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Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

India’s three big challenges

Productivity should be measured by the output produced per unit of the scarcest resources

The generation of more jobs, the creation of a national identity, and improvement of the total factor productivity of the Indian economy are three big challenges for the Indian government.

The imperative to generate more jobs much faster, and the remarkable sluggishness of the Indian economy in generating jobs in spite of high gross domestic product growth, have been widely noted in the past few months. The question of a national identity, and whether it should be shaped around a history of a Hindu India, as forces around the present government are advocating, is causing great strains within the country. The challenge of improving the total factor productivity of the economy is connected with the other two.

The total factor productivity of a system can be increased by improving the productivity of the most constrained resource in the system, and/or obtaining more of the scarcest resource. Land and space, and money, not labour, were the scarcest resources for Japanese companies when Japan embarked on its rapid industrialization in the last century. Therefore, applying methods of total quality management, they invented the Kanban system of minimum inventories, which not only reduced working capital requirements, but also reduced space requirements for storage. Japanese managers designed their factories, as their homes were too, to be very frugal in use of land and space. Applying these principles, Japanese factories became the most productive in the world in many industries. Their output grew, and employment grew too.

People (labour) are not the most constrained resource in the Indian economy. On the contrary, more labour should be put to use to provide incomes for people. Therefore, productivity of the Indian economy, and enterprises in India, at this stage of growth should not be measured by the output produced per unit of labour. Rather, it should be measured by the output produced per unit of the scarcest resources.

Resources that are more constrained in the Indian economy than labour are capital and time. (Water is becoming another scarce resource too). Things don’t get done in India when they should, and as fast as they should for an economy that has a lot of catching up to do. Tardiness in implementation not only reduces returns on capital, it also reduces availability of capital because investors won’t risk more money if timely returns cannot be foreseen.

India’s energetic democracy is often blamed for the Indian state’s inability to get things done faster. Some even say that India would have grown much faster if dictatorship had preceded democracy. Though dictatorships have not always produced well-run states, efficient institutions of the state are functioning in many Western democracies. The insight of political scientists, such as Francis Fukuyama (Political Order and Political Decay) and Daron Acemoglu (Why Nations Fail), is that, whether produced by democracy or dictatorship, strong state institutions are necessary for sustainable growth.

Political scientists, including Fukuyama and James Cook (Ancient Religions, Modern Politics), point out that the formation of strong states has often been enabled by the forging of a strong national identity, which has frequently been based on ethnicity or religion. Germany, Japan, Korea, Singapore, France after the revolution, and even Israel, are some examples. Therefore, it is tempting to conclude that Indians must be rallied around a shared national identity to enable the building of a strong state that can impose order and get things done. However, a special challenge that India has if it follows this route, as Cook explains, is that there is no ethnicity or religion that can rally all Indians into one nation.

Aryan culture cannot be India’s identity. Dravidians in the south have made it clear that they were settled on India’s land before the Aryans came, and they are proud of their ancient, well-evolved culture and languages. To the east, other ethnic groups resent being treated as second-class Indian citizens. Nor can religion unify all Indians. India proudly has almost all the religions in the world. The religion of the majority, Hinduism, with its caste system, has been unable to contain everyone equally even within itself. Moreover, the beauty of Hinduism is that it accepts that people can have many beliefs and many ways to their gods. The imposition of any singular version of Hinduism may even divide Hindus rather than unite the country.

The conclusion is, a strong Indian state must be formed around a vision of the future, as the US was, and not around a religion and a selective history of the past. India’s prime minister rightly says that the Constitution is his god. For all Indians too, their Constitution must be the guide to the conduct of the state, as it is for citizens of the US.

Foreigners will invest more, as will Indians, if the Indian state functions more effectively. An effective state will also deliver better public services—healthcare, education, sanitation and public utilities, as well as law and order. Moreover, reforms of policies and their implementation will become easier when citizens trust the state. Fostered by a better functioning state, the growth of competitive enterprises, with higher total factor productivity, will generate more jobs.

Thus, the three challenges of improving total factor productivity, creating more jobs, and strengthening the state are inter-connected. The cautionary note is, Indians should not waste energy and time on rewriting the history, an exercise that will divide them. They should unite around a vision of the future.

Arun Maira is a former member of the Planning Commission.

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