Last year was an eventful one for the India economy. The difficult transition to the Goods and Services Tax (GST) and the disaster (in my view) of demonetisation, were two shocks that likely hurt economic growth, and in ways that might have been felt more by those on the bottom rungs of the economic ladder. What is the situation facing India in the new calendar year (if not new fiscal year)? I offer comments in what I see as four key areas.
Remember the 2014 election slogan “Minimum government, maximum governance?” It was always, to me, somewhat problematic to translate this into specific, welfare-enhancing policy decisions. India’s government is not really large, but it does interfere with economic activity in multiple ways, often unnecessary or misguided. But governance begins with government, and the past few years have seen almost a continuous political campaign striving to line up governmental control at the state level with control at the national level. The way the Rajya Sabha works has incentivised this process. But the result has not been improved governance. If anything, the politics of campaigning have adversely affected day-to-day governance, especially in economic matters, with the focus instead being on identity, fear and cultural divisions. Another favoured term, “cooperative federalism,” also lacks bite if the only path to “cooperation” is to exert control at all levels—hierarchical dominance is not a basis for true cooperation.
Demonetisation and the GST did not help on this front, but those problems should disappear over time. The big news was India’s jump in the World Bank’s Ease of Doing Business Index, going from a rank of 130 to 100. After little movement the previous year, which resulted in the government criticising the methodology of the index, the swing was in the other direction, with a new bankruptcy law accounting for most, or perhaps almost all, of India’s better ranking. The proof of the this pudding will be in the implementation of the new law, and some of the other weaknesses in the environment for doing business, such as delays in enforcing contracts, may turn out to be binding constraints. Still, one cannot dismiss the possibility for positive change, and this such legal reforms can also be counted as improved governance. Beyond the game of improving the index ranking, India still faces broad challenges in corporate governance, reducing crony capitalism, and lubricating business through access to working capital (the World Bank index give a high ranking for ease of getting credit, but I do not think this reflects the difficulty small and medium enterprises have in funding their ongoing operations, let alone growth).
While renewable energy is making progress, and there has been some improvement in fossil fuel pricing, there is a long way to go on the environmental front. The economics and politics of coal make it a challenge to transition away rapidly from this fuel source. Meanwhile, air pollution is made worse by behaviours that have nothing to do with fossil fuels. The burning of rice stubble in Punjab and Haryana and its impacts on Delhi’s air brought these problems to the attention of the elites, but air pollution is pervasive. The dean of a prestigious management school in Punjab told me in 2016 that the air around the expensive modern building was poisoned from all the polluting fertiliser factories nearby. Punjab is perhaps the poster child for environmental apocalypse, with its groundwater either falling in level or being poisoned by effluents from agriculture. Throughout the country, water will become increasing scarce and a source of greater conflict. At least Japan and China achieved industrialisation as they suffered increased pollution. India is achieving the latter without the former.
Higher growth, a more flexible economy, and an awareness of global possibilities (including the success of the Indian diaspora in the United States, in particular) helped change the aspirations and confidence levels of young Indians. But the failure of growth to accelerate to East Asian levels (consistently above 8% for several years), and the anaemic job creation that has accompanied India’s “post-reform” growth, are worrisome when there is a demographic bulge needing to be swallowed into the economy. It is easy in this situation for governmental and other actors to use identity divisions, exacerbating them for short term political gains. Social conflict is the surest way of derailing even the economic growth we have. It is two years since Shekhar Shah made the point to me and the audience at a talk at a conference in San Francisco, that India needs to grow faster, or else it will grow slower—the current rates of growth are not an equilibrium. I think this is true, because of the problem of social conflict when good jobs are not being created fast enough.
What is the conclusion from my broad-brush reflections? Good governance is clearly the starting point, and any improvement here has not been noticeable, at least from a bird’s-eye view. Political tricks are no substitute for policy changes that can accelerate growth and job creation. Promoting social divisions will only hurt, not just in the long run, but almost immediately. And the days of achieving increases in material wealth by depleting natural capital (and poisoning people) have to be in the past. The New Year has to be made much better than the one just past.