That India’s annual gross domestic product (GDP) growth may have sunk as low as 5% in 2012-13, from the high of over 9% seven years ago, is a shock and a wake-up call. The fear is that India’s impressive growth story has derailed. It must be put back on track. There are great expectations from finance minister P. Chidambaram’s budget later this month.
It will be worthwhile to step back and see what has gone wrong. The wheels of the engine of economic growth move along two tracks. On one track are the wheels of economic reforms, financial systems, and the budget—subjects that engage economists and the business press. On the other track are the wheels of institutions that get things done, especially action on the ground. These are institutions of administration, the police and judiciary, and institutions of democratic participation and political decision-making.
Freeing the wheels on one track and lubricating them with further economic reforms to make them move faster, while there is increasing friction in the wheels of institutions on the other track, can cause the engine of growth to derail. Indeed, this is how India’s growth story has stumbled.
Investments are not flowing into India now in the volumes the country needs. The reason they are not coming cannot be that the economy is closed to foreign investment. Almost all sectors of the economy are open to investment, many to 100% foreign investment. The reason they are not coming cannot be that India’s duties and taxes are too high. They are low and generally in line with tax rates in other countries.
The real reason why investment is not flowing is because it is not easy to do business in India. India ranks very low in the World Bank’s Ease of Doing Business surveys. There are too many procedural hurdles. Projects cannot be completed in time. Decisions take too long, and often get reversed, creating uncertainty. These are hurdles for both domestic and foreign investors. And they trip up small enterprises most of all. To attract more investment domestically and from abroad, the country will have to reform its administration and its institutions.
The friction in the wheels of institutions on the ground is affecting the ordinary citizen’s well-being also. The widespread anti-corruption movement and the nation-wide outcry after the dastardly gang-rape in Delhi were eruptions of people’s anger against the poor quality of government institutions, of police, administration, courts, etc. Like investors have, citizens have also lost faith in the capability of government institutions to deliver.
In fact, in 2005, when India’s GDP growth was nudging 9%, scenarios of India’s future growth prospects, prepared by the World Economic Forum and the Confederation of Indian Industry, had shown that if India did not fix its institutions, GDP growth would fall in a few years to 6%, as it has. The friction in the wheels on the institutional track has put brakes on growth as was predicted.
We expect allocation of more money in different sectors to be the solution of our large problems. We need large investment in urban infrastructure but do not have the human resources and governance institutions to run our cities properly. Money for education is spent on school buildings while there are no teachers. Money for health goes to build hospitals and dispensaries in rural areas with no doctors. No wonder, education and health outcomes have not improved much in spite of large expenditures.
India cannot afford to postpone institutional reforms, and implementation of the recommendations of the Second Administrative Reforms Commission, any longer. In fact, these must take precedence over other economic reforms. Otherwise, the increasing mistrust of citizens in institutions of governance will make it even harder for government to sell them the tough economic reforms, such as reducing subsidies to balance the budget, that are required for economically sustainable growth.
In a few weeks, the finance minister will announce the national budget. The media is buzzing with speculation about what he will do to put growth back on the rails again. This time the finance minister has the unenviable task of reducing the fiscal deficit which he has promised to investors. He must also deliver to the expectations of the citizens who want improvement in their lives very soon and not in some distant future by the trickle down from GDP growth.
Since both citizens and investors are demanding an improvement in the country’s administration and institutions, perhaps the finance minister should focus his budget on improving delivery systems on the ground. He should emphasize the urgent need to implement the recommendations of the second administrative reforms commission and he should provide funds targeted to capacity building.
Capacity building does not cost much money. It can be easily accommodated even when deep budget cuts are required.
Moreover, as studies of development of nations have shown, investments in human assets and management abilities cost relatively little compared to hard infrastructure, but they deliver the most bang for the buck for a nation’s progress.
With elections not far away, is the government going to give more handouts or is it going to offer better governance and walk the talk?
Arun Maira is a member of the Planning Commission. Comments are welcome at email@example.com