Why have 1.3 billion Indians not created the world’s largest economy?
India has created the world’s largest democracy on the infertile soil of the world’s most hierarchical society, but the question is why haven’t we created the world’s largest economy? Why did it take 72 years for 1.3 billion Indians to cross the GDP of 66 million British, which will happen in 2019?
If you will allow me to take a slightly historical view... in the early 1900s, the Swaraj movement was gaining ground, and one of the ideas that emerged was that Swaraj without Swadeshi would be half done. (Sir) Sorabji Pochkhanawala, the founder of Central Bank India said: “politics devoted solely to political freedom was an empty concept, if not backed by economic power". Something happened in 2014, which caused a definitive change in the way the political will was articulated and then followed up. Pre-2014, you had governments (and I’m not taking a moral position here, it was just the way it was) that would run large deficits and would inflate the debt away after that. Public sector banking was used for loans which were evergreened or siphoned off, and the government would periodically recapitalize the banks. Most businesses had two books of accounts—their own bahi khata and the one the auditor signed off. But the rules that worked for this $500 billion to $1 trillion economy were strained as we grew. When this new political thought came in, there began an attack on corruption not seen before. We can say demonetization was a failure but it was in the direction of fighting corruption, along with GST (goods and service tax), shell company shutdowns, RERA (Real Estate Regulatory Authority), NFRA (National Financial Reporting Authority), PAN-Aadhaar link and rule-based auctions. The political will of going after this parallel economy was manifest. This legitimization is essential before we turn to $5 trillion.
I can’t say whether it was 2014 or not, but we have seen time and again that technological revolutions have allowed countries to punch above their weight in terms of economic power. It happened in Europe with the Industrial Revolution and it has happened in China and India with the new technology revolution that is allowing us to unlock the power of our population. China is ahead of us because they turned that corner faster, but we have people here at this table who have used technology and human capital to forge ahead. That is the direction in which we should be going. If you talk about the drive against corruption, it started earlier—for instance when we had MCA21 (the corporate ministry’s e-governance initiative), when we just removed a registrar of companies who would take bribes and outsourced all that to a call-centre in Noida, and now companies get incorporated in a completely digital process.
I’ll build on what has been said by Monika and Rahul. First of all, societal beliefs matter—the Egyptians built the pyramids because they had a certain belief in the afterlife. So what a society believes in has implications beyond politics and economics. In the last 70-80 years, we got one belief right and two wrong. The one we got right is a democracy. One thing we got wrong is central planning. It took us a long time to recover from it. Then when we did decide to recover, there was a second bad idea from Europe which is still holding us back and that idea was unified Europe. A continent that produced Nokia, Volvo and SAP in the last 20 years has not produced any significant company. The Koreans, Japanese and Chinese didn’t adopt that idea—that the structure of the economy doesn’t matter—but we did. Today, size as a measure of the economy is irrelevant. We don’t have a conversation about the structure of our economy. In 2015, Microsoft in a humbled state made more profits than the top 20 IT services companies of the world put together. Cisco is going through a humbled state but made more profits in 2018 than the top five European telecom operators put together. The point is, the structure of the economy and where the value capture happens matters.
On the question of why we are where we are, I agree that a suspicious attitude towards market and trade that led to central planning is one of the reasons. In the 90s, the social and cultural belief with respect to the economy and the market and its participants changed. In a Hayekian sense—talking about knowledge and society and price being the mechanism that you can use to efficiently allocate resources—I don’t think we have internalized even now. That is the reason we still go back to the government for a lot of solutions; so not market, not society but the government as an agent for the solution to our problems is what has held us back.
So picking up from the perspective of society, if we think of the 1990s or even the 2000s, finding a government job was the measure of success for any individual. But today entrepreneurship and startups are the most celebrated professions, so there is a movement and a shift to the point when people aspire to start companies instead of being employees. There are venture capitalists and there is money available in India, and I think things are changing and directionally we are much better off.
Do goals matter? If they do, is $5 trillion the right goal?
One of my favourite quotes from the Bhagavad Gita is that what stands between us and our greatest goals are not obstacles but clearer paths for lesser goals. I have always thought jobs were a lesser goal than wages. I wanted to get all your thoughts on this: is $5 trillion the right goal and the right way to think about India’s future? Because goals matter.
Goals matter. And if you are to give yourself a target, I think it’s better to give yourself a higher target than a lower one. My sense, from the maths, is that it seems to be a high target given where we are, given all the challenges, and just assuming a steady state rate of growth, we are likely to hit $4 trillion more easily than five. The things that we do with that target are probably going to take us where we have to go, regardless of the number we eventually achieve.
People say you can have goal thinking or systems thinking. If you have systems thinking you will get to the results you want, or you can have goals without systems thinking. The danger that I see is that by picking an aggressive $5 trillion goal, we may perpetuate the attempt to grow a bad system. Agriculture is a living example of this. We have not been able to eke out value from agriculture. The activity of agriculture hasn’t shrunk, but the value to the economy has not grown. We haven’t applied systems thinking to agriculture. The same activity could have yielded a lot more value to our citizens, to our farmers, to our economy had we applied the right kind of framework. So my fear is I don’t see enough discussion taking place in terms of the type of economy we need. We could have a much more valuable country from a human development perspective, from wealth perspective, if we were at $4 trillion but with the right structures versus a $6 trillion economy teetering on the brink of collapse because we don’t have the right structures.
Also, remember what has happened in the last 10 years—you have had 300 million people getting out of poverty and there is a burgeoning lower-middle and middle-middle class. It’s an aspiring nation. And it is a very different demography now who really wants their place under the sun. For that aspiring Indian, this target is like a goalpost of entering an elite club of nations.
I think it’s a good target. Two reasons: first, India’s dependency ratio will peak by 2035 and at that point of time the challenge will become even tougher; and second, for the next five years, the politics are aligned, we have a strong central government and state governments that are mostly aligned to the centre. So it’s good to chase $5 trillion in the next five years. If not now, then when?
My concern is that there are ways to achieve this that may not actually benefit us from an overall perspective. You can see the economy growing at different rates: you have 300 million people that are growing at a particular rate, and you have one billion people that are pulled out of poverty but still growing at a much lower rate. Now in order to achieve $5 trillion, you could focus on the 300 million, but that would be at the detriment of 1 billion, who should at this point in time be given some attention, even at the cost of not hitting $5 trillion in five years.
Does raising productivity solve this problem?
I agree that there is a difference between absolute GDP and per capita GDP. But if we don’t get to $5 trillion then we won’t have $4,000 per capita income. Ultimately, the GDP is about the productivity of Indians. And if we make Indians productive, $4,000 per capita is not that productive compared to, say, the Americans. So I think the process of getting to $5 trillion is rooted in productivity; it is in better formalization, better urbanization, better financialization, more human capital. I don’t think the $5 trillion goal for the economy as a whole, which is a sum of domestic consumption, exports, agriculture and everything else, is a flawed goal. So now what do we have to do qualitatively achieve this goal?
I’d start from a very public finance angle because that’s what I work on. Currently, government resources are spread too thin doing a lot of things, and one thing that the government will have to do is spend in fewer areas but spend more in the areas it is focusing on. For example, we have started the rationalization of centrally sponsored schemes, so that needs to be taken to the next level. As countries get richer, they spend more but they spend in fewer areas. So we need the government getting out of the way in many areas and concentrating on fewer things and spending more on them, which will also lead to an improvement in human capital.
Let’s assume productivity matters. Now clearly, productivity improves either because of deepening of capital or as a function of innovation. Innovation is needed both from market participants and state participants along with the right innovation architecture. That requires being disciplined about picking the leverage points where small changes yield big results. The new system requires a combination of state action and market action. In my opinion, the model that allows that to happen is the jugalbandi between public infrastructure and private innovation.
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Is technology a pill for all ills?
So do you agree with Sharad (Sharma) that technology is one pill for all ills? Do you think it is time for innovation?
As a consumer business entrepreneur, there are a couple of things I grapple with. We employ almost 1,500 people in FreshMenu today, and FreshMenu is a trickle in the ocean in the food sector. Food is a largely unorganized sector and therefore building a company in food has its own challenges. Some of my learnings are, for example, with regard to education. Finding people with the right skills remains a challenge at different levels, which brings us to education. In the past 15 years, all we have done is built engineering colleges and created engineers. Skill-based education is important to move the economy in the right direction.
What we want really is a policy direction. Let me give you an example of regulation. So when you change the direction of the country from socialism to capitalism, then you have this new animal called a regulator. I think India now has 75 regulators in place. But do we have a regulatory thought?
How can we solve the legacy problem?
Democracies don’t reboot, they are not tabula rasas. There is an opening balance. How do we counter this?
You raise an important institutional point. If you are really talking about any kind of a structural change, it is a 10-year or 20-year process. A politician has a five-year horizon. Democracies that have done well are the ones that have created institutional structures that allow for longer range thinking and that the politicians pick up. As an example, on malaria, what Bill and Melinda Gates Foundation said. Everybody was wanting to solve malaria in five years and they said, ‘We don’t think it’s a five-year problem, it’s a 20-year problem’. Most of the benefits will accrue in the last five years of those 20 years. Could a politician do it? No. But you could create a think-tank that takes a 20-year view. The point is we didn’t create the institutional structures.
To put a constitutional perspective on this, essentially, we have three arms of the government for three different things. When it’s all working perfectly, they do their things and keep each other in check. We can’t say we should divorce the politicians from achieving the $5 trillion economy. Because that’s the poetry and we need a poet in this mix. We also need to have a plumber who is the one who will write the prose, which is the bureaucrat, and he should not be working on the same time horizon as the politician. So whatever the poetry is it needs to be articulated in a long-form treatise which runs for 20 years. Then you have the judiciary which is supposed to come in and see all of this is done as per basic principles. But to get to the point of what we need to do right now, and why we didn’t do it sooner, one of the reasons is we have built up so much friction in our system that it slows us down. The biggest source of friction today is in the lower bureaucracy and lower judiciary, lower law enforcement or the police, and these are not problems you can throw a technocratic solution at and expect it to go away in five years.
What do we need to make this transition?
We need an attitude shift. If you go to Switzerland, the tax guy will negotiate with you on the tax that you have to pay. They are not really looking to pick you up because you filed some wrong statement and then have you in court for a long time. Here every small tax matter goes all the way up to the Supreme Court. Now how is that effective? The attitude of the bureaucrat is that I must find which law he has broken. That’s not the approach. The approach has got to be he has come for business, and this law is coming in the way. How do we find a way for him to do his business which is not generally messing up the whole economy? The message has to come from the top, telling the guy at the bottom that it is okay to do this and I am not going to hold you accountable for that courageous thing you did because you have done this to shift in the right direction. Similarly, the lower judiciary has to find out what serves justice in the context of what they are doing. They need to have a broader view. The police have to stop being impediments.
Trade, a contributor for growth, is something we need to focus on, including both intra-national and international trade. Intra-national, with GST being more rationalized now, will aid growth. In international trade, it would help to lower tariff barriers even though the world might be changing to a more economic nationalism. For India, trade needs to go up to reach the target.
Specific ideas that will trigger this change
So civil service reform, you think is the challenge? (To Daga) What do you think are the challenges?
One challenge is for society to get more women into the workforce. Beti Bachao, Beti Padhao has at least hit the realization that women’s education is important but the next step is we have to encourage them to work. Tonnes of households say we earn enough we don’t want women to work. Raising women’s participation in the economy from 26% to say China’s 60% would be really helpful in propelling the economy.
In my view it’s credit. Money is what keeps the fires of business burning. You have working capital which is frozen right now. You have infrastructure funding which is frozen right now because of the way the system has gone after what it perceived as corruption. Nobody is lending and especially for the smaller entrepreneur. One way out is a vibrant bond market. For that, you will need regulators to allow a junk bond market to thrive.
Democratizing credit is probably one of the most important goals but it’s not clear to me that the Western bond market template is the right one for us. On the other hand, imagine a solution like invoice-financing at scale—keep in mind that out of the 8.8 million businesses that pay GST every month, it is estimated that only 1.2 million businesses have any kind of bank or NBFC finance—you could imagine a system five years from now when every invoice that’s generated in GST is getting financed. That solution will be unique to India. It will be parallel with Mexico, it will be parallel with Columbia, but, you know what, the Harvard professor will not be interested in promoting that solution. So as long as we are dependent on western elites to give us structural solutions to our problems, we will lag.
So no more RBI bank governor or chief economist with a US PhD? (laughs)
I don’t think so. I think the first test is, do you know what Tally is? If they don’t know what Tally is, don’t appoint them in any economic position. We have to move away from a generalist civil service and bring some level of performance management in the civil services. If you ask me if the IAS is holding us back from $5 trillion, I’d say significantly.
Is it a poetry problem or a prose problem?
Do you think there is an intellectual vacuum and do you sense that something has changed in the last five or 10 years (or whatever your time frame is)? If you ask me, we have too much intellectualism and not enough plumbing, execution, just putting one step in front of the other. I would perhaps say we have a courage vacuum—we have an inability to articulate or recognise that a 20-year plan is needed, but the nature of democracy is you articulate five-year plans at a time. But what are your thoughts on this? To use Rahul’s poetry and prose analogy, is it a poetry problem or a prose problem?
I think it’s both, it’s like philosophy and MBA—you need both. Unless you have the philosophy in place what you do with that MBA is going to be questionable.
It is perhaps harsh to say intellectual vacuum. But if we use a generalist-based civil service that actually doesn’t have any expertise, is not incentivised to build expertise in a particular area as it gets shipped from one ministry to another without picking up any skills, we are going to end up with path-dependent solutions because that’s the only thing they feel comfortable doing. And to that extent, we need to leverage pockets of intellectual expertise to find innovative solutions.
We need innovation and courage to follow new thinking over jugaad. I think our upbringing is all about jugaad and quick fixes, we need to let that go—and it has to work from the top.
You cannot make an orbit shift without a secure government, and for the first time we have a relatively secure government, so what we should do in the next five years is hold it accountable for how many orbit shifts has it made for the core problems that we have. Before we achieve it there will be a period of messiness, and only a stable government can take us through that period of messiness to the other side.
We don’t need a tabula rasa. Even within the current democratic system, it is possible to create reforms, for example, state governments having their trade representations abroad as well so that they can drive their growth on their own. That is just one idea that is possible even now, and some states can choose to do it, some cities can have collaborations with other cities for chasing growth. There are possibilities within the system, and we need to grab those opportunities.
I think this is a unique time. In 1956, P.C. Mahalonobis said by 1970 we won’t need taxes because the public sector would have grown so much. In 1965, Milton Friedman warned us that the problem with the Mahalanobis system is you will end up with capital being handicapped without labour and labour being handicapped without capital, and that was prescient. In 1972, Mohan Kumaramangalam told Indira Gandhi let’s nationalise Tata Steel. All three are representatives of a world of ideas that is now far behind us. The road to a $ 5 trillion dollar economy— will we get there only by a new orbit? Or are there emergent properties and ideas?
I think the next five years are going to be a very interesting time.