Goldman Sachs economists Jim O’Neill and Tushar Poddar, in the latest investment bank view of India’s long-run potential, offer a Top 10 list.
The list, in their order (but not necessarily with a specific ranking, except the first item), is: Improve governance, raise educational achievement, increase quality and quantity of universities, control inflation, introduce a credible fiscal policy, liberalize financial markets, increase trade with neighbours, increase agricultural productivity, improve infrastructure, and improve environmental quality.
The authors note that India lags the other three Bric (Brazil, Russia, India and China) members in their company’s “growth environment score” (GES), an index of 13 components such as inflation, investment, deficits, debt, openness, education, corruption and so on. Unsurprisingly, the Top 10 list aligns quite closely with the GES components, though there are differences as well, reflecting the specifics of the Indian case, the difference between means and ends, and the new salience of energy and environmental issues.
At the broadest level, the list is unobjectionable, even somewhat platitudinous, but the details contain some specific recommendations that do have more content, including inflation targeting, fiscal rules, decentralization and regulatory reform. One can read through the report and nod in agreement with almost all it says: In fact, everything in it has probably been already written somewhere else. That thought raises the question, “If we know what has to be done, why hasn’t it already been done?” If that question cannot be answered, then laying out an agenda for reform is of limited value. Note that the authors stay away from controversial recommendations such as labour law reform and privatization (though public-private partnerships are extolled), so the list really is “motherhood and apple pie” — like a government document in many respects.
Here I offer a conceptually different perspective on how India can achieve its growth potential. I agree with the Goldman Sachs authors that governance reform is of overarching importance. Decentralization is part of the solution. So is greater transparency. The broader issue that needs to be tackled, however, is civil service reform. This was on the UPA government’s early agenda, but then disappeared from sight. A detailed blueprint for civil service reform is desperately required, one which improves incentives for attracting the best, and for their acting optimally once chosen. This extends to absent teachers and health workers as well, since they are government employees. But, how is this going to come about?
Around a year ago, the Prime Minister exhorted the captains of Indian industry to adhere to a “Ten Point Social Charter” as a basis for a government-industry partnership for inclusive growth. However, the 10 points missed the mark by placing too much emphasis on moral behaviour by industry actors, completely neglecting the responsibilities of government to create the right playing field.
India does need a new social contract, however, in which the government, industry and civil society monitor each other, and cooperate in key ways. Civil service reform will be driven by accountable politicians. Political reform for accountability will come from joint citizen and industry pressure. And the right kind of industry pressure will come from operating in a competitive setting, but with dynamic profit opportunities. In essence, a new social contract and follow-on governance reform will come when India has a large, deep, well-functioning corporate sector, with a large enough middle class.
In that case, there is an argument for greater liberalization and reform to support entrepreneurship and corporate growth. Key policies would include further relaxation of controls on commercial activities of all kinds, labour law reform, further tax reform, and of course financial sector deepening through regulatory reform and liberalization. This combination may be what India’s economy needs to generate more jobs—in turn, that is a key aspect of a stable social contract and sustained growth.
The issue of employment brings one back to the basics of health and education, as preparation for jobs. Civil society and business have to combine to force the government to deliver on these fundamental rights of citizens. The Goldman Sachs report reviews all the issues with respect to poor education delivery, but basic health and nutrition may be even more critical since malnourished and ill children do not learn effectively, even if they have schools and teachers. With respect to education, opening up higher education to new entry (whether domestic or foreign) is desperately needed, but will also need industry and middle-class pressure.
So here is my shorter, refocused list for India to reach its long-run potential: Make it easier for entrepreneurs to start, grow and wind up businesses; restructure the civil service; decentralize effectively; pay real attention to health and nutrition; and educate everyone. My list is simpler as well as shorter, and I think it gets to the heart of the barriers to India’s sustained growth. I would argue that the other good outcomes will follow. The sticking point remains full acceptance of the first item on the list. But maybe a tipping point is close.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at firstname.lastname@example.org