Putting wind beneath the economy’s sails

Unfinished business. The base of India’s social and demographic pyramid is economically weak. At Independence, India’s policy makers took the Nehruvian high road to build the commanding heights of the economy. They built foundations for a modern industrial economy: large factories for basic inputs for manufacturing and agriculture, namely steel and fertilizers, as well as scientific institutions. World class institutions were established for technology education (IITs), and fundamental research (the atomic energy establishment, the Tata Institute of Fundamental Research, and foundations for space research). These industries and institutions were built by the public sector because they require large capital investments and produce little or no profit. The Gandhian road—to build village economies and local institutions of governance—was given lip service. For all practical purposes, it was consigned to the dustbin of history as an old man’s romantic ideas.

A large economy without a strong base of producers and consumers in its villages and small towns cannot be sustainable, economically or politically. Investors in capital intensive factories need customers to buy their produce. Investors can be tempted with incentives and subsidies, and by making it easier for them to do business. However, if consumption does not grow, investments will slacken. Economic growth will run out of fuel until the masses’ ease of earning and ease of living increase.

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Globalization will be disrupted by international conflicts for many years. The energy of India’s 1.4 billion citizens, with the largest number of working age persons, is the biggest pool of insufficiently tapped human energy in the world. It can be a substantial source of energy for India’s economic growth. Policy makers must concentrate on creating employment for the masses, who work on farms and small enterprises, and not more wealth for the classes employed in financial ventures and high-tech industries.

Interrupted business. India’s capital goods, power equipment, and automotive sectors were as advanced as the Chinese in 1990, perhaps more. By 2010, the Chinese capital goods sector was 50 times larger than India’s, and China was a global supplier of electronic equipment. In 1991, a new wind propelled India’s economy faster, but it blew the economy off course. “Make in India" was confined to history as “protectionism" and “industrial policy" became taboo. Imports became easier, which was a boon for Indian consumers who could buy international products from China, Korea, and other countries. Employment and incomes for workers increased there. Incomes precede consumption; and good employment produces good incomes. Indian citizens must have good jobs to put a strong wind behind the Indian economy’s sails.

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Indians can make a lot more for themselves. The country's leaders must nurture the strengths of domestic industries. Foreign producers are welcome to participate in the country’s growth, by investing and producing in India, provided they are willing to help their Indian partners and domestic suppliers to learn new technologies. Several foreign companies had done this before 1991, in commercial vehicles, auto parts, power equipment and other capital goods. The government must also promote high employment industries more vigorously that produce consumer goods such as fabrics, garments, processed food, electronics, etc., and persuade them to provide better jobs. And the government must expand the social safety net.

The ideology of business. India’s GDP is rising in international rankings. Yet the country continues to rate very low in HDI (human development indicators). The purpose of economic growth is to improve the lives of citizens; and human development is necessary for sustainable economic growth.

A new economics swept the world in the 1990s. According to it, governments are not the solution, they are the problem; and public is bad, private is good. India’s education and health sectors have been handed over to the private sector. The government must reverse the excessive privatization of the country’s public services and strengthen its own capabilities to deliver. This will build the economy’s base more sustainably than welfare schemes and digitized transfers of benefits (which help to win elections) can.

Arun Maira is former chairman of BCG India and member at Planning Commission

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