Jul 18, 2011

The Elephant is not a Tiger

 (Short and slightlymodified version of a paper written with Preyansi Mani for an academic conference)


This piece is my understanding of India’s growth story with particular reference to aspects of sustainable economic development, poverty reduction and social equity. It identifies India’s economy as an elephant, often slow in its pace but able to generate bursts of speed intermittently unlike the spirit of tiger exhibited by authoritarian East Asian economies or China. It also argues that India is in danger of becoming a dual track economy - one track speedily moving ahead on the path of economic growth while the other track is increasingly left behind to fight deprivation and poverty. The balance between the two parts will determine India’s future development.

Pre-Liberalisation

Post Independence India emulated a Soviet style centrally planned economy, with a federal Planning Commission churning out detailed Five Year Plans for every sector of the economy. Industrial growth was propelled by elite state-owned enterprises along with a heavily regulated private sector to support this growth. Each of these steps aimed at self-reliance of the Indian economy.

The mantra of self-reliance and import-substitution had its own pros and cons. While the introduction of high-yielding variety seeds in agriculture in late 1960s brought about Green revolution resulting in buffer-stocks that created self-sufficiency in food grains; the quest for ‘import-substitution’ remained unfulfilled due to an excessive bureaucracy known as the ‘license raj’. Till the 1980s, the Indian growth rate was 2-5%, dubbed as the “Hindu rate of growth” for its connotations of gradualism normally associated with Hindu religious traditions. An inability to substitute imports ironically led to an increased spending on imports.

By 1990s, the Indian government realized it had a balance of payments crisis. By some accounts, the government had enough reserves to finance three weeks worth of essential imports including oil before it ran out of money. The crisis sparked deregulation and liberalization of the economy.  There are several views on these reforms. Some argue that the reforms of 1991 were an expression of an “elite revolt” against the system of industrial permits and licenses. Others hold a view that more-than-doubling of India’s growth rate took place around 1980, with little discernible change in trend after 1991. This was because the government made incremental reforms that favored business conglomerates selectively but did not change general market conditions. Thus, reforms were pro-business (say, a corporate tax exemption for certain industries) but not pro-market (say, in a general move towards trade liberalization).  

Post-Liberalization

The beneficiary in post-liberalized India was industry, especially family-run business conglomerates. The general trend since then has been incremental steps towards market - based reforms and loosening of government control. However, in sectors like hospitality and aviation, even though private players have pitched in; closing down loss making state owned enterprises is still considered a political risk. In a rare combination of luck and market conditions, India has developed a world class information technology services sector. The Business Process Outsourcing (BPO) sector at a lower position on the value chain as well as higher value information technology services has continued to be a key foreign exchange earner for India.

In contrast, the agriculture sector continues to be a complex tangle of government regulations and subsidies. Most points in the agricultural supply chain are weakly linked to market mechanisms and are prone to speculative manipulation by cartels of politically connected merchants and big farmers. Agriculture in India today has become a high risk, low return economic activity and one symptom of this is increased indebtedness of farmers leading to suicides.

Education and health-care provision by government remains of poor quality. The Indian government has implemented large scale programmes to push up school enrollment such as the flagship Sarva Shiksha Abhiyan (SSA) and the Mid-Day Meals Scheme which give every school-going child a cooked lunch. However, the quality of primary education has continued to be a challenge. In its 2010 Annual Status of Education Report, Pratham, an Indian NGO, tested primary school children on learning achievement and found that only 53.4% of children in Class 5 could read even Class 2 texts owing to factors like absenteeism of teachers and so on.

Moreover, the tertiary or higher education segment is struggling to meet India’s demographic explosion in the number of young citizens who need training to join the workforce. With more than five million people entering the 15-24 age cohort annually, the supply of higher education institutions needs to be ramped up. While the government has tried to keep up with the spurt in demand by establishing more public institutions, the supply side increase has actually come from a boom in the number of private institutions. Accreditation levels are low and voluntary leading to a situation where about one-fifth of colleges and less than one-third of all universities are formally accredited.

On the other hand,despite India’s policy stance on health as a public good, government’s health-care infrastructure is poorly equipped and congested. The lack of access to good public healthcare has spurred the growth of a huge private sector that serves most of India’s population and accounts for an estimated 80% of healthcare spending.

Finally, India’s economic growth has not translated into equivalent reduction in income inequality and poverty. Measured by the UNDP’s Multidimensional Poverty Index, eight Indian states have more poor people than in the 26 poorest African countries combined. Of 88 nations, India ranks 67 on the Global Hunger Index 2010, published by the International Food Policy Research Institute.

The Case for Action

Against such a backdrop, India needs to keep its economy growing while redistributing the benefits of growth to weaker sections of the population. Redistribution needs to be coupled with an eco-system of equal opportunities to ensure equal participation of all.

Redistribution has political, economic and social rationale. Politically, it has turned out to be a viable strategy to attract poor and rural ‘vote banks’ who form the majority since Indian National Congress’ victory in 2004 election on a policy plank of pro-poor entitlements. Economically,  India needs to manage its ‘demographic dividend’ by ensuring access to basic education and skills training. It also needs to improve its HDI rankings so that the deprived can participate in economic growth. Finally, growing inequalities can aggravate existing class and caste tensions.

There has also been a shift in the policy discourse. For instance, the ‘capabilities approach’ propagated by Amartya Sen is particularly relevant for societies like India and focuses on creating opportunities for people to have the freedom to make life choices. In the world of business, CK Prahlad has argued that companies can unlock huge markets in serving low income market segments - the so-called ‘bottom of the pyramid.’ Prahlad maintains that poor people will pay for essential goods and services and generate considerable sustained demand for products.

Policy Challenges: The Sub-Optimal Mix

India’s democracy is often termed chaotic - millions of voters, thousands of candidates, hundreds of political parties - all competing for access to state resources to meet often directly conflicting demands. This has led to a trend towards political fragmentation and emergence of coalition politics with no single party being able to command enough votes to form a government of its own. The decline of the Indian National Congress as the dominant political party in India. has been accompanied by the rise of multiple small regional parties.

With the weakening of Congress, marked increase in the political mobilization of lower social groups came about. Parties with strong upper caste representation have since then tried to blunt lower caste efforts at political mobilization. Part of this counter-strategy involves including lower caste members in affirmative action categories, thereby ‘reserving’ a certain percentage of government jobs, which splinters an already fragmented and heterogeneous group.

Given this environment, every political coalition in power treats office as a short run game in which to maximize revenues. Cabinets become large and unwieldy as every party in the coalition seeks plum ministerial appointments in order to dispense patronage. Weak campaign finance laws in India also make it a necessity for parties to ‘raise funds’ through systemic corruption.

Corruption in India, much like several public services, is a two-track phenomenon. At the lowest level, citizens have to negotiate access to government services through bribes and intermediaries. But there is also grand corruption at high level, where minute policy and contract clauses are manipulated so that large government contracts go to cronies. In 2010 India was ranked 87th out of 178 countries in Transparency International's Corruption Perceptions Index.

Owing to the quality of politicians in power, parliamentary processes have significantly deteriorated in India, resulting in policy formulations that do not always hold the best interests of voters. In the words of a former Indian minister, “Everyone has enough power to block everything and no one has enough power to see anything through.” [Shourie, The Economist (2001)]. This distributed, uncoordinated power structure at the level of the political leadership has also politicized the Indian bureaucracy. The bureaucracy, instead of lending a technocratic dimension to policy implementation, has instead, fallen prey to politicization and sycophancy.

Policy Interventions: Mitigating the Challenges

Much like an elephant wandering in the forest, reforms in India have been gradual and not always linear. The political call for ‘inclusive’ growth has been accompanied by a technocratic shift from ‘outlays to outcomes’ prompted partly by criticism of corruption in administration of government programmes both by the national media and by multilateral institutions such as The World Bank.

Evidence of this shift starts with the federal Union Planning Commission changing the way ministries report to it on public programmes from outlay based ‘utilization certificates’ to produce ‘outcome budgets’ which need to show programme impact in terms of non-financial indicators of the outcomes of such expenditure.

Market oriented reforms and privatization of key public services is becoming increasingly popular. This approach has worked well in sectors like power and telecom and not so well in other areas like hard infrastructure (construction of roads etc.) owing to contractual and operational risks especially in remote areas. Foreign Direct Investment has remained low and has actually declined in recent years.

Concurrent with the market reforms are redistributive and poverty reduction policies. The National Rural Employment Guarantee Act (NREGA) as a case in point, guarantees 100 days of annual employment at statutory minimum wages to any rural household whose adult members are willing to do unskilled manual work. NREGA is an ambitious programme and has various ‘trigger mechanisms’ designed to activate and establish people’s entitlements. For instance, the Act mandates that anyone who applies for a job card in their Panchayat (village level local government) must be given one within 15 days. Setting such service levels inhibits an official who may choose to delay a process in the hope of extracting a bribe.

Along with these policies has emerged a debate about quality of governance as well. The judiciary in India continues to curb the worst excesses of politicians and bureaucrats. India’s Election Commission is an efficient, impartial arbiter of elections. India has also successfully produced its own Right to Information Act, a breathtaking piece of legislation to emerge out of a governance system with such strong competing interests. The Indian media, which has enjoyed a spectacular growth with the advent of private news channels on television and the Internet, regularly highlights instances of corruption that have tumbled out of the government’s closet.  And to reinforce such recent developments, India’s system of ‘reservations’ of seats in educational institutions and government jobs for weaker sections of society continues to be a strong but controversial affirmative action policy.
 
India Today

Six decades after independence from colonization, where does India stand today? On one hand, by the yardstick of economic power and strategic influence, there is no doubt that India, after China, is a rising power in Asia. India’s GDP growth rate was strong in pre-crisis years and has recovered remarkably in the post-crisis phase.  GDP growth looks set to regain the pre-crisis trend of around 8.5-9 percent in this year and the next (FY2011-12) [World Bank 2010 Dec update].

India’s huge domestic market will be an attractive destination for multinational enterprises to do business in for years to come. The biggest Indian business conglomerates, managed as family businesses, are now going on a mergers and acquisitions drive in international destinations. The Tata group’s acquisition of Land Rover and Jaguar in the UK and Arcelor Mittal’s take-over of European steel and metals giants are examples of the confidence of the new Indian business.  

With a growing closeness to the US, prompted partly by American problems with increasing tensions in Pakistan and its need to counterbalance China’s power in the region, India seems set to reap the benefits of a strong partnership with a superpower. Economic and political prominence has also been accompanied by the soft power of India’s popular culture.

On the other hand, India is grappling with severe problems of extreme poverty, inefficient public administration systems, poor infrastructure, virtually absent social security networks and growing corruption. India’s poor achievements in human development indices are an embarrassment for a country that is gradually gaining global stature. Rising income inequality combined with poor social security mechanisms, public health and education systems is making a significant chunk of India’s vast population cautious about market oriented policies and increasing scepticism about their role in a new economy.

More importantly, it signals the co-existence of two Indias - one, educated, Westernised, mostly urban and harnessing the benefits of economic growth and globalisation and the other, a poor, uneducated mass, mostly in rural and semi-urban areas that depends on government’s redistributive capacity and affirmative action policies to survive. Each half is warily watching the other and the fault lines between the two halves are potentially so great that it can easily result in a backlash against policies aimed at increasing growth. Whether India will sustain its growth story will depend on how government, civil society and businesses come up with mechanisms to reconcile these two halves or at the very least , manage to stop them from splitting apart.