What India must do to
grow in double digits
The celebrated economist, who
is also the Indian prime minister’s
economic advisor, reveals what
the country must do to start
growing again
It is an honor… to celebrate the reforms that India undertook in the 1990s, especially the role of the cen- tral figure in those reforms, then finance minister and now prime minister, Dr Manmohan Singh.
By reducing controls and increasing competition and
entry, those reforms unleashed the latent and suppressed
energy of our people. India has achieved much in the two
and a quarter decades since then.
There is so much to celebrate, whether it is that we have
moved away from the Hindu rate of growth of 3.5 percent
or whether it is that so many millions of Indians have
moved out of debilitating poverty into a life of some comfort — and yes, despite all the furor over the Planning
Commission’s poverty line, we have brought down poverty
enormously.
Shops are full of goods that we could only dream of buying in 1990, many of them made in India. I can withdraw
money from my US bank account today from any ATM
nearby (by the way, not incurring the fees I would incur in
the US), while a migrant worker can send money using his
cell phone to his family’s bank account in his village.
We can buy air and train tickets online, which has eliminated long waits and some corruption in those areas.
Organizations like Shankar Netralaya are showing the
world how to offer medical care cheaply but effectively. The
consumer has never had more choice in India than today.
And even though we lament the deterioration in our old
institutions, superb new ones have
come up such as the National
Stock Exchange or the 24/7 TV
networks. The latter’s competition
for news does keep our administrators on their toes even though
some in the audience may feel the
networks often produce more
sound than light.
As Mr Chidambaram and Mr
Yashwant Sinha built on Dr
Manmohan Singh’s reforms in the
years after this book’s ( India’s
Economic Reforms and Development — Essays for
Manmohan Singh) first edition was published, we enjoyed
the strongest period of growth India has ever had.
Even our gloom today over the fall in growth to between
6 and 7 percent reflects how far we have come — 20 years
ago we would have been elated with such performance.
However, even as the world becomes more competitive,
India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our
macroeconomic health has deteriorated.
Alarm bells should sound when domestic industry no
longer wants to invest in India, even while eagerly investing
abroad.
Why the gloom?
A shopping mall in West Bengal. Following the reforms that India undertook in the 1990s, there has been much to celebrate, including
the choices of goods available in the country and the ability to buy them — which were only a dream in 1990
RUPAK DE CHOWDHURI/REUTERS
The problem, that I am sure is obvious… is that despite the
tremendous success of the first generation of reforms, some of
the key next-generation reforms have been stymied.
Typically, these are the reforms that reduce rents and
patronage, while increasing
competition — for example, the
bill on foreign entry into higher
education, attempts to auction
resources transparently, or
attempts to transform public
sector enterprises into more
autonomous corporations.
On the other hand, rent,
patronage, or entitlement
enhancing measures have sailed
through. Clearly, there are many
exceptions to this asymmetric
reform process — the Right to Information Act and the setting up of the Unique ID Authority being important game
changers of the right sort — but I am talking about a central
tendency.
For a while, growth papered over the paralysis in growth
enhancing reforms, while it made the expansion in subsidies and entitlements seem affordable.
With growth slowing, government tax revenues stagnant
as a fraction of GDP, and spending high, fiscal deficits
remain high.
At the same time, private consumption, especially in rural
areas, is growing strongly on the back of rising incomes,
strong credit growth, and continuing government transfers
and subsidies.
RAGHURAM
RAJAN
The result: The gap between our spending and our saving
is making us dependent on short term foreign inflows to a
dangerously high extent, at a time that the international
investor is increasingly skeptical about the India story.
The depreciating rupee is the first warning sign of an
unstable macro economy, rising long term interest rates
could be the second.
Dangerously volatile oil prices could lead to a blowout in
our fiscal and current account deficits, while at the same
time depressing exchange rates and elevating interest rates.
Given geo-political uncertainties, we cannot be complacent.
For a large vibrant economy like India’s, there is always
hope. We still have tools to tackle our problems. But we
must exercise those tools with vigor and a sense of urgency.
I know that sense of urgency is shared within the government, but urgency has to translate to persuasion and action.
We need a common minimum program across all sensible
political parties to ensure that we stabilize the economy and
foreign investor perceptions quickly.
If politics and narrow personal advantage trumps economics and national interest, as it has done for the last few
years, we will jeopardize the legacy of Dr Manmohan
Singh’s reforms that are so well documented in the book.
How have we come to this pass?
As an academic, I will offer a possible causal narrative,
without any claim that this is tested by evidence. It is, at
best, a working hypothesis, but as I will argue, offers a
plausible course of action.
