A recent report by Kotak Institutional research serves to remind us of the need for growth. Basing his numbers on average income growth rates, the analyst concludes that 100mn additional households (i.e. half billion people) will remain in the “survivor” category by 2025 if GDP grows at 5% rather than at 9%. In other words, a growth rate slower by 4% per annum will consign approximately 7% of the world’s population to poverty over the next 13 years. Poverty that could have been avoided! High growth is incontrovertibly a desirable objective for any government.
Is democracy a hurdle?
Our erudite prime minister included, the current political class and “chatterati” blame India’s democracy for slower economic growth compared to China. This is without basis.
Yasheng Huang, a professor of Political economy at MIT delivered an excellent lecture at TED last year which I strongly urge the reader to listen to (http://www.ted.com/talks/yasheng_huang. html). Huang compares India’s growth with China and concludes that the growth differential arises less out of political structure and more out of differences in education and health parameters.
One of the interesting points that Huang makes is that India, during the period 1961-1991, had a dominant single party rule (less democracy, more autocracy – the Emergency being a case in point). During this period, the economy averaged a growth rate of 1.8%. Post 1991, with the first “minority” government, and under subsequent coalition governments, average growth for the next two decades has exceeded 5%. In itself, this should silence those who blame “fractious democracy” for slower growth as the data suggests exactly the opposite.
Data given in the below table is worth thinking about. In 1981, India had better rail coverage (a proxy for infrastructure) than China. However, India lagged significantly when it came to human indicators. Literacy in China (1985) was significantly higher – with women literacy more than two times that of Indian women. Perhaps that explains the higher life expectancy of the Chinese by more than a decade. Indian women had a life expectancy lower than that of men – in itself an unnatural situation. Post this decade, the difference in growth rate of China and India diverged significantly. If no other data is presented, would it not be logical to conclude that growth rate differentials are driven more by human capital, and less by the ability to set up infrastructure? Huang, in fact, concludes that infrastructure development is a result of economic development and not its cause. As the economy develops and generates savings, infrastructure improves.
Does “reform” only equal “FDI in retail”?
Indian “reform” started in the decade of the 90s with lower licensing requirements – allowing the Indian entrepreneur to use his talents as he sees fit. Trade barriers were lowered with lower import tariffs, forcing Indian industry to become more competitive.
Capital restrictions were reduced. This led to an increase in foreign inflows within the country – and, of late, overseas investments by Indian corporations. Another factor of production, i.e. “capital”, was unshackled.
Two other economic factors of production – “land” (which, in economic terms, includes all natural resources) and “labour”, have, however, escaped any significant “reform”. We therefore have a situationwhere, though consumption demand in India remains strong, supply is restricted. In fact, the country has to rely on imports to meet its demand. Supply increase, which should act as automatic stabiliser to increased demand and fuel growth, is restricted by land and labour laws that are cumbersome and archaic.
Despite this, calls for economic reform restrict themselves to allowing “FDI in retail” as a magic formula to erase all ills that afflict the economy. This can partially be put down to vested interests of analysts – most employed by “sell side” brokerages – who mouth what their clients want them to – i.e., greater market access. However, one wonders about the compulsions of the writers of the Economic Survey, who also repeatedly dish out the same formula, while remaining silent on the market destroying features of the proposed “land reform” bill, or the lack of clear policy in handling out natural resources for use by industry.
Needed: A focus on factors other than capital
Running a government is complex. More so, in a large, diversified country like India. Any leader can get overwhelmed by the enormity of the task. But, as I stated in the beginning, slow growth destroys opportunities for 7% of the humanity. A visionary leader would focus on one or two issues in a term of 5 years – issues that can unleash the potential of millions of his countrymen and women. Education and health are two such issues. Natural resource is another.
True reform would be to provide a policy framework, and create a transparent environment where the Indian entrepreneur can use these factors of production to further the goal of economic growth – and generate employment. Providing “entitlements” to people without empowering them to reach their own potential is the hallmark of bureaucracy, not leadership.