National identity and growth
CHIEF economic adviser Arvind Subramanian explains in the annual Economic Survey what is required for India's economy to grow faster. The survey discusses the fiscal deficit, the need for investments in infrastructure to boost the economy, and the pros and cons of sticking to the fiscal responsibility road map. For financial markets, these seem to be the most important issues. The survey also discusses priorities for development: agriculture, health and education, the small and medium enterprises (SME) sector, and others. Subramanian also uses the pedestal of the Economic Survey to describe ideological forces shaping the Indian economy- 'socialism without entry' that has changed to ' market-ism without exit'- neither of which is good for economic growth.
From this pedestal, Subramanian comments on broader institutional forces that will determine whether India's gross domestic product (GDP) will grow at high rates for a long period, which it needs to as China's has done, to provide economic opportunities for India's burgeoning population of youth and lift many more millions of Indians out of poverty. Explaining that the Indian economy is more integrated with the global economy than it used to be, and that the global economy is not doing well, he calculates the effect of the glob- al economy on India's GDP. He estimates that a 1 percentage point change in the global GDP will cause a 0.42 percentage point change in India's GDP. Global growth, currently at 3%, and subject to many uncertainties, can, most optimistically, rise to 4.5%. Therefore, India can count, at most, on a 0.6 percentage point change in its GDP from a better global econo- my. Therefore, if India wants to increase its growth from the current 7% or so to 10%, an increase of 3 percentage points, it will have to find internal sources of growth for the remaining 2.4 percentage points.
Subramanian points to 'institutions' as the source for sustainable long-term growth. He presents an interesting chart showing the relationship between institutions and growth. The theory is that stronger institutions should cause higher growth. However, the chart reveals two huge outliers to the normal: China and India. It suggests that China with weaker institutions (according to the definition he uses) has grown very fast, whereas India with stronger institutions has grown much more slowly than it should have. Exceptions, they say, sometimes prove a rule. But these exceptions are too large. Besides, in science, excep- tions suggest that the theory must be improved to provide for a more unexceptionable explanation. Hence, the Special Theory of Relativity had to be replaced by the General Theory of Relativity.
The problem with Subramanian's chart is easily explained. He has chosen to limit the description of institutions to 'democratic' institutions only. India has stronger democratic institutions than China has. Indeed, comparisons of China's and India's growth rates make it difficult for economists to establish that democracy is always good for development. However, institutions of participative democracy are only a subset of institutions for governance of a nation. The state must also have an institutional capacity to deliver the ' public goods' that it is expected to provide to its citizens: safety, public services such as health and education, and basic infrastructure for water, transportation, sanitation and so on. India has strong democratic institutions for electing representative assemblies and a free media. Yet, the Indian state has been unable to deliver public goods and therefore has been described as a "flailing state" by Harvard economist Lant Pritchett.
Political scientist Francis Fukuyama traces the origins of strong state institutions in two recent books, The Origins of Political Order and Political Order and Political Decay. Historically, ' nation' building has been critical to the success of ' state' building. The histories of Germany and Japan are well known; Fukuyama presents many others too. He also points out that "if a strong sense of national identity is a necessary component of state building, it is also for that reason dangerous. National identity is often built around principles of ethnicity, race, religion, or language, principles that necessarily include certain people and exclude others". Historian Michael Cook carries the analysis further in Ancient Religions, Modern Politics.