T C A Srinivasa-raghavan: Koizumi's tutorial for Sonia Gandhi

Madam needs to ask if her fear of reform is any longer well-founded.

In the eyes of Indian politicians, Prime Minister Junichiro Koizumi of Japan pulled off a veritable miracle last week. He promised economic reform""and won the election as a result. Chances, however, are the poltroons will say India is not Japan.

I remember how in the late 1980s the much-maligned Surjit Bhalla used to cry himself hoarse about China, only to be contemptuously told that India was not China. But look at where China is today.

The question that Indian politicians, Sonia Gandhi in particular, need to ask is if their fear of reform (and therefore as a consequence, their preference for patronage) is any longer well-founded.

The mood in the country is that it isn't, but who will tell Madam? Who does the Congress have who can explain these things to Ms Gandhi? Only Sam Pitroda, perhaps. In any case, isn't she probably too set in her ways to change her mind?

Nevertheless, if she wishes the country well, she must try to understand the importance of reform. Why, even the CPM is making an honest attempt.

Ms Gandhi must surely know that her preferences shape the preferences of her ministers. Unless she changes her approach, they will not change theirs.

Instead, they will continue to do things that they think will please her and block reform. It is in this context that she needs to be educated about the gamble that Mr Koizumi took, and why it paid off.

The difference between Ms Gandhi's view and Mr Koizumi's is simple. He understood that the absence of reform had been hurting the people for far too long. Ms Gandhi doesn't. Indeed, she thinks reform is bad politics.

But she should reflect on the fact that Mr Koizumi, like Indira Gandhi in 1971, has shown that the trick lies in recognising an idea whose time has come.

If Indira Gandhi took the country towards even more dirigistic policies, and won a thumping victory, Sonia Gandhi can do the same by going in the opposite direction.

Mr Koizumi, like Indira Gandhi, correctly identified the key public grievance and chose his target carefully. He began pressing for the reform of Japan Post, which is a sort of LIC to the power of 100. It receives savings and life-insurance premiums from millions of Japanese. At last count, it controlled $3 trillion in household financial assets.

But it gives lousy returns because it is inefficient. Mr Koizumi thought that selling it to the private sector would improve the returns people received on their savings, which they deserved. The people agreed.

However, he reckoned without politicians, including several from his own party. Doubtless, they benefit from Japan Post not being privatised, and so opposed the sale. Mr Koizumi called an election and the people gave him a large majority.

He could, had he wanted, a la the Congress party, have increased returns in the way we do here for, say, the provident funds""tax the poor to reward the rich. But he didn't.

Ms Gandhi needs to ask why. And she needs to do so without saying that India is not Japan. She must concede that in some vital respects it is.

For example, political corruption in both the countries is high. The politician-bureaucrat-businessman nexus is very strong. As a result, vested interests are also very strong. The system functions, on the whole, for a select few and not for the people as a whole.

And, most important of all, as a direct consequence, there is a strong preference for the status quo so that change, even when permitted, has to be gradual and incremental""and even that gradualism comes up against strong opposition, often from all politicians and certainly from the bureaucracy, who, in any case, hold all the cards.

There is another major similarity, which was pointed out to me by a senior civil servant with a very superior understanding of economics. This is that the writ of the Japanese central banks runs only about as far as that of the Indian one""a very short distance, and which is getting shortened by the day.

The causes in the two countries are different. But the effect is the same.

Thus, since the early 1990s, the Japanese economy has been pretty much impervious to monetary policy. The reasons for this have been extensively investigated by economists. But they never really quite get to the bottom of things.

In India, too, said the civil servant, the same thing is happening. The funds generated because of corruption, disdainfully ignored by economists, are neutralising the RBI in the same manner. These funds exceed the money created by the sterilisation of FII flows by a generous margin.

In Japan the official interest rate had fallen to zero or thereabouts and continues to be low. In India, said the bureaucrat, the same thing has almost happened in the informal money market, which now dominates the economy.

In any case, even the banks are corrupt. Loans are often made (or not collected) only after a bribe has been paid.

In Japan that issue was the low return on private savings. Mr Koizumi understood that he had to do something about the low returns.

Ms Gandhi, too, needs to understand that the key to political success now lies in acting on the one issue that everyone recognises as the main problem""corruption. On that, at least, she will have the full support of her Prime Minister as well.

In India, back in 1971, Indira Gandhi correctly saw the need for the state to be seen by the people as directly doing something for them. Today, the people want the exact opposite.

They don't want the state to do anything for them because of the corruption that it generates when it does anything at all. The latest example is the rural employment guarantee scam. Why, even Jean Dreze, its fiercest advocate, doesn't any longer think of it as a scheme.

Ms Gandhi has a chance to change tack. She has done what she thinks needed to be done in respect of the state funding of elections, which is what the rural employment guarantee scheme will ensure.

Now she must take on corruption by undertaking vigorous economic reform. That is where the votes are.