“An Economic Strategy for India” covers many important areas of policy action and reform, but it does not bring all the pieces together where it matters, in creating conditions where firms will be established at higher rates, and expand more robustly
In my previous column (FE, December 24, 2018; https://goo.gl/Q8DX1Q), I discussed an important document, “An Economic Strategy for India,” produced by 13 economists with wide-ranging expertise on the Indian economy. I described many of the highlights of the report, but concluded, “What is missing most, perhaps, is a clear sense of how to fix India’s moribund industrial dynamics.” I expand on this idea in this column.
Of course, the report touches on many issues that affect the creation and expansion of greater numbers of “dynamic, employment-generating firms in India” (my phrase). The report mentions firms only in the context of labour market rigidities, land market failures, financing constraints, power sector problems, export constraints, or skill and training needs. All these are vital areas that need to be addressed, and the report has some important recommendations. But there is no part where firms and their performance are the focal point. The alternative terms “company” or “corporation” are absent, as is the word “entrepreneur.” These absences just illustrate my contention.
Suppose we make firms the centre of policy attention, and ask, “What will make their performance better?” There are some solid answers available, from several years ago. Here are some samples. In 2011, Ejaz Ghani, William Kerr, and Stephen O’Connell analysed the spatial determinants of entrepreneurship in India. After noting the limits of the “informal” sector, they documented that India’s density of new business registration, conditional on per capita GDP, is below average: India lags in the kind of entrepreneurship that could help growth. In most cases, greater new business creation did translate into subsequent higher employment growth. They also found that the rate of entrepreneurship in organised manufacturing was positively affected by the share of population with a graduate education, and by closeness to a city. The strength of local supplier networks was also a positive for setting up new establishments.
Nicholas Bloom, John van Reenen and various co-authors, in work from a decade ago as well as more recently, found that Indian firms with strong management practices were comparable to the best US firms in productivity, but there was a thick tail of badly-run (by their measure of management practices) Indian firms, which often neglected basic tasks such as collecting and analysing data, setting clear performance targets, and linking pay to performance. Shruti Sharma and I, in a work published in 2013, found indirect evidence that management quality affected the productivity of Indian manufacturing plants.
Works such as these point to the importance of higher education, including management education (of a very practical nature), and of product market competition. The deficiencies of Indian higher education do not get mentioned in the report—although school education, which is the necessary foundation, is treated thoroughly. The need for greater product market competition is mentioned in a few specific contexts, such as power distribution and agricultural products, but there is no discussion of the general problems of competition in Indian industry.
There are still other factors that matter. These include telecommunications infrastructure, that is, reliable broadband and not just mobile phones; tax policies that support entrepreneurial risk-taking (a crucial aspect of Silicon Valley’s dynamism); and urban infrastructure for housing, transport and sanitation. The spatial organisation of economic activity matters, because there are benefits to clustering, and Indian economic policies do not pay enough attention to this either. There are also implications here for the public finances of cities and towns (especially property tax regimes). Moreover, one can think of Special Economic Zones and Coastal Export Zones as special cases of the kinds of clustering that are needed.
To summarise the argument I am making here, the framing and organisation of the document, “An Economic Strategy for India,” covers many important areas of policy action and reform, but it does not bring all the pieces together where it matters, in creating conditions where firms will be established at higher rates, and expand more robustly. Putting this goal at the centre of policy thinking adds several other important areas that need to be part of the overall policy package, as I have illustrated.
A further issue is that of political economy. The report, with some exceptions, is somewhat in a tradition of what one might term “sage advice.” There is not much about why many of these fixes have not happened already, when they are large and obvious problems. The power sector, especially the case of the State Electricity Boards, is one example. Of course, we know what the political barriers are, but in that case, a useful economic strategy must also provide some guidance on pathways to political feasibility. One answer here might be greater political competition, not in the sense of more elections, but tying election outcomes to economic performance more closely. Pushing more economic policy freedom (including tax authority) down to the level of states, cities and towns can improve that linkage. One has to be careful about wasteful political competition, but my judgement is that India is not close to that at the subnational level.
None of the above controverts the lessons of “An Economic Strategy for India.” But I am arguing for some refocusing and rounding out of the picture. Whatever happens in the looming national elections, India’s economic policymakers will have to think carefully and always strive to do better.
The author is professor of Economics, University of California, Santa Cruz