Sprinting the Marathon

Debashis Basu 21 July 2016

Vijay Joshi is emeritus fellow of the Merton College, Oxford. Unlike professors teaching and researching in foreign universities, Joshi has had ringside view of the Indian economy having held official positions like the special advisor to the governor of the Reserve Bank of India, director of JP Morgan Indian Investment Trust and consultant to several international organisations like the World Bank. In this book, he asks and answers three simple questions. One, how realistic is it for India to become a prosperous country over the next 25 years, given the current institutional structures? Two, how can we speed up the progress? Three, how can we quickly eliminate extreme poverty?

The short answer for the first question is: it is really tough; almost impossible. The short answer to the third question is a radical overhaul of the subsidy regime and direct cash transfer to the very poor. Much of the book is devoted to answering the second question which, indeed, is what we are interested in. For starters, what is the definition of a prosperous country? Possibly, the level of per capita income enjoyed by the lower rung of high-income countries today (say Portugal), with the condition that national income should be widely shared and even the poorest people should have a good standard of living, as we see in Europe.

This goal can be reached only by ‘high-quality’ per capita growth of income of around 7% a year for a quarter century, starting now. By ‘high-quality' growth Joshi means growth that is distributive and not concentrated in the hands of the powerful. Though growth economists have not traditionally bothered about the social parameters, Joshi’s high-quality growth has one more element: growth that is environmentally-friendly. How tough is this kind of quantitative and qualitative growth target?

The central argument of this book, and one with which I wholly agree, is that with 'business-as-usual' policies, India will be hard put to achieve high-quality and enduring per capita growth of even 6% a year, let alone 8%, which would be necessary for it to become a prosperous nation in the next quarter century. What we need is radical reform. Why can’t we grow at a 7%-8% clip? Because it is really tough, as history tell us.

A study by Lant Pritchett and Lawrence Summers examined growth in all countries, for which data exists, from 1950. From 1950 to 2010, there have been just three countries that have recorded super-fast growth (6%+) for three decades continuously. These were China (1977-2010: 8.1%), South Korea (1962-91: 6.9%) and Taiwan (1962-94: 6.8%). Note that just one country—China has had a per capita growth rate of more than 8% a year for 30 years. And none of these three was a democracy during this high-growth period.

Indeed, apart from these three countries, no other country has had per capita growth of 6% for a continuous period of even two decades. Super-fast growth phases are quite short and nearly always end in a sharp slowdown, probably because of overconfidence bias of bankers, politicians, officials and businessmen.

It is worthwhile to remember that while we are celebrating 25 years of liberalisation, India has had a just one longish period of super-fast growth, which is 2003-11. If we look back, we had only a small role to play in this growth spurt. It was first a global growth wave, led by China. When this brought a global financial crisis, growth was goosed up by loose money policy, which obviously was unsustainable beyond 2011. That year, India started raising interest rates and the growth rate collapsed.

What can India do to start sprinting for the next 25 years? Joshi diagnoses the problem correctly: stop intervention by the Indian State. “It often intervenes, arbitrarily or to correct supposed market failures… That is why India is regarded as one of the worst places in the world to do business… It quite properly intervenes for redistributive purposes but does so ineptly and ineffectively.”

Neither does the Indian State “deliver in the areas that fall squarely in its province, such as administering law and order… making sure that public services are provided and creating an effective and adequate safety net for poor people.”

The direction is clear: “both the state and the state-market relationship need urgent reform… Without such a reconstruction the project of rapid and high-quality growth is very unlikely to succeed.” But the irony is every policy-maker in India already knows this. So did the previous prime minister, an erudite economist. The key is bold political leadership, not another correct economic diagnosis.

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