A dif­fer­ent view of In­dia's eco­nomic growth

The Pak Banker - - OPINION - Manas Chakravarty

RE­SEARCH re­ports by bro­kers, even the ones on the macro-econ­omy, are usu­ally fo­cused strictly on eco­nomic pa­ram­e­ters, avoid­ing all men­tion of pol­i­tics. Fuzzy mat­ters such as political econ­omy, which can't be re­duced to a set of num­bers, are gen­er­ally given a miss. When pol­i­tics is dis­cussed, it is through the nar­row lens of how many seats the rul­ing party will win in a state and whether that will help im­prove the chances of push­ing through re­forms. As a re­sult, all too of­ten, they miss the wood for the trees. And yet, there are many changes in the air that could al­ter the In­dian busi­ness cli­mate in fun­da­men­tal ways. To take one in­stance, Re­serve Bank of In­dia gov­er­nor Raghu­ram Ra­jan has, very re­fresh­ingly, been talk­ing of the cul­ture of im­punity that big bor­row­ers en­joy and how they con­tinue with a lav­ish life­style de­spite ow­ing hun­dreds of crores of ru­pees to banks. The bank­ruptcy code, di­rect trans­fer of govern­ment ben­e­fits to bank ac­counts, changes in the ease of do­ing busi­ness and the em­pha­sis on im­prov­ing in­fra­struc­ture are other ex­am­ples.

One bro­ker that has taken the less-trav­elled road is Am­bit Cap­i­tal Pvt. Ltd. Last year, they iden­ti­fied what they called three "re­sets"-tak­ing steps to in­crease In­dia's fi­nan­cial sav­ings, mea­sures taken by the govern­ment to curb sub­si­dies and an at­tempt to at­tack black money and crony cap­i­tal­ism. They say th­ese mea­sures would lead to pro­found changes in the In­dian econ­omy. In a re­port brought out on 16 De­cem­ber, they say, "Af­ter a decade of os­si­fi­ca­tion, the land­scape is chang­ing at a rapid rate for In­dia Inc. as: (1) An un­con­ven­tional PM calls time on the tra­di­tional model of sub­sidy funded con­sump­tion growth and crony cap­i­tal­ism driven capex growth in In­dia; (2) A gutsy RBI gov­er­nor brings about mul­ti­ple pol­icy changes to rad­i­cally in­crease com­pe­ti­tion in the Fi­nan­cial Ser­vices sec­tor; and (3) Tech­nol­ogy low­ers the bar­ri­ers to en­try into sec­tors such as lend­ing, con­sumer goods and auto." In­ter­est­ingly, the political econ­omy part of the changes men­tioned by Am­bit par­al­lel the anal­y­sis put for­ward by an Ef­fec­tive States and In­clu­sive De­vel­op­ment work­ing pa­per ti­tled The political econ­omy of eco­nomic growth in In­dia 1993-2014 in De­cem­ber 2014 by Ku­nal Sen of the Univer­sity of Manch­ester and Sabyasachi Kar and Ja­gadish Prasad Sahu of the In­sti­tute of Eco­nomic Growth. The au­thors say that In­dia's growth tra­jec­tory can best be de­scribed by study­ing the changes in political econ­omy from or­dered deals to dis­or­dered deals and from closed deals to open deals. Or­dered deals are deals struck be­tween political elites and busi­nesses that are hon­oured, while dis­or­dered deals may be re­neged on. An ex­am­ple of dis­or­dered deals would be ret­ro­spec­tive tax­a­tion. Open deals are deals where par­tic­i­pa­tion is larger and more open to the pub­lic, as op­posed to closed deals, which ben­e­fit only the well-con­nected.

The au­thors say the 1990s were a pe­riod dur­ing which the In­dian econ­omy be­came much more open and the ben­e­fits of re­form trick­led down to all sec­tions of the pop­u­la­tion. This was an 'or­dered deals' en­vi­ron­ment and it was also more open, as it saw the en­try of many new com­pa­nies, while at the same time al­low­ing the old elites of the pre-re­form pe­riod to grow. From 2002-10, ar­gue the au­thors, there was a marked change in the type of growth. Be­cause of the in­crease in prices of com­modi­ties dur­ing this pe­riod, re­source ex­trac­tion sec­tors, with their close links to govern­ment land, be­came far more im­por­tant. The pa­per says, "Thus, eco­nomic growth in the se­cond growth episode was qual­i­ta­tively dif­fer­ent from the first episode, in that it re­lied more on Ren­tier sec­tors (such as min­ing and pe­tro­leum refining) and other high rent Power­bro­ker sec­tors (such as telecom­mu­ni­ca­tions and real es­tate), along with a re­ver­sal in struc­tural trans­for­ma­tion of the econ­omy (as re­flected in de­creas­ing prod­uct com­plex­ity of In­dia's ex­ports)." The en­try of new com­pa­nies de­clined dur­ing this pe­riod. In the au­thors' frame­work, this was a ' closed deals' regime. How­ever, th­ese cosy deals be­tween the political and busi­ness elites brought about a back­lash, seen in the move­ment against cor­rup­tion and in the de­ci­sion to auc­tion na­tional re­sources in­stead of leav­ing them to dis­cre­tionary al­lo­ca­tion. That, in turn, led to mas­sive un­cer­tainty in the busi­ness sec­tor, re­sult­ing in a slow­ing down of growth. Also, as ques­tion marks were raised about the le­git­i­macy of govern­ment con­tracts, as the land ac­qui­si­tion law was tight­ened and as the govern­ment des­per­ately tried to off­set de­clin­ing rev­enues by milk­ing the cor­po­rate sec­tor through ret­ro­spec­tive tax­a­tion, the en­vi­ron­ment shifted to one of 'dis­or­dered deals' af­ter 2010.

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