India Vision 2020: Growth and Welfare

Introduction

   Elections are a few months away and the election battle has been joined.  Parties are formulating their manifestos and trying to refine a vision that they can present to the voters.  It is therefore timely for those of us with a national (as against party) perspective and some knowledge and experience of economic development, growth and governance, to put forward our views for the consideration of the contending parties.  In the first of a series of notes, we start by putting the critical importance of economic growth to people’s Welfare in historical perspective.

Social Welfare

History

 The welfare of the average Indian was about the same as the welfare of the average inhabitant of the World at the peak of the Pala (Northern) and Chola (Southern) empires (1000-1200). This was followed by a period of invasion, wars and political consolidation (Sultanate, Mughals), during which the real income of the average Indian fell to 80% of the average World inhabitant by 1820. The gap between the welfare of the average Indian and the World widened dramatically during colonial rule, reducing the average Indian to pathetic poverty by the time of Independence.  In 1950 the real income of the average Indian (per capita GDP at PPP) was reduced to a quarter (1/4^th) of that of the average inhabitant of the World. The British colonialists ensured through a combination of neglect and design, that the industrial revolution did not revolutionize India’s economy.  The fruits of the industrial revolution, which originated in Great Britain and propelled it to global super-power in 19^th century, were denied to India.[i]

Socialist Decline

      The gap continued to widen during the first 30 years of Independence, to reach its widest point of 85 per cent points in 1980.  During this period economic policy was driven by the ‘Indian version of socialism,’ sometimes incompletely referred to as “Fabian” or “Nehruvian Socialism”, as Shrimati Indira Gandhi contributed to its negative development from 1966 to 1977. This misplaced approach continued the Indian people’s descent into abject poverty, to 14.5% of World average.  In 1980s Mrs. Indira Gandhi abandoned her failed policies, accelerating India’s per capita income growth above the World average and began to close the Welfare gap.

Reforms and Catch UP

   The economic reforms and liberalization of the Indian economy, first in the 1980s and then further in the 1990s, has had unambiguous benefits for the Indian people.  The welfare of the average Indian had increased to about a third (1/3^rd) of that of the average World inhabitant by 2010.  The rate at which the welfare gap has been closing has accelerated over this period (1980 to 2010), with the rate of catch up during the 2000s being about three times that during the eighties.  The highest average 10 year growth rate of per capita GDP at PPP was 6.2% in decade 2002 to 2011. These facts contradict assertions based on selective use of comparator countries and time periods. However, this acceleration had within it the seeds of its own hubris. Because of widespread growth complacency and consequent mismanagement, growth collapsed in 2011 and the welfare gap has started widening again. Unless the new government formed after the election, takes decisive corrective action, the gap may continue to widen in 2014.

Social Indicators

It is very important to understand that it is this gap between our per capita GDP (at PPP) and the World, that, (a) categorizes us as a (relatively) poor country, (b) results in our having much greater ratios of poor and near-poor people than other countries, and (c) Is the primary cause of the gap between our social welfare indicators and those of better off countries. In 2012, Vietnam with a per capita GDP at PPP of 30% of the World average was two ranks below India at 32% while Pakistan with 24% of World average is 8 ranks below.  On the upper side are Philippines (37%), Indonesia (42%) and Sri Lanka (52%), still poor, but with their “Aam Admi” much better-off than ours.

Conclusion: Objective

The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the World, in the shortest possible time.  This objective is inseparable from the objective of sustaining fast growth. What is a realistic target to aim for by 2020-2025?  The next Indian government should aim to raise the per capita GDP level of India to 43% of global average by 2020 and 54% by 2025 (from 32% today). This will require a restoration of per capita growth to 6.5% within three years and a sustaining of this growth rate till 2025. This will generate economic opportunities and jobs for youth and begin to restore the welfare and dignity of the average Indian to the level of the average World inhabitant.  We will explore other elements of the broad vision in subsequent articles.

[i] Arvind Virmani, "Fall and Rise of India", Working paper No. WsWp 1/2013, October 2013 at https://sites.google.com/site/drarvindvirmani/growth or https://sites.google.com/site/drarvindvirmani/working-papers

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A version of this note appeared under the same title at:

http://blogs.economictimes.indiatimes.com/PolicyAnalysis/entry/india-vision-2020-growth-and-welfare.

Globalization, Growth and Welfare: India under Narsimha Rao & A B Vajpayee

Backdrop

   One of the first policy actions of the Aam Admi Party on forming the Delhi State government was to announce that it would try and rescind the decision of the previous Sheila Dixit government to allow FDI in Delhi’s retail sector.  The anti-FDI position of the left in BJP(or RSS) is very similar to that of the leftists in the Congress party even though they draw their inspiration from different sources.  There is therefore a danger that the manifestos of several parties may take an anti-FDI stand, and thus unnecessarily bind the next PM and the ruling coalition into policy positions they may regret.   It is therefore vital to understand how India has benefited from the opening and globalization of the Indian Economy since 1991.  The note shows how Globalization of the Indian economy, acceleration of economic growth and improvement in peoples Welfare have progressed in tandem during the tenures of both Shri Narsimha Rao and Shri Atal Bihari Vajpayee as Prime Ministers from 1991-2 to 2003-4.

Nineties Reforms

   The 1990s policy reforms consisted of three major elements- Domestic decontrol, Tax reforms and External opening and one smaller element- Public sector disinvestment.  Both the domestic and external liberalization focused on product and capital markets. On the product side, prices, production, investment, imports, exports and technology import were freed from controls.  Agricultural products were kept out of this agenda and remains largely so till today, at great cost to consumers and farmers.  Capital markets were also liberalized in a carefully phased manner to allow domestic companies to raise funds and for domestic and foreign savers to supply capital and innovative financial products. This was accompanied by a major effort to simplify Central government taxes (CIT, PIT, sales-excise-VAT, customs) by reducing exemptions & deductions and unifying and reducing rates. The Public Sector disinvestment was also intended to nudge the political owner (govt. departments) and the bureaucratic managers & employees to act more like private owners and managers.  The basic objective of this set of policy reforms was to improve the competitiveness of the product and capital markets and thus promote productivity and growth.  These reforms succeeded in promoting competition and opening, and raising the growth rate of the economy, resulting in a closing of the gap between the Indian per capita income and the World average.

Outcome: Opening & Competition

      India’s Imports rose from 8.3 per cent of GDP in 1990 before the Narsimha Rao reforms to 19.3 per cent in 2004, the last year of the NDA government. Part of this was a consequence of the rising World trade ratios. However the (negative) gap between the Indian and World Import-GDP ratio almost halved from 11.9 per cent to 7.3 per cent. India’s exports also rose from 6.9 per cent of GDP in 1990 to 15.3 per cent in 2004, closing the (negative) gap between Indian and World export-GDP ratio from 12.9 per cent to 9.3 per cent.    There was a corresponding opening of the Capital account and of technology imports as jointly captured by the inward Foreign Direct Investment (FDI). The ratio of net inward FDI to GDP increased eleven fold from a miniscule 0.07 in 1990 to 0.8 in 2004.  The ratio of Global FDI flows to World GDP however almost doubled from 0.93 to 1.66. Thus, India’s FDI-GDP ratio remained below the World FDI-GDP ratio by 0.86 per cent points.  Overall the opening of the Indian economy to international goods, services and capital improved competitiveness of the domestic producers and accelerated growth.

Growth and Welfare

      Indian Industry responded to the increased competitive pressure and opportunity for import of higher quality input, capital goods and technology by raising the rate of investment and productivity growth, particularly in the corporate sector and thus accelerating economic growth. The growth of per capita income at purchasing power parity accelerated to 4.3 per cent per annum during 1992 to 2004, up 1.4% point from an average 2.9 per cent per annum during 1981 to 1991. Though part (0.6% point)of this was due to an acceleration of World growth, Indian per capita income growth was faster than World average by 2.5% points during the Narsimha-Vajpayee period compared to the 1.7% point gap during 1981-1991 (Indira2-Rajiv). As a result of this growth acceleration, Indian per capita GDP at PPP rose from 18% of average World per capita GDP in 1990-1991 to 24% in 2004.

Lessons For Future

  The economic reforms of the 1990s were wider and deeper than those of the 1980s, overall as well as on the three major dimensions:[i]  Domestic decontrol, tax reform and external liberalization (opening and globalization). Consequently they resulted in a greater acceleration of economic growth relative to average World growth and a faster closing of the gap between the welfare of the average Indian and the average World inhabitant. We need to carry forward and complete the reforms in these three areas, including agriculture decontrol, further simplification of taxes and FDI in Defense, Insurance and Retail.   Reforms have been very limited and hesitant in one dimension, which has been shown to enhance productivity growth: Disinvestment and privatization of the Public sector, including Public sector Banks and Financial institutions, and de-monopolization of infrastructure enterprises.  This is partly due to inertia-the original objectives have long since become irrelevant and practiced only in the breach.  Land market reforms remain flawed and incomplete. Labor laws remain mired in an ideological swamp.[ii] These reforms could yield enormous dividends in terms of Welfare gains in the next two decades! We can only hope that the next government will have the understanding, will and political leadership to carry them out.

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A version of this article appeared on the editorial page of the Times of India on 20th February 2014, under the banner, “Don’t Close Down, Open Up.”  http://timesofindia.indiatimes.com/home/opinion/edit-page/Globalisation-during-Narasimha-Rao-and-Vajpayee-years-was-good-for-growth-and-welfare/articleshow/30689500.cms

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[i] See for instance, Arvind Virmani, “Policy Regimes, Growth and Poverty in India: Lessons of Government Failure and Entrepreneurial Success!, Working Paper No. 170, ICRIER, October 2005.           http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 or other references  at https://sites.google.com/site/drarvindvirmani/growth

[ii] See Arvind Virmani, "Reform Agenda for Growth and Welfare," Policy Paper No. 1/2014, New Delhi, January 2014; at https://sites.google.com/site/drarvindvirmani/policy-papers or “Reforms for Policy and Growth” at http://dravirmani.blogspot.in/2013/12/reforms-2014-19-for-employment-and.html for further details.

Aam Admi Party (AAP): An Economic Evaluation

Introduction

   In the election to the Delhi State assembly, AAP emerged as the second largest party and formed the government with the help of the Congress party.  As far as Delhi is considered it should have 4-5 years till the next election to demonstrate its abilities.  However, it has already declared its intention to enter the General elections in a big way.  So the public has the right to use all available information including the utterances of its leaders, their personal actions and its performance so far in Delhi, to make a judgement about its national potential!  Given its outsized ambition one is forced make quick judgements about it from the available information.

Anti-corruption Crusade

   The most positive feature of the AAP is its declared objective of attacking corruption in Public life and the Bureaucracy.  In fact one could call this its USP to the urban voters, particularly the urban middle class, who are fed up of the harassment and corruption. The appeal of this issue encompasses the poor who face the brunt of the corruption of the lower bureaucracy and its overbearing attitude towards the citizens who they are supposed to service.  It also touches the small business man who has to deal with extortion, corruption and inadequate public services on a daily basis. Thus this issue cuts across all classes and unites them. Given the origins of the AAP leadership in the Anna Hazare movement for probity in public life and against corruption, it has a certain amount of credibility in this respect.  However, this goodwill is not likely to last till the general election, unless it is able to demonstrate that it can bring the corrupt (who it had so vociferously attacked when in opposition) to book and make a visible difference in the extent and degree of corruption in Delhi.  It should keep a lazer focus on this issue, introduce the promised Lok Ayukt bill and show how a reduction of corruption can lead to an improvement in the quality and volume of services provided (including for example in the incidence of rape & water-sewage-sanitation).  Given that estimated fraction of corrupt payments on virtually all government expenditures ranges from 30% to 50% this is far from impossible!

Correctable Weakness

Constitutional & Govt. Rules

 Having never run a government before, the public statements and actions of several AAP ministers seem to display a weak understanding of government systems and procedures, though this cannot be said of Mr Kejriwal a former IRS officer. This is however, correctable with a little serious effort to listen and understand Governmental systems and procedures with an open mind (instead of suspecting every interlocutor to be corrupt).  These include the constitutional separation of powers and responsibilities between Center, States and localities (Nagarpalikas and Panchayats), between Government, Judiciary and other institutions and between ministers and their secretaries. Some of AAP’s  leaders also have to understand the complexity of government decisions. Most major decisions  have positive and negative effects on different sub-sets of voters. Any such decision will therefore have to be judged by its net overall effect.  This is an assessment that political leaders have to make.  It cannot be decided by mohalla sabhas, by those who agitate and shout the loudest or through pols & referendum.  Voter interaction is highly recommended for understanding public problems and concerns, but not for making decisions that affect many sub-groups, some positively & others negatively.

Self-Absorption(righteousness?)

         There also seems to be an excessively individualistic approach to corruption, with little thought or understanding of the pervasive and systemic nature of corruption in India today.  The AAP leaders have identified a set of “bad guys” in politics and business and posited themselves as the “good guys”.  It is assumed that once they the “good guys” replace the political “bad guys” and go after the “bad guys” in business most of India’s problems will be easily sorted out. This self-righteous approach, earlier seen in the V P Singh anti-corruption campaign, is extremely naive!  Though trial & punishment of the corrupt has important signalling effects, an anti-corruption campaign is unlikely to be sustained in the medium-long run, unless systemic improvements are made. This includes institutional improvements like the Lok Ayukt bill, police and bureaucratic reform and economic policies such those related to land use, auctioning of government land and public transport & parking, that create incentives for honest behavior.

Negatives

        From the past statements and behavior of the AAP leaders, their academic contacts  and the kind of prominent personalities that these leaders have invited & enticed into the party (as against those who applied and/or requested to join it), one can discern two  potential negatives in this party.

NGO Ethos

       Given the background of the original leaders (as well as of the prominent personalities they are trying to attract into the leadership) in the NGO sector, they share the micro-specialized approach of these NGOs. Most of the activist NGOs operate at the village or mohalla level and have a good idea of the problems faced by the local people. To the extent that problem and solution is purely local they can contribute to the solution, even though the issue of scalability is often ignored -success depends on every locality have the same quality of leaders who are just not available elsewhere. But when any potential solution has repercussions beyond the locality to the district, State or Nation, their approach is often too narrow to offer a viable & sustainable solution. In other words such NGOs usually lack an understanding of broader macro issues and often act betray a self-centered arrogance towards other equally well -meaning experts!  There is thus a serious danger that the AAP will rapidly deteriorate into a Federation of NGOs with narrow interests, thus bringing the worst features of the NAC right into the government, with not even a cabinet system to limit the macro damage to an indulgent list of micro policies.

Leftist Ideology

     Many of the academics, intellectuals and think tankers associated with the AAP leadership appear to be leftist adherents of State Socialism with an ideological distrust of markets.  They seem to have learned little from the 30 years of Nehru-Indira socialism and the LPQ Raj from 1950 to 1979.  They even refuse to believe the fact that the real per capita income (Pc GDP at PPP) in India declined progressively from 29 per cent of World average to about 20 per cent of World average during this period. In other words, the ostensibly pro-poor Socialism reduced the Welfare of the average Indian relative to that of the average World inhabitant by nine per cent points (or 30%).  There is therefore a serious danger that an AAP government would re-introduce failed policies, which put the economy back on a lower growth path with serious adverse consequences for growth of job opportunities and public welfare!

Conclusion

   The Aam Admi Party (AAP) has stirred up the political system by showing that an underdog can come from nowhere to second place finish in India’s capital.  Its anti-corruption plank makes it a good candidate for running urban local governments, where it could demonstrate the positive effect of reducing corruption and thus generating better public services as well as saving money that can be used to transform service delivery.  However, given its NGO origin & character and leftist, State socialist ideological baggage (that it seems to carry), it could be an uncertain proposition at the State level and downright dangerous at the Central government level. 

    This judgment can and will need to be reviewed, If and when AAP is able to establish a track record of good policies and governance.
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A version of this post appeared at, http://blogs.economictimes.indiatimes.com/PolicyAnalysis/entry/evaluation-of-aam-admi-party-from-national-perspective