S12 PRAVASI BHARATIYA DIVAS 2014/NEWS India Abroad January 2014
Macroeconomic difficulties originate in the unsustainability of the redis- tribution agenda — reflected in
high fiscal deficits, which have led to high
inflation and widening current account
The Indian growth model, emphasizing
skill-intensive services at the expense of
unskilled labor-intensive manufacturing,
may be running out of steam because the
skilled are scarce and the unskilled are
underemployed in low-productivity occupations.
Against this backdrop, the Bhagwati-Sen
debate rages within India. Redistribution or
growth seems to be the critical question.
The protagonists and their acolytes focus on the differences in objectives. The mediators argue that the differences are less stark and pertain more to emphasis and
But to us, both sides miss the crucial importance of state
capacity even in attaining their own objectives. Consider
To the inclusionistas, we would ask at least three sets of
First, how can an already enfeebled, leaking and corrupt
state take on additional burdens to fulfill the legitimate
objectives that they embrace? More food can hardly be
distributed effectively when the existing public distribution system does not work where it is most needed. The
right to education cannot be honored if teachers do not
show up in schools and the non-shows never pay the consequences.
Second, how can we create an entitlement state without
this state acquiring legitimacy from providing public
goods such as literacy, public health, law and order and
physical connectivity? As Indira Rajaraman has insightfully pointed out, the ‘entitlement state in Europe came
well after governments had delivered on their core role as
providers of public goods.’ A welfare state superstructure
built without that foundation will be inherently unstable.
Third, isn’t a corrupt and arbitrary state even more of a
problem for the weak and downtrodden? The well-off can
buy their way out — gated communities, private schools,
private security guards and payoffs. But the poor cannot.
The harassment and humiliations of the powerless by
the very people charged with their well-being will only
change when state functionaries are held much more
accountable — something that has not been a priority for
For the growthistas, the way forward is reforms —
which would deliver growth, which would, in turn, finance
redistribution. For the growthistas, reforms have a strong
deregulatory emphasis, namely to reduce the overweening
role of the state: Reform labor and bankruptcy laws, liberalize trade and foreign direct investment, privatize the
public sector, and so on.
Necessary as some of these reforms may be, this camp
inadequately appreciates and emphasizes the positive
things that the state needs to do to facilitate growth by
reinvigorating private investment, especially in manufac-
First, just how will business overcome the decrepit and
arbitrary machinery of law and order, which raises transaction costs of doing business and heightens uncertainty?
Business requires a well-functioning legal system if contracts are to be enforced and an effective police force to
eliminate fear and extortion. That both are in a shambles
is hardly a blinding insight, as is their debilitating consequences for growth. Changing laws is relatively easy;
enforcing them is much harder and requires augmenting
police and judicial capacity.
In the case of the judicial system, it is not just a matter
of more judges to handle the volume of litigation; it is
important to focus on better training and recruitment,
and reforming the procedures for accepting and allocating
Second, of course, India needs to cut the host of rent-extracting regulations. But the modern state is — and will
be — a regulatory state. Health, finance, power, the environment, among many other sectors, will require the formulation and implementation of regulations.
The debilitating forms of crony capitalism that have
emerged in India are unsurprisingly in the most heavily
regulated sectors, especially infrastructure and resource
extraction. But that is a clarion call for carefully rethinking the design of regulatory institutions rather than eliminating regulation per se.
Third, a revival of manufacturing will involve more than
just rolling back misguided policies. It will require building decent infrastructure and harnessing agglomeration
Implementing public-private partnerships in infrastructure will need not just honest but technically skilled
bureaucrats to design and assess bids and to navigate the
difficult terrain of contracting and increasingly re-con-tracting.
The creation of two dedicated freight corridors; of
national investment and manufacturing zones; and of
greenfield industrial townships alongside offers rich
opportunities to create agglomeration-leveraging manufacturing.
But this requires coordination among many states and
different state agencies, and across sec-
tors and foreign partners as well as
undertaking major investments in
physical and human capital.
The Indian state has been variously
characterized as a ‘soft’ state; a license-
raj state; a jugaad state; a ‘flailing state.’
Each new poverty program seeks to
bypass the wreckage of previous pro-
grams with seemingly smarter design.
But in each case the results are similar:
The state may not be enabling, but it
can be severely disabling.
India’s three decades of rapid growth
in information technology services may
well be a consequence of that sector
never having been regulated because it
was not known to exist. But that model
has run out of steam and India is
reaching the limits of the bypass state
A weak state has effectively gifted
labor-intensive manufacturing to
India’s biggest strategic competitor —
It is extraordinary that, after more than two decades of
reform, how little effort has gone into addressing India’s
Achilles heel: the quality of its government structures.
Consider the looming challenges and their scale.
India’s democratic success and the demographic bulge
mean that tens of millions of young people will be joining
India’s workforce with aspirations that their parents
couldn’t even dream about.
In addition, rapid economic growth is imposing severe
resource constraints, be it land, energy or water — constraints that will bite even more if the pessimistic predictions of the effects of climate change on India come to
pass. With social authority structures — whether family or
religion — weakening, the need for parallel authority
structures based on legitimacy and trust in state organs
will only be greater.
In rebuilding its public institutions, India has to address
a whole range of difficult questions, from the systems
selecting the human capital of government agencies, their
organizational underpinnings and the institutional and
political context in which they operate.
This will require, to take a few examples, thinking of
how to get better expertise in government agencies;
strengthening the office of the block development officer;
and insulating the police and bureaucracy from the vice-like grip of politicians.
It is well worth remembering that the difference in the
economic performance between China and India is not
the extent to which each has turned to markets, because
Rather, the Chinese Communist Party-state, as an economic institution, is more responsive, more meritocratic,
and more skilled in human capital than the Indian state.
Rebuilding the Indian state on firmer foundations may
well determine not just what future India will have, but
whether it has a future.
Devesh Kapur is director, Centre for the Advanced Study
of India at the University of Pennsylvania.
Arvind Subramanian is senior fellow at the Peterson
Institute for International Economics and Centre for
By arrangement with Business Standard
India’s economic travails
arise from a combination
difficulties and a
deceleration in the trend
rate of economic growth,
say Devesh Kapur and
The flaws in India’s growth model
A weak state has effectively gifted labor-intensive manufacturing to India’s biggest strategic competitor —
ANINDI TO MUKHERJEE /REU TERS