Retreating from inclusive growth?

Less democracy, even when interpreted in the context of reduced resistance to reform rather than access to the ballot box, is not going to solve the problem of India’s growth

But this analogy may be misleading, especially if it is combined with protectionism, which also seems to be taking root again in Indian policymaking. (Representative image)

The withdrawal of the controversial farm laws by the central government is an important marker in India’s economic trajectory. But what has happened needs to be understood in a much broader context. The farm laws were not designed as well as they could have been. Much worse, the process of their introduction was problematic in the context of India’s federal structures. Nor was the sequencing of reform the best—it would have been better to first tackle the problems of agricultural production (including environmental damage and diminishing returns) and the foodgrain procurement system.

Finally, there was a genuine concern that the farm Bills would make existing economic inequalities in the agriculture sector worse.This last issue is a much more general area of concern. A year ago, the CEO of NITI Aayog was recorded as saying, “In India we are too much of a democracy so we keep supporting everybody.” One could argue that the trajectory of the farm laws has validated his argument. In this view, the protests—a vivid example of democracy in action—led to the withdrawal of needed reforms. In particular, the protests signaled potential problems in the upcoming Uttar Pradesh state elections, and that is likely what triggered the government’s retreat.

This positive association of the will of the people and the electoral process is vital to democracy, in contrast to what happened before the last UP election, where the power of money for campaign finance had a probable role in the demonetisation shock. The December 2020 speech which expressed the idea of too much democracy was in the context of India needing to be bold enough to think big in terms of size and scale, and producing global champions.

Superficially, this seems like the right thing to do, since countries like Japan, South Korea and China have all fostered the growth of globally competitive companies, often conglomerates, as an important component of their growth strategy. But this analogy may be misleading, especially if it is combined with protectionism, which also seems to be taking root again in Indian policymaking.The key difference is that the East Asian miracle was built on a much more equal base of education and health conditions than India currently has.

One only has to look at the state of much of Latin America, and its history over the past century, to see the limits of a growth strategy that is based on enabling a few giants to flourish, without pulling up the rest of the economy and the general population. Systematic empirical work by economists on the connection between democracy and economic growth, or between what Daron Acemoglu and James Robinson have called “inclusive institutions” and growth, all points to a positive relationship. 

Aside from the evidence of past growth experiences, there is something else very different now than in the past. Information technology and the Internet have changed some of the requirements for scale and scope that existed in the past. Basic chip manufacturing still has to be done at a large scale. But making custom electronic products, or designing them, rely more on human capital than on large factories. The ability to reach distant markets depends more on access to the requisite digital tools, rather than sheer size.

The organisation of production into networks (itself enabled by information technology) also opens up room for smaller players. In a nutshell, the case for supporting a few global champions may be obsolete.Instead, India should be working on policies to bolster the missing or anemic middle of its industrial structure. This “middle” extends into what are officially labeled small as well as medium enterprises. Strengthening their access to digital technology (and to reliable and less expensive electric power), and reducing their regulatory burdens by cleaning up government processes, can reduce their costs and their need for scale. Indeed, scale in India seems to be more about political influence than economic efficiency.Also a year ago, an article in The Economist magazine pointed out that “India’s super-rich are getting much richer.” This was in a period in which the economy shrank dramatically.

The numbers indicated that India’s wealth inequality has become worse than America’s or China’s or Russia’s. This is shocking. All these three countries have higher average standards of living, and even though they have severe and inexcusable problems of inequality, this just makes India’s situation seem that much worse.Less democracy, even when interpreted in the context of reduced resistance to reform rather than access to the ballot box, is not going to solve the problem of India’s growth.

The pandemic exposed the fragility and inequality of India in terms of access to education and health care. To that, one can add unequal access to credit as another major concern, whether that is for households, or, more importantly, for most firms except the few largest. India needs more democracy on all these fronts. That will yield greater aggregate returns than supporting a handful of global champions.

Professor of economics, University of CaliforniaSanta Cruz

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