Turn in the India story

Indian Express, 11 July 2011

The India shining story is turning gloomier every day. Not long ago we were exuberant that India would become a fast growing economy with good institutions and healthy markets. While economic reforms unleashed economic growth, is growth in peril owing to the lack of legal, governance and institutional reforms that should have accompanied reforms?

In the immediate post-independence period we believed we were on our way to becoming a prosperous country, but we soon collapsed to the hindu growth rate. Now, after 20 years of high optimism, it seems once again that low human and institutional capacity will constrain India's rise.

In advanced countries like the UK and the US, the State matured over very long time horizons. It took more that a hundred years for these countries to develop well-functioning institutions. In India, after 1947, at first there was a lot of confidence in India's ability to reinvent itself and reach global frontiers. Attempts at accelerating growth were superimposed on the existing economic structure. That period, instead, led to a derailment of growth through a sprawling scale of government interference in the economy where the state ended up running hotels, airlines, selling liquor and granting land and industrial licences.

Soon we collapsed into the `Hindu' rate of growth of 3.5 per cent. In this period, per capita GDP growth was 1.5 per cent. This would have given us a doubling of per capita GDP every 45 years. It would have taken many centuries to catch up with the West.

India learned from its mistakes, and from the late 1970s onwards, policy reforms started falling into place: first focused on the domestic economy, and then increasingly breaking away from autarky. These yielded quick results in terms of higher growth.

For matching advanced economies in terms of per capita growth we would have to think of per capita GDP growing at least at 6 per cent. This gives a doubling every 11 years. If this is kept up for 55 years, per capita income will go up by 32 times, and India will be a developed country. There are just a handful of countries which have achieved prosperity in a very short time. In the years of fast growth in the 2000s, this seemed possible.

However, a large number of countries have seen a sharp rise in growth immediately after globalising, and later collapsed into stagnation. After 2002, when growth rates really rose, perhaps we started getting overconfident. An array of issues were swept under the carpet under the claim that the growth rate was 8 per cent or more. One repeatedly heard the argument that India does something better than, say, the US because India gets 8 per cent growth while the US is at 2 per cent. Many irrational policies were justified and left unchanged on the grounds that we were getting 8 per cent growth.

In the 1970s, we were at one extreme -- of saying that it would take hundreds of years of fundamental transformation in order to become an advanced country. In the last few years, we started saying that within half a century, India would become an advanced country, even though we were ignoring the human and institutional elements that make an advanced country.

Now, in 2011, we are at a more gloomy reappraisal of the difficulty of getting high and sustained growth. For a while, we were thinking that high growth was easy: now we are seeing that sustaining high growth is very hard. Sustained high growth requires a transformation of the human and institutional foundations of the country, something that has not been taking place in the last few years.

In economic reform, we never got beyond a few incremental changes where `reform by stealth' was done while leaving existing laws and institutions untouched. This has given an improbable juxtaposition of archaic rules riddled with special exceptions, and government agencies who lack clear purpose and accountability. There is little sign that Parliament will go after cleaning out this thicket of laws, and radically restructure government agencies so as achieve good quality public administration -- with clarity of purpose, strong accountability, and the internal processes through which improved performance can be achieved.

It is ironic that while India has avoided deeper changes of laws, government processes and institutions, high economic growth creates a sharp requirement for precisely this. For each doubling of GDP, the way government functions needs to be reformed. In the West, doublings of GDP took place each 25 years, and roughly speaking, they have undertaken re-organisation of government in each generation. But in India, with GDP doubling every decade, we need an even more rapid transformation of the State. There is a particularly unfortunate juxtaposition between our inability to achieve institutional change, and the high GDP growth that demands rapid institutional change. This gap has created a sharp gap between our existing State structures and the needs of India.

Instead of strengthening the existing institutions though increasing transparency and accountability in the executive and the judiciary, short-cuts to better goveranance are being sought by turning to the Supreme Court or through the Lokpal bill. If the huge tax administration machinery does not focus on improving tax administration, how far can a special body created to address the issue improve the system? If instead of strenghtening the capacity of the judiciary to do better law enforcement, an additional institution is created to do the job, the judiciary does not get better. Assuming, for a moment, that the solutions being offered are good and workable, even if these appear to be short cuts to better governance, will they solve the long term problem of giving India a well functioning executive and judiciary?

With all these problems, we did manage to turn in an impressive growth performance for some years. When you start at the bottom, very modest changes can unleash substantial improvement. But will this continue? The question marks surrounding the Indian growth story are now mounting.

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