How to Get India Going Again

T N Ninan

Mrs Prem Bhatia, Mr Bajpai, Dr Debroy, Mr Malhotra, trustees of the Prem Bhatia Memorial Trust, and friends:

I entered the world of journalists when Prem Bhatia was already a grey eminence. But, unlike what General MacArthur said about old soldiers, distinguished old journalists don’t fade away; and Mr Bhatia’s career eventually spanned six decades. He had started on the copy desk at the Civil & Military Gazette in Lahore, then moved to the radio, the army, the government and the Indian embassy in Moscow, before returning to journalism at the Statesman and later the Delhi editorship of the Times of India and then Indian Express. Like the title of a recent book that has been in the news, you could say that, for Prem Bhatia, one career was not enough!

More professional achievements were to follow, when he became India’s high commissioner to Kenya and then to Singapore. Not long after he returned to India, he went to Chandigarh for a long stint as editor of The Tribune, a paper where they still remember him for being a stickler for the correct use of English. He started the Hindi and Punjabi editions of the paper, and led the Tribune with distinction during troubled years in Punjab. Returning to Delhi at the age of 75, he continued to write his columns for many years.

Today, on the 103rd anniversary of his birth, we should celebrate the life and work of a fearless journalist whose ramrod-straight bearing reflected his thinking, his writing, and his leadership of different newspapers. It is a privilege to be asked to deliver a lecture instituted in his honour.

Before I turn to the subject of my lecture, I would like to congratulate the two journalists, Smita Gupta and Nitin Sethi, who have been recognized for their work. It gives me special pleasure that Nitin is a colleague at Business Standard.

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The trustees have suggested that I should talk on “How to get India going again”. I have assumed that the reference is to our recent frustrations. The economic growth rate has halved, and the old government was seen to be in a state of paralysis. We have had to endure sustained high inflation, and a general inability to match aspirations with delivery. If the new government could address these, and deliver rapid growth once again, most people would say India has “got going again”.

But questions follow. Would plain economic growth improve the air we breathe, or only make it worse? Would it help to address corruption, or promote crony capitalism? Would it help put an end to extreme poverty, or increase inequality? Remember that China has all the problems I have mentioned -high levels of corruption, dreadful air pollution, great and growing inequalities. But in the eyes of the Chinese, and of the world, that country has definitely been “going”for well over three decades. Should India aspire to do the same, or seek to balance growth with other objectives?

The questions are real, and immediate. This is also a contentious area of discourse—especially in our argumentative society. So let me stake my position. There is nothing as important for India as sustained, rapid economic growth. Growth reduces poverty. It improves the lives of ordinary people by giving them higher incomes, and therefore greater economic security. Growth helps both people and governments spend more on health and education, and thereby improve key indicators of human development. Growth generates tax revenues that can be used to finance a safety net for the poor. Growth of the economy also improves our national security. It helps to pay for bigger defence budgets; it makes international companies look more positively at India; and it persuades other governments to listen to what we have to say on everything from trade to nuclear policy. Without rapid growth, India becomes a lesser country, and all of these goals get compromised.

You will want me to substantiate what might sound to some like an ideological position. So let me point out that the years of rapid economic growth have seen the fastest declines in poverty rates. This is true whether you take the Tendulkar definition of poverty, or the new Rangarajan definition—or for that matter the World Bank definition. You may quarrel with the definitions, but it is hard to quarrel with the trends in the numbers. So it is simply not true that rapid growth helps only the rich while the poor get poorer.

In the seven years from 2004-05 to 2011-12, when economic growth averaged a handsome 8.5%, the poverty ratio as defined by Tendulkar declined at three times the rate that prevailed before, when growth averaged 6.5%. In the seven years of rapid growth, 137 million people crossed the poverty line—or nearly 20 million every year. If you take the recent Rangarajan calculations, more than 90 million crossed over the poverty line in just two short years, from 2009-10 to 2011-12, a period when average growth was 7.8%. What can we conclude? If we did not have rapid growth of incomes, poverty would have declined at a slower rate. If we want to completely abolish extreme poverty, it can be done with 10 to 15 years of sustained, rapid growth.

I said that growth improves our ability to spend on education and health care. In support, let me point out that the expenditure per head on health and education doubled in the seven years of rapid growth; indeed, it grew at the rate of about 10% a year, which was much faster than the growth of income per head, of under 7%. In the UNDP’s Human Development Report, you will see that countries with higher incomes have better human development indicators; the poorer countries have worse indicators. Almost all the countries that have better human indicators than India also have higher incomes; and almost all the countries with worse indicators have lower incomes. The conclusion is obvious. If you want to improve health care and education, you have to raise income levels. That means economic growth. China, which has the best record of sustained rapid growth, also has about the best record in improving health and education standards.

There is also evidence to support my statement that rapid economic growth usually gives a boost to tax revenues. In the middle years of the last decade, central tax revenue went up from the earlier 10% of GDP to nearly 12% before falling back to 10.2% last year. Getting tax revenue back up to 12% of GDP would mean an additional Rs 2 lakh crore and more. With that money, we could pay for a food security programme, double the weapons acquisitions budget for defence, and still have money left over. So let us not underestimate the primacy that we must give to economic growth.

To recapitulate, the objective of getting India going again has to mean getting back rapid economic growth. As I have tried to show, it will help reduce our poverty numbers; it will help us improve health and education; and it will improve national security and help pay for a social safety net. This does not mean that growth alone is enough; far from it. We have to address many other issues as well. Government programmes have to be better administered so that budget allocations are well spent. The many handicaps that combine to deny opportunity to the economically disadvantaged and socially oppressed need attention. The pattern of economic activity has to be environmentally sustainable. And the rules for private sector activity must be properly framed so that we get good capitalism, not bad capitalism – a subject to which I will return. In short, rapid growth is not sufficient, but it has to be an essential and indeed the primary goal for a lower-middle income economy like ours. Since growth will help us achieve a great many other goals as well, it is not an either-or choice that we face.

On the basis of that understanding, what do we need to get India going again? I will deal with three sets of issues: first the economic ones, and then some key societal changes that have not received enough attention. Finally, I will turn to some ideas for changing the rules of politics and the nature of what we think of as the government.

On the economy, we need to recognize, first, that the reform which has been achieved is still very partial. Much reform remains to be done. The best way to understand this is to look at the four factors of production, or resources -land, labour, capital, and entrepreneurship. Are these free or constrained? If constrained, how do we free them?

Take land, which had to be made a freely transferable asset, and the land market made transparent. This meant digitising land records, dropping stamp duties to realistic levels, and putting an end to flourishing land rackets. But then land became a hot-button political issue because people were being thrown off their land with a pittance as compensation, to make way for industrial projects. Unfortunately, the new legislation passed last year has overshot in terms of corrective action, and has the potential to do lasting damage—just as changes in labour laws more than 30 years ago caused India to miss the manufacturing bus. The land acquisition law needs to be changed again, not because farmers don’t have the right to a proper price, but because there is also such a thing as too high a price, and windfall gain.

The crucial point is that, by the time the new law came into being, the market reality for land had changed. Land prices in India have multiplied four- and five-fold in most parts of the country in the last decade. As Sanjoy Chakravorti has outlined in his book, The Price of Land, significant stretches of rural India now have land prices that are higher than in parts of the United States, and even parts of Europe. This is illogical, because land productivity in India is much lower than in those countries. And when it comes to residential construction, the picture is even more irrational because the link between capital value and rental value has snapped. Rental value used to be 6 per cent of capital cost, which was a decent return on capital. Now in many urban centres it is less than 1 per cent. Land prices have simply risen too high.

Not recognizing this, the new land law stipulates that forcibly acquired land must be paid for at two to four times these very high market prices, in addition to other relief and rehabilitation costs. This makes most projects financially unviable. On top of that, the procedures outlined are very time-consuming, and also involve many intermediaries—and we know what that means. In effect, the new law will stop fresh land acquisition in many parts of the country. Meanwhile, the original reform agenda for land is still not addressed.

Likewise with labour laws, an issue that has been much discussed. Some changes have now been kicked off. I’d like to crystallize the issue, as it relates to manufacturing, to exports and to employment, with an example from the garment industry. You will recall that one of the main benefits of the Uruguay Round of trade negotiations was that trade in textiles was made free with a time lag. India was expected to be a big beneficiary. But in the period when India’s exports of garments went from $10 to $12 billion, that of Bangladesh surged from $8 billion to $21 billion. One of the reasons why India has not done as well as Bangladesh is the rigidity of its labour laws.

Let’s understand what this means for jobs. India’s garment export industry employs 7 million people—or about 6,00,000 for every billion dollars of exports. More than doubling the size of garment exports (as Bangladesh has done) would add 8 million jobs. Those jobs would be more productive and sustainable than the manual work created under the rural employment guarantee programme. Nrega had an outlay of over Rs 40,000 crore last year, and created the equivalent of 8 million man-years of work – at half the wages that prevail in the garment industry. Yet Nrega is a holy cow, while garment exporters say it is difficult to get the time of day from anyone in government.

It bears emphasizing that the best form of inclusion is not government hand-outs but jobs. Someone who is employed doing productive and sustainable work at a decent wage, in the garment industry or elsewhere, does not need hand-outs from the government. I am all for a social safety net, but let’s also do sensible economics. More flexible labour laws will encourage manufacturing activity and create more jobs—and get India going while also delivering inclusion.

The third factor of production that needs to be freed is capital. When the government runs large fiscal deficits, especially revenue deficits that finance consumption, it pre-empts capital that could have been used productively elsewhere. When less money is left for the private sector, interest rates go up; that in turn impedes both consumption and investment. In the six years between 2007-08 and 2013-14, the scale of government borrowing multiplied more than four-fold. If the government had borrowed less, it would have lowered inflation as well as interest rates. We might then have avoided the current slowdown in economic activity, and the freeze in capital investment by companies. What did the government do with the money that it borrowed? Basically, it went into higher subsidies. The major subsidies are up from 1.5 per cent of GDP seven years ago to 2 per cent, whereas capital investment financed by the budget has shrunk from 2.5 per cent of GDP to 1.75 per cent.

I am not against subsidies. Any country with a conscience would subsidize consumption by the poor, but in India’s case most of the subsidies do not go to the poor. It should be possible therefore to cut the subsidy bill without affecting the poor, and then to put more money into investment -in roads, railway lines, and other essential infrastructure. That too will help get India going again.

We have discussed three factors of production -land, labour and capital. What about the fourth, entrepreneurship? The distinguished economist William Baumol has co-authored with two others a relatively recent book called Good Capitalism, Bad Capitalism. The authors talk of four kinds of capitalism -entrepreneurial, big-firm, state-led, and oligarchic. Crudely put, their thesis is that capitalism in developing countries like India tends to be state-led and/or oligarchic, while that in developed economies like the US tends to be big-firm and entrepreneurial. And they argue that successful capitalism is usually a combination of entrepreneurial capitalism and big-firm capitalism.

How does India look in this analytical framework? We certainly see elements of oligarchic capitalism, and a great deal of state-led capitalism. The recent scams involving iron ore, coal and spectrum all had to do with the wrong kinds of capitalism. And these played a role in pushing India off the rails. Fortunately, we also have a flowering of entrepreneurship; but as our poor rankings in the World Bank’s surveys on Ease of Doing Business show, we don’t make life easy for entrepreneurs. Then, some firms have acquired enough scale to play the role of big firms, but there is work to be done in preventing big firms from behaving like oligarchs.

That brings us to Mancur Olson, who argued with great insight half a century ago that special interest groups can cause economies to ossify. In political democracies, it is minorities that often fear the majority. Olson turned this on its head and argued that in economics it is the other way round, and minorities trump majorities. Small groups lobby to capture benefits, and organize themselves to protect what they have, while the price is paid in a diffuse way by an unorganized majority. Think of how trade unions have protected laws that help those already employed, at the cost of the vast armies of unemployed and under-employed. Or how a small group of producer firms will influence policy, to the cost of much larger numbers of consumers. This is particularly relevant to India, where electoral pressures often come in the way of governments tackling interest groups, so that we fail to bring about the required change.

What makes countries deal successfully with such challenges? In their persuasive book, Why Nations Fail, Daren Acemoglu and James Robinson argue that it is political and economic institutions that make the difference between a country’s success and failure. One only has to look at the different paths of Pakistan and India, or of South and North Korea, to realise the truth of this finding. But before we celebrate, we should be conscious of the weakness of our institutions: courts that are slow, law enforcement agencies that are corrupt, regulators that get captured by corporate interests, and so on. A moment’s thought will tell us that all of these institutional defects played a role in putting brakes on the economy. This is where institutions come in. As Baumol and co-authors argue, “Institutions must reward socially useful entrepreneurial activity”. There is no short-cut; we have to make our institutions function better, to deliver good capitalism.

Finally, let me quote our own economist Jagdish Bhagwati, who has talked in an interview about the crucial difference between the types of corruption in India and China. India’s corruption, he says, is classic “rent-seeking”, where people jostle to grab a cut from existing wealth. In contrast, the Chinese have what he calls profit-sharing corruption. To quote from the Financial Times interview, “The Communist party puts a straw into the milkshake so that it has an interest in having the milkshake grow larger.”This reflects Baumol, who says “government institutions must discourage activity that aims to divide up the economic pie rather than increase its size.”Bhagwati’s insight is that this holds true even when governments or those in authority indulge in corruption!

I have tried to show how India’s corporate sector, its institutions and its politics failed; and how all of them contributed to the economic slowdown, the political logjam and the resultant sense of drift. If we are to get India going again, it is not just a matter of getting some roads built or arranging the supply of coal; we need to address fairly basic reform agendas, and complex institutional challenges.

Having dealt with the economic aspects of our subject, let me turn now to larger societal changes, reform of the government, and how the political economy of India has to adjust to new realities. Importantly, we need to understand how today’s India is radically different from the India of even two decades ago.

One seminal change is that the poor are no longer the country’s largest population cohort; an aspirational neo-middle class has taken that position. This should be good news, but a lot of people get very upset if you point it out. Still, we have to go by the numbers. The Tendulkar calculation shows that the percentage of poor more than halved, from 45.3% of the population in 1993-94 to 21.9% in 2011-12. But Tendulkar’s numbers have become controversial, so we could go to the more recent Rangarajan committee’s definition of poverty. This sets a higher income benchmark, by which 29.5% of the population was poor in 2011-12. That was down from 38.2% just two years earlier. Impressive as this achievement is, some state-wise details are even more dramatic. Kerala had a poverty headcount of only 11%, the undivided Andhra Pradesh had 14%, and Punjab 11%. The hill states in the north were not badly off either: Jammu & Kashmir’s poverty ratio was 15%, and Himachal Pradesh’s 11%. Four other large states—Rajasthan, Tamil Nadu, Maharashtra and Karnataka—were in the 20%-22% range. On average, in a dozen states the poor numbered barely one-sixth of the total population—matching the figure for a place like Delhi. Five-sixth of the population in these states was out of the poverty net. And of this five-sixth, the overwhelming majority would be what the current government calls the neo-middle class.

These dozen states run down India’s geographical spine, from the north through the west and down to the south. They account for nearly half the seats in the Lok Sabha. If this vertical belt has become neo-middle class country, it is also becoming more urban than rural. Maharashtra, Kerala and Tamil Nadu reported more than 45% urbanization in 2011. Gujarat, Punjab and Haryana were not far behind. What is more, most of the population growth in the future will be in urban areas. The story in the heartland and eastern states is of course quite different; their poverty headcount is still 40% or more, and urbanization can be as low as 16%. But the emerging realities are the trends up and down the geographical spine. India’s politics needs to recognize this. The catchword about an ”aspirational”class captures some of the new reality; and the new stress on urban development, “smart cities”and the like shows that policy is responding.

After the emergence on centre-stage of the neo-middle class, and urbanization, the third seminal change to focus on is the population outlook. Back in the early 1980s, the Indian woman used to give birth to an average of 4.5 children in her lifetime. That has dropped by nearly a half, to about 2.4. This total fertility rate, or TFR, is not very much above the internationally accepted “net reproduction rate”(or NRR) of 2.1. For India, given its higher infant and child mortality rates, and also the skewed sex ratio (fewer women), the NRR should be higher than 2.1. So India’s TFR might reach the much-desired NRR in a couple of years.

The startling bit of statistics here is that about a dozen states are already at an NRR of less than 2.1, some of them being as low as 1.6 (which puts them in the same category as the ageing societies of Europe). The black side of this somewhat unbelievable statistic is that in some (not all) of these states, the very low TFR reported may be because millions of girl-babies are being killed at birth, and therefore not reported. Whatever the reason, India’s population may peak at 1,550 million, not the UN’s figure of 1,700 million.

One result is fewer infants and young children. The 2011 census reported 159 million in the 0-6 age group; that was 5 million less than the 164 million in 2001. Also, the share of the 0-6 age group has dropped from 17.9 per cent of the total population in 1991 to 13.1 per cent in 2011. It is only a matter of time before this trend spreads to older age groups. The total population under the age of 15 is already static, and will begin to decline. India’s population explosion began in the early decades of the last century; many of us in this room will live long enough to see the second demographic transition, as India’s population peaks and then begins to decline.

What does that mean, among other things for India’s education system? Since we have already achieved universal primary enrolment, do we need more primary schools -or only better schools? From 4.1 million students in universities in 1991, the number reached 17 million in 2010-11, but the Planning Commission says barely one-sixth of those with a degree are employable. Many tens of thousands of seats in engineering colleges are going vacant, yet Nasscom complains that only a fifth of the graduates from engineering colleges are employable. A quality rating system has found that 90 per cent of our colleges are either average or below average. That is for the colleges which offered to get rated; the reality of the unrated colleges will be even worse. Over and over again, the message is that the problem is quality, not numbers. Does our education system address this question? If not, how can India hope to get going in the 21st century?

Finally, let me turn to some specific steps that I would recommend to the government. Let’s start with politics. One of the things that held up decisions in the last government was its dependence on fringe parties. This also led to sundry scams, as alliance partners extracted their pound of flesh. We need to prevent a recurrence of fringe political parties holding coalition governments to ransom. For that the anti-defection law has to be changed. As it stands, the law applies to individual legislators switching loyalty from one party to another. It does not apply to parties themselves, which are free to join and leave coalitions at will. As Bimal Jalan has suggested in one of his books, I would think that parties should be subjected to the same discipline as legislators; if a party leaves a coalition, it must give up its seats in the house and face fresh elections—just as legislators have to do when they leave their party. This will reduce the scope for political blackmail by minor parties. And it will rewrite what has euphemistically been called coalition dharma, which is really adharma.

Second, the civil service has to be made independent of ministerial whim. The damage that the last government did, in allowing ministers to choose their departmental secretaries, has to be ended and status quo ante restored. Recall that Mr Raja was allowed to get rid of a non-cooperative secretary for telecom, and to replace him with someone whom he knew from his previous charge (environment and forests). If this change had not gone through, there may have been no telecom scam. In rare cases, and only with good reason, should a secretary be changed at ministerial request. Otherwise, the steel frame of administration gets reduced to less than a bamboo frame.

Third, the Prime Minister must re-invent the government, and persuade chief ministers to do the same. Agencies in charge of implementing field programmes should be carved out of the government proper and converted into service organisations headed by CEOs. The government then contracts them for specific jobs, with targets—like running schools and achieving a minimum pass percentage, or meeting public health targets. Failure means the CEO gets changed, or the agency loses the contract. If you think this is an unrealistic, “pink paper”kind of idea, think again; it is in one of the reports of the Administrative Reforms Commission headed by Veerappa Moily. And it has been tried in countries like Britain under Mrs Thatcher.

It’s not a novel idea even in India. We have already outsourced some of the work involved in issuing passports; we have contracted out the building and running of airports; and we have a separate agency like the Unique Identity Authority to issue identity numbers. This process can and should be taken much further. The railways should be made into a corporation, and run like one. Why shouldn’t postal work, which is done poorly, be handed out to a service agency? These steps should be designed to deliver significant efficiency gains. And ministerial intervention in the day-to-day functioning of government-owned companies should be tackled through appropriate structures, like holding companies that act as a buffer managements and ministries. The strictly civilian government will then become a much smaller organization, shrinking from three million people to much less than a million; and it would be devoted essentially to policy-making and monitoring progress on various fronts.

There are other issues that I would have liked to dwell upon, including the sustainability question, the challenges on the health and sanitation front, and how best to ameliorate the condition of the poor. But I have already gone on for too long. So let me wind up by saying that many complex factors went into derailing India; they were economic, political, social, administrative, and institutional. In the business of getting the country going again, there are some quick fixes that can be tried, but it would be a mistake to ignore the larger, underlying issues. If we fail to address them, and if we do not substantially complete the reform process, we will not achieve sustained rapid growth. In any case, the state of the world economy is not such that will facilitate a dramatic return to high growth tomorrow. That is all the more reason for focusing on the hard work that needs to get done.

Thank you for your attention.

Nitin Sethi
Receiving Award Smita Gupta
Receiving Award T. N. Ninan
Delivering the Lecture The Dais Trustees
With Award Winners