Different engines need different solutions

But the basic flaw in this conclusion is that the there is little in common between the economic problems of SE Asian countries and India.

Industrialists, corporate leaders and economists agree there is really no connection between the developments of SE Asia and the reforms in India. If India were to increase its pace of reforms, it would never land up in the mess that SE Asia is in.

Says Dr. S.P. Gupta, director of the Indian Council for Research on International Economic Relations, “This is an attempt by the Government to look good. It has lost face as far as economic reforms in concerned.” The message from SE Asia is the opposite of what the Government believes. “The lesson to drawn from the SE Asia situation is the opposite of what the Government believes. “The only lesson to be drawn from SE Asia is that India should increase its pace of reforms and not decrease it,” says industrialist Adi Godrej.

Percy Barnevik agrees. The former head of Swedish giant ABB and now the chairman of Investor AB, which holds stakes in large Swedish companies says that the SE Asian countries may have made some mistakes, but at least they maintained a high rate of growth. “It is better to have setbacks from time to time and have a 10 per cent growth than to have a five per cent growth and no setbacks. I think you (India) have a good balance sheet, good fundamentals of the economy. I think you should leverage this and have higher growth.”

To understand why India should step up its pace of reforms, it is essential to understand what went wrong in SE Asia “While the basic policy of export-led growth was sound, the countries made the mistake of depending heavily on crony capitalism,” says B. Bhattacharyya, dean of the Indian institute of Foreign Trade in New Delhi. “The governments decided which decided which industrial houses to promote and support. The government then asked banks to lend money to these corporations without ascertaining project viability. As a result a nexus developed between banks, the Government and the corporations.”

The rot in the economy began with the banking system. There was little transparency in business decisions and banks often lent without adequate collateral. According to estimates, the bad loans of East Asian banks now account for between 10 per cent to 20 per cent of their total loans. The figure for the US is just 1 per cent while for Singapore is about 4 per cent. In South Korea which emerged as strong competitor to Japan in the short span of a decade, the bad loans of the top nine banking institutions vary from 94 per cent to 376 per cent o the banks capital. Investment firm Jardine Fleming estimates that non-performing loans of SE Asian banks will be about $ 73 billion. This is about 13 per cent of the GDP of SE Asian economies.

Another problem that the SE Asian countries ignored was of interest rates. The real interest rates were much higher than those decided by the Government. Even the currencies were overvalued. Says Dr Gupta, “To avoid the situation reached in SE Asian India should become more transparent in its policies. The interest rates and the rupee should be allowed to at realistic values.”

For the section of the domestic industry that is not happy about increased competition, the SE Asian example is the perfect argument against further opening up of India. But pushing through the reforms on the agenda will not lead India the SE Asia way. In fact it will help the economy, the domestic industry as well as the consumer. The key reforms that are pending include privatisation of the insurance sector, electricity reforms, land reforms, reduced red tape and improved company laws.

The final words rest with Godrej, “I feel that we must reform intelligently and not recklessly. But we must keep reforming. There are some reforms platforms, which are very obvious and on which there is a consensus, but they have not been done. For example, everybody is clear that the Urban Land Ceiling Act should be repealed. Everybody agrees with it. But we have not done it at all. And that’s not a reckless step at all.”