The Hindu Business Line : Will the growth story go on?

It is the season for prognosis and a review of the past 12 months. Yet for us in India, everything that happened in 2007 is small beer compared to the record growth rate of the national income at constant prices. This growth figure has now crossed nine per cent, and could move up further. There are understandably two opposing views although the considerable euphoria amongst industry, government and the general public is well accepted on all hands. There are also the inevit able questions. How did this happen? And more importantly, will it last? What should we do to ensure that growth does sustain this rate?

Economic performance

How much of the performance of an economy, which comprises hundreds of millions of households, can be attributed to deliberate policy and action is a needless debate. Of course, a single number is an artificial construct anyway. It is the result of a multitude of actions and reactions, complicated by interactions among themselves. To understand what lies underneath this piece of data is the purpose of the framework diagram alongside this article. Every level below the topmost currently visible tip, the performance, will need our attention if we have to secure the future of the economy. And it is not just the usually trotted out list of infrastructure, a jargon word that seems to have lost its force. We, therefore, must consider each of the three levels in turn.

Structures and systems

Firstly, there is no doubt in anyone’s minds that the animal spirits, meant to be let loose by a liberal set of policies in 1991, have indeed been aroused. The year saw the emergence and growth of several new entrepreneurs such as Suzlon and new industrial groups, as well as new ventures by the established ones such as the Tatas and Reliance. We saw the biggest overseas acquisitions of them all, the Mittal-Arcelor deal and the Tata-Corus.

Apart from growth through market expansion and new product development, companies have now set out on an ambitious programme of acquisitions and mergers. And far more than before, they are ready to venture abroad as well. The buoyant Indian rupee can’t hurt in this process.

In banking, telecommunications, and in airlines there will continue to be a series of consolidation attempts. Even the State Bank group of associate banks have announced plans to merge in order to acquire the sort of size, essential to face overseas competition. Scale has always been and remains a big issue for Indian industry, though less so than in the early 1990s.

All of this is part of the second layer of the pyramid, namely the structural and systemic support to economic growth. Although this is going ahead rapidly on the industry and services front, the same unfortunately is not true of the broad spectrum of the farming economy. Actually the non-cropping part, mainly plantation products and commodities, has managed to grow at a respectable six per cent. It is the foodgrain and cereal sectors that have really dragged the growth down. Here the long overdue and well-recognised changes will not take place until our politicians wake up to the destructive nature of their short-term thinking and ideological battles.

Land acquisition for any end-use is difficult; consolidation and industry-scale farming is still far away; and the application of better practices and inputs is progressing painfully slowly. As a result, per capita incomes in the backward and more rural States are slipping further below the levels reached by the prosperous ones. The fact that the poorest States are also the most populous ones is, for the whole of society, a time bomb ticking away.

Thus improvements to the way both technical systems and social structures function could be a drag on sustaining economic performance. A factor that is trotted out as a reason for poor performance, particularly by the Central ministers, is the fact that farm-related matters are for the States to decide policies. Here again, little can be done without some direction from a strong leader – and that is always a double-edged sword, as we saw in Gujarat.

The foundations

Next come the foundations of society — the legal, judicial, administrative and legislative bases on which a democratic society as large as ours has to rely on. Far more fundamentally, however, the effectiveness of these institutions can be strengthened or undermined by the quality of education and skill-development in the society. A vast network of schools and colleges is an inevitable pre-requisite for a growing economy that seeks to be modern; and this has not been forthcoming across the country in equal measure. There are great yawning gaps in the administration of free, State-supported education; and the quality of facilities and teaching is indeed unsatisfactory. Various political factions with their pet peeves want to use the educational system to their advantage, to make a point. And it is unfashionable to question a non-merit based system of admissions, where professional colleges are concerned. Equality of opportunity is fine but deliberate engagement and passing of students who do not seem to have learnt the minimum required knowledge and skills is dangerous. The country is not doing itself any favours by producing doctors with 30-35 per cent as pass marks in their examinations.

In the name of righting of wrongs of the past, we have indulged for six decades in distorting the educational system which, along with the use of the English language and the Anglo-Saxon traditions of the professions such as law and medicine, had been a prime starting advantage for the young independent nation. Now, rather belatedly, there is widespread recognition that the intellectual raw material and talent in the country is as good as anywhere in the world. However, it needs considerable focus and direction before it becomes employable. Little wonder then that teaching of English language communication, problem solving, critical and independent thinking and the so-called soft skills (basically good manners and ability to get along in a civilised manner) have all come to the forefront of attention in the past few years. It is obvious that without these, inclusive growth will remain a pipe dream. We will only create small pockets of BPO-lands and little Bangalores and Gurgaons here and there but a widespread development will be sadly missing.

As for the legal, judicial, administrative and legislative bases, unfortunately the events of the year gone by do not bring much reason for cheer. Court cases are piling up by the millions, progress in civil legal suits takes decades and the police and judicial systems have been repeatedly brought into question by scandals and tragedies. If the democratic recourse to any issue must finally result in the Supreme Court stepping in to make a pronouncement, then we have little hope of going anywhere. Already there are mutterings heard about the probity and conduct of judges, their appointment and the extent to which they can make observations during hearings and trials. The atmosphere of intrigue and conflict that politicians inevitably seem to bring to any issue, especially if it has anything to do with social and religious divisions, does not augur well for the future of the foundations.

Assumptions and beliefs

Underlying all of this are the assumptions on which policy making appears to be run in the country. We seem to thrive on sweeping, generalised prescriptions such as setting up regulatory mechanisms the moment a conflict of interest surfaces, as it is bound to do in a pluralist society. Soon, the regulators need regulation or supervision and courts have to intervene. Legislation, however laudable and desirable, takes ages and coalitions have shown how not to move fast in a world that won’t wait for us.

A second set of assumptions is that throwing money at the problem should solve it. So allocation of resources gains priority over using the money already allocated. Tax collections are buoyant to levels undreamt of in the country’s history yet it is unlikely that fiscal responsibility will dawn on our governments anytime soon. Simply printing more money and hoping problems will go away if we bury our heads in the sand and increase subsidies, remains the official approach to macro-economic policies. Our only hope is that true liberalism will prevail and more and more of the economic decisions will get decentralised. It is sad to reflect that an eminent person such as Ratan Tata practically admitted in so many words that the way policy is formulated and administered in the country is still based on favouritism and cronyism. And this indeed is a spur for many industrial groups who are not in the favoured category to search for pastures new, overseas.

Merely giving away money, either as subsidies or price benefits or indeed entry guidelines for some sectors, is a hangover from the Socialist era. As for reducing the size of futile bureaucracy, our mindset is still guided by the assumption that paying some people to dig holes and others to fill them up will help the economy grow — a case of misapplied Keynesian prescription for the Depression.