Financial Express, December 6, 2012

Is India’s growth story dead?

 It wasn’t too long ago that we were beginning to discuss 10% growth for India as a realistic aspiration. Some observers even began to question the focus on growth alone (at the expense of other dimensions of development). Recent events have taken care of that worry, though not in a way that might have been desired. India’s growth has slowed sharply. Even the latest, more optimistic forecasts of global investment banks talk of recovery to growth rates in the 6-7% range. That is not bad, but not the stuff of miracles, and not rates that will make a rapid dent in poverty. 

 

In August 2012, Dani Rodrik of Harvard wrote a piece titled “No More Growth Miracles”, arguing that technical progress in manufacturing is becoming more skill- and capital-intensive, and that there is less room to export for new entrants. Hence, growing through labour-intensive manufactured exports, the recipe for the growth miracles of the last six decades, is going to be more difficult than in the past. Compounding this problem for countries such as India is the slowdown in advanced economies, as they age and as they deal with accumulated debt.

According to Rodrik’s analysis, India may have missed the boat. Or, to use another metaphor, we finally decided to join the party as it was winding down. India may chug along at 6-7% growth (not difficult with current saving and investment rates), but the kind of fundamental transformation that double-digit growth can achieve is beyond our reach. Note that the Rodrik story does not discount the importance of domestic policy choices; it just limits what difference they can make in the aggregate. 

One response to this scenario might be to say that India can still make the best of the hand it has been dealt. Along with 7% growth, improvements in income distribution, institutional quality, and the well-being of the poor in non-income-based measures such as basic health, nutrition and education may be the optimal path to follow. This has something to commend it: investing in people may actually make growth more sustainable. Unfortunately, slower growth could also make progress in all these other dimensions harder rather than easier. A focus on redistribution, in particular, can come at the cost of growth, so that the growth rate may fall even further. 

Let us instead argue that growth need not come at the cost of human development, and vice versa. Also let us argue that policy should be designed to pursue these aims simultaneously, and in a way that minimises any trade-offs, for example, focusing on improving the long run opportunities for the poor through health and education, rather than on short run subsidies, whether through in-kind or cash transfers. 

Next, let us ask, how can India create its own growth miracle, despite the tougher global context described by Rodrik? The key to this may be to unbundle India. Much attention is now paid to the role of India’s states, how state-level policies make a difference to growth and human development, and how different states’ performances reflect differences in the quality of governance and policy-making. Think of India as the world and the states as nations. Rodrik’s constraints may have less force in this mini-world: states can grow by getting to the technology frontier, by trading with each other, and so on. For this to work, the Centre has to give them the right environment and resources, taking care of national-level public goods, such as a well-functioning financial system, and giving them more resources, particularly by working out a deal on the Goods and Services Tax that is favourable to the states. And there is plenty of room to deal with equity across the states through a more streamlined, focused intergovernmental transfer system. 

India has been marked by growth that has done less than average (compared to other countries) in bringing down poverty. If one thinks about the reasons for this, whether one focuses on sectors such as agriculture, or human capital deficiencies captured in the lack of health and education, the source of the problems can be found at the state level. And if the states have not performed, much of the problem can be traced to the incentive structures induced by the Centre. This situation can be changed, with the right kind of intellectual framework. 

The project of national integration that began with independence has been quite successful. Indians mostly see themselves more as Indians than before. The media, migration and urbanisation will only reinforce this development. Keeping India together is no longer a worry. The time is really ripe for the Centre to let the states do what they should be best at doing, providing health, education and policies to support local development, and to give them the resources for such tasks. This will increase growth, make it more inclusive, and keep India’s growth story alive.