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Reply to Pankaj Misra

Submitted by admin on Mon, 04/11/2005 - 13:21

Pankaj Mishra is always entertaining. His elegant tirade against the “neo-oriental discourse” of the “business lounge class”, however, doesn't help very much to further one's understanding of the great puzzle of our times—why, in fact, are China and India rising economically, and so rapidly? The reasons are very different for the two countries, and I shall try to grapple with the case of India.
¼br /> Although the world has just discovered it, India's economic success is not new.After three post-independence decades of meagre progress, the country's economy grew at 6 percent a year from 1980 to 2002 and at 7.5 percent a year from 2002 to 2006—making it one of the world's best-performing economies for a quarter century. In the past two decades, the size of the middle class has quadrupled (to almost 250 million people), and 1 percent of the country's poor have crossed the poverty line every year. At the same time, population growth has slowed from the historic rate of 2.2 percent a year to 1.7
percent today—meaning that growth has brought large per capita income gains, from $1,178 to $3,051 (in terms of purchasing-power parity) since 1980.

To appreciate the magnitude of the change after 1980, recall that the West's industrial revolution took place at a rate of 3 percent GDP growth. If India were still growing at the pre-1980 level, then its per capita income would reach present U.S. levels only by 2250; but if it continues to grow at the post-1980 rate, as it most likely will, then it will reach it by 2066--a gain of 184 years. Thus, the first thing to be said about India's economic rise is that it is real. It is now the world's fourth-largest economy; soon it will surpass Japan to become the third-largest.

The second thing is that India's path is unique, and this is a bit scary because it is not following any of the proven success models. Rather than adopting the classic Asian strategy—exporting labour-intensive, low-priced manufactured goods to the West—India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. India's share of consumption in GDP is 64% compared to 44% for China. It has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. As a result, inequality has increased much less in India than in other developing nations. (Its Gini index--a measure of income inequality on a scale of zero to 100-- is 33, compared to 41 for the United States, 45 for China, and 59 for Brazil.) Moreover, 30 to 40 percent of GDP growth is due to rising productivity—a true sign of an economy's health and progress—rather than to increases in the amount of capital or labour.

The model is not without its problems. India's high growth has not been accompanied by a labour-intensive industrial revolution that could transform the lives of the tens of millions of Indians still trapped in rural poverty. Indians watch mesmerized as China seems to create an endless flow of low-end manufacturing jobs by exporting goods such as toys and clothes and as their better-educated compatriots succeed in exporting knowledge services to the rest of the world. Observing these two phenomena, many   wonder if India is going to skip the industrial revolution altogether, jumping straight from an agricultural economy to a service economy. Not surprisingly, the question frightens many. The rest of the world evolved from agriculture to industry to services. India appears to have a weak middle step. Services now account for more than half of India's GDP, 22 percent is from agriculture, and industry's share is only 27 percent (versus 46 percent in China). And within industry, it is high tech/high skill manufacturing that is India's particular strength. The failure to achieve a broad industrial transformation stems, in large part, from bad policies of the past. The situation in the past five years, however, has improved and industry is gaining, and if this continues, perhaps, after a decade, the distinction between China as the “world's workshop” and India as the world's “back office” will slowly fade as India's manufacturing and China's services catch up.    

What is most remarkable, however, is that India seems to be rising despite the state. The Indian state, to its credit, has gradually been stepping out of the way—not graciously, for no state gives up power politely, but by being kicked and dragged into implementing economic reforms. The pace of reform has thus been frustratingly slow.   But incredible as it seems, every succeeding government after 1991 has persisted in reforming. And even slow reforms add up.

Unlike China, the entrepreneur is clearly at the centre of India's success story, not the state. As a result, India is spawning highly competitive private companies, such as Reliance Industries, Jet Airways, Infosys, Wipro, Ranbaxy, Bharat Forge, Tata Motors, Bharti, and Tata Steel. Some of these are likely to become global brands soon. India had 23 billionaires on the latest Forbes list (versus 8 in China) who had a combined worth of $99 billion (higher even than Japan). Competitiveness runs deep and beyond these are another dozen companies on the verge of global competitiveness. More than hundred companies have a market cap of over a billion dollars. Foreigners have invested in over 1000 Indian companies via the stock market. In deference to India's human capital, 125 out of the 500 Fortune companies now have R and D bases in India. All this has disciplined the wilful banking sector, whose bad loans are now less than two per cent compared to China's twenty percent (and even though none of India's shoddy state owned banks has so far been privatized).

This is in marked contrast to China, whose success is largely based on exports either by state enterprises or by foreign companies. China's government continues to be suspicious of its entrepreneurs--only 10 percent of China's banking credit goes to the private sector, although it employs 40 percent, whereas India's entrepreneurs get more than 80 percent. While Jet Airways has quietly become the undisputed leader of India's skies, Okay, China's first private airline began to fly only in February last year.

Where Pankaj Mishra and I differ the most is in the role of the Indian state, whose greatest achievements lie in the non-economic sphere. It has held the world's most diverse country together in relative peace for 57 years. It has put a modern institutional framework in place. It has held free and fair elections without interruption. Of 3.5 million village legislators, 1.2 million are women. These are proud achievements for an often bungling state with terrible implementation skills and a dreadful record at day-to-day governance.

The Indian state's economic record is a disaster and this goes back to
Prime Minister Jawaharlal Nehru and his imperious daughter and successor, Indira Gandhi , who oversaw India's dark economic decades. Father and daughter shackled the energies of the Indian people under a mixed economy that combined the worst features of capitalism and socialism. Their model was inward-looking and import-substituting rather than outward-looking and export-promoting, denying India a share in the prosperity that a massive expansion in global trade brought to the post-World War II era. It set up an inefficient and monopolistic public sector, over-regulated private enterprise with the most stringent price and production controls in the world, and discouraged foreign investment--thereby losing out on the benefits of both foreign technology and foreign competition. It pampered organized labour to the point that productivity declined, and finally it ignored the education of India's young children.

But even this system could have delivered more had it been better implemented. It did not have to degenerate into a “license-permit-quota raj”, as C. Rajagopalachari first put it in the late 1950s. Although Indians blame ideology (and sometimes democracy) for their failings, the truth is that a mundane inability to implement policy may have been even more damaging.

Pankaj Mishra is factually wrong when he says that “India registered its most impressive gains from 1951 to 1980” and that it did as well “most countries”. Whereas India has been one of the fastest growing economies in the world from 1980 to 2005, its per capita income grew at only half the rate of the developing world between 1950 and 1980. Whereas one percent of the poor have been crossing the poverty line each year since 1980, poverty levels remained stagnant between 1950 and 1980. In fact, the greatest indictment of Nehru and Indira Gandhi's socialism is that in the end it did so little for the poor.

Fortunately, the old centralized bureaucratic Indian state is now in steady decline. Where it was desperately needed--in providing basic education, health and drinking water-- it has performed appallingly; hence, the benefits of the reforms have been slower in reaching the poorest. India's real success lies with its self reliant and resilient people. They are able to pull themselves up and survive, nay, even flourish, when the state fails to deliver. When teachers and doctors don't show up in government primary schools and health centres, they don't complain. They just open up cheap private schools and clinics in the slums, and get on with it. This makes for a tough and independent people. Indian entrepreneurs claim that they are hardier and better because they have had to fight, not only their competitors, but also state inspectors. This suggests to me that India's economic success might be more durable because it has been produced organically from below. It also means that in India society has triumphed over the state.

Pankaj Mishra will perceive, most likely, an ideological bias to this conclusion, but I trace the problems of the Indian state to institutional capacity. The Indian government's failure is much less ideological and much more managerial. There are democratic states where one out of four government school teachers and where two out of five government doctors are not absent without cause. Until the Indian government acquires this ability, I am happy to leave things to the vibrant and irrepressible society.