New Delhi: The famous author of India’s Turn: Understanding the Economic Transformation, Arvind Subramanian, has challenged popular opinion about India’s recent economic history.
Subramanian, a senior fellow at the Peterson Institute for International Economics, and senior research professor at the Johns Hopkins University in the US, was described as an “agent provocateur” by finance minister P. Chidambaram at a function to mark the launch of the former’s book.
The book challenges the notion that 1991 was the watershed in India’s economic transformation. According to Subramanian, it started a decade earlier. He spoke to Mint about India’s economy over the past three decades and the cracks that threaten to derail growth. Edited excerpts:
Economic concerns: Author and professor Arvind Subramanian says fundamental challenges remain as India is seeing development, across skill levels and regions, that could create pressure on people to migrate.
You have said till 1980, Indian manufacturing’s role in the economy was in line with the countries comparable at that time. Subsequently, services overshadowed other sectors. What happened?
If you took a snapshot of the Indian economy in the 1980s because of the policies we pursued (import substitution), there were two kinds of motives underlying those policies. One was the standard thing of protection against foreign competition. Second idea that permeated those policies is a phobia against size. I call this a kind of Gandhian overlay of Nehruvian socialism. One manifestation of that was industrial licensing. We didn’t want people to get too big. What it led to was a manufacturing sector that remained stunted. On a cross-sectional basis, it was pretty normal.
Then you had this sudden accident of the IT (information technology) thing picking up and India being particularly well-suited. The fact (is) that we developed high skill and neglected basic education. So the technology shock came along, (and) we had high skills and the services sector takes off. So we get into a pattern of development after 1980 in which not only services takes off, even manufacturing does well. So it should be treated not so much as services versus manufacturing.
What I am going to develop further is that in some ways this has gone one step further. If you look at FDI (foreign direct investment), the big China-India comparison is that China gets a lot of FDI, India gets very little. If you look at the exports of FDI, India exports a lot of FDI, more than China. It exports this FDI to not just poorer countries, but to the rich countries as well. And it is also exporting this stuff in manufacturing, where we are supposed to be relatively behind China.
So to me what this suggests, of course, is two things. This skill we have is not just people, who can write code cheap, it’s also about managerial and entrepreneurial capital, which is now a world beater. This is kind of really striking. Generally, countries do this when they are at a much higher stage of development. This is the kind of upside, or triumphalist side of precocious India. Of course, there is a downside to this. By definition if you develop based on a factor that is in limited supply, you don’t use a factor in relatively abundant supply, you get inequality. So the challenge for India is going to be how we provide opportunities for all these unskilled people. How we manage the challenge is one of the big challenges facing the Indian economy.
In this context, could you tell us how this will play out as you noticed some institutional weakness? Your work has emphasized the critical link between institutions (democracy, judiciary, executive, etc.) and growth.
Another paper in the book and a theme I am very keen on is the question of what is happening to our institutions. First point to note is more and more economic research is showing what ultimately determines long-run levels of prosperity is how good your public institutions are. The reason is that public institutions perform certain functions, which are very important for a market economy. Now, to me this is another aspect of precocious India in the sense that we inherited very good institutions. On the political side it is well noted. But it is also true of our economic institutions. But the question is decline seems to be setting in. So there is a lot of hope. We are also decentralizing and maybe decentralization allows institutional experimentation, which is going to be a positive dynamic in the long run.
But the problem is certain core institutions—such as the judiciary below the level of the Supreme Court, the rule of law, the bureaucracy, the police—one could make the case, and I have some evidence based on some of the institutions I have studied that some of these are declining.
If you looked at India and China, for example, it’s a kind of crude comparison. China seems to have some kind of state capacity. We are kind of slipping a bit on that front. On the other hand, our private sector is very entrepreneurial, very dynamic. The contrast is China has a very good public sector and a lagging private sector. We have it the other way around.
The question is, which would you choose in terms of the future. There’s an asymmetry. It is easier to create the private sector as it is about letting go and allowing people’s natural entrepreneurial instincts. In that sense Chinese private sector will eventually get very good. But building institutions, arresting institutional decline seems to be a much more challenging task.
Looking ahead, while I am fundamentally bullish about the Indian economy, I think the task would be made considerably more easy if we could make public institutions keep pace with this. If it doesn’t happen, you set yourself up for problems.
Another challenge for India, you have said in your work, is the possibility of a social churn if the slow-growing states don’t catch up with the fast-growing ones. It is at least a couple of years since you have written that. Since then, based on your observations, how would you update that?
It seems to me that fundamental challenges remain. I think states are still growing unevenly. One update from that is, I would say, with Rajasthan and Bihar, at least now things seem to have changed. At least the perception that someone is trying to change course. Whether it is translated into real outcomes in terms of poverty and growth, remains to be seen. We are getting very uneven development, across skill levels and across regions. In principle, the way this should work itself out is either people start leaving because the opportunities are very bad, or capital will start flowing into countries that are relatively poor. It is possible that these states that are not well managed are in some kind of institutional trap. Even though they are poor, people are leaving, it may not be enough to attract investment.
In principle if you are poor, that means there are a lot of opportunities for investment. That is the standard theory. But if you have bad institutions and institutional trap, the point is returns are going to be low and the danger is that some states find themselves in that trap. What will happen is that there will be greater pressures for people to migrate. Eventually the way this will have to turn itself around is what I think is the most positive dynamic in India. That is, the way I think there will eventually be pressure on governments to turn around. To some extent, it is happening in Bihar, Orissa and Rajasthan.
Which section of the economy do you think needs maximum attention at this point of time?
If you ask that question to 10 different economists, you will get 11 different answers. Because our development is based so much on supply of skilled labour, we have to ensure supply of skilled labour keeps pace with demand. We are seeing skilled labour wages increasing by 13-14% (annually), which is extraordinary. It shows demand is considerably ahead of supply. How can we get the unskilled to acquire skills where the opportunities are? To me that is a very high priority.