From Financial Express November 9, 2012

Inclusive growth in the US and India

The US Presidential election has just concluded, and Barack Obama has been re-elected. Voters in exit polls said they cared most about the economy, but what they really meant were their own material circumstances in the economy. What may have carried the day for President Obama was the sense that he cares more for the middle class (where almost every American likes to place himself or herself) than his erstwhile opponent. 

In fact, the choice between the two candidates illustrated clearly two very different conceptions of society and justice. Mitt Romney’s infamous remarks branding almost half of the country as lazy free-riders were in a centuries-old tradition of the rich justifying wealth as deserved through talent and hard work (or before that, as divine will). Romney and his party simply refused to recognise that inequality of opportunity has grown dramatically in the US, so that the growing inequality of outcomes is not determined on a level playing field. Growth in the US has been far from inclusive.

Barack Obama, on the other hand, has had a vision that is completely consistent with the idea of inclusive growth. Interestingly, in 2007, Ifzal Ali and Hyun Hwa Son of the Asian Development Bank provided a theoretical and empirical analysis of inclusive growth that resonates conceptually with Obama’s policies, as well as with what has been attempted in India. Ali and Son look at the distribution of opportunities across different parts of the income distribution. Thus, they focus on opportunities rather than outcomes such as income. In this, they are following the work of Nanak Kakwani and others. To make things concrete, they use access to health and education as examples of opportunities. They apply a specific index of opportunity to health and education data from the Philippines, to measure precisely how inclusive growth has been in that country.

As many have argued, health and education are to be valued in their own right, as well for their importance in helping to level the playing field for earning income. Barack Obama recognised this in pushing for wider and more equal access to healthcare, and for improvements in access to higher education through expanded federal student loan programmes. In some ways, then, the US agenda is not that different than India’s attempts to improve access to health and education across the country.

Of course the levels of development, institutional details, and scope and scale of challenges are very different in the US and India. One similarity, though, has been the lead role played by the federal (central) government in both countries, in health, especially, in the US. The American suspicion of government applies particularly to the federal government, and that has created a political battle over healthcare reform. But one only has to look at examples such as civil rights, the national highway system, and the GI Bill which funded college for returning World War II veterans of all socio-economic groups to realise that the Centre has played positive roles on major issues in recent US history.

In the Indian case, too, the justification for the Sarva Shiksha Abhiyan and National Rural Health Mission has been that the Centre needed to step up because the states were failing to do their part. The problem in India has been that central direction has tended to be confused with central implementation without adequate capacity, or more with a lack of consideration of appropriate incentives for modifying behaviour. Even in the US, these kinds of problems do arise, and the challenges for a poorer country like India are bound to be greater.

As I have argued in other columns, there is a case for considering innovations in revenue-sharing across levels of government, to improve the efficiency of expenditures, as well as to build government capacity in the longer run. The Ali and Son framework offers a way of comparing the distribution of improved opportunities, and hence the inclusiveness of growth in some important dimensions, for different types of policies and implementations. Hence, it should be possible to see if policy design and implementation at the state or local level does better than centralised decision-making.

In the US, my guess is that the successful Massachusetts experiment in universal healthcare would not have spread to other states, and the federal government’s push was very likely the right way to address the problem of lack of access to healthcare. The Indian situation is very different, though, in starting point and in scale. It might be worthwhile to give Indian states more resources and incentives to try and improve healthcare access themselves, with flexibility to innovate and experiment. If just Uttar Pradesh can pursue more inclusive policies, that would affect a population roughly the size of Brazil’s. That would be an impressive achievement.

 

Imagining India 2.0: Innovation, Entrepreneurship and Growth

Recently I attended the US-India Business Summit West, in Silicon Valley. The stellar array of speakers was capped by a closing keynote from former US Secretary of State, Condoleezza Rice, making the case for a global alignment of nations to promote “free people and free markets”. The US-India Business Council, which represents US business interests in India, naturally expressed concern over the policy uncertainties and lack of some key economic reforms in India. The pause on FDI in multi-brand retailing and the recent Budget pronouncements on taxes, seemingly threatening arbitrary discretion in making tax claims retroactively, figured prominently in these concerns.

Panels on innovation and investing were the most enlightening, however, almost exclusively featuring entrepreneurs and investors of Indian origin. As one would expect from those trying to make the future, either through implementing new ideas or funding them, there was a quiet optimism that provided some balance to the macro concerns expressed at other times during the day, which also dominate the headlines. This is not to say that the only optimism came from Indian Americans. Senior executives from Cisco, VMWare and Walt Disney International also gave examples of how India represents opportunities, or how it can take advantages of emerging opportunities.

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Lessons from India's Voters

In my last column, I wrote about learning from China. The experience of other countries, especially those that share key characteristics with India, is obviously important as a guide for policymakers. But there are important lessons from India’s own experience. Democratic voting allows the individual experiences of citizens to be articulated, albeit in an aggregate and imprecise manner. Drawing the right lessons from India’s latest elections is vital.

The stock market seemed to conclude that the outcome in Uttar Pradesh was a bad one for India’s economic future. Since the UP state assembly election did nothing to consolidate the political position of the ruling party’s heir apparent, it may be that uncertainty and jockeying for position at the Centre will continue, both within the ruling party, and in the wider coalition. Capricious coalition partners and powerful ministers may continue to block or divert needed and potentially beneficial economic reforms.

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What Should India Learn From China?

Arguably, China’s successful embrace of one form of capitalism (“to get rich is glorious”) in 1978 ultimately played a role in steering India’s path of economic reform. Since then, China has often served as a benchmark for judging India’s progress, because it is the only other country that matches India in population size. Sorting out the lessons from China’s experience is always useful, beyond the comparison of the countries’ planning exercises, the subject of my last column.
What should India learn from China, and what should it not?

One should start by rejecting the political values of China’s regime. Suppressing the free expression of ideas, or the exercise of political voice, is not necessary for economic development, or even for political stability. India’s previous flirtations with such suppression were never associated with economic progress, and recent attempts to impose broad censorship of the internet are indicators of insecurity of the political elite, and nothing more. The notion that China’s authoritarianism has virtues (often part of the “Asian values” school of thought) to be copied by India must be totally rejected. Democracy is not incompatible with inclusive economic development.

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A Tale of Two Plans

India is moving toward finalising its Twelfth Five-Year Plan, for 2012-17. The process is long and fascinating. A 140-page draft approach paper was made available late last year, and has been followed by an exceptional process of consultation and discussion, including meetings across the country, a website that allows citizen discussions of specific points and issues, and even a Facebook page. The Plan document, and the framework of 12 strategy challenges, are encompassing in nature, as befits the ambitious goal of faster, sustainable and more inclusive growth.

The world’s other emerging giant, China, also still has Five-Year Plans. In this case, it is only a year or two ahead of India—its Twelfth Plan was finalised last year, and covers the period 2011-15. One cannot imagine the Chinese government having online discussions by citizens for shaping such a document, and certainly not a Facebook page. But more than the process, which is ultimately mostly top-down at the formulation stage for both countries (because that is where the expertise and knowledge mostly reside), the tenor and goals of the two Plans are quite different.

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India and the World in 2012

These are two columns reflecting on what went wrong in India in 2011, what I hope will change for the good, and what the global and domestic threats are for the continuance of India's growth story.


Making 2012 a Better Year for India

A year ago, I offered an optimistic and hopeful view of India’s possibilities in 2011. As it turned out, things were much less rosy than I had guessed they might be. I had gone with the then-popular growth forecast of 9%. Growth has been much lower. Part of the problem was the ongoing European crisis, and the US’s slow recovery. Much of the difference came from what has been happening within India.

A year ago, I remarked that the private sector in India has done well despite poor governance. This has remained true, but not to the extent that I had hoped. The general poor quality of governance was compounded in 2011 by uncertain handling of corruption, which surfaced as a major issue for India’s citizens. My view is that India’s ruling coterie is currently weak in its leadership and its vision. Too many of those who rule are focused on short-term personal advantage, rather than leading the country well. Will this improve in 2012? It is hard to say what will happen at the national level. However, one can hope for more progress in governance quality in some of the states.

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Thousand Rupee Notes on the Pavement

The past year has driven home the fact of globalization, even for countries like India that are relatively less integrated with the global economy. For example, India’s ratio of exports of goods and services to GDP is only about two-thirds of China’s (despite excluding Hong Kong and Macao). But it has still felt the wind from global storms. The European crisis, in particular, has heightened risk perceptions, slowing global growth, and leading to a flight to safety of global capital. What are the potential global threats for India in 2012?

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Thoughts on FDI in Retailing

Here are two columns I wrote late last year, reflecting on the political process and economic analysis associated with India's attempt to open up multi-brand retailing to FDI. The first column also has some thoughts on developmental objectives and social opportunity, based on some new work by Yale economist John Roemer.


Development and Opportunity

The furor over the attempt to open up FDI in multi-brand retail reminds us of several things about India. But the true lessons may not be the seemingly obvious ones. It is certainly possible that the government’s handling of the policy change was not the best it could have been. On the other hand, those with long memories will recall numerous occasions where policies have been floated, reversed, modified or even transformed. At one time, all FDI and disinvestment were controversial—now the discussions are more nuanced (even if political rhetoric remains strident).

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Retailing and Reform

In my last column, I mused on India’s economic reform process and inclusive growth, in the context of opening up multi-brand retail to FDI. I want to return to the question of political capital, and policy thinking about reform in the retail sector.

On using up political capital, I think ongoing events have proved me wrong. Opposition to opening up multi-brand retail has come from the same quarters as opposition to other reform measures, including the Pension Bill and Companies Bill. On all these, the government has openly looked for compromises that will lead to acceptance of the reforms. If that is the case, then moving on multiple fronts may give the government more chance of getting some changes through, not less. The government has also reset its approach to FDI in retail, marshaling interest groups that might benefit, and saying more to make the case for the positive consequences of the change. So even if it lost some political capital initially, it should recover it quickly.

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Entrepreneurship and Jobs in India

India needs more jobs than it is creating. Without enough job creation, its demographic dividend—adding a million people to the workforce every month—will become a disaster. One possible source of job creation is entrepreneurship. Recently, Ejaz Ghani, William Kerr and Stephen O’Connell (GKO) have been systematically exploring this hypothesis for India, in several research articles. What do we learn from their work?

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Building a New India

When the UPA came back to power in 2009, with what seemed to be a stronger and more reasonable coalition structure, I was very optimistic. The global economy had dodged the bullet that might have wounded it critically. India had managed to grow robustly, even in the throes of the global crisis. There was a chance for experienced leadership to return and continue its work. Halfway through the government’s term, things appear much less rosy. What has happened and why?

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Diaspora, Development and Democracy

The title of this column is the title of a new book by Devesh Kapur, head of the Center for the Advanced Study of India at the University of Pennsylvania. The book is about how Indians who have emigrated have influenced the country they left behind. It is a fascinating study, broad in scope and full of new insights. Kapur argues that the economic, political, social and cultural consequences of international migration imply a richer framework for thinking about globalisation and related ideas such as ‘openness’, than just focusing on movements of goods and capital. He asks, “Is a country with substantial trade, but with few citizens who move around the world, really more ‘open’ in a broader … sense than a country where trade is more limited but whose citizens live and travel internationally, thus remitting foreign exchange and ideas to a much greater extent?”

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Marc Andreessen on the significance of software

Marc Andreessen, the founder of Netscape, the company which kicked off the original Internet boom, has an interesting article title "Why Software is Eating the World." "Eating" is not meant in a negative sense here -- the article is about how software is used across the economy, in increasingly innovative ways. There's nothing particularly new about what he says, but it's nicely articulated. The punchline for Andreessen is that software is where the US economy can flourish and keep growing. That led me to think that the same implications could hold for the Indian economy. For now I'll just pose that as a question -- the precise benefits of software for the Indian economy will differ from those for the US, but what are those differences? Of course, India's software firms can keep servicing the advanced economies with software services. But what about domestic needs? Something to articulate for India's policymakers and business titans, just as Andreessen has done from a US perspective.

Navigating the Next Crisis

Is a new economic crisis coming? Is it just a playing out of the financial crisis of 2008? What should India’s policymakers do? These may seem like just a tough set of questions from a civil service exam. But they are real challenges that face India's leaders. Unlike their counterparts in the US, Europe and China, India’s leaders actually have significant room to maneuver. What should they do, and why?

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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

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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Competition in the Indian Market for Currency Derivatives

In 2009, MCX Stock Exchange (MCX-SX) “informed” the Competition Commission of India (CCI) that the National Stock Exchange of India (NSE) was acting anti-competitively in the nascent market for currency derivatives. Both NSE and MCX-SX provide platforms for trading instruments such as US Dollar-Indian Rupee currency futures of differenhttp://www.blogger.com/img/blank.gift maturities. MCX-SX essentially complained that NSE was using predatory pricing to drive its competitor out of the market, using its dominant overall position in providing trading platforms for financial instruments (especially equities), and resulting deep pockets.

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Getting India to Ten Percent Growth

The 10% growth target for India has had a magical allure. It is hard to say if anyone first held it out publicly as something to strive for realistically, but I do remember Vijay Kelkar as being an early believer. The current Prime Minister has also mentioned this target several times. Yet that double-digit growth rate has remained stubbornly out of reach as a short-term forecast of actual growth. Indeed, it seems that when the Indian economy nears 10% growth, inflation rears its ugly head, and fears of overheating spread. A few years ago, estimates of India’s medium-term potential growth rate tended to be in the 8-9% range. This may be about to change.

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The G20 Makes Progress

The recent G20 meetings in February and April have showed that the G20 works. The achievements are not dramatic, but the forward progress is visible, if at a measured pace. Last year, the US had been pressing for rebalancing—basically asking mostly China, but also other current account surplus countries, to adjust their macroeconomic policies to increase their domestic demands and reduce their relative export focus. Those countries argued that the US’s own macroeconomic policies—fiscal and monetary—needed to adjust drastically. Rather than drifting into confrontation and stalemate, this issue has been tackled relatively effectively by the G20.

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How fast are India's states growing, and why?

Three years ago I did the following calculations based on per capita state domestic products:

State	1993-94	2003-04	Growth (percent)	Growth rank
Andhra Pradesh	7416	11756	58.52	5
Bihar	3037	3557	17.12	18
Jharkhand	5897	7732	31.12	13
Goa	16558	30506	84.24	1
Gujarat	9796	16780	71.29	3
Haryana	11079	15752	42.18	9
Karnataka	7838	13141	67.66	4
Kerala	7983	12328	54.43	7
Madhya Pradesh	6584	8284	25.82	16
Chhattisgarh	6539	8383	28.20	14
Maharashtra	12183	16479	35.26	11
Orissa	4896	6487	32.50	12
Punjab	12710	16119	26.82	15
Rajasthan	6182	9685	56.66	6
Tamil Nadu	8955	12976	44.90	8
Uttar Pradesh	5066	5975	17.94	17
Uttaranchal	6896	9471	37.34	10
West Bengal	6756	11612	71.88	2

You can see that over the decade used in the table, the three slowest growing states were poor ones: Madhya Pradesh, Uttar Pradesh, and Bihar. Punjab, a rich state, grew quite slowly too.

There is newer data now, and here is a calculation for a later seven year period. It leaves out Uttarakhand (Uttaranchal) and Goa, since they are quite small.Note that the data for per capita SDP are not comparable across the tables because they use different base years for the constant price index in which they are measured.

	99-00 SDP PC	06-07 SDP PC	Growth	Rank
Andhra Pradesh	15507	22835	58.56	6
Bihar	5786	8167	62.43	3
Chhattisgarh	11629	15660	51.74	8
Gujarat	18864	27027	62.02	4
Haryana	23229	37314	85.75	1
Jharkhand	11549	14252	39.40	13
Karnataka	17502	22952	43.62	11
Kerala	19461	30044	63.67	2
Madhya Pradesh	12384	12881	18.95	16
Maharashtra	23011	30982	50.83	9
Orissa	10567	15528	59.02	5
Punjab	25631	30041	32.58	15
Rajasthan	13619	16460	39.69	12
Tamil Nadu	19432	28320	54.81	7
Uttar Pradesh	9749	11334	33.95	14
West Bengal	15888	21753	48.90	10

Haryana and Kerala do a lot better in this later snapshot. Karnataka does relatively worse. Bihar also does a lot better. Uttar Pradesh, Madhya Pradesh and, yes, Punjab are still growing relatively slowly over these seven years (the periods do overlap).

All kinds of things can affect growth rates, but my guess is that governance matters a lot.