India continues with a structure designed for state-led industrialisation and the political economy wrestles with issues which it interrogated in the 1960s. The state does too much of what it must not do and too little of what it must do.
By Shankkar Aiyar |Published: 20th June 2021 06:55 AM |
June 20, 1991. Quintessentially in India’s political landscape, activity picks up after sundown. PV Narasimha Rao, anointed prime minister, had finished meeting with the new pilgrims lining up to pay obeisance. His next caller was Cabinet Secretary Naresh Chandra. After the perfunctory pondering about the swearing in ceremony the next day, Chandra handed over a file to Rao with two notes on the state of the economy — the significant one was about the commitment India made on 25 conditions under the January 18 IMF bailout signed during the Chandra Shekhar regime.
The magnitude of the crisis in the economy was exposed in this newspaper on July 8, 1991 when I scooped the airlift of India’s gold reserves to be pledged with the Bank of England. The saga of liberalisation is frequently enveloped in mythical notions — about who did what, when and how. On July 24, Rao, who retained the industry portfolio, dismantled licence raj India and honoured the promissory note issued to IMF. In his budget speech, Manmohan Singh quoted Victor Hugo: ‘No power on earth can stop an idea whose time has come’. It was not voluntary action, but the compelling power of crisis which propelled change.
In 1991, India’s population was 83.8 crore. In 2021, it is estimated at 139 crore. Effectively four of ten Indians, or 55 crore Indians scarcely know of an India which existed in perpetual want — when people waited for years for a phone, LPG connection and even a scooter. Today, the Aadhaar-based digital infrastructure enables Indians to get a phone connection or open a bank account in minutes. In 1991, India pledged gold for a $ 400 million loan. In 2021, it has over USD 600 billion in reserves.
Relative to its past, India has done well — from sub 5 per cent growth pre-reforms to an average of 7-plus per cent GDP growth. Since reforms, India’s GDP has vaulted ten times from USD 270 billion to over USD 2.7 trillion and its per capita income from USD 303 to 2,000. However, relative to other countries, India has lagged. China opened up its economy roughly the same time as India. Between 1991 and 2019, China’s GDP has grown from $383 billion to over USD 14 trillion and its per capita income from USD 333 to over USD 10,200.
Economic growth is sustained by the virtuous cycle of income- consumption-demand-investment-growth. India has struggled to enable investment — indeed, it could be argued that deterred investment results in a large part of its consumption demand being exported. Structurally speaking, decentralisation accelerates processes yet India has persisted with a centralised system that suffers from bipolar disorder of authority and accountability.
And this is worsened by the regulatory landscape. In theory, India dismantled licence raj but permission raj persists. Successive governments have shied away from reviewing the process of clearances. For sure, India has moved up on ease of doing business rankings but the question remains why must a power project wade through over 90 clearances or a hotel project need over 100. Small and medium enterprises are the bulwark of employment and exports but suffer from over regulation and under provision of capital.
Attracting foreign savings is critical for building infrastructure and economic expansion — as Deng Xiaoping famously said, the colour of a cat doesn’t matter as long as it catches mice. India’s policy on foreign direct investment has been defined less by objectives and more by crises. This has detained expansion in the areas where access to capital and technology could have made India a dominant player — for instance in electronics and computer hardware.
Growth at a macro level is but a means to achieve ends. No country has progressed without investing in human development and yet India has struggled to up the spending on education and health. For sure, China is enabled by the authoritarian system whereas India is a vocal democracy. Yet the fact is the authoritarian state has done better on every human development indicator. China is ranked 85 and India 131 among 189 countries by the UN HDR. The number of years of schooling and access to health matters for sustaining and propelling growth.
The defining factor in success is a sense of political purpose and efficiency of the state. Three decades after liberalisation, India continues with a ministerial structure designed for state-led industrialisation. Five decades after the first Administrative Reforms Commission, the political economy wrestles with the very same issues which it interrogated in the 1960s.
The Indian state suffers from lop-sided deployment of resources — it does too much of what it must not do and does too little of what it must do. Thirty years back, exactly to the day, the India Story the unfinished agenda — install Gov 2.0 to enable minimum government and took a definitive turn. To deliver on the promise of its potential, India needs to complete maximum governance.
Shankkar Aiyar, political economy analyst, is author of ‘The Gated Republic –India’s Public Policy Failures and Private Solutions’, ‘Aadhaar: A Biometric History of India’s 12-Digit Revolution’; and ‘Accidental India’. You can email him at firstname.lastname@example.org and follow him on Twitter @ShankkarAiyar. His previous columns can be found here. This column was first published here.