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, July 26, 2012

Demographic dividend or disaster?

India’s demographic trends could lead to a dividend of higher growth, as the working age population bulges. Two things have to happen for this dividend to be realised. If they don’t, the possible alternative is demographic disaster, and social unrest. First, India has to create more jobs across the board. In a previous column (Entrepreneurship and jobs, FE, November 28, 2011, http://goo.gl/ PYEdk), I discussed this side of the equation. Second, India has to give its people skills to work at jobs productively. In this column, I want to look at the basics of India’s education policy.

There are serious problems with Indian higher education. These include a shortage of high quality faculty, poor incentive structures, lack of good regulation (which would promote competition and transparency, rather than defending a dismal status quo), and artificial constraints on supply of educational services. I have often argued that allowing much more foreign entry in higher education would be a good solution to these problems.

As bad as Indian higher education is, the worst problems are in primary education. After all, without a good foundation, subsequent education cannot happen easily and effectively. This is true even for vocational training, not just elite education for the advantaged and talented. At the primary level, there are also serious problems with health and nutrition that impact the effectiveness of education and the capacity for learning, but let us set those aside and focus on the education sector, government-provided primary education in particular.

A large amount of empirical research has been done on this subject in the last decade. We now know much more than we did a few years ago. Karthik Muralidharan, a major contributor to this research programme, has recently summarised what we know, and drawn out the policy implications. There is a large gap between what we know and what policymakers are saying and doing. If policymaking and implementation do not respond quickly to the latest lessons, India’s youth will be poorly prepared for productive participation in the economy.

What does Muralidharan’s survey (presented at the recent India Policy Forum) teach us? The following is my own interpretation. First, many kinds of school inputs do not translate into improved learning outcomes. This includes toilets, electricity, computers, mid-day meals, student grants, more teachers and better-trained teachers. This does not imply that these measures are bad, just that they are not enough. On the other hand, certain kinds of incentives linking teachers’ rewards to performance do work. These incentives may be monetary or non-monetary, small or large, positive or negative. The best mix can be context-dependent and subtle. One important example of incentives is that contract teachers do better than those who are tenured government bureaucrats, even when paid much less. But even regular teachers do better when their rewards are linked to performance, which can include showing up to teach as well as having their students do better on tests.
The implication of all the studies is that education policymakers are focusing on the wrong things. Muralidharan notes that the ministry of human resource development’s central policy document, while discussing access, equity, quality and departmental processes, has “no mention of learning outcomes.” Quality is just about improved inputs, not outcomes. Certainly, just changing this mindset would be a start towards reform of educational policy. Muralidharan acknowledges the political and institutional difficulties, even as he discusses possible reforms of curricula, organisations and governance.

My own take on the current situation is that change from within will come too slowly for India. A disruptive, radical solution is needed. A clue to where to look comes from the reported research which shows that remedial instruction actually does improve learning. My guess is that the key feature is that this instruction is targeted, individualised, and has a quick and clear feedback loop. Apparently, computer remedial programmes do better than teachers, but cost more. This differs from research that computers alone are useless. I think the problem is with the way digital technology is used. Computers are not needed to teach basic reading and mathematics skills. Very cheap specialised devices for playing educational games, with preloaded software that allows students to move up levels by answering problems or recognising words, and to compete with each other, can combine low cost with strong learning incentives.

This is a far cry from elaborate textbooks and curricula, and will outrage most professional educators as debasing education. But it will work, and will not need to wait for massive institutional reform. Children have to get hooked on learning. They have to get quick rewards for achieving small learning outcomes, with continual progress. They have to be able to measure themselves against their peers. This can all be done with simple software and cheap dedicated devices. Once a start is made, more sophisticated tools can be developed for older children and higher learning, even ones for teachers. Educational computer games can be the first step towards reaping the demographic dividend.

India's National Manufacturing Policy

India’s new National Manufacturing Policy (NMP) is just around the corner. Newspaper reports have provided some glimpses of the thrust of policy changes, with stated goals of creating 100 million jobs and increasing the manufacturing sector share of GDPhttp://www.blogger.com/img/blank.gif from 16% to 25% by 2025. Several innovative proposals have surfaced. One is to provide capital gains tax exemptions to small-scale enterprises, allowing them to raise equity by selling inherited land. Another is to create joint sinking funds in specified manufacturing zones, allowing speedier resolution of payments to labour that loses jobs. Much has been made of greater flexibility for environmental clearances. Unfortunately, this is probably going to result in greater social costs, and may not be the main culprit in constraining manufacturing growth, despite the recent attention given to this issue.

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