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Book Review
Resilient or at risk?
C.T. KURIEN
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Analysis of the higher growth rate since liberalisation to assess whether it can be sustained
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SUSTAINING INDIA’S GROWTH MIRACLE: Jagdish N. Bhagwati, Charles W. Calomiris — Editors; Stanza- Rave Media, 22-C, Pocket C, Siddhartha Extension,
New Delhi-110014. Rs. 495.
Jagdish Bhagwati, the senior editor of this volume, is a distinguished economist of Indian origin and has been professor at Columbia University for a long time. He was a strong critic of the state-dominated economic regime in India during the planning era because of his conviction that economies perform best when they are left to the market. In the 1970s and the 1980s he was one of the few asking for the Indian economy to be opened up both to international markets and to m
arket forces within. Hence when India decided early in the 1990s to go in for reforms that favoured the market, he felt triumphant. That mood is palpable in this volume also.
Sustaining growth
In the Introduction the editors say: “These reforms placed the economy on a higher growth path... The central question on the minds of many observers of India today is whether India can sustain the upward shift in the growth rate and whether the country can push it up further to double digit level.”
Both to those who agree with Bhagwati and colleagues that India’s growth was “abysmally low” until the reforms were introduced, and the explanations that they offer for it, and to those who do not agree with their position, the “central question” posed above is of interest. It was to address this question that a conference of scholars and public figures was convened in Columbia University in October 2006 and the volume consists of papers presented at the conference. Practically all the papers have quite a bit of background material about India’s growth performance of the past, necessary for the participants, and worth browsing through whether one agrees with the perspective or not. Similarly, some of the international comparisons are also useful. But in this review I shall concentrate on the main thrusts of the papers and on what they say needs to be done to sustain India’s growth miracle.
Pattern of growth
Arvind Panagariya’s paper, “Transforming India”, makes a critical analysis of the pattern of growth since the reforms. The main contention is that while in the short period there has been a significant fall in the share of agricultural output in GDP, the share of industry, particularly manufacturing, has not grown. He links this up with the flow of foreign capital into India, the bulk of which has gone into portfolio investment, i.e., to purchase the shares of companies, and even a major share of the direct investment has gone into services whose capacity to absorb such investments is limited. These facts have not received the recognition they deserve. Comparing the growth profiles of China and India, Panagariya points out that in the former, capital flow was into unskilled/labour-intensive industries which helped the country to become a major supplier of light industry goods to the rest of the world. There isn’t any discussion of the manner in which the Chinese government (unlike the Indian government) played a decisive role in directing the flow of foreign capital into the country. Instead, the writer suggests that if foreign capital is to move into unskilled/labour-intensive industrial segments in India, now dominated by the informal sector, some drastic changes in labour legislation favouring foreign capital are called for. Skills of workers need to be upgraded too, he concedes, but even for this the flow of foreign capital is necessary into the educational sphere, in the form of private universities.
Unfinished reform
The second essay is by T.N.Srinivasan, another distinguished Indian economist for long in Yale University, who writes on the unfinished reform agendum in the fiscal sector. Apart from the usual recommendation to bring down fiscal deficit, Srinivasan asks for changes in two major areas. The first is to create a Fiscal Review Council, partly to replace the periodic Finance Commission, but mainly to provide a forum for the Centre and the states to discuss each other’s fiscal policies in a common forum. This is necessary to have a proper architecture of fiscal federalism in the light of the coming to power of strong regional parties in many states and the emergence of coalition governments at the Centre which necessarily include many of these parties. While this recommendation is worth pursuing, the second, to convert the Planning Commission into a Fund for Public Investment is questionable as it perceives the role of the Planning Commission solely as a funding body.
In the third essay Frank A.Wolak deals with the Indian Electricity Supply Industry which has details of the industry’s many problems and shows that the major challenge to the restructuring of the industry is establishing a regulatory process that protects the interest of the consumers while allowing suppliers to earn sufficient revenue to recover their costs and a reasonable return on investment. That, certainly, is acceptable, but the writer does not go much beyond that.
After recording the phenomenal growth of the Indian software industry and its contribution to India’s rapid increase in exports, Ashish Arora expresses doubts about India’s university system to cope with the quantity and quality of personnel required to sustain the growth of the industry. The recommendation, again, is to open up the higher educational sector to foreign institutions and capital.
Further privatisation
The fifth chapter reports on the proceedings of a panel discussion in which Jagdish Bhagwati, Arun Shourie, Ambassador Ronen Sen and former U.S. Ambassador Frank Wisner were the participants. Many issues of economics and politics were discussed, but the thrust was on the need for further privatisation of the Indian economy. Union Minister for Commerce and Industry, Kamal Nath’s Inaugural Address constitutes the final chapter.
In 2006 it would have been difficult to curb the enthusiasm and exuberance of those committed to the need to open up all economies for the free flow of capital, to allow unhindered expansion of international trade, and to get the state to withdraw from economic activities leaving them to private enterprise and the market. Hopefully, the events of the past couple of months right in the homeland of free enterprise and spreading to the rest of the world would have convinced them that growth cannot be the only objective of economic policy, and that when markets bring the system to a near collapse, it can be saved, if at all, not by capital and its owners, but by the state.
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