India’s entrepreneurship is now second to none. Unfortunately, that can hardly be said about its governance
This longer than usual essay is about the dichotomous story of India’s entrepreneurship and governance. The former is a matter of sheer joy. Despite facing innumerable challenges, the entrepreneurial energy that now radiates across all activities from almost all parts of India is greater than what one has seen over the past four decades. The state of political and economic governance of the nation, however, is quite another story. To misuse W. B. Yeats’ poem, things are falling apart, the centre cannot hold and with every passing day, some form of mindless anarchy is being loosened on the land. That the two coexist is itself a miracle. How long they can is another story.

Let’s start with the bad news: the state of governance. Without any hyperbole, it is fair to say that one should not expect any significant economic reforms over the next two years that the present government is slated to remain in power. Here are five reasons why zero reforms can be the order of the day.

First, the nature and numbers of this coalition government. Coalitions can work. But for that to occur, there must be a leading party that carries considerable weight in numbers and persuasion; and the minimum size of the blocking group needs to be large. Neither is true today. With only 145 seats, the Indian National Congress commands less than 27 per cent of the Lok Sabha. Even with the support of its allies (66 seats, or 12 per cent of the Lok Sabha), the Treasury Bench accounts for merely 39 per cent of the seats. To survive, it needs opportunistic backing from a smattering of other parties and the block votes of the 60 Left MPs who constitute 11 per cent of the seats and, at best, “support the government from outside”. This makes it hellishly difficult, if not impossible, to pilot any significant economic reforms that need legislative assent.

Second, the Congress has been losing state elections. It lost Bihar in 2005; Punjab and Uttarakhand less than two months ago; and got routed in the Delhi municipal elections a few days ago. It will be lucky to win even 30 seats in the UP assembly polls. And in all likelihood, lose the state elections in Himachal Pradesh and Delhi in 2008. Also, it doesn’t seem to have the organisation and machinery to pull off upsets in Gujarat (which goes to the polls this year), or even Madhya Pradesh and Rajasthan next year. So, the Congress may well face the 2009 national elections with lesser control of the states than before — something that is frightening the ‘High Command’ no end.

Third, there will be increasing pressure from the Left. In the best of times, the Communists would have opposed privatisation, divestment, increasing FDI in insurance, further opening up of banking, major pension reform and greater flexibility in labour laws. Today, after the egg that it has got on its face in Nandigram, be prepared for the Left, especially the CPI(M) to be much more intransigent than before. And the Congress has very little in its political arsenal to be an adroit persuader.

Fourth, there are many within government who have little enthusiasm for reforms, and believe that these highfalutin western ideas are the root of all problems. This cabinet is more than the Manmohan-Chidambaram-Montek troika for whom the English press sing Hallelujahs. We tend to forget this simple fact.

Fifth, there is the spectre of inflation. It is not as if 6.5 per cent wholesale price inflation is new to India. We have been in this zone several times over the past 15 years. But the fact that it is being driven by the supply side, especially primary products, is giving this government the willies. At last count, price of primary products (which account for 22 per cent weight in the index) has been rising at over 11 per cent; fruit and vegetables at 19 per cent; pulses at 17 per cent; edible oils at 14 per cent; and cereals at almost 8 per cent. And no government in India can afford to alienate the farmers by slashing import duties on all wage goods to zero. So, while Congress politicians blame inflation for the loss of Punjab and Uttarakhand, the government ducks for cover and runs hither and thither making loud anti-inflationary noises.

There are many facets of economic non-governance. Two suffice as examples: highways and power. No political party — not even the Left — denies the need for better roads and greater supply of power. In other words, there is no political opposition to focusing on infrastructure. Yet the performance is abysmal.

Consider highways; 380 km of roads connect key ports to national highways and need to be four-lane dual carriageways. Less than 36 per cent is completed. Only 12 per cent of the 7,300 km North-South East-West highway corridor has been four- or six-laned. Mere 226 km of highways have been constructed under the aegis of the National Highways Authority of India over the past seven months — at a completion rate of 1 km per day. Indeed, that spectacular rate has recently dropped to 0.26 km per day. Since the launch of the Pradhan Mantri Gram Sarak Yojana (the village roads programme) over five years ago, less than 8 per cent of the target has been achieved. And who will take the DMK-affiliated cabinet minister for Surface Transport, T.R. Baalu to task? According to press reports, he rarely visits his office.

Power is worse. In the first nine months of 2006-07, there has been a 14 per cent deficit between peak demand and supply, versus 10.5 per cent shortage last period. Swathes of Maharashtra are reeling under 7-10 hour power cuts; with Haryana, Punjab, UP, Karnataka, Andhra and Tamil Nadu being, more or less, in the same league. Every manufacturing unit survives on captive power; and for the core industries, a major investment item is the setting up of captive thermal power plants.

Of the 17,767 MW of additional generation capacity targeted for 2006-07, only 3,668 MW or 21 per cent was achieved in the first nine months of the year. According to a 2002 plan called ‘Mission 2012: Power on Demand’, all villages were supposed to have electricity connections by 2007. The facts: at the beginning of 2006-07, there were 154,250 villages yet to be electrified. Over the first seven months of the year, a total of 133 villages got electricity connections. Such is the speed of building infrastructure!

In the meanwhile, we dream big. Succour, we are to believe, will come from six ultra-mega thermal power projects, each of which will cost of Rs 15,000 crore and deliver 4,000 MW of power. When, one fervently asks, will this government take a leaf out of a N.R. Narayana Murthy axiom, ‘under-promise and over-deliver’.

And yet, in this awful milieu of non-governance and crumbling infrastructure, India’s companies continue to deliver phenomenal results. In the first half of 2006-07, net sales of 1,800-odd listed manufacturing companies grew by an average 30 per cent, and EBITDA by 34 per cent. Their EBITDA margin stood at 16.6 per cent of sales, and PAT margin at 8.8 per cent. The growth of listed non-financial service sector companies was even more impressive. A sample of 489 for H1 2006-07 shows net sales growing at 33 per cent and EBITDA at 36 per cent; with their EBITDA margin at 18 per cent of net sales and PAT margin at almost 11 per cent.

This is, without doubt, the most impressive set of corporate results anywhere in the world. And even if the margins take a hit because of higher raw material prices and interest rates, Indian entrepreneurship will still deliver some of the best results in the world in 2007-08. Notwithstanding Dr Reddy’s perennial prodding of the interest rate.

Can it last? Certainly for the next few years. But if the current bout of non-governance becomes the theme of all times, you can be sure that the great window of opportunity will close pretty soon. And we will then be what our cricket team has often been — resolutely snatching defeat from the jaws of victory, while China merrily marches along. Does anyone care?

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The author is the founder of CERG Advisory that specialises in corporate consulting and economic advisory services. He can be reached at This email address is being protected from spam bots, you need Javascript enabled to view it