Republic Day is an occasion for ruminating on events of the past year. We can hardly claim that it was a year of good political or economic management. Yet India ended the year a clear winner because good luck overcame the losses caused by poor management.
The two major strokes of luck both related to events in America. One was the bombing of the World Trade Centre last September. President Bush declared war on terrorism. He forced Pakistan to turn against the Taliban and ban the Lashkar-e-Toiba and Jaish-e-Muhammad. This laid the ground for President Musharraf to declare war on jehad and call for a new secular Pakistan. This is an astonishingly favourable turn of events for India. We could never have achieved it through the most astute political or diplomatic stratagems. It fell into our laps like manna from heaven. Osama bin Laden, thanks very much.
On the economic side, the biggest mess continues to be non-reform of the power sector. This was exemplified in Maharashtra’s refusal to buy power at the contracted rate from the Dabhol plant of Enron. Many questions have been raised about the Dabhol contract in the past, but all efforts to establish corruption have failed, and the contract was anyway revised to rectify supposed shortcomings.
From the viewpoint of the global business, Maharashtra was guilty of wilful default, and India’s name became mud to global investors. All other foreign power companies operating in India decided to quit because the mind-set of other state governments was not materially different from Maharashtra’s. The culture of non-payment in the sector is deeply entrenched: The state electricity boards have payment arrears of a whopping Rs 40,000 crore, as much as the GNP of many developing countries. And then manna fell from the heavens again.
In the US, Enron collapsed with lightning speed in the last quarter of 2001, amid accusations of fudged accounts, collusion with auditors, and attempts to fool investors and lenders. In the case of Dabhol, Americans saw Enron as a victim and India as an oppressor. But after its collapse in December, Enron’s image became that of an oppressor. Indeed, the word Enron has now become part of the English language as a synonym for lying and swindling. A US Senator said the other day that he would not allow the US president to do an Enron to the tax bill.
Now, the Enron scandal in the US had nothing to do with its Dabhol operation. At Dabhol, Maharashtra accused Enron of making exorbitant profits. But the accusation in the US was the very opposite, that Enron lost huge sums in foreign ventures like Dabhol and then cooked its books to keep its losses and debts off its books. The company collapsed when the truth came to light.
From the US viewpoint, the scandal was not that Enron made too much profit from infrastructure investments abroad, but too heavy losses, and so had to dress up its balance sheet. Yet Enron has got such a bad name in the process that this has let Maharashtra (and India) off the hook. It is a classic case of India’s gross mismanagement being offset by sheer good luck.
The story on the political side is much the same. Atal Behari Vajpayee started 2001 with strong talk about Pakistani perfidy at Kargil, saying it was pointless to start a dialogue with Pakistan unless it foreswore support to militants in Kashmir. Pakistan did not oblige.
Yet Vajpayee then did a U-turn and invited Musharraf for a summit at Agra. There was much excitement at the possibility of a breakthrough. But Vajpayee bungled the negotiation, was outmanoeuvred by Musharraf in the drafting of an Agra Declaration, and suffered the ignominy of having the draft shot down by his own Cabinet colleagues. Agra ended with Musharraf in high spirits, having got the better by far of the exchange.
Yet within months bin Laden struck at New York, and President Bush declared war on international terrorism. Suddenly the Agra fiasco no longer mattered. The US obliged Pakistan to disown first the Taliban and then all terrorist groups including those it had used as its storm troopers in Kashmir, like the Lashkar-e-Toiba and Jaish-e-Muhammad. Vajpayee’s mismanagement at Agra was more than offset by his good luck.
A famous story tells how Napoleon chose a leading general for the French Army. The credentials of one candidate were explained to him at great length. That’s all very well, said Napoleon, but is he lucky? Napoleon, it seems, would have regarded Vajpayee as a good candidate.
Yet history proves that good luck soon runs out. Pakistan is a case in point. Under General Ayub Khan in the 1960s it ran a successful economy, and its GDP growth was much faster than India’s. But after he fell, economic mismanagement and corruption grew. Yet Pakistan thrived for another two decades because of luck.
The loss of its eastern wing in 1971 was a political disaster, but an economic boon: It got rid of most of its poor and raised average living standards. Then came the oil crisis of 1973, which initially seemed bad luck. But it created a huge demand for Pakistani labour, and soon remittances from Pakistanis in the Gulf became the country’s biggest export, papering over its growing failure in other export sectors. Luck seemed to be running out when General Zia turned Islamic, and the US cut off foreign aid. But good luck returned with the Soviet invasion of Afghanistan. This fetched Pakistan massive foreign aid.
But its run of good luck ended with the Soviet withdrawal from Afghanistan. After that, Pakistan has gone from one financial crisis to another, a beggar in thrall to the IMF. That holds a lesson for India. Good luck has saved our bacon in 2001. But we need in the coming year to depend on good management rather than good luck. Otherwise we too will go the Pakistan way.