During the reforms of 1991, Narasimha Rao?s was a minority government. UPA dominated the Rajya Sabha even during the Vajpayee era, but he successfully negotiated with the Opposition on important legislations

The year 1991 was a watershed in India?s economic history. Momentous economic reforms turned the fate of a lagging and bruised economy on it?s head. India?s reforms: How they produced inclusive growth, the first volume of Oxford University Press? series Studies in Indian Economic Policies, edited by Jagdish Bhagwati and Arvind Panagariya, takes a look at how poverty, inequality, and democracy in India have interacted with reforms. ?There?s also some work that we tried to do in this volume on how people themselves view growth. Then we worked on the relation between election outcomes and economic growth: CMs who gave growth outcomes better than the national average, their candidates pretty much swept the 2009 elections in their respective states,? says Arvind Panagariya. He adds that in spite of the gloomy economic environment globally, India can actually aim for near 10% growth as the benchmark, provided it sets its house in order by setting up large-scale manufacturing and labour-intensive industries along with ushering in labour reforms. About the future volumes of the series, he says, ?The second volume is more about economic transformation, about what?s happening to the labour market, and likewise what?s happening in manufacturing and services. There will be a volume that will talk about reforms in states as well.? As the nation awaits a second generation of economic reforms, Panagariya talks to Sarika Malhotra and Sukalp Sharma about the impact of the first generation of reforms, the current state of the economy, and more.

One stark observation in the post-reform era has been the seemingly widening gap between the rich and the poor, urban and rural…

Whenever rapid growth happens in a country, the gap widens initially. I have not seen a single example of a country where this does not happen. Also, growth tends to concentrate regionally. It is driven by agglomerations and often they will be concentrated in the urban areas. Even if they start in rural areas, they turn very urban. Look at the entire south China region. They started rural but turned urban. But to the naked eye it seems as if the urban-rural divide just got steeper. India today is more urban. Many are better off today. And at some level, that gap is declining too.

But isn?t it too early to use the term ?inclusive growth? in the title of the book itself?

There will be a follow-up volume where we develop this idea in great detail. If you look at the national data, you?ll see that the number of poor has declined. No one can say that the growth has not been inclusive, but the question is did we reduce poverty as much as this growth should have or as much as similar growth in Korea and Taiwan in the 1950s and the 1970s, respectively, or in China more recently, did? No. If labour-intensive industry would have grown far more rapidly, poverty would have reduced a lot more. The process of moving people out of agriculture into manufacturing and services hasn?t worked well, in spite of the tremendous shrink in agriculture?s share in the GDP.

Doesn?t that have to do with lack of skilled labour as well?

I don?t feel that skills gap is the big part of this story. How much employment do these skill-based industries support? The entire IT industry has around 2-3m workers. India has more than 500m workers. We primarily need jobs for the unskilled. Our industrialists don?t think on those lines. Look at China, you?ll find huge industries producing things like footwear and light consumer products and employing a huge chunk of the labour force. In India, entrepreneurs run away from labour because the laws are very lopsided against entrepreneurs. This also acts as a major hindrance in setting up large-scale production facilities. Take the apparel industry: only 5% of the workforce in that industry works in what we can term as large facilities (200-plus workers) while in China 90% work in such facilities, which enables them to produce much more at lower costs. As a result, our exports in apparel are just 1/10th of China?s. Even Bangladesh today exports more clothing than India.

We started correctly by dismantling investment licensing and import licensing, getting the exchange rate at the right level. But we still have other restrictions: land market and labour market restrictions.

What?s your take on programmes like MGNREGA?

If the option is between having MGNREGA and not having it, I?ll choose the former any day. Among government subsidy programmes, it is better targeted at the poor. Now, what could be done to improve productivity? I feel cash transfers are better than asking people who are otherwise working as daily-wage labourers and so on to work on projects that are not leading to any asset or skill creation. You give R100 to a worker for an MGNREGA project, but he would have anyway managed at least R60-70 as a labourer. In effect the labour is being used unproductively. Wouldn?t it be better if you just give the fellow R100 without losing his labour?

But if you just give away R100, workers might seek more work in the job market…

Some might do that. But I think people are inherently ambitious and we underestimate them. If people didn?t want to work, then how do we have so much seasonal migration of labour? At least cash transfers are giving those who are willing to work the option to work. In fact MGNREGA in its present form might be destroying the work culture, as an artificial scarcity of labour has been created and that will obviously have an impact on productivity.

Having correlated election outcomes and growth, how do you rate the election prospects of today?s government?

They?re in big trouble. At the Centre they?ve delivered very poorly and have just been riding the productivity gains of reforms done by Narasimha Rao and Atal Bihari Vajpayee. On top of this, most of the Congress governments in the states are not performing very well. They have huge problems in Andhra and Rajasthan, for example. The ex-NDA governments have done extremely well on the other hand?in Bihar, Orissa, Chhattisgarh, Jharkhand, Gujarat and Madhya Pradesh. It?s too early to really tell what will emerge in the next elections but people generally go more by how the state governments are delivering.

Isn?t a coalition an obvious disadvantage to begin with for any central government?

Our reforms got done in 1991 and Narasimha Rao?s government was a minority government. Then it was the NDA coalition that carried them forward. I would say that even the minority governments of IK Gujral and HD Deve Gowda were much better than the UPA. So this whole idea that coalition doesn?t let you do reforms is an eyewash. The larger problem is sitting within the Congress party. A lot of the Congress men don?t want reforms. Congress leadership today is extremely sceptical of reforms. And of course their coalition is extremely mismanaged.

Take multi-brand retail. It was an enabling policy, so no state, including Mamata Banerjee?s, was under any compulsion to open up to FDI. She could have been easily won over if the Congress had handled her well. That is the spirit in which Vajpayee worked. He didn?t have votes. Even during the NDA era, the Rajya Sabha was still dominated by the UPA. So on important legislations, he went ahead and consulted and negotiated with the opposition parties. The UPA can?t always say that the opposition is not cooperating as at the end of the day the government has the responsibility, as well as all the carrots and sticks. This may also have something to do with the fact that we don?t have a politician PM. And in hindsight, even the BJP did not do the nation a service by forcing Sonia Gandhi to appoint Manmohan Singh as the PM.

India?s Reforms:

How they Produced Inclusive Growth

Jagdish Bhagwati & Arvind Panagariya, Eds

OUP

Hardcover, pg 312

Rs.465