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Business News/ Opinion / Columns/  Opinion | Top-heavy governance might be well past its expiry date already

Opinion | Top-heavy governance might be well past its expiry date already

We should devolve power downwards for ground-up responses to complex new economic challenges

Photo: MintPremium
Photo: Mint

We are entering uncharted territory in the third decade of the 21st century. So many ground realities have changed over the last three decades that one doubts the ability of even competent governments to be able to cope with the challenges. As far as India is concerned, despite the well-meaning intentions of old trade and free-market theorists, there is no certainty that their advice will work. The reason: when advice is taken too late, it may not work at all.

Take a simple example. We hope to become one of the replacements for China as global supply chains look to diversify their sources. But when we ask ourselves a different question, whether the world today is going to accept a new export-based economy—a key factor in past Asian growth miracles—one has to hesitate. China was the last country to lift itself out of poverty by becoming the factory to the world, and one doubts the world is going to allow another China to arise, even assuming India gets all its policies right. The time for export-led growth may be gone. At best, we can look for specific sectors where Indian manufacturers can take on the world.

Another example. It is routine for economists and experts to suggest market reforms as a panacea. But what would have had a significant impact in 1991, when we had a great opportunity, is unlikely to give us the same boost—growth with lots of new jobs —today. The reason: businesses have found other ways to deal with inflexible labour laws. Most corporate chiefs no longer see labour laws as their main source of worry; court delays, excess regulation at multiple levels (central, state and local bodies) and expensive logistics may now be the top of that list. In just three decades, technology seems to have replaced all other factors of production as the main driver of growth.

Global investment strategist Ruchir Sharma predicts that today’s world is unlikely to produce any miracle economies that can sustain high growth for long periods of time. He lists four Ds for his gloomy prediction: depopulation, declining productivity, high debt, and deglobalization. I am not so sure about declining productivity, for all the new technology now being deployed is bound to raise productivity sky-high at some point, even though this is not showing up in statistics. This may be because in the initial stages of technology induction, companies do not reconfigure their work systems to take maximum advantage of new technologies by cutting jobs. Covid-19 is providing just such an opportunity, and the chances are that many low- to mid-skill jobs that are shed now will never come back. The related productivity gains might also begin to show up in official statistics.

Demand may grow more slowly in the post-covid world, with back-to-basics attitudes and climate change shaping consumption patterns. As the threat of global warming forces the world to “reduce, recycle and reuse", it is not going to be easy to ask people to consume much more, except by way of services. Demand in most parts of the developed world can’t grow too fast, as they are ageing (Japan, northern Europe), and demand in the developing world will grow far slower as population growth falls below replacement levels.

Demand structures are also changing, with ownership imperatives being replaced by pay-by-use ideas (rental homes, shared mobility) in order to flog already-created assets. Companies will be less eager to borrow to finance expansion, and credit growth will remain tepid. We have seen this happen over the last few years and still wonder why growth is not picking up. Post-covid, the bias towards equity is likely to be more pronounced. Example: India’s biggest single non-bank debtor—Reliance Industries—has, in just three months, become a zero net-debt company. This means banks too have to shrink their traditional volume businesses and focus on small firms. As a result, they too will depend more on equity than debt to grow.

Geopolitically, with China turning out to be the 21st century’s big threat to global peace and stability, and with war unthinkable as an alternative to settle this unsettling development, we have entered a new cold war. America, the other pole of this war, will take years to regain its leadership after the waywardness of its Donald Trump years. This means all of China’s neighbours, especially India, will have to divert resources to defence and internal security. As growth predictions go, the best one can say is that it will be highest in security-related industries, and possibly in healthcare and education as well.

To conclude, it is impossible to conceive of a situation where New Delhi has all the answers in an economically complex world. Power must be devolved lower and lower down all levels of government, so that people are empowered to do their own experiments with what works, and develop the resilience needed to respond to new opportunities and threats. In the post-covid, post-China world, states must shrink, not grow. This is the opposite of what our new Keynesians are telling us.

Solutions will emerge from below, not above. One does not have to be a libertarian to realise that top-heavy states are past their sell-by date in a more complex world with so many simultaneously moving parts.

R. Jagannathan is editorial director, ‘Swarajya’ magazine

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Updated: 04 Aug 2020, 08:32 PM IST
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