The current economic discussion focuses on managing the ongoing stresses on our external finances and an almost desperate search to revive economic growth
from its meager 5 percent annual rate. Neither of these is
going to be easy.
Today, let us lift our gaze beyond these short-run exigen-
cies and assess the prospects for reverting to a high (and
inclusive) growth trajectory in the medium term. The out-
look does not look too promising if one
examines the array of unattended con-
straints that are getting sharper by the
To keep it manageable, let me focus on
just four such constraints, which have
strong sociopolitical roots that render
them especially intractable.
Twenty years after a draft Cabinet note
was readied to loosen our exceptionally
restrictive labor laws (one of Indira
Gandhi’s most damaging, anti-poor economic legacies), no progress has been
achieved. The consequences continue to be
profoundly (and increasingly) negative.
Sixty-five years after Independence, over
90 percent of our 500-million strong labor
force ekes out its living in ‘informal sector’
occupations with scant job security and
Industrial employers have every reason
to avoid taking on new ‘regular’ employees
and to shy away from large-scale operations in labor-intensive sectors like textiles, garments, leather products, toys and
electronics, which were the hallmark of
hugely successful employment-intensive
industrialization in East Asia since 1970.
Little wonder that formal sector wage
employment has stagnated, total employ-
ment has grown little in the most recent
period (2004-05 to 2009-10) for which
reasonable data are available and the share of agriculture
in total employment has remained unusually high (around
50 percent) despite the sharp drop in the sector’s share in
GDP (to 15 percent). The much-touted ‘demographic divi-
dend’ of a youth bulge is being frittered away by our
benighted labor policies and could easily morph into a
massive, intractable problem of job scarcity, unemploy-
ment and underemployment.
The huge disincentives to employ workers in large and
medium-sized industrial units have also seriously stunted
the growth of our manufacturing sector, which has stagnated at 15 to 16 percent of GDP for many years, compared
to 30 percent plus in most East Asian nations including
China. Of course, other factors have also mattered but
probably less than our exceptionally restrictive labor laws.
With the stagnation of labor-intensive manufacturing,
where will the ‘youth bulge’ find low-skill employment?
In sum, our labor laws continue to grievously weaken the
most effective mechanism for assuring ‘inclusiveness’ in the
development process for our most abundant resource of
Broadly defined, the second major constraint on rapid,
broad-based growth is the penchant for fiscal populism,
fuelled by competitive, short-horizon politics at all levels of
government. This has at least two dimensions: a propensi-
ty for premature launching of ill-designed entitlement pro-
grams (for example, legal rights to work, education, food
and so on); and a widespread ‘subsidy culture.’
The first has been massively strengthened during the last
nine years of the United Progressive Alliance government,
without first undertaking the reforms necessary to make
these programs effective and efficient.
This means continuation of massive leakages (for example, estimated at 50 percent and higher in the public food
distribution system), rampant corruption and rent-seeking
and strong vested interests against reform (to, say, conditional cash transfers or voucher systems). Both types of fis-
Tightening constraints to
inclusive development in India
governance has been deteriorating over
There are at least two broad reasons for
First, over time, politics has become
more of a ‘business’ and less about public
service and ideological commitment. Huge
sums are raised and spent on campaigning
for office and ‘politicking’ between elections (mostly under the table), which have
then to be paid off by various subversions
of public policies and decisions. ‘Crony
capitalism’ has increased greatly, especially
in resource sectors, such as mining, land
allocation/use, telecom spectrum and large
Secondly, it is generally agreed that the
quality and probity of civil services have
worsened over time for many reasons,
including: the quality of entrants (for
decades, many of the best people have
opted for the growing opportunities outside government services); the ramping up
of caste-based reservations or quotas since
1990, which has severely diluted the meritocracy principle; the increasing ‘
politi-cization’ of public administration at all levels and the growing spread of bribery and
corruption in government-citizen transactions. Taken together, the entropy in governance is likely to hurt future development.
The challenge of urbanization
Normally, development experience worldwide suggests
that urbanization is associated with higher productivity
and growth. However, in India, this association may be
diluted by the well-known weakness of governance institutions in our cities and towns. Can anyone recall the name of
a prominent mayor? Until the early 1990s the Indian
Constitution did not recognize sub-national governments
below the level of state governments. The ‘third tier’ was
missing. The passage of the 73rd and 74th Amendments in
1993 corrected this lacuna and accorded a role to panchay-ati raj rural elected institutions and urban local bodies.
Although this was a major step forward, municipalities and
other ULCs remain largely fledgling institutions with limited powers for mobilizing and allocating resources.
Against this background, the expected increase in India’s
urban population by over 200 million between 2010 and
2030 poses a daunting challenge for urban governance.
While there are some signs of hope, the general outlook is
far from reassuring. Without a much more serious effort at
urban institution building by the central and state governments, the realistic prospect is for rapid expansion of ill-governed and under-financed urban habitations, which
impede the reaping of the economies of agglomeration
associated with well-functioning cities and towns. Such
inchoate urbanization may prove less an asset and more a
drag on rapid, inclusive development in the long term.
So, all things considered, the return to high growth with
inclusion poses arduous challenges in the years ahead.
MANSI THAPLIYAL/REU TERS
Women stand in a queue to get themselves enrolled for the Unique Identification database system in
Rajasthan. According to the author, rapid and inclusive growth in India in the medium term does not look too
likely if one examines the array of unattended constraints, including the a propensity for premature launching
of ill-designed entitlement programs and a widespread ‘subsidy culture.’
cal populism spawn high fiscal deficits with their attendant
growth-retarding dangers of high inflation, large external
imbalances and high interest rates and debt.
The second, ‘the subsidy culture,’ has a longer history and
continues to undermine the economic viability of key sectors. Electricity subsidies (especially for agriculture) have
contributed majorly to the parlous situation of our electric
power sector. They have also led to over-pumping and
falling water tables in much of North and West India,
amplifying the looming crisis in water availability. Food
grain subsidies have distorted the agricultural economy
and retarded the development of non-food crops. The
growing subsidy on urea fertilizer has seriously weakened
soil fertility. The massive diesel subsidy (now declining) has
weakened energy security and hurt the environment. The
explosive growth of mobile telephony in the last 15 years
has demonstrated that subsidies are unnecessary for high
growth and inclusive reach of a sector. But old habits die
Weaknesses in governance and administration
Governance and administration are huge subjects. They
clearly affect all dimensions of economic and social life,
especially for poorer segments of society. They determine
the quality of personal safety, justice, property rights, contract enforcement and the delivery of publicly provided
goods and services. Worryingly, there are clear signs that
Shankar Acharya is honorary professor at Indian Council
for Research on International Economic Relations and
former chief economic adviser to the government of India.
This article was written during a short residency at the
Rockefeller Foundation Bellagio Centre.
The author thanks the Foundation for its generous
hospitality. Views are personal.