The next general election is less than a year away, and this is a good time to take stock of where India’s economy might be headed. Recent academic research seems to support the hypothesis that democracies do better than authoritarian regimes in economic growth, but in India’s case that is not always clear. Global results based on many countries do not allow for the special nature of India’s governance. One aspect of that specialness is what I would argue is over-centralisation, since local governments have little in the way of autonomous revenues nor control over expenditures that matter for their local constituents: this matters in a country as large as India in population size. Another problem of India’s democratic design has been the quirks of representation in the Rajya Sabha, which has made the ruling party focus on winning state assembly elections, to give it control of the upper house of Parliament. Arguably, this effort has come at the expense of economic reform and day-to-day governance.
To the credit of the prime minister, he does continue to push for some version of cooperative federalism: without getting into academic debates about the term, it can only help economic growth if the incentives of the states and the central government can be aligned better on more issues. At the recent NITI Aayog governing council meeting, the PM asked states to take a lead on increasing exports, something I have written several columns about. It will be interesting to see if the central government can move beyond exhortation to incentivise the states to create dynamic Coastal Economic Zones, for example. The PM, has also recognised the heavy cost of perpetual campaigning, and his appeal to the states to support a proposal for simultaneous national and state elections is one that surely should be viewed positively.
Another example of creative thinking in the federal dimension, also from the recent NITI Aayog meeting, is the PM’s urging the states to formulate policies that would increase corporate investment in agriculture. At the level of legislation, states can and should look to reform how agricultural markets are regulated and governed, but the Centre can do its bit by formulating model reform legislation for the states to adopt. The Centre can also consider the extent to which its own policies of procurement or of transfer payments can constrain or crowd out state efforts, and look for reforms it can make.
Perhaps the biggest issue, however, is that investment has fallen overall as a percentage of the economy, dues to the overhang of bad loans and its impact on balance sheets of banks and corporations. Fixing this problem requires national level attention, and there is not much that the states can do. This is a first order problem of the greatest urgency. Cleaning up the banking sector, reducing the possibilities for crony capitalism, and increasing the channels and sources of finance (including allowing new entrants in banking) will make it possible for states to do something realistic on the investment front, such as supporting private sector investment by reforming their own policies.
In another vital area, that of skill development, the state of play illustrates the challenges India faces. Skill development has become a buzzword, there is a national mission, and NITI Aayog had a sub-group of state chief ministers produce a 240-page report on the topic in 2015. As far as I can tell, it did not have any impact in conceptualising goals or in implementation to make a dent in India’s skills deficits. Of course, the problems are complex, involving lack of teachers and trainers, and institutional capacity to support them, plus more fundamental deficits in health and nutrition that impede basic education. For the first two of these lacks, giving the private sector more room and better incentives would make sense, including coordinating better with the goals of the Digital India initiative. This would allow government, at the state level in particular, to focus on fixing deficits in basic health, nutrition and literacy.
One can discuss other examples as well, but the general lesson is that India’s governments, whether at the national or state levels, are still struggling with how to draw the boundary between what they do and what the private sector does. Cooperative federalism can certainly help, but what is needed if India is to achieve the resurrected vision of growing its economy at double digit rates is what sociologist Peter Evans—in the context of analysing how countries like South Korea succeeded—termed “embedded autonomy.” The term refers to cooperation between government and business, but without falling into the trap of crony capitalism.
Academics can provide many policy insights as in the studies supported by the International Growth Centre, some of which I have highlighted in earlier columns. But there is nothing like private sector profit motives for testing ideas and weeding out the ones that will not work. Government policies need to be oriented toward mitigating the risks of trying out new approaches, and ensuring there are channels of finance for getting new ideas going. Again, this requires national level approaches, although individual states can also tinker with tax and incentive policies.
Four years of the current government have seen reforms initiated by earlier regimes moved forward or deepened or refined, but more creative reforms still await formulation and implementation, and double digit growth will require them.