Three pillars of hope

Updated: Dec 3 2013, 09:29am hrs
I have been on the international conference circuit these past few weeks. One question has been asked of me at every place: When will India return to the trajectory of growth It was not will India return, but when. Underlying this question has been disappointment and hope. There is the perception that Indias current economic woes are of its own making. This disappoints, because India did so well to withstand the Great Recession of 2008. There is also the view, however, that these problems can be remedied with stronger leadership. The hope is that this leadership will be forthcoming and that a resurgent India will counter an ambitious China. There were, of course, supplementary questionsis corruption an endemic feature of our polity Who will best whom in the presidential tussle between Narendra Modi and Rahul Gandhi What is the nature and consequence of the strengthening tide of federalismbut they all flowed from this interest in the future prospects of the economy.

I am glad I was subjected to these queries. It helped refine my thinking. Most of us who live in large cities and circle the opinion formers in government, politics and journalism tend to get bogged down in the minutiae of anecdotal analysis. We assert views on the basis of personal experience, oped commentaries and drawing-room chatter. We focus on the trees and lose sight of the forest. The challenge of responding to interested, non-partisan and well-meaning critics of the India story on foreign soil compels analytical realignment. I have never been comfortable critiquing India at a public forum abroad, and as such it has never been easy walking the tight rope between this sentiment and intellectual honesty. But this time, I had no difficulty because I am persuaded that, subject to one overriding caveat, we will in time look back at the period of 2010 to 2012 as an unfortunate and wholly avoidable interregnum in a period of strong economic growth. The caveat is obvious. The 70 million-odd new voters in May 2014 must vote into power a politically strong and decisive government.

My belief is built on three pillars. First, the travails of the Indian economy are the result of a combination of policy mistakes and poor governance. They are not because of structural factors. The slippage in the growth rate from an average 8% from 2003 to 2010 to less than 5% today, the hike in the consumer price index to near double digits, the fact of stagnant employment and the pressures of high fiscal and current account deficits, have all come about because of policy paralysis, cronyism, corruption and, to an extent, the international situation (high oil prices, economic recession in Europe). They have not happened because of a shift in the economic fundamentals. Our savings rate is still over 30%; a large slice of the corporate sector is globally competitive; we have a strong reservoir of technical talent (although there is increasing disquiet at the quality of our engineering graduates); and there is of course the growing domestic market, reinforced by rising rural wages.

The flip side of rising unemployment and underemployment is a concern, but this is again remediable. Growth has hitherto been driven by the capital-intensive service sector. What is now required is a policy shift towards labour-intensive manufacturing, and that is indeed what is envisaged in the National Manufacturing Policy. There is also concern about laggard domestic investment. Corporates have held back because of political uncertainty and the high cost of capital. The millstone of bureaucracy and red tape has also clogged a large number of infrastructure projects. This concern will not abate soon. For, RBI will not ease up on interest rates until inflation is well under control and the political environment will not clear until after the general elections. But this said, and looking ahead, one can see slivers of light.

The US shale boom should bring down the international price of oil and gas and improvements in the public distribution system should ease the supply-side constraints. These should together arrest and reverse the inflationary trend. There is also the Cabinet Committee on Investment. It has made material progress in clearing several major infrastructure investments. The other major concern has to do with finance. Here again, there is reason for optimism. The finance minister is determined to stay within his red line on the current account and fiscal deficits. He may or may not succeed, but this determination will check further populist and wasteful expenditure. It took three years for growth to slip from 8%-5%.

So one should expect it will take at least that long to return to status quo ante. The point is, however, that there are no systemic blockages to this turnaround.

Second, the state is fighting a losing battle against society. The lines are easy to discern. On one side, there is a hesitant and cautious state shackled to precedent and suspicious of liberal capitalism. On the other, there is a burgeoning and youthful population, individualistic, entrepreneurial and striving to create a different and hopefully better future than their parents past. The two have been in clash for some time. Initially, it seemed that the state would win out. Today, it is clear the tide has changed. The Anna Hazare movement , the reported response to the Aam Aadmi Party, the draw of our gotcha press, the increasing influence of interest groups and NGOs, are all symptomatic of the strengthening force of society. My view is that these forces will help check big-ticket corruption and encourage a less ideologically hidebound approach to policy.

Third, there is the positive of federalisation. India is no longer run out of Delhi. The latter controls the purse strings, but that has not deterred the states from asserting their autonomy. Most recently, Nagaland decided to ruffle the Centre by demanding rights over its sub-surface oil and gas reserves. There are several reasons why this is a positive. One, it will allow for a more nuanced and effective management of economic policy. India is not a homogeneous entity and it has always been a mistake to straitjacket its economic heterogeneity into a one-size-fits-all policy framework. A federalised polity will, as Anand Mahindra points out in an article he wrote for the book Reimagining India, enable India to break [its] problems into manageable pieces and to weave together an urban web that is the equivalent of a thousand Singapores. Two, it will spur competition between states and cities and, in the process, encourage innovation and creativity. Three, it will help jettison the residual shibboleths of the Fabian era, such as public sector dominance, administered pricing, labour laws, etc. A weak Central government will not find it easy to implement the required second-generation reforms. But a strong and

development-focused decentralised leadership may well manage to do so, albeit under a different guise.

These are the three pillars of hope. The strength of the foundation on which they are built will depend on the outcome of the next election. I am optimistic they will be solid because, as Fareed Zakaria has written in his chapter in the same book, there is the birth of a new sense of nationhood... drawn from the aspiring middle classes in its cities and towns... [this] might not be as romantic a basis for nationalism as in days of old but it is a powerful and durable base for a modern country....

The writer is the chairman of Brookings India and senior fellow, Brookings Institution

Vikram S Mehta