The long road to prosperity
The last 300 years of India’s economic journey, characterised by colonialism, socialism and a reluctant capitalism, are an aberration in the country’s long history. Between 1 AD and 1700 AD, India accounted for 30 per cent of global GDP for the first 1,000 years and then 25 per cent of world GDP for the next 700. With a firm embrace of reformist, pro-market policies, India can return to course as one of the preeminent economies of the world in quick time. This is the essential thesis of eminent economist Arvind Panagariya’s
India Unlimited: Reclaiming the Lost Glory, his first book on India after his January 2015-August 2017 stint as the first vice chairman of the NITI Aayog.
Unlike many recent books written by experts who have departed government, this is not a salacious account of the author’s time in government. Neither is it is a paean to the government. All credit to Mr Panagariya for retaining his integrity, personal and intellectual. This is a scholarly work, but it is different from his earlier books on the subject because it combines academic rigour with insights that can only be gained by sitting at the high table of policymaking.
By the author’s own admission, this is not an exhaustive account of India’s economy. It addresses key transformation challenges and priority areas for policy change. Given all the noise about job creation, Mr Panagariya rightly addresses the problem of underemployment in agriculture and in industry and services. India’s problem is not unemployment, but low productivity, low-wage employment — people don’t have good jobs. Most readers would be familiar with the litany of problems in the agriculture sector, the least reformed sector of the economy, as also with the many hurdles in building a competitive manufacturing sector.
But three analytical points stand out. First, agriculture and manufacturing have a similar binding constraint. There is no scale. Not only are farms too small to do anything more than subsistence farming, most manufacturing enterprises are in the micro (rather than small and medium) category without the scale to participate in regional or global value chains. These small farms and firms employ a disproportionately large number of people with low productivity.
Second, no matter how much agriculture is reformed, it cannot grow fast enough to alleviate the incomes of all those currently dependent on it. Third, India cannot prosper with a services-only strategy. Manufacturing is a necessary complement and despite the pessimism about global trade and the fourth industrial revolution, there remains time and space for India to grow a labourintensive manufacturing sector, just as the East Asian economies.
Mr Panagariya has several suggestions on how this can be achieved through policy intervention, including large Autonomous Employment Zones ,
India’s version of Shenzen. He does not recommend import substitution via raising trade barriers. Instead the focus ought to be on liberalising labour laws, tax reform and dropping the insistence on a strong rupee.
The chapters in the section “Road to Reforms” are interesting for their choice of subjects. Apart from export and manufacturing-led growth, the author has chosen urbanisation, financial sector reforms, higher education reforms and governance with disinvestment, electricity distribution and some other topics combined into a single chapter under the miscellaneous category. Again, as with the diagnosis of the transformation challenges, Mr Panagariya hits at the fundamental, almost binding, constraints that need urgent solutions. The financial sector, whether banking or the securities market, is the heart of any body economic. Those looking for sensible solutions to India’s non-performing asset problems or the future of public sector banks would find a balanced set of arguments in these chapters. Similarly, sensible suggestions are made to overhaul higher education. The author suggests that India look at the UK model rather than the US one because that may present an easier pathway to change than the US system which is very differently structured. In the end, it is reasonable to ask why this list of reforms, several of which are well known, is not implemented. Mr Panagariya blames the socialist hangover in the polity and an obstructionist or status quoist career bureaucracy which, in his view, grinds to slow failure a reformist PM’S best intentions.
One wishes that the author had devoted a little more space to the political economy of reform. Which constituencies can be mobilised to support reform? Could a new generation of young entrepreneurs in a vibrant startup ecosystem combine with enlightened elements in the older generation to form a pressure group?