For India to tackle its economic slowdown, it needs to reverse its impulses for centralisation, needs to be more open, and must create a robust infrastructure for digital communications.
The year 2019 has been a momentous one for India. On the political and societal front, one has seen a centralisation of political power, accompanied by measures to homogenise Indian society in ways that seem to be at odds with the country’s recent history and ideals. My view is that these efforts have also affected the economy, both by taking away attention from core economic issues but also by shrinking the set of perspectives on economic policy that are valued within the corridors of power.
The Indian economy has been in the grip of a worrying slowdown, one which policymakers have been slow to acknowledge and to come to grips with. One can argue that the problems are short term ones, the result of a conventional macroeconomic slowdown, global economic uncertainties, and perhaps some specific structural reforms which have been initially disruptive, but will soon bear fruit. In this perspective, the slowdown is a blip that will disappear.
But, there is an alternative view that has been recently expressed very forcefully by Ashoka Mody, now at Princeton University, who has written in the past on India’s demographic dividend, as well as its industrial dynamics. His latest analysis, in the form of an OpEd, has a title that makes his position clear: How India’s growth bubble fizzled out. Mody views the growth experience of India since the 1991 reforms as being driven by finance, real estate and construction, and argues that this is the bubble that has now popped. He emphasises the lack of investment in urban infrastructure and human capital, and the erosion of Indian manufacturing, and says that it will take a generation to catch up on those fronts, which are critical for sustained future growth. From this perspective, India is in a crisis.
There are strong elements of truth in Mody’s analysis, but one should not underestimate the changes that were wrought in the last three decades, to the point where five percent growth is considered a barely acceptable floor, rather than an aspirational rate of growth. There have been improvements in tax policy, in infrastructure, in financial systems, and in attitudes, though all of these are now under stress. But, where Mody concludes that there are “no easy fixes”, I would argue that there is a way forward that can begin to turn around the economy relatively quickly.
First, the central government has to reverse its impulses for centralisation of everything. The terms of reference of the 15th Finance Commission seem to me to reflect those impulses, looking for ways to reverse the greater share of tax revenues, awarded to the states by the previous commission, along with somewhat greater flexibility. Instead, the Centre needs to allow the states more room and ability to spend money, perhaps with nudges towards priorities such as education and urban infrastructure. If the centre needs to discipline the states’ spending, it should invest in strengthening their fiscal management and accounting systems, all the way down to cities and towns, rather than trying to punish or reward them based on meeting fiscal deficit targets.
Second, the Centre needs to be more open. There are many dimensions of openness. The only one that seems to have received attention is measures to attract foreign investment, by liberalising restrictions. But, everything else the Centre has done has worked against openness. There has been hostility to trade measures that might support the integration of Indian manufacturing into regional production networks. The lack of progress on this front, precisely at a time when it was both needed and possible, has been shocking. Second, opening up higher education to domestic and foreign entrants would go a long way to addressing human capital gaps at the upper end of the educational spectrum. At a time when the global higher education sector is in turmoil, and flexibility is becoming the norm, Indian higher education policy has lagged badly. A vital component of policy in this case would be creating an institutional and social environment where faculty from other countries (including those of Indian origin) want to spend substantial periods of time in India. Instead, the government’s political and societal impulses have had the opposite impact. A third dimension of openness is being willing to gather inputs on economic policy from a wide range of people with appropriate expertise. Here, too, the current government appears to have regressed.
A third area where concerted government action can have rapid payoffs is in the creation of a robust infrastructure for digital communications. This implies tackling the continued deficiencies of the electric power sector—perhaps the one place where pressure on the states is needed for further reform. But, the approach to building and improving the communication networks has to change. Currently, there are two inefficient government-owned firms, and a dominant, almost predatory private sector behemoth. This is not a recipe for long-run growth. India is large enough to support more competition in telecoms, and there is enough potential for growth to make it attractive for new entrants, if the playing field is level. Public-private partnerships for investment in the needed infrastructure may work here. Policies will need to be carefully designed, but can yield benefits to industry, education, finance, and almost every part of the economy.
(The author is Professor of Economics, UC, Santa Cruz. Views are personal)