India's Dangerous Response to the Meltdown

There are dangerous signs that the global financial crisis may push back capitalist influences that finally brought India some measure of prosperity.

Though the historic election of Barack Obama has taken our minds off the convulsions in the international financial markets, the brevity of the stock-market rally that followed confirms widespread skepticism about the health of global capitalism. Indeed, the recent economic setbacks have provoked an unseemly amount of gloating on the part of many in the developing world. That Presidents Fidel Castro and Mohammed Ahmedinejad should pronounce themselves vindicated by the crisis is hardly surprising, since capitalism has over the years been so strongly identified with America that both see the problem through the lens of their own anti-Americanism. A worrying number of people in India, though, are saying similar things. There’s a real danger that India’s political classes could find themselves persuaded by this lapse into historical amnesia.

It is sadly impossible to quantify the economic losses inflicted on India over four decades of entrepreneurs frittering away their energies in queuing for licenses.

In India, the debate between capitalist globalization and self-reliance required a huge paradigm shift. Whereas, in the West, most people axiomatically associate capitalism with freedom, India’s nationalists associated capitalism with slavery -- because the British East India Company had come to trade and stayed on to rule. So from 1947, our nationalist leaders were suspicious of every foreigner with a briefcase, seeing him as the thin edge of a neo-imperial wedge. Instead of integrating India into the global capitalist system, as only a few developing countries like Singapore so effectively were to do, India’s leaders were convinced that the political independence they had fought for could only be guaranteed through economic independence. So self-reliance became the slogan, the protectionist barriers went up, and India spent 45 years with bureaucrats rather than businessmen on the “commanding heights” of our economy, wasting the first four and a half decades after independence in subsidizing unproductivity, regulating stagnation and trying to distribute poverty. This only goes to prove that one of the lessons you learn from history is that history sometimes teaches the wrong lessons. It would be tragic if recent events led Indians to learn the wrong lessons again.

For decades, the theory of development economics suffered from two intertwined historical circumstances – the experience of the Great Depression in the 1930s, when only robust government intervention saved a number of economies, and the fight for freedom from colonial rule, which involved the overthrow of both foreign rulers and foreign capitalists (though few nationalists could tell the difference). The development gurus firmly believed in the wisdom of top-down rule and government planning by all-knowing, all-seeing economists, of whom India suffered from a superabundance. So they created a license-permit-quota raj that denied Indian businesses the opportunity to prosper and grow.

The result was what was derisively called the “Hindu rate of growth”, at which India chugged along at 3 percent while much of the rest of Asia shot ahead. Resources that the state could have spent on infrastructure development, education, health and agricultural reform went instead to massively inefficient public-sector projects that employed many and produced little. It is sadly impossible to quantify the economic losses inflicted on India over four decades of entrepreneurs frittering away their energies in queuing for licenses rather than manufacturing products, paying bribes instead of hiring workers, wooing politicians instead of understanding consumers, and “getting things done” through bureaucrats rather than doing things for themselves. The disastrous inefficiencies of the system were masked by subsidies from the national exchequer, and a combination of vested interests – socialist ideologues, political opportunists, bureaucratic managers, self-protective trade unions and captive markets – shielded it fiercely from economic reality, as millions of Indians languished in poverty.

In the last 15 years, India has pulled more people out of poverty than in the previous 45 – averaging some 10 million people a year in the last decade. The country has visibly prospered, and despite population growth, per capita income has grown faster and higher in each of these years than ever before. India needs to safeguard those gains and to build on them – not return to the economics of nationalism.

Shashi Tharoor is the chairman of Dubai-based Afras Ventures and former Under-Secretary-General of the United Nations. For more information, please visit