Book Review: Can India Grow?

Public policy discourse is often about ‘actionable solutions’. While solutions are necessary, sometimes it is also important to take a step back and reflect on our mental models of the world in which the solutions are rooted.  A change in the way we view the world can significantly alter our approach to problems and the solutions that follow, even if the argument to change the ‘world view’ is not an ‘actionable policy’.

"Can India Grow? (CIG from now on), a new book authored by Gulzar Natarajan and Anantha Nageswaran, published by Carnegie India belongs to that genre which argues for a change in our mental models of the economy and our approach to addressing problems of economy. CIG’s argument for a new approach is not rooted in ideology. It’s built upon a scathing, data rich review of Indian economy. It also proposes some innovative solutions but I see the argument for change in approach as the key take away from the book.  

Quoting from the book
Economic growth and social progress are best achieved by stripping away illusions and delusions and starting with a stark understanding of the challenges that confront India. Once that understanding is in place, the necessary policy and behavioral changes can and will follow with relatively more ease
The broad argument of the book, the new approach to Indian economy is best summarized in the following lines:
India faces acute capital deficiencies on multiple fronts as well as much under-appreciated adverse global structural headwinds which pose serious constraints to the achievement of sustainable high growth rates. High growth can be achieved only as episodes of over-heating followed by years of pain and lower growth from cleaning up the excesses. In the circumstances, the most prudent strategy may be to target a long period of moderate growth by focusing on steady economy-wide physical, human, and institutional capital accumulation and opportunistically riding on emergent global tailwinds.”
The review of CIG below is structured as follows. The first section attempts to give a flavour of the book by presenting a summary of the review of Indian economy. Readers interested more in the critique of the book can skip this section. The second section is about aspects that I believe are important but not considered by the book.  In the third section, I comment on some of the arguments presented in the book, other than the central argument. In the fourth section, I comment on the central argument of the book – change in approach towards reform. 

I. Summary of Indian Economy’s review

Let’s consider a simple model. Growth needs increased business activity. Skilled workforce (human capital) is a crucial input. Once the business is started, it should have a smooth environment to conduct business (ease of doing business). Businesses also need capital. Businesses also require demand, markets where they can sell goods. The demand and capital are interlinked in an economy. If people in a country save more, it gives more money for investments and increases the availability of capital. At the same time, saving more means that people consume less and hence less demand, affecting businesses. Finally, it requires state capacity to put appropriate systems in place for businesses to conduct operations. By no means, this is a complete model of how economy works but let us consider this approach for the sake of simplicity and see how Indian economy figures on each of these aspects. I use the numbers quoted in the book in the discussion below. Please refer the book for appropriate sources.

Consider the state of industries. Indian industry sector is characterized by a large number of less productive small and microenterprises and a few large corporations. Factories that employed 3/4ths of labour pool account for only 7% of total fixed capital and 11% of total output.

Businesses face the challenge of recruiting skilled professionals for the lack of it. 52% of class 5 children can’t read class 2 text. 12 million people join workforce every year. Only 10% of the new graduates and only 25% of the engineering and MBA graduates have adequate skills and are employable. Health care – Nearly 60% of healthcare spending in India is paid out of pocket. 47% of hospital admissions in rural areas and 31% in urban areas are financed by loans and asset sales. 30% of those needing care in rural India and 20% of those in urban areas go untreated because of inability to pay for healthcare.

Adding salt to this wound is the difficulty of doing business. While much of the discourse on ease of doing business is skewed towards smoothening the procedures to start and exit business, and hiring and firing of workers, the book appropriately draws attention to the ease of actual doing of business, the challenges faced by companies while running it in their numerous interactions with bureaucracy. For instance, companies have at least 15 numbers required by taxation, labour and other central government laws. Not to mention the numerous filings required by companies and some specifically are to be filed only in hard copy.

After human capital, the other input to business is capital. Capital can be sourced either domestically through banks or through FDI. In the climate of FDI enthusiasm, the book brings attention to a cold fact that historically FDIs didn’t account for more than 4% of GDP in any other countries. Majority of them were funded domestically. Further, at current levels, even if we assume that FDI accounts for 4% of GDP, it would account for 40% of India’s total incremental credit market.

Funding industries by raising money domestically has its own challenges. One, the bank NPAs have soared in recent years, with 14.5% in public sector banks. It constrains banks’ lending capacity. Two, India is stuck in a low savings – investment equilibrium. The highest ever Gross Domestic Savings achieved by India is 32% of GDP, while East Asian economies had a consistent 40%+ in their heydays. Even the 32% figure of India is misleading because 70% of Indians savings are locked up in land and gold that can’t be leveraged to increase lending capacity. Three, India has a narrow tax base. Only 3% of Indians, around 4 crore come under tax net. In US, there are 15 crore assesses for a population of 30 crore. Four, India has shallow credit markets.

Traditionally, East Asian countries have grown by promoting savings domestically and relying on demand abroad to market their products, while using domestic savings for investment. India doesn’t have that flexibility. It has to depend on domestic demand to enhance economic activity, while at the same time promote savings to increase capital availability. Relying on domestic demand is also challenging due to India’s narrow middle class, which accounts to only 3% of its population. A whole country can’t depend on demand of a mere 3% of the population.

The next crucial aspect is the state capability, the capability of the state to design and implement policies. The usual delays in government work is well known. There can be several reasons for it. India requires 40,000 urban planners while there are just 3,000 registered urban planners. New York has 180 food inspectors for 24,000 eateries while Hyderabad has just 4 for a similar number of eateries and so on.

The situation is exacerbated due to premature industrialization (shifting to service sector before leveraging manufacturing to pull large pool of work force into formal sector) and weak global growth. During times of slowing of global trade, countries try to manage their share of trade. In case of India, even that’s declining, while that of Bangladesh and Vietnam is increasing.

In summary, businesses have low productivity. They don’t have good pool of skilled work force. They face tough time complying with government regulations. There are challenges in capital formation to increase lending capacity. There are limitations to local demand. The global demand is weak. State’s capability to design and implement policies, in order to provide an enabling environment, is weak. The external conditions aren’t favourable either.

The analysis in the book goes on similar lines on numerous other metrics honestly acknowledging the state of economy, outlining both domestic and external challenges, highlighting the weak fundamentals of Indian economy. It warns of the risks in going after short term growth fetish as it lends to long term problems like NPA crisis etc.

What’s the lesson from all these? The discussion above illustrates the weak fundamentals of Indian economy. The book hence calls for a serious rethinking about India’s growth prospects in short term and need to focus on building fundamentals aiming long term growth. As presented earlier, “most prudent strategy may be to target a long period of moderate growth by focusing on steady economy-wide physical, human and institutional capital accumulation and opportunistically riding on emergent global tailwinds”. It asks to hunker down, stop obsessing about China’s GDP, do plumbing to achieve growth and forget about growth to achieve growth.

In other words, the book argues that it may not be possible for India to achieve high growth rates considering its fundamentals. The focus has to be hence on strengthening these fundamentals in order to achieve quality growth.

II. Things that could have been mentioned

Let me just make minor comments before going to my major comments on the book. There isn’t much discussion on agriculture in the book, which is a crucial part of the economy considering the number of people it employs. Police and Judicial reforms form an important aspect of state capability but it isn’t touched upon in the book. May be this police and judicial reforms is widely quoted and hence has become obvious but it needs repetition since nothing is being done on that front. The discussion on state capability and the solutions suggested are in the domain of higher bureaucracy, at the decision making level.  There is less discussion on bureaucracy at the lower level which is also equally crucial. There's also little discussion on one of the important issues, corruption, and its implications.

III. My comments on the arguments in the book

One, the book points out the difficulties induced in decision making with limited and incomplete information due to the various accountable measures like RTI, CAG. It argues that there are genuine cases where deliberations can’t be made public because deliberation is a process of learning and arguments made in that context can’t be used to target decision makers. Similarly, calculations made with benefit of hindsight don’t do justice to decisions taken with incomplete information and so on.  Such actions lead to decision paralysis. These arguments may have merit but the alternative is questionable.

Public decisions fall in the spectrum of opaque – transparent – nakedness continuum. Everything was in the opaque side of the spectrum until RTI and other accountable measures. These measures tilted the balance towards transparency. There may be genuine grey areas in between where there is too much transparency bordering on nakedness.

The key aspect while making calls on grey areas is the public trust on the governments that the judgment calls err on the positive side and don’t have malafide intentions behind them. Unfortunately, Indian governments don’t enjoy that trust. When even the mandatory voluntary disclosures aren’t being followed, a strong blower’s bill isn’t being brought while many activists are being murdered, lokpal is not being appointed, attempts have been made to dilute RTI, it is difficult to believe that government is erring on the positive side while making decisions in the grey area of transparency – nakedness continuum.

In that context, it’s better not to touch these grey areas, when government has so much to answer. I don’t know if we can trust governments with these at this stage. In fact, attempting reforms in grey areas when there are many outstanding pending issues can even result in a public backlash.

Two, the book lists developing leadership as one of the important process principles. It further lists embracing risks, keeping wise and fearless critics around, and communication as important attributes of a leader. While there can be endless debates on the definition of a leader, one aspect needs to be mentioned in this context.

Leadership in India should also be about doing things which aren’t necessarily demanded by people, which aren’t issues of electoral debates, but are still important. 

Shankar Aiyar in his book Accidental India argues that every major worthwhile reform done in India is due to a compulsion to act in the face of a crisis – 1991 economic reforms in the face of balance of payment crisis, green revolution in the face of food shortages etc. None of the paradigm changing actions were an act of true will but were demands of circumstances. If we were to continue this trend, wellbeing of the country is only a pipe dream because of the costs due to delay and the fact that weakness in some sectors doesn’t necessarily result in a crisis.  Waiting for a crisis to increase attention to these sectors is not a wise strategy.

Three important reforms of this category are – role of money in electoral campaigns, decentralization, education & health care. While not going into the role of money in elections and the resultant baggage it brings to governance, it suffices to underline that there is an acceptance of inevitability of distribution of money in elections and its influence on governments’ policies. It has to change to have a substantial change in the nature of governance of the country. It goes back to the point of public trust discussed above. This isn’t solvable through strict rules or any other conventional methods. The only way to change is to take a vow that one doesn’t distribute money in elections and be a role model, thus inspiring change. It requires leadership.

Similarly, people aren’t going to demand decentralization. Education & Health care aren’t likely to be crucial in electoral debates. Neglecting them because they aren’t electoral issues is harmful. It requires leadership to work on these despite them not being electorally unimportant at the moment.

Three, need for smaller districts to enhance governance. Many critical governance issues like Education & Health care are essentially about governance at local level. It is essential to make it as easier as possible to bureaucracies to govern them. Indian districts are huge and hence don’t yield to effective governance. It is virtually impossible even for a well-meaning collector to operate organisations at this scale. While we pursue decentralization, it is also important to divide out districts to make them more manageable.

IV. Appropriateness of CIG’s approach to growth

The broad argument of the book is to essentially forget about growth acceleration in short term and instead focus on strengthening fundamentals. It easily follows from the scathing data narrative in the book. However, considering this as the appropriate approach requires elimination of other competing approaches.

One such competing approach to growth is Dani Rodrik’s growth diagnostics. It’s interesting to note that some of the key ideas in the book are inspired from Dani Rodrik’s work. In fact, I would argue that analyzing economy as a tree of interlinked components, stripping of ideology from the analysis, as presented in the book is similar to Dani Rodrik’s growth diagnostics approach.

However, Rodrik outlines a different approach regarding solutions. He argues to focus on a binding constraint in the economy easing which can result in short term burst. Meanwhile, the fundamentals can be strengthened and by the end of the lifetime of short term burst, the strengthened fundamentals can be propelled to achieve long term growth. Such approach goes in contradiction to the CIG’s approach which argues that there is no scope for short term bursts in Indian case. May be the authors' argument to opportunistically ride on 'global tailwinds' is a channel for short term boost. CIG’s approach hence needs further substantiation.

There are other important arguments which posit that some sectors have the potential to bring short term boosts. Textile sector is the widely quoted one. If there’s a way to boost agricultural growth to around 4% (leveraging on horticulture etc.), it could have a significant impact on overall growth. All these arguments have to be systematically proven infeasible to call CIG’s approach as the appropriate strategy.

The other competing growth theory is the theory of institutions. As per this, institutions are crucial to achieve growth. India has too less growth for its level of institutions highlighting India’s growth potential. How does CIG’s short term growth skepticism square up with this? May be CIG is talking about growth in short term while institutions approach is pointing to growth in long term. CIG should also answer this question to affirm its approach as the appropriate one. 

V. Conclusion

“Can India Grow?” provides a scathing data rich review of India’s economy.  The discussion on State Capability and Process Principles are the unique value additions to the discourse. The issue of state capacity is least recognized. Even if it seems obvious, policy actions tend to gloss over it. Process principles are a timely reminder of the importance of internalizing certain crucial principles. Thus, discussion on these is a valuable contribution. The book rightly argues that India has been muddling along and that it increases the exposure to risks.

The arguments of the book based on honest data rich diagnosis of the situation are a timely addition to the discourse. It’s a refreshing way to approach analyzing Indian economy, stripping ideology out of the analysis. If the metric of the book’s success is to provide an honest account of state of the economy, make people acknowledge it and attempt to change perspective of Indian economy, it is successful in that regard. It’s a sobering read and highly recommended for all those interested in understanding and appreciating the nuances of Indian economy. 

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