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 one of the biggest causes of the problem is lack of effective education to give people job skills. In 2013, economist Karthik Muralidharan summarised reams of research and noted that ?there is very little evidence to support the notion that improving school inputs in a ?business as usual? manner will improve learning outcomes? and yet ?there is no mention of learning outcomes in the most recent RFD [Results Framework Document]? of the Ministry of Human Resource Development. This refers to government-provided elementary education: the same failures plague higher levels too, particularly vocational training.
Job creation also requires business creation and expansion. Political scientist Atul Kohli has characterised Indian government policy as ?pro-business? rather than ?pro-market.? What he means is pro-big-business, since smaller firms struggle to thrive on an unlevel playing field. But again, this does not mean that markets or capitalism are at fault in a general sense. Rather, the Indian state has not done what it could have to create a more favourable environment for doing business, and 2013 brought that fact home. The land market and the electric power market are two examples where innovation can make a difference. For example, Maitreesh Ghatak and Parikshit Ghosh have offered an auction-based mechanism for acquiring land for new factories that can reduce arbitrariness and corruption.
Finally, 2013 has ended with a diplomatic incident, one which brought out once again India?s struggle with inequities of caste, class, and gender, as well as its lack of international clout. It is doubtful that a Russian or Chinese diplomat would have been subjected to the treatment received by India?s Deputy Consul General in New York. Some of the difference in status has to do with military might and capacity for retaliation, but economic might also matters in garnering global respect. What has really hurt India?s position, though, are the contradictions exposed in its own society, with respect to the treatment of women, of lower castes, and the poor. Again, these problems all pre-date economic liberalisation. Globalisation and economic change are only making them more obvious. If anything, patriarchal attitudes and caste oppression are being challenged by the new economic order.
The lesson of 2013 for India ought to be that economic progress and positive social change can, and ought to, go hand in hand. Economic policy has see-sawed between paternalism and neglect towards those who are disadvantaged, but these are not the only choices. It will be interesting to see how India?s politicians respond in 2014, as the country moves towards a major decision on who will rule.
The author is professor of Economics, University of California, Santa Cruz
