| Gurcharan
Das
Magazine Articles
Where society has triumphed over the
state
Financial Express (10 October 2006)
India’s mystifying economic rise bewilders
Indians and baffles economists. No one quite
understands why this noisy and chaotic democracy
of a billion people has become one of the world’s
fastest growing economies. It is looking at
a fourth year of consistent real growth of around
8% a year, following upon 22 years of very respectable
6% average annual growth. What puzzles economists
is that India is not following any of the proven
paths to success. Compared to the classic Asian
strategy—exporting labour-intensive, low-priced
manufactured goods to the West—India’s
economy is driven more by consumption rather
than investment, its domestic market rather
than exports, services more than industry, and
high-tech rather than low-skilled manufacturing.
With consumption accounting for two-thirds
of GDP, it is a people friendly model and this
why inequality has grown much less in India
than in other nations. Its Gini index, which
measures income inequality, is 33, compared
to 41 for the United States, 45 for China, and
59 for Brazil. (In a perfectly equal society
it would be zero.) The domestic orientation
has meant that the Indian economy has been far
more insulated from global downturns and is
less volatile. More importantly, thirty to forty
percent of its GDP growth is due to rising total
factor productivity rather than mere increase
in capital and labour. Ironically, high end
manufacturing, which is capital and knowledge
intensive, is succeeding, but India is failing
to create a broad based industrial revolution
based on low end, labour intensive manufacturing.
Thus, it is not creating the employment commensurate
to its economy’s growth. This rightly
worries Indians, and they ask: how will India
shift its vast army of people from rural to
urban areas?
Even more perplexing is that rather than rising
with the help of the state, India appears to
be rising despite the state. The entrepreneur
is clearly at the centre of this success story.
India today boasts highly competitive private
companies, a booming stock market, and a modern,
well-disciplined financial sector. Competitiveness
runs deep. More than hundred companies have
a market cap of over a billion dollars. Foreign
institutions have invested in over 1000 Indian
companies via the stock market. Of 500 Fortune
companies 125 now have R and D bases in India,
and 380 have outsourced software development
to India. All this has disciplined the wilful
banking sector, whose bad loans are now less
than two per cent compared to China’s
twenty percent (even though India’s shoddy
state owned banks have not been privatized).
Their economy may mystify Indians but they
are agreed on one thing. They are succeeding
because their over-regulated state is gradually
stepping out of the way. The pace of reform
is frustratingly slow, but incredible as it
seems, every succeeding government after 1991
has persisted in reforming. Even slow reforms
add up, and they have added up to make India
the world’s fourth-largest economy in
terms of purchase power parity and it will soon
cross Japan to become the third-largest. During
a quarter century of high growth, the middle
class has quadrupled to around 250 million,
while one percent of the poor have been crossing
the poverty line each year, and this too has
added up to 200 million people. At the same
time, population growth has slowed from the
historic rate of 2.2 percent a year to 1.7 percent
today—meaning that growth has brought
large per capita income gains, from $1,178 in
1980 to $3,051 in 2005 (in purchasing-power
parity).
Yet, the Indian state has not lived up to its
side of the 1991 bargain. It hasn’t built
enough good roads, nor given uninterrupted power
and water. Government schools and health centres
are rotten. The police are corrupt. In short,
Indians don’t get the services that citizens
in other countries take for granted. The Indian
state is so riddled with perverse incentives
that accountability is impossible. And the irony
is that there are so many in this government,
supported by their Left allies, who want to
bring back state control in the economy and
waste hard earned taxes on schemes that will
never benefit the poor.
India today stands at the cusp of something
big. Growth should not only continue, but accelerate
because half the population is below 25, and
this can yield a demographic dividend. But it
will only happen if it continues to reform.
There is a vast, unfinished reform agenda. Public
debt is too high, which discourages investment
in needed infrastructure. The public sector
is sector is still too large (even though much
smaller than China’s) and uses resources
inefficiently, diminishes the potential for
employment, and is a drag on growth. Severe
labour laws cover only 10 per cent of workers,
but once hired they cannot be fired.
What does all this mean for international investors?
Unlike China, the Indian state is not particularly
friendly and businessmen don’t get red
carpet treatment. In fact, they have to put
up with a frustrating bureaucracy and miles
of red tape. It’s true that in recent
years competition between the Indian states
for investment has reduced some of the earlier
bureaucratic irritations. While the judiciary
may be slow, there is justice at the end. Corporate
governance has improved amazingly. Because India
opened up late competition in the marketplace
is still not severe. Investors report that once
established the rewards are large, enduring
and more certain. Some companies have said that
they are more likely to make profits in India
than in China.
What most impresses investors, however, is
India’s vibrant, positive, and innovative
middle class, and this contrasts with the bungling
state. International companies have discovered
that English speaking Indian employees are highly
skilled and their biggest asset. This is why
Indians employees have been steadily climbing
to the top in many global multinational companies.
India’s rise is obviously good news for
its billion people. But it is also good news
for investors abroad who can benefit from a
society which has triumphed over the state.
This is a more durable environment for private
enterprise. India’s rise teaches that
rapid economic growth is attainable in a democracy
if you get the policies right. Until 1991 India’s
policies were wrong. India’s greatness
lies in its self reliant and resilient people,
who responded to the reforms. And when the state
fails them today, they don’t complain.
When teachers and doctors don’t show up
in government primary schools and health centres,
they open up cheap private schools and clinics
in the slums, and get on with it. The simple
lesson is that open societies, free trade and
multiplying connections to the global economy
are the pathways to lasting prosperity.
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Gurcharan Das is former CEO of Procter &
Gamble India and the author of India Unbound:
The Social and Economic Revolution From Independence
to the Global Information Age (Profile Books)
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