May the force be with us

Written by Bibek Debroy | Updated: Jun 25 2008, 04:03am hrs
The first Goldman Sachs BRIC (Brazil-Russia-India-China) paper contributed to the India Shining story. Contrary to what several people think, the first BRIC report didnt project very high real GDP growth. It was only around 6%. The explosion was because Goldman Sachs was projecting much beyond the conventional 2020, till 2050. That low 6% trend was symptomatic of most projections before 2003, when the 9% trajectory hadnt occurred. Most projections dont factor in labour inputs and the demographic dividend (BRIC being an exception), even if one accepts that productivity increases arent significant. They are fundamentally based on capital formation. Before 2003, one hadnt anticipated increases in savings and investment rates. To a lesser extent, manufacturing take-off was also unanticipated. We are almost certainly on a cyclical downturn now. However, ignoring growth rates in the next two to three years, there still remains the question of what Indias trend rate now is and what needs to be done to maintain it, or jack it up. For instance, in January 2007 Goldman Sachs produced another India report, arguing that India is now on a trend of 8%, with increased manufacturing productivity, movement away from low-productivity agriculture, urbanisation bo nus and better roads all incremental contributors.

There was a catchy acronym tooFORCE, standing for financial sector growth, openness to trade, rural-urban migration, capital formation, education and environment. If mass is large, a given force doesnt lead to large acceleration. In June 2008, there was another Goldman Sachs research report on India. This had a wish-list of 10 items for India to do. (1) Improve governance; (2) Improve educational achievements; (3) Increase quality and quantity of universities; (4) Control inflation; (5) Introduce a credible fiscal policy; (6) Liberalise financial markets; (7) Increase trade with neighbours; (8) Increase agricultural productivity; (9) Improve infrastructure; and (10) Improve environmental quality. These are indeed important heads. But I have three problems with such lists. First, is something like (10) that important We arent China, at least not yet. Second, items like (1), (4), (5), (6) and (7) are too vague and generic. What do they amount to in concrete terms Third, the problem is not with the goal, such as (2), (3) or (8), but on how to get there. Unless that is explained, we havent accomplished much. Consider the problem differently. With new inflation figures, speculation about early elections because of the nuclear deal should be dispelled.

However, there will be elections in 2009. UPAs sacred book for all policy is National Common Minimum Programme (NCMP). This is a vague mishmash. It is clear about what the government cannot do, but is sketchy about what the government should do, and how. Consequently, it is a confused motherhood pronouncement. Despite it being a political, rather than economic, document, it can be precise. And in 2009, the incoming government should do better. If you ask external agencies about what should be included in the laundry-list of the new NCMP, you will get items like Industrial Disputes Act, FDI in retail, privatisation of PSUs (also banks), liberalisation of insurance and pensions, lower tariffs, corporate farming, exchange rate convertibility. Without denigrating their importance, my list is completely different. (1) Be clear about what is a public good, warranting government-provisioning. My list is water (irrigation and drinking), power (generation and transmission), rural schools, primary health centres, rural roads, law and order and security. Given scarce government resources and possibilities of private-sector provisioning, nothing else needs inclusion. If transport connectivity improves, I am not even sure that rural schools and primary health centres belong. (2) Identify and subsidise the poor. This isnt that difficult.

For rural India, there is already a self-determined identification through National Rural Employment Guarantee (NREG). Why cant we use it to issue biometric identity cards From urban India, if one adds old people and women-headed households, the identification of genuinely poor will be complete. Notice this identification has to be individual or class-based, not collective (region, religion, caste). (3) Free private sector entry and introduce credible regulation. Access by the poor is taken care of through direct subsidies (education, health, road transport, food, fertilisers, petroleum products, power), not through State-provisioning. No State-provisioning is justified unless it is in the core public good list of (1). If State-provisioning remains, that should be based on competition, commercial considerations and hard budget constraints. If one accepts this core public good list and also recognises that almost everything remaining is a State subject, most Central ministries and departments (and centrally-sponsored schemes) can be scrapped and direct funding to local bodies ensured. (4) Reform the legal regime, primarily the criminal justice system (also the police) and subordinate legislation. We dont need anything other than these 4 points to catapult us into the 10%-plus league. Though the empire will strike back, may the force be with us.

The author is a noted economist