How Can Indians Be Happier?

From Financial Express, September 30, 2013

How can Indians be happier? 

 The most obvious aspect of the Bhagwati-Sen debate on Indian economic policy is the question of trade-offs between growth and redistribution. A subtler and deeper issue, central to Amartya Sen’s work, is that of goals. Gross domestic product (GDP, or its cousin, GNI—gross national income) per capita provides a single number, capturing purchasing power, and therefore a sense of the standard of living that people can afford. But this misses many complications, having to do with the imperfections and gaps in the ability of markets to value what we really care about.

The UN Human Development Index (HDI) creates a different numerical measure of well-being, including GDP, but also other dimensions of our lives, such as how healthy and how educated we are. But it is still somewhat arbitrary in its weightings of different outcomes, and it still misses some things that matter to us for our well-being. Can we do better in tracking average well-being?

The World Happiness Report (WHR) is precisely designed to get a better understanding of how well off people are in different countries, and what contributes to their sense of well-being. The data comes from asking people carefully calibrated questions about how they evaluate their own life circumstances, with answers chosen on a numerical scale. “Happiness” may be a fuzzy concept, difficult to pin down, but, on average, people can give an accurate sense of how they view their lives. Different surveys can distinguish between temporary and transitory feelings and emotions on the one hand, and an overall, longer-run evaluation of life conditions.

The latest WHR is the second annual effort in what may be a major step forward in understanding systematically what contributes to our overall well-being. In turn, it may help policymakers do better in setting their priorities and choosing policies. To make this concrete, look at where India stands. First, the facts. In the 2013 WHR, India ranks 111th out of 156 countries surveyed. For comparison, the US is 17th, China is 93rd, Bangladesh is 108th and Pakistan is (a surprising) 81st. The IMF GDP per capita rankings out of 187 countries, on the other hand, are: US (6), China (93), India (133), Pakistan (141) and Bangladesh (154). And the HDI rankings, also for 187 countries, are: US (3), China (101), India (136), Bangladesh (146), Pakistan (146).

Note that, unlike the HDI, the happiness ranking does not directly include GDP/GNI per capita—it is based on asking people directly how well off they feel. Hence, by comparing the happiness ranking with GDP per capita, one can get a better sense of the importance of material conditions. For the world as a whole, and for most regions and countries, GDP per capita is the most important variable in explaining happiness (there is a larger, unexplained residual). But “social support” is a very close second. Social support is measured by yes-no responses to the question, “If you were in trouble, do you have relatives or friends you can count on to help you whenever you need them, or not?” The remaining four important, identifiable variables that seem to explain happiness are, in order: healthy life expectancy, freedom to make life choices, generosity, and perceptions of corruption.

The initial take on the data does not provide anything new or surprising for India: material conditions (GDP per capita) matter, as does health. This is in concordance with our familiar indicators of progress. But there is one interesting nugget: India was significantly less happy in 2010-12 compared to 2005-07, despite being richer. What happened? The measure of perceived social support fell dramatically between the two periods. And this happened in a situation where the perception of social support in South Asia is far lower than in any other region of the world.

The data need further investigation and understanding before policy implications can be drawn from them. But the happiness index and its explanatory variables provide some beginning for possible policy innovations. If India’s lack of social support is a consequence of social fragmentation, low trust or erosion of extended family support structures, will government transfer programmes address it, or are deeper changes needed? Indeed, is government action the place to look for possible improvements in societal structures that will increase perceived well-being? The WHR finds that trust in national government is not correlated with happiness (subjective life evaluations), but that government effectiveness, reflecting aspects of honesty and effective delivery of public services, is strongly correlated with life evaluations.

Perhaps the preliminary lesson of the WHR for India’s policymakers is therefore the following one. Before trying to fix problems that have deeper social causes, stay focused on the basics, these being material well-being as measured by average income and by healthy lives; and before doing anything else, figure out how to make the government itself more honest and effective in whatever it needs to do most.

Financial Express, August 19, 2013

Can India grow faster again?

India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest that India can grow at 8% a year, even in the current economic climate. 

 

India’s growth has slowed dramatically from the global boom years. What can it do to recover? Was the period before the financial crisis just a temporary, lucky window for India, now gone forever? The rich world is saddled with debt. An emerging market slowdown, partly a result of the industrialised countries’ own slowdown, and partly due to internal structural issues in China and elsewhere, is the latest shadow looming over India’s growth prospects. Is the gloom escapable?

There are possibilities for hope. Much as I dislike the idea of Indian exceptionalism, in this case it may be warranted to some extent. Most importantly, India is by far the poorest of the BRIC group, and probably one of the poorest of the more amorphous “emerging market” designation. That means it has more room to grow. It is quite far from having to worry about any so-called “middle-income trap,” that might be an issue for China and Brazil. Secondly, India’s demographics give it an opportunity that does not have to be sabotaged by a global slowdown. Thirdly, India’s slowdown is partly a result of its own policy missteps, and not just global conditions. These factors suggest to me that India can grow at 8% a year, even in the current economic climate. How can this be achieved?

The need to create productive employment at a very large scale is obvious. This is more complicated than just giving away money for rural make-work programmes—that is just a transfer scheme for redistribution-cum-income insurance. India needs to create more new businesses and allow existing ones to expand more easily, and in employment-friendly ways. Clearly, labour market reform is needed, and it is not as difficult as it is made out to be. The core problem is political acceptability, and a grandfathering scheme, where existing employees are protected, but new ones in new firms, or certain classes of old ones, are allowed to be employed under more flexible conditions.

Next, the focus of new business creation should be in second and third tier cities and towns. These are best placed to absorb rural labour most efficiently and flexibly. To make this work, strengthening urban infrastructure at this level is critical—this means empowering urban local governments, increasing their capacity and incentives to raise revenues and build and manage new infrastructure. It also needs continued development of rural roads.

Another way in which India is somewhat different is in its geography. This geography actually makes it easier to develop internal supply chain networks, again provided that the internal infrastructure is in place. Currently, a wholesale review of India’s transportation sector is under way—hopefully its recommendations will be the basis for reform, not just in physical infrastructure for internal movement of goods, but also in the institutional infrastructure of regulation and taxation that often inhibits the development of internal production networks.
India also needs to think about patterns of production. Japan certainly grew by becoming an exporting powerhouse after World War 2, but it also produced for its domestic market. Durable goods industries making appliances and cars for domestic consumers were crucial to Japan’s inclusive growth. India is poorer, bigger and more heterogeneous than Japan. On the other hand, technology has made it easier to set up new industries (smaller-scale factories, for example), to manage production, and even to innovate inside a technology frontier that has itself been pushed out at an incredible rate. The key to inclusive growth is domestic production of consumer goods that are affordable to large numbers of Indian consumers—not just watches and bicycles, but mobile phones, kitchen appliances, energy generating devices and more.

This last point suggests that the idea of Track 1 and Track 2 reforms, so clearly articulated recently by economists Jagdish Bhagwati and Arvind Panagariya, may be dominated by a reform agenda that integrates the need for growth with inclusion, and goes beyond mere redistribution or trickle down.

To support the growth path outlined above, there are three crucial areas where the national government needs to focus, beyond basic health and literacy. First is a large-scale, effective set of vocational training programs: there has been much talk on this front and little achievement. The private sector probably needs to be incentivised to make something happen quickly. Second, the government needs to fix the mess in electric power generation—this is well-documented as a prime constraint on growth. My earlier calculation suggested over a percentage point of growth is lost each year.

Third, and most difficult, the national government needs to overcome its own corruption and inefficiency by devolving responsibility and authority to the states, and from there down to cities. Old fears of national disintegration are no longer valid. Political power at the centre can be just as well sustained through sustained economic betterment, as opposed to short term handouts. Political parties at the national level need to understand that this is possible. A future Indian spring can be a true blossoming, or it can be like the Arab one so far.

Financial Express, April 11, 2013

Rebuilding Punjab

 The state of Punjab in India represents an important case study of development gone awry. Partition in 1947, which wreaked havoc on the region, was followed by surprisingly rapid recovery and progress. An infrastructure of roads and market towns was created in the 1950s, followed by the Green Revolution of the 1960s, which saw Punjab become the breadbasket of India. Punjab became the richest state in India, measured by per capita income.

More recently, Punjab’s growth has lagged the rest of India, and it has slipped down the league table of states. This is not worrisome in itself, since the state’s growth has not stopped, and it remains one of India’s better-off states. The bigger worry is looming ecological disaster that will harm Punjab irretrievably, and with it, the whole nation of India.

Last month, Inderjit N Kaur and I organised a conference on rebuilding Punjab at UC Santa Cruz. Participants such as Rajinder Sidhu of Punjab Agricultural University emphasised the criticality of the groundwater situation in Punjab, with rapidly falling water tables, and the distortionary policies, such as free power for farmers, that have accelerated the problem. Upmanu Lall of Columbia University noted that drinking water pollution has also become alarming, so a health disaster will accompany the desertification that comes with groundwater depletion. Lakhwinder Singh of Punjabi University discussed a range of issues, including poor governance, falling investment, monopolistic middlemen, poor educational outcomes, and lack of adequate modern infrastructure, with many of these points coming out in presentations by Dr Sidhu as well.

Pritam Singh of Oxford-Brookes University and Jugdep Chima of Hiram College brought out the complexities of interactions among economics, politics and society, and there was often agreement that state-level politicians have been failing on the job. Poor revenue effort, high fiscal deficits and corruption have been taking their toll on the economy. There were mixed views on the legacy of the militancy and repression of the 1980s and 1990s, which still looms large in many lives. In a separate analysis, Swaminathan Aiyar has dismissed this history as an excuse or explanation for the current crisis of Punjab, preferring to focus on the more recent failings of state governance, but perhaps the two are connected. At the conference, Pritam Singh argued that the lack of an effective opposition party in Punjab has hampered the workings of normal politics as a mechanism for responding to constituent needs and wants.

It is certainly plausible to argue that the political economy of the Green Revolution model has trapped Punjab in an unsustainable and undesirable equilibrium of depleting its natural resources and neglecting its human resources, to keep growing grain for the country’s public distribution system. The seeds of the Punjab crisis, which included issues of water needs amplified by adoption of new varieties and cropping patterns of wheat and rice, perhaps were sown along with the technological innovations of the 1960s.

Swaminathan Aiyar, in his work that emphasises economic freedom and a reform agenda firmly rooted in allowing more room for markets to flourish, pushes for fiscal consolidation and a better environment for doing business. On the other hand, some of the perspectives at the conference emphasised the role of the government in providing the infrastructure and complementary inputs for private sector success. Aiyar notes the distortions of markets in the current Punjab economic system, but perhaps not enough the crisis of drug use and similar problems of societal values. One only has to look at the US to see that economic growth does not automatically translate into a society with greater general well-being.

One of the goals of the conference was to examine the larger, more global, cultural, societal and historical factors that feed into the current state of Punjab’s economy and polity. Pashaura Singh of UC Riverside, Gurinder Mann of UC Santa Barbara, Harpreet Singh of Harvard, Van Dusenbery of Hamline, Supreet Kaur of Columbia, and Inderjit Kaur of UC Santa Cruz discussed various aspects of these factors, and the role of the Sikh diaspora, in particular received some attention. How one creates a social vision, aligns the interests of the leaders and the led, and creates space and momentum for change were all questions that were raised, if not fully answered.

Answers are urgently needed, though. The sense of the conference discussions was that there is no more scope for muddling through—Punjab has to go up or else it will go way down. This is a small state in India, one that often gets lost in the shuffle of national policymaking, but the repercussions of a collapse of Punjab’s economy will have huge implications for India. Already, it is clear that the national food policy is inefficient and even destructive. It should be clear that changing that policy will benefit energy and water security as well. The national government should be making the Punjab economy a national priority.

Financial Express, March 8, 2013

Betting on India

 At my university, I help run a new initiative that focuses on finance, and we just hosted a visiting speaker, a prominent statistician known for some innovative algorithms for analysing data. He is also apparently a lifelong—and successful—bettor on horse racing.

He was asking me about India’s economic prospects and, in formulating my answer, it struck me that the metaphor from his passion is apt: it is time to bet on India.

Why do I now think so? For the past few months, I have been gloomy about India’s policy paralysis and missteps. Indeed, many of the core problems are still there. But there is evidence that India has turned the corner. The place to begin is with the Economic Survey of India. (By the way, our visitor to UC Santa Cruz has been a long time colleague of India’s present Chief Economic Advisor). The first two chapters of the Survey lay out India’s current situation and long term growth prospects with unprecedented clarity. The quality of the overall analysis itself is cause for optimism. If this analysis truly begins to guide policy, India will be getting on the right track.

The Economic Survey predicts growth of 6.1-6.7% in the coming fiscal year. This is conditional on a decent monsoon, moderating inflation and reasonable global growth. Barring problems on these fronts, the prediction seems a reasonable one. Even a moderate improvement in growth can make a big difference to confidence at this stage. This growth projection feeds into the numbers used for budget estimates, so it is a critical number.

In addition to the factors mentioned, economic policy decisions will also be crucial. This brings me to the Union Budget.

Writing a few days after the Budget has the advantage of being able to see a slew of more immediate reactions. Most of the reactions were positive, from mildly so to enthusiastic. Some comments were simply based on relief that there were no new government giveaways of the scale and kind that have strained the fisc in recent years. Indeed, the budget was circumspect in this regard, with the need to reassure investors, both foreign and domestic, that the government is serious about managing its finances. A major negative comment was driven by the view that the revenue projections are wildly over-optimistic. If they do not pan out, the budgeted expenditure would be veer into unsustainable territory. But in the current year, it was the ability to pull back on expenditure (especially plan expenditure) that allowed the government to rein in the fiscal deficit despite lower than projected growth and revenues.

This kind of pulling back is not the best way to achieve fiscal consolidation, but my guess is that the coming year will be better. First, the GST keeps getting closer, and the steps that lead to it also have positive impacts. Second, if growth does recover next year, that should help revenues. Third, my overall sense of the tax proposals is that they contain few gimmicks and nothing like the major misstep of last year. They pay attention to principles such as maintaining broad bases for taxation. There are a few proposals here and there that will enhance revenues without too much distortion. The revenue side may well provide good news in the coming year.

On the expenditure side, the main welcome feature of the Budget, as noted, is the restraint shown in expanding transfers or subsidies. This restraint may come under pressure as the general election nears, but for now, it is the official position. The quality of expenditure remains problematic, and one misses the promises of a few years ago to monitor outcomes and test the effectiveness of public expenditure, but perhaps that should be outside the budget in any case.

Tax expenditures seem to be a strong feature of the budget, with several policies intended to spur investment in manufacturing. Similarly pro-growth are measures to streamline regulation of areas such as foreign investment. Indeed, the finance minister has promised more measures along these lines through non-legislative actions outside the Budget’s legislative process.

Overall, then, my sense of this Budget was that it is one of the better ones I have seen, in terms of avoiding silly policy measures, taking a host of small steps in the right direction, and most of all, being intellectually consistent with the rigorous analysis of the Economic Survey. It is still possible that political calculations of the worst kind will derail the possibility of progress. But I am betting that the ruling political elite have realized how far things were going wrong. They have also been given a clear picture of why they have been going wrong (the Economic Survey is again an excellent summary source, presented with clarity and directness), and seem to be betting themselves that they can do better politically by performing rather than pandering. If this is right, then it is time to bet on India once again.

Financial Express, February 27, 2013

Current account deficit worries

 In recent weeks, the Governor of the Reserve Bank of India, Duvvuri Subbarao, has twice highlighted the nation’s current account deficit (CAD) as a cause for concern. The CAD is basically the difference between what is earned on selling goods and services to foreigners and what India pays for foreign goods and services, and it has recently hit record levels—over 5% of GDP. The CAD is typically offset by foreign capital coming into India. Why should a high CAD be a cause for worry? 

The RBI Governor highlighted several concerns. At the G20 Finance Ministers’ meeting, he said, “There are a number of risk factors for inflation. The most important is the current account deficit.” A few days earlier, he had stated, “We would not worry if the widening CAD is on account of the import of capital goods, but here it is high on account of the import of oil and gold. The other concern is the way we are financing it. We are financing our CAD through increasingly volatile flows. Instead, we should ideally be getting as much of FDI as possible to finance the CAD.”

What is the possible reasoning behind the Governor’s statements? It is useful to begin with some basic accounting. Macroeconomic balances imply that the CAD is equal to the difference between domestic savings and investment plus the government deficit. Hence, an increasing CAD can reflect a higher fiscal deficit, an increasing shortfall of domestic savings, or both. In India’s case, it has been both. Domestic private savings have fallen as a percentage of GDP, and the fiscal deficit has gone up. It is important to realise that the CAD is a symptom of more basic factors that deserve attention. A high CAD is not bad in itself: it just signals possible underlying problems.

The problems are poorly managed government spending and taxes, high inflation (and high inflation expectations), and a strong perception that government policies are unfavourable for future growth. The last is based on policy inaction as well as evidence of corruption. These problems deserve focus, not the CAD per se.

Turning to the RBI Governor’s statements, why should the CAD be a risk factor for inflation? If the economy were overheating, and pulling in foreign investment for that reason, this statement might make sense—again, the CAD would be a symptom not a cause. But that does not seem to be the problem, unless India’s potential growth rate has fallen more than policymakers admit. If foreigners were unwilling to finance the CAD, and the Indian rupee had to depreciate, pushing up the domestic price of inelastic imports such as oil, that could fuel inflation in the short run (though not in the long run, unless the RBI made a monetary accommodation). But interestingly, after a temporary pause, foreign investment into India has been strong.

Subbarao’s second point was that foreign investment is of the wrong kind, “volatile” portfolio flows instead of FDI. A related concern was that the CAD itself is of poor quality—fuelled by imports of gold and oil rather than capital goods. This leads back to poor inflation management (people are buying gold as an inflation hedge) and poor economic management (lack of an effective energy policy and lack of confidence for private industrial investment in India). His main point, though, seemed to be that portfolio flows are volatile and therefore bad.

To the extent that portfolio flows bring in foreign capital, they are as good as FDI—domestic firms receiving foreign portfolio flows may be encouraged or enabled to make real investments themselves. If this link is absent, it points again to poor domestic economic conditions. Foreign portfolio flows could be contributing to an asset bubble, but volatility seems to be a red herring. My ongoing research with Ila Patnaik and Ajay Shah suggests that such flows do not create wild swings in the domestic stock market, or harm domestic investors at the expense of foreigners. Separately, I have not seen concrete evidence that domestic stock market movements have much impact on India’s real economy.

In fact, any kind of equity investment involves risk sharing, and in that sense it is good for the recipient. At worst, foreigners exit and the currency depreciates: India can still pay its bills. Problems arise much more if the CAD is financed by borrowing on terms fixed in foreign currency, especially at short maturities—that can create a crisis. The real issue, therefore, is what is happening to India’s external debt stock, and its maturity composition. This is where RBI should be focusing, in addition to domestic monetary policy. Unnecessarily worrying about volatility of portfolio flows (or of the exchange rate) is just a distraction. Meanwhile, the biggest problems lie beyond RBI’s control: in the government’s management of revenue raising, spending, and the conditions for private sector investment. FDI is good, but so is domestic investment. The national government needs to do its job better. If it does, the CAD will take care of itself.

Financial Express, February 14, 2013

India’s inflation puzzle

India has been struggling with high inflation for over two years. The Reserve Bank of India (RBI) gradually raised its policy interest rate and has held it relatively firm, with only two small cuts coming recently. Meanwhile, economic growth has slowed dramatically. It has been asserted that RBI’s policy has contributed significantly to the growth slowdown. It has also been argued that monetary policy is ineffective in India, given structural rigidities and incomplete markets in the country’s economy. Fiscal policy and commodity prices have also been under the spotlight. What do we really know? 

A couple of weeks ago, Deepak Mohanty, an executive director of RBI, gave a speech in which he tackled India’s inflation puzzle. I will outline what he said, and then assess the arguments. Mr Mohanty first pointed out that India’s recent inflation surge and its persistence did not line up well with either its own history or what has been happening contemporaneously in the rest of the world. World inflation rose somewhat with the recovery from the Great Recession, but then moderated, while India’s inflation climbed to double digits. In India, moreover, a sharp growth slowdown seemed to do nothing to bring inflation down.

Mr Mohanty traces the start of India’s inflation spike to rises in the global prices of food, crude oil and other commodities. He refers to an unidentified analysis that pass-through of global price shocks to domestic prices increased in this recent period, and notes that corporate finance data are consistent with this increased pass-through. The depreciation of the rupee made the pass-through of external inflation that much worse. Mr Mohanty goes on to note the substantial increase in demand for higher-protein foods. He further documents the rise in real wages in rural India. He highlights the fiscal stimulus that coincided with the recession, and asserts that “higher fiscal expansion also impedes efficacy of monetary policy transmission.” Finally, Mr Mohanty emphasises that long-term inflation expectations rose in this period.

In examining the conduct of monetary policy as inflation spiked, Mr Mohanty emphasises that rises in interest rates trailed inflation, so that, starting from historically low interest rates, the real policy rate remained negative: “Thus, monetary policy was still accommodative though the extent of accommodation was gradually closing.” While all the other points made by Mr Mohanty have been widely recognised and detailed, it seems to me that this feature of recent monetary policy conduct has not received enough attention. Another important point that he highlights is that RBI’s estimate of India’s potential output growth rate has been reduced from 8.5% to 7%.

The story above is plausible, and draws on many analysts’ judgements. I have not been able to identify a publicly available structural model of the Indian economy that would allow one to say that the explanations above are the right ones, or to quantify their different contributions to India’s recent inflation experience. Formal, comprehensive empirical modelling is always a nice check on judgements that are necessarily fragmented and somewhat subjective. In the absence of a model, let me offer some additional thoughts, which may undercut the notion that India’s recent inflation experience should have been puzzling.

First, the monetary policy tightening was actually slow and even hesitant. There may have been good political and economic reasons for this, including fears about derailing an uncertain recovery, but RBI was neither choking off inflation nor growth in an assertive manner. Furthermore, RBI was not doing a good job of managing inflation expectations—interest rate hikes sometimes came with statements doubting if they would be effective. Sharper, faster interest rate hikes and confident statements would have worked. There is no puzzle in the experience.

Second, focusing on rising individual prices or on accommodative fiscal policy are both misleading. Yes, there can be short-term cost-push effects, and government deficits add to aggregate demand. But economic theory tells us that inflation is fundamentally a monetary phenomenon, having to do with the aggregate price level. The so-called fiscal theory of the price level, according to the best theoretical economic research that I have found, can tell us something about transmission channels, but not about long-run inflation.

Third, the growth slowdown has more to do with domestic political events that started to destroy India’s growth potential, more than RBI has estimated. The level of uncertainty for the private sector jumped. It is also true, I think, that government deficits have crowded out private investment directly. So fiscal policy has hurt potential growth. Global uncertainties and anaemic recoveries, especially in Europe, but also in the United States, have also worked to reduce potential output growth in India.

In sum, monetary policy was too timid, and failed to use the power of the word to complement actions; domestic economic management was dysfunctional in ways that reduced potential growth, while failing to account for structural changes in the economy; and global economic conditions exacerbated domestic policy shortcomings. This is a story with clear lessons and no puzzle.  

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.

From Financial Express, September 19, 2012

Creating virtuous growth in India

In my last column, I introduced the concept of virtuous growth, which subsumes the idea of inclusive growth. Virtuous growth includes promoting fairness, but it also means avoiding societal change that corrupts and degrades positive human values. In this column, I want to spell out how India might create virtuous growth in practice. Virtue and inclusion, as characteristics of growth, may be the keys to sustaining that growth, besides having intrinsic societal value. However, it is important not to make the pursuit of virtue a pursuit of an unattainable utopia.

Michael Sandel, writing on the “Moral Limits of Markets,” sharply defines the conceptual issue for dealing with virtue. He quotes prominent American economist and policymaker Lawrence Summers: “We all have only so much altruism in us. Economists like me think of altruism as a valuable and rare good that needs conserving. Far better to conserve it by designing a system in which people’s wants will be satisfied by individuals being selfish, and saving that altruism for our families, our friends, and the many social problems in this world that markets cannot solve.” Instead, Sandel argues, virtuous attitudes are like muscles that grow stronger with exercise. In his view, altruism and similar virtues need to be pushed beyond family and friends, to the wider public sphere.
This gets to the heart of the Indian paradox. India’s leaders and its elite promoted a flawed implementation of virtuous growth after independence. Virtues such as fairness were sought to be achieved through legislation, in a society dominated by vertical and horizontal social cleavages. But India’s structures of governance became unintended arenas for the play of market forces, with government favours being bought and sold. Affirmative action made small inroads into lessening social divisions, but India’s masses have been seen as perennial children, to be managed without ever growing into well-functioning adults.

Like Lawrence Summers, India’s policymakers thought of virtues such as altruism to be in fixed supply. They thought of themselves as possessing most of this supply, so unlike Summers, they favoured paternalism rather than market allocation. Parallel manifestations of this attitude have been a high degree of government centralisation and extreme government control of the market.

The last point needs emphasising. Unlike the United States, where Michael Sandel can rightly bemoan the overreach of the market, India’s market system remains grossly underdeveloped. Economic reform in India has to correct that underdevelopment. India’s Dalits have perhaps been helped as much by market-oriented reform that has created more economic opportunities for them as by affirmative action. At the same time, the point of seeking virtuous growth is to avoid moving too much in the direction of a society where everything in life is bought and sold.

What can government properly do? Much of the inculcation of virtue is done through family and religion. But Sandel’s idea of promoting “reasoning about the common good” can be implemented in a couple of obvious spheres of action. One is civil society. India possesses a reasonably strong set of civil society institutions. These should be allowed to flourish, free of political interference and manipulation. These institutions, too, have a responsibility to seek change through reasoned debate and action, rather than agitation and knee-jerk reactions to the role of markets.

The largest arena for sowing the seeds of virtuous growth is at the level of local government. This is an ongoing process in India. Evidence is emerging that decentralisation in India has not only improved the allocation of some public goods, but has also led to more engagement, more public debate, and more transparency. The gains are still small, but they do suggest that the old fear that public virtue is limited at the local level no longer holds. If anything, problems continue to be witnessed with schemes that are decided in far-away Delhi, and trickle down to the village. It would be far better to give local governments more fiscal capacity and with it, more real decision-making power. The common good will be promoted by debates at the local level on the best means of doing so, when the debaters know that they control the outcomes.

This does not mean that virtue will emerge spontaneously. Frameworks of participation have to be structured to be fair and inclusive—the reservations for women at the local government level are a good example. Just as when James Madison wrote, while debating the formation of structures of governance for the US, “men are not angels.” And neither are women. Monitoring, accountability and checks and balances are still needed.

My conclusion, then, is a modest one. A start to implementing virtuous growth can be made by decentralising more fiscal capacity to the local level. To do this in a politically feasible way will also require fiscal decentralisation to the states, of revenue as well as expenditure authority. The Centre has to structure this decentralisation to protect horizontal equity. The current system of intergovernmental transfers does that in a very imperfect and limited way. Fixing this system will require a strong effort, so even this modest goal will not be easy. But exercising virtue often is not the easy thing to do.

From Financial Express, August 22, 2012

Towards a strategic foreign policy for India

In my last column, on India’s ‘global strategy’, I made several points. First, India should put economic growth at the centre of its foreign policy. Second, it should pursue knowledge and capital eclectically and vigorously from around the world, to support this goal. Third, attention to infrastructure in telecommunications, energy, roads, ports and airports is vital to national security, beyond the obvious economic benefits. Fourth, China’s rise is the main global strategic issue for India. In this column, I want to develop the implications of these points for foreign policy in practice.
I will begin with the last point, the implications of the rise of China. India has to deal with China in an accommodative way (there is no choice, given geography and history) but from a position of strength. Economic growth will not be sufficient to achieve this position of strength, especially in the short run. Therefore, to mitigate security risks, India has to engage in deeper strategic cooperation with other nations. Such cooperation goes beyond the conventional military dimension. On that front, the United States is almost the only game in town. A critical new front for strategic cooperation is information-sharing. Here, too, the US has enormous strengths, and a vital role to play, but there are other possible partners. Most such potentially valuable partners, however, have strategic ties to the US. The conclusion is inescapable that India has to deepen its strategic cooperation with the US. This is nothing like the Cold War world of treaties and alliances. It is about India assertively and systematically pursuing its interests in a framework of mutual benefit.

Is there a downside to closer strategic cooperation with the US? Will there be a cost because it offends China, or reduces India’s strategic autonomy? The answer must be ‘no’. Such cooperation strengthens India’s capabilities, especially if it focuses on learning (and it has more to learn than the US, in such cooperation). Will it provoke China? Not if it is done intelligently. And if the counter argument is that India should not seek to protect its security for fear of upsetting China, then that says that China is anyway reducing India’s strategic autonomy.

Given the necessity of strategic cooperation with the US, it becomes more important for India to seek economic ties more widely. Luckily, there are many alternatives here. In fact, barring higher education, information technology and some aspects of agriculture, US capabilities are not necessarily the best choices for India. To take a prominent example, US-style mass market retailing as it has evolved in the past decades may not be best suited to India’s geography and infrastructure. In renewable energy, mass transit, high-end engineering, consumer durables, mineral extraction and so on, Germany, Britain, Japan, South Korea, Australia and numerous other economies may have more to offer India in terms of knowledge bundled with investment. A diversity of economic ties acts as a counterweight to the narrowness of options for strategic cooperation.

To summarise, India has to integrate economic growth goals more clearly into foreign policy. Its diplomats should speak the language of commerce, and its business people should speak the language of the country they seek to do business in. (Wouldn’t it be wonderful if India invested heavily in foreign language training, not just for its superb diplomats, but also for its enterprising business people?) It has to pursue commercial engagement more actively across the globe. At the same time, India has to deepen strategic cooperation with the US, and existing strategic partners of the US. This is not about diplomatic treaties and grand alliances, but really about lower key information-sharing and security cooperation in all its modern forms.

Foreign policy is about pursuing national interests in the international arena. Sometimes, this means cooperating with other nations that have different political systems and values. Nixon famously went to China in pursuit of national interests, when China was still wedded to Maoism. But China wanted economic growth from that new engagement, and it succeeded. India has to deal with China, for many reasons, but not for reasons of strategic balance. India has little to offer China except resources, markets and acquiescence, and so is in a weak position. It has to strengthen that position.

Luckily, India has alternatives for strategic and economic cooperation with nations whose political values align well with India’s ideals. Even if shared values are not of importance in determining directions of international engagement, they are a useful bonus, as they enhance trust and cooperation. But ideals should not get in the way of national interests, and they should not be pushed on others. In any case, India has much to do on the domestic front before it can claim to be an international example of virtue. The bottom line remains that India’s government has to deliver greater material and non-material well-being for its citizens. Foreign policy is just one aspect of that larger challenge.

My talk at the Commonwealth Club, San Francisco

Recently I gave a talk on what we can expect for India's economic growth.

You can hear a podcast here