of India, we should think about why it is not great for the government to maximize revenue at all times and all costs, and what the alternative policy should be. This issue is bound to come up again in a different sphere, and the media, the Opposition in Parliament as well as individual citizen-voters should think it through rather than shooting from the hip. Finally, Telecom Ministry should be disbanded and the sector’s regulation mandated fully to TRAI. Do we really need a separate Ministry for it? It’s time to put the “A” back in TRAI, which stands for Telecom Regulatory Authority of India.

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