In­dia’s East Asian dream

Financial Mirror (Cyprus) - - FRONT PAGE -

On Au­gust 15, Naren­dra Modi de­liv­ered his first In­de­pen­dence Day speech as Prime Min­is­ter. Though he con­tin­ued the tra­di­tion of ad­dress­ing the coun­try from the ram­parts of Delhi’s his­toric Red Fort, the speech broke with con­ven­tion. Shun­ning a writ­ten text, Modi ex­tem­po­rised for an hour, map­ping out an ex­plicit vi­sion for In­dia, in­clud­ing an economic model that con­sti­tutes a clean break from In­dia’s past.

Since 1991, In­dia has been slowly chang­ing its pol­icy frame­work away from the so­cial­ist vi­sion of its first prime min­is­ter, Jawa­har­lal Nehru. How­ever, for po­lit­i­cal rea­sons, the changes were always jus­ti­fied in an al­most apolo­getic way. In­deed, many Nehru-era in­sti­tu­tions con­tinue to ex­ist – and even thrive.

In one fell swoop, Modi an­nounced the abo­li­tion of one of the most im­por­tant of th­ese in­sti­tu­tions: the pow­er­ful Plan­ning Com­mis­sion, which had con­tin­ued to churn out Soviet-style “Five-Year Plans” and re­mained at the heart of a cen­tralised re­source-al­lo­ca­tion process. Its suc­ces­sor, the Na­tional Devel­op­ment and Re­form Com­mis­sion, will prob­a­bly func­tion more as a think tank – pro­vid­ing ideas and en­sur­ing pol­icy co­her­ence, but with no power to al­lo­cate.

Modi also ar­gued for a new economic-growth model based on ex­port-ori­ented manufacturing. This means en­cour­ag­ing do­mes­tic en­trepreneurs to man­u­fac­ture goods for ex­port and invit­ing the world’s top com­pa­nies to re­lo­cate pro­duc­tion to In­dia. This ef­fort is im­por­tant, be­cause In­dia’s econ­omy and ex­ports are dom­i­nated by ser­vices, which have grown steadily rel­a­tive to over­all out­put, now ac­count­ing for al­most 60% of GDP. By con­trast, the in­dus­trial sec­tor’s share of GDP has re­main un­changed, at around 26%, for the last three decades (the manufacturing seg­ment is even smaller, at 14.9% of GDP).

When Modi’s em­pha­sis on ex­port-led manufacturing is viewed in the con­text of his gov­ern­ment’s fo­cus on heavy in­fra­struc­ture pro­jects – rang­ing from power gen­er­a­tion to rail­ways – it be­comes clear that his growth model, with its mass de­ploy­ment of labour and cap­i­tal in in­dus­try, looks sim­i­lar to East Asian coun­tries’ strat­egy. It is also con­sis­tent with his fre­quent ref­er­ences to the need to cre­ate new cities, be­cause ur­ban­i­sa­tion is the spa­tial man­i­fes­ta­tion of in­dus­tri­al­i­sa­tion.

The shift to an “East Asian” growth model should not be sur­pris­ing, given In­dia’s de­mo­graphic pipe­line. In­dia needs to cre­ate jobs for the ten mil­lion peo­ple per year who join the work­ing-age pop­u­la­tion. It also needs to ac­com­mo­date the mil­lions who wish to shift away from agri­cul­ture, which still em­ploys half of the work­force. Al­though the ser­vice sec­tor was able to gen­er­ate growth in the past, it has proved to be a poor job cre­ator and only em­ploys 27% of work­ers, far lower than its share of the econ­omy. By con­trast, con­struc­tion and manufacturing are rightly seen to be more promis­ing out­lets for the mass de­ploy­ment of semi-skilled work­ers.

There are, of course, many ob­sta­cles in Modi’s path. In­dia’s tax and reg­u­la­tory regime is widely re­garded as un­friendly to busi­ness; but Modi’s track record in gov­ern­ment sug­gests that he is sen­si­tive to this prob­lem and will be able to make sig­nif­i­cant im­prove­ments.

The greater chal­lenge for Modi will be fi­nanc­ing his growth model. The suc­cess of the East Asian model was pred­i­cated on a sharp in­crease in the in­vest­ment rate. Be­gin­ning with Ja­pan, ev­ery rapidly grow­ing East Asian econ­omy sus­tained in­vest­ment rates in the range of 38-40% of GDP over its rapid-growth phase. China is cur­rently in­vest­ing al­most half of its GDP. In­dia’s fixed­in­vest­ment ra­tio, by con­trast, has de­clined in re­cent years to around 30% of GDP.

For­eign cap­i­tal can play a role in sup­port­ing rapid growth, but in­ter­na­tional ex­pe­ri­ence shows that do­mes­tic sav­ings is key to sus­tain­ing high in­vest­ment rates. Mo­bil­is­ing th­ese sav­ings will re­quire care­ful think­ing about how the do­mes­tic fi­nan­cial sys­tem can be ex­panded by an or­der of mag­ni­tude with­out risk­ing a future cri­sis.

An­other ma­jor prob­lem will be the mi­gra­tion of tens of mil­lions of peo­ple as they are sucked into the ex­pand­ing in­dus­trial econ­omy. In­dia does not have China’s so­ciopo­lit­i­cal con­trols, such as the hukou res­i­den­tial-per­mit sys­tem, to man­age such a large-scale move­ment of peo­ple. Ja­pan and South Korea are per­haps too small to serve as use­ful prece­dents. Modi may be hop­ing to pre­empt the prob­lem through his project to cre­ate 100 “smart cities,” though how the pro­gramme will be im­ple­mented re­mains un­known.

De­spite all of the ob­sta­cles and risks, Modi has ar­tic­u­lated an ex­plicit economic vi­sion for the first time since Nehru. Un­like the apolo­getic re­forms of the past two decades, In­di­ans have been promised a con­fi­dent new be­gin­ning. It is now a mat­ter of im­ple­men­ta­tion.

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