‘There are signs that our growth model will survive’

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Edited Excerpts From An Interview

Arvind Subramanian
Arvind Subramanian, Photo: Vijay Pandey

After a decade of growth, why did the Indian economic model come under such strain in 2011?
India’s growth model has been dependent on three factors of production: skilled labour, land and social capital. In 2011, all three came under pressure. Let us look at them closely. India has a large pool of unskilled labour but this is underutilised because of lack of education and our labour laws. We’ve been dependent on our smaller pool of skilled labour for economic growth. But demand has far outstripped supply of skilled labour, the latter has not been dynamic because of the failings of our higher education system. Similarly, land has become a very expensive factor of production because of reasons we know well. Finally, there’s our social capital. Our public institutions and governance more broadly are in a shambolic mess. This point was driven home by the scandals in 2011. Given all this, what is our comparative advantage going to be in the future? The year brought home these problems and these questions.

So 2012 brings more concerns about India’s economy than 2011…
I think two things have gone wrong. For the medium run, the spate of corruption and governance scandals has led people to question if India’s ambitious growth rates are really feasible. As for the short term, inflation remained persistently high in 2011. And in some ways, the two are related. The fact that inflation has remained persistently high might be a signal that in the coming years, India may have to settle for 5-7 percent growth rather than the 8-9 it hoped to achieve.

To what degree has the external environment affected India?
There’s a relative answer and an absolute answer. All countries are going to be affected by a deteriorating external environment. And those that are more exposed by trade or financial channels are going to be more affected. What is worrying about India is that the same external environment has spelt more bad news for India than for some others. In turn, this has had much to do with the internal problems we discussed in the previous question.

What works in Gujarat or Bihar will be tried elsewhere. That’s why I remain an optimist on India
What works in Gujarat or Bihar will be tried elsewhere. That’s why I remain an optimist on India

How’s China handled the same set of external factors, given its more excruciating export dependency?
The really big difference is in terms of China’s ability to leverage fiscal and monetary space. Chinese exports were brutally hit in the 2008 crisis. But the country’s fiscal position was sound and this allowed the government to impart a fiscal stimulus that was the envy of the world. Now inflation is under control so China can relax monetary policy as growth starts dipping.

India, on the other hand, has problems on both these counts. It has a much bigger public debt and fiscal deficit. As such the fiscal policy space remains constrained for the government. Similarly, high inflation and a depreciating rupee has also placed constraints on monetary policy. Quite apart from this, there is the Chinese government’s ability to react and do things quicker, but that is an issue of political systems. I’m talking of factors relating to macro-economic policy.

Has social sector spending become unaffordable?
The short answer is ‘yes’. The government’s got carried away. There are the purely financial conseque nces of fiscal populism — be it the MGNREGA or the Food Security Bill — that entail spending money you can’t afford. However, I recognise these fulfil very important objectives. The bigger problem is with the ‘Rights’ approach to meeting equity objectives. The objectives are laudable; the means problematic. What’s happening is that UPA-2 is asking the State to do more and more in financial terms and organisational ability precisely when both are compromised. So you are requiring of the State what it is not capable of doing. It’s as if the mere passage of legislation, without the supporting hard work, will produce magical outcomes.

While the objectives are laudable, we need better ways to approach them. Take the Right to Education law. How will you achieve its goals if teachers are missing from schools? Also, is enacting the law undermining private education, one of the few success stories in India?

What works in Gujarat or Bihar will be tried elsewhere. That’s why I remain an optimist on India

Why’s India no longer an attractive destination for foreign investors?
Because of the Eurozone crisis, funding is drying up. The Indian private sector is particularly dependent on European banks. That aside, our external situation looks difficult. There are questions about whether India can generate high growth in the next, say, 18 months. So it’s both a cyclical and fundamental reassessment.

Indian companies are investing abroad with a gusto that is unprecedented.
There’re two ways of interpreting that. First, the surge in outward FDI has shown that Indian companies can be competitive on a global stage. What’s special about Indian FDI overseas is it’s not using the comparative advantage of cheap labour in India, but the comparative advantages of entrepreneurship, managerial and, in some cases, technological skills. That is the good news. There’s also the bad news. Why are Indian businessmen searching for opportunities overseas? Simply because, like foreign capital, Indian capital is hedging its bets. It is unsure of Indian growth.

Having said that, India’s outward FDI began around 2004. At the time, foreign capital was pouring into India, so we unambiguously celebrated the outward FDI. Now that foreign capital’s drying up, we tend to see the outward FDI in the context of a push factor rather than a pull factor.

Are you pessimistic about 2012?
No. There are important positive signs that tell us the Indian growth model can and will survive. We have Narendra Modi, Nitish Kumar and possibly now Jayalalithaa, who serve as models and have a demonstration effect. They can be a real force in pulling up other states. Labour and capital are mobile in India. If they move to, for example, Gujarat or Tamil Nadu, it will put pressure on other states to perform.

So you’re putting the onus on the state governments rather than the Union?
There’s value in the economically and politically integrated India that we have created — what Sunil Khilnani nicely dubbed “The Idea of India”. It has a force of its own, and ensures that good experiments will eventually be seen as worthy of successful emulation. What works in Gujarat or Bihar will be tried elsewhere. That’s why I remain an optimist.

Ashok Malik is Contributing Editor, Tehelka. 
ashok@tehelka.com

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