Forget growth to achieve growth
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As with many things in life, this one too happened unplanned. We were discussing the extremely fragmented structure of production in India’s farms and factories and wondering how the country could enhance the standard of living for more than a billion people with such an inefficient production structure with all its other drawbacks for workers, for the government, for the environment, etc. We set about documenting it and then one thing led to another. The rest is, well, there in our little book, Can India Grow? Challenges, Opportunities, And The Way Forward.
Of course, India can grow. Developing countries have tremendous potential and hence, the definition of an economic recession that applies to developed countries does not apply to developing countries. A period of sustained below-potential growth is a recession for developing countries.
For a start, corporate India is still in the middle of a balance sheet crisis, especially acute in the infrastructure-related sectors. Its impact on the banking sector has been paralysing, with non-performing assets (NPAs) rising to alarming proportions. Even if the problem of NPAs has peaked, banks will take a long time to restore credit flow to the economy. The share of private sector capital formation in the gross domestic product (GDP) has been on a continuous decline.
Our concerns are not merely cyclical but structural. Put differently, our effort is to identify and address concerns that keep India’s long-term growth potential on a leash. Economists call that trend growth rate. There are fundamental structural and global factors, with no ready solutions, which come in the way of the country achieving high growth (say, an average of 8% growth per annum) for a decade or two. More than seven decades after freedom from colonization—an epoch that saw India’s industrial capacity denuded totally—India faces a big challenge to elevate the share of manufacturing and industry in its economy. The forces of premature de-industrialization, limitations of a services-led growth model, plateauing of global trade, secular stagnation in developed economies, and the costs of climate change are formidable long-term headwinds.
Further, the country’s savings rate is inadequate to facilitate infrastructure investment on a scale that a country of India’s size and population needs. And all these sit atop deep human resource and state capacity weaknesses.
In short, India faces acute capital deficiencies on multiple fronts as well as much under-appreciated adverse global structural headwinds which pose serious constraints to the achievement of sustainable high growth rates. High growth can be achieved only as episodes of over-heating followed by years of pain and lower growth from cleaning up the excesses.
To start with, there has to be acceptance that achieving growth rates in excess of 8% on a sustained basis is difficult, given the aforementioned challenges. Acceptance of that reality will induce a realistic assessment of the country’s structural impediments and growth potential and help design policies that ensure stable and sustainable growth and development. In the circumstances, the most prudent strategy may be to target a long period of moderate growth by focusing on steady economy-wide physical, human, and institutional capital accumulation and opportunistically riding on emergent global tailwinds.
As regards the latter, India should stand to benefit from the low commodity prices, especially oil price, which looks likely to remain low for quite some time. Apart from improved terms of trade and lower current account deficits, it would also contribute to low inflation and macroeconomic stability. Further, the slowdown in China presents India with a great opportunity to stand up as the foreign direct investment destination of choice. That said, India should stop obsessing about China’s economic growth and achievements.
It is against this backdrop that we make certain policy and process recommendations. The former includes reforms in school and higher education; urban governance; housing, land, credit, and labour markets; infrastructure contracting; delivery of social welfare services; and improving state capability and personnel management.
The latter assume far greater significance and their internalization is critical in India’s context. On its part, the government should hunker down, resist growth through bubbles and fads, and whole-heartedly embrace the principle of under-promise and over-delivery. It should seek to break down silos within its own public systems. The politically expedient and cosmetic should not displace the strategically important and substantive.
For a country of India’s size, diversity, and political complexity, any fundamental reform has to emerge as a bottom-up effort, similar to the millions of marginal revolutions that characterized China’s growth over the past three decades. These revolutions have to be facilitated by cooperative and competitive engagement of the Central government with the states and among the states. This has to be the cornerstone of India’s growth strategy in the coming decade.
To conclude, if the country worked on doing the right things, economic growth shall be the logical consequence. As Scott Adams, creator of Dilbert Cartoons, put it, successful people do not pursue goals. Success accrues to those who make goals part of their system. It eludes the rest.
(This is the final column based on the authors’ joint work, “Can India Grow?” published by Carnegie India—Ceip.org/2g3EFlN).
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