By Ashok V. Desai

Indians do not have much understanding of European crises - in Iceland, Ireland or Greece. They all ran fiscal deficits; but so do Indian governments. They ran up public debts; but so does India. European states do not have their own currencies and so cannot devalue; but Indian states do not have that freedom of manoeuvre either.

If European woes are the reward for fiscal improvidence, Indian governments should have collapsed long ago. They would - if no one were prepared to lend to them. Four decades ago, Indira Gandhi solved that problem by nationalising banks, and made sure they would meekly buy government debt when asked.

If banks demur, the government can issue money, which is equivalent to borrowing for an infinite term at zero per cent. Printing money leads to inflation; but as long as the government does not indulge in excess, people will tolerate it. These are not state secrets; Indians cannot understand why they are beyond the grasp of clever Europeans. However, it is not European stupidity but the Indian growth rate that makes the difference. Growth brings down debt-GDP ratios without any effort on the part of the government; it makes an improvident government more bearable.

After the Second World War, India settled down to grow at 3.5 per cent a year; it was considered an improvement on the 1 per cent annual average growth in the previous century. The government retained and elaborated wartime controls in the name of socialism. But when the Asian tigers grew at twice that rate in the 1960s, 3.5 per cent came derisively to be called the Hindu rate of growth. There were payments crises at least once a decade; but international aid rescued India every time.

Then in 1991, India got into a payments crisis too big for aid to tide over. It led to rethinking about economic policies. Industrial and import licensing were dismantled, and direct tax rates were brought down to international levels. In the next two decades, income per head grew 2.5 times; But India is still a minor trader; in 2010, its exports were 1.8 per cent of the world total, its imports 2.8 per cent of global imports.

India's controlled economy was a bargain between politicians and big business. Industrial licensing was used by politicians to collect money, and by businessmen to restrain competition; import licences were used to protect domestic industrialists, and were a lucrative business for bureaucrats. There was also a bargain between the finance ministry, which controlled the budget, and the ministry of commerce and industry, which gave out licences. Liberalisation involved the recasting of the bargains. Industrial licensing was abolished in 1991, but to protect Indian business, the commerce ministry continued as the licence raj for foreign businesses wishing to expand operations in India. Import licensing was abolished in 1992, but import duties were only brought down slowly.

The bargain worked well for Indian business. Big firms have grown, such as Reliance, which owns the world's largest refinery, Hero Honda, the world's largest motorcycle manufacturer, and Mahindra, which makes tractors. As they saturated the Indian market or ran out of raw materials, Indian firms began to hunt around the world for acquisitions. Tata Steel now operates in 26 countries and exports to 50; Tata Motors owns Jaguar and Land Rover.

Fewer foreign companies have captured major markets in India. British companies were there in droves, but after independence, the Indian government made things so tough for them most sold out to Indians; Unilever and British American Tobacco are the only ones with a substantial presence now. Since India was a Soviet ally till 1989, American companies kept away; more recently, US information technology companies have established a presence, but Indian firms dominate the industry. The Japanese got seriously interested in the 1980s, but were defeated by the Indian bureaucracy.

Under pressure from his G20 friends, the Prime Minister Manmohan Singh recently tried to let in foreign retailers; but the opposition parties saw in it a chance to harass him, and he gave up. He may succeed later. But Tesco will find it difficult to compete with Indian retailers whose costs are low. The Indian market is protected more by low local costs than by trade barriers.

India does offer opportunities, but they are not all in India. Indians are passionate travellers. They go mainly to Southeast Asia and the UAE for now. They could be attracted to Europe. For that, however, it will have to cater to their two passions - shopping and Indian food. Europeans would do well to emulate London, which is a popular Indian destination. They would do extremely well if they hosted Indian weddings in their chateaux. Indians are comfortable only with English; it would have to become the lingua franca of Europe before Indians feel at home there.

(Ashok V Desai is an economist and former adviser to the Indian finance ministry.)


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