Column: An underachieving economy

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Published: June 15, 2015 12:20:22 AM

India suffers from an entrenched anti-capitalist attitude even today

The Indian economy remains a gamble in the monsoon, as I was being told 60 years ago in my course in Indian Economic Problems. This is a spectacular failure of the successive governments which have ruled over India. A dithering, doubting, moralistic elite has failed to transform the Indian economy over the last 67 years. India has too many subsistence farmers—around 85% of all farmers. Agricultural productivity is low compared to the rest of Asia.

The manufacturing sector is small and has stagnated for decades. The higher education system is pathetic by international standards, with no institution in the top-50 worldwide, where China does much better.

This judgement was reinforced for me when, at a recent conference, I came across a list of the world’s largest public investment companies—the Global Public Investor 2015, published by OMFIF. (Declaration of interest: I am chairman of their advisory board, though I did not contribute to this publication). This book lists the 500 largest public asset holders including central banks, sovereign wealth funds and pension funds. These 500 institutions hold $29.7 trillion worth of assets. Of these 500, 95 are from North America, 164 from Europe, 103 from Asia , 42 from Latin America, 63 from Africa. There are 164 central banks, 89 sovereign funds and 247 public pension funds.

There is not a single Indian entry in this list of 500 public investment companies, just as there are no top-notch Indian universities. It is impressive that many African institutions make the grade, as do many Asian ones. India is a laggard. Why is this so? Indians succeed abroad. Many head large multi national companies. Yet at home, there is persistent underachievement. Obviously, the reasons have to do with public policy as well as a lack of ambition on the part of the private sector. India is a reluctant capitalist economy. All political parties, including even the BJP, have pretensions of being socialist. Their affiliated trade unions and think-tanks are all suspicious of business, xenophobic about foreign investors and institutions. Most politicians believe profits are somehow immoral. They support entitlements which drain public resources. Successful industrialists are harassed, pursued by tax authorities arbitrarily and reduced to a state of dependency. No wonder there has been crony capitalism. If you do not become a crony, you end up on the scrap heap.

Of course, the anti-capitalist attitude has deep roots in the history before Independence. It is even more so in the interpretations of history. India had colonial rule for much of the 19th century and the first half of the 20th century.

The foreign rulers are blamed for de-industrialising India, for draining the surplus away and for inculcating a subservient clerical mentality. But consider this. India was not the only country to lose the handicraft industries of pre-Industrial Revolution period. All European countries, including England, France and Germany, lost them too.

Yet, India was the first country in Asia to acquire modern manufacturing, railways and telegraph. Between 1860 and 1900, manufacturing grew by 8.5%, a higher rate in most years since 1947. Of course, it was from a low base.

The stagnation of the Indian economy comes during the inter-war period, when the UK economy is going through a bad patch. The Great Depression hit agriculture all around the globe badly. The nationalist rhetoric of anti-capitalism comes from this period, when Mahatma Gandhi was the leader. The younger Congress leaders under Nehru were socialists and fascinated by the USSR.

Nehru remained suspicious of Indian industrialists and enamoured of the Soviet-style model of autarchic growth.

The Mahatma was not against businessmen but did not wholeheartedly support the profit system. The Jan Sangh, when it became the BJP, adopted Gandhian socialism (whatever that may mean) as its philosophy.

Even the new government remains a reluctant industrialiser. The government shies away from privatising PSU banks or even consolidating them to build a decently-sized bank. Public pension funds are forced to stay away from equity investments. Disinvestment is reluctantly pursued, more for revenue than for restructuring the economy. By and large, the Fabian model of mixed economy retains its fascination with the Modi government. Let us hope in the second five-years, India changes for the better.

There is a need for rejuvenating business and restructuring the economy if India is to become a world leader. The required steps are, in my view, the following:
* Consolidate the banking sector by divesting, privatising and merging banks to build two or three substantial banks which can compete globally.
* Encourage subsistence farmers to quit agriculture by providing them employment in manufacturing or services in urban or metropolitan areas.
* Reform the regulatory environment in which manufacturing industry works. A substantial speeding up of manufacturing growth is the only path to global leadership.
* Provide infrastructure for energy and power supply, transport and health care on a substantial India-wide basis.

The author is a prominent economist and Labour peer

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