What are the lessons for India of the year that is coming to a close? A year ago, I described 2012 as difficult, if not dismal. This year has presented many of the same challenges. Inflation has continued to be higher than what policymakers wanted and strived for, while growth has been lower. Social unrest has continued to simmer, its main causes unattended to. India’s global stature remains insecure, its potential at odds with the palpable asymmetries of its dealings with the United States and
China. The nation’s voters seem about to be presented with a choice between a bumbling, paternalistic populism on the one hand, and an ideology that offers efficiency but twists inclusiveness into erasure of differences. The conceptual debate in 2013 was exemplified by two books, each by a pair of economic heavyweights, that seemed written as part of an intellectual duel, and, whatever their nuances, pushed people into thinking once more in terms of “State versus Market” or “growth versus equity.”
These are false dichotomies, and the wrong lessons from India’s experience in 2013. The country’s problems are a reflection of shortcomings in markets as well as in government. Focusing on human well-being does not mean that the growth rate of GDP is a silly measure of material progress. And efficient governance does not have to mean abandoning equality in diversity. Let us look at some specific examples.
The financial sector often comes in for criticism from those opposed to “liberalisation” of the economy. Indeed, financial markets can be unstable and destabilising. On the other hand, access to credit is an important avenue for improving one’s material condition. In India, despite public sector dominance of financial intermediation, the bottom of the pyramid, whether defined as poorer households or as smaller firms, has very poor access to credit. India in 2013 was exposed as a case of inefficient financial intermediation. This year saw a new governor take over the Reserve Bank of India, someone who has a deep understanding of how financial markets can be designed to increase access while controlling overall risk.
This year also saw continued failure on the job creation front. Part of this goes back to inefficiencies in markets for business credit. And poorly designed labour protection laws also share some of the responsibility, though the solution here is not just to liberalise, but to redesign them to provide the intended protections more efficiently. But