India’s economy is more balanced than that of other fast-growing Asian economies, observes Raghuram G. Rajan in ‘Fault Lines: How hidden fractures still threaten the world economy’ (Collins). “Partly as a result of democratic pressures, it has not been as biased towards producers or exporters, and therefore does not require a major change in strategic direction. However, there are a number of areas where it needs to act far more decisively and rapidly than it currently is doing,” he adds.
Foremost in the section on ‘impediments’ the author rues that India has the people but the jobs are not where the people are, and that not all the people are necessarily capable of undertaking the jobs that are being created.
Many of the new jobs are in the fast-growing, better-educated western and southern coastal states that are connected through rail, roads, and ports to the big cities and to the global economy, but much of the population growth in India is taking place in states like Bihar, Madhya Pradesh, and Uttar Pradesh, he reminds. With incomes in these states lagging behind owing to the level and penetration of education and infrastructure, ‘many of the people have voted with their feet, migrating to work in the overcrowded cities of the richer states.’
If better infrastructure can be a solution, one may wonder if it should be difficult to build transportation links, power plants, and sewerage, especially when China seems to have no difficulty at all. The critical factor in short supply, as Rajan decodes, is not technical knowhow, managerial capacity, labour or capital, but land.
How come, then, that European countries with far greater population densities seem to have little problem acquiring the land they need for critical infrastructure? In India, though, land rights are often poorly demarcated, he reasons. “In the poorest states, land and revenue records are not well maintained. Moreover, a number of communities, such as the tribal populations that are spread throughout India, do not have formal title to land but have been customary users of it over centuries.”
To add to the murkiness of land rights in India, even those under whose names the land is registered may not have ownership, the author cautions. “A registered tax-paying owner’s title may be invalidated if someone else can prove that her grandfather was cheated out of his rights to the land many decades ago.”
He is hence positive that reforms clarifying who owns what, and giving them full and clear title to the land will create a much more vigorous and liquid market for land transactions, and will smoothen the way for the land acquisition that is necessary for the creation of infrastructure and for industrialisation.
Raj of the land mafia
Watch out, there are powerful vested interests who will feel threatened by meaningful land reforms. One such group, as Rajan instructs, consists of people who grab government land. “After all, if few know it is public property, well-placed payments here and there can ‘privatise’ the land, and no one else need know about it. If land records were clearer and more easily accessible, land grabs could be easily identified, especially by an agile free press, and the authorities would be forced to take action.”
He is anguished that the ‘Licence Permit Raj’ has given way to the ‘Raj of the land mafia,’ where land acquisition is possible for insiders who know how to work the system, but extremely hard for outsiders. “This immediately ensures that only a few insiders are capable of undertaking large-scale infrastructure projects or creating new industrial enterprises, which not only limits the pace of growth but also creates enormous profits for these insiders – as they become seen as the only ones capable of delivering on promises to build, and therefore the only ones who win government contracts.”
Rajan is dismayed by the ‘dubious’ distinction of India as the country with the second largest number of billionaires per trillion dollars of GDP, second only to Russia, before the recent crisis. Given that Russia has fared somewhat worse during the crisis, it would not be surprising if India has already achieved the number one status, but why call it ‘dubious’? Not because Rajan is against wealth but because three factors – land, natural resources, and government contracts or licences – are the predominant sources of the wealth of India’s billionaires, and all of these factors come from the government.
It would augur better for India, argues the author, if more of its billionaires came from competitive sectors with free entry such as software, and fewer emerged in sectors where government favour influences profitability.
Another impediment is that the government occupies immense space in India, but generally does a very poor job delivering the goods and services it chooses to provide, Rajan writes. Generally, it is not the rich and the upper middle class who are hurt by this barrier; they can opt out of most government-provided goods and services because they have the money to buy these from competitive and efficient private sector, he explains.
In contrast, ordinary Indians do not have the money to escape the public sector entirely, as this vivid portrayal captures: “Whether it is the public distribution system where the best grain is often siphoned off, the education system where teacher absenteeism in government schools is rampant, the financial system where despite decades of public sector focus on financial inclusion most Indians do not even have a bank account, or the public clinics where doctors and nurses have little time for each patient, the outcome is the same: the public, especially the poor in whose name politicians push government expenditures on services, actually see very little service.”
In sum, instead of redressing the balance between the poor and the rich, between the disconnected and the well connected, between the powerless and the powerful, the Indian state, despite all its socialist rhetoric, often ends up discriminating against the former and in favour of the latter, laments Rajan. He frets that the government, despite the best intentions of some dedicated officials, has the bicyclist’s mentality of bowing on top and kicking below.
Despite all the successes that India has had, this deficiency of governance has the greatest potential to trip it up, for it accentuates the inequality, the privilege, and the resulting social conflict that invariably chokes growth, the book warns.
Cleanse the system
The privatisation by stealth of the Indian state must be reversed, even while the vibrant private sector is given the regulatory support to flourish, urges Rajan. He is hopeful that breaking the nexus between the poor voter and the corrupt politician will allow dedicated reformers the space and the support to cleanse and improve the system. “In many areas, this will require the government to move from actually providing goods and services to creating a fair, transparent, enabling framework to govern how they are provided; from being a player to becoming a fair umpire.”
India’s story, if it is successful, will be an inspiration to many other poor countries, the author expects, because few countries have grown rapidly from abject poverty even while their people have enjoyed full democratic freedoms. “If messy, chaotic India – with its many communities, languages, religions, and castes – can still pull it off, it can undercut the legitimacy of authoritarian regimes in much richer countries who insist that the loss of political freedoms is the price their citizens have to pay for economic growth. The world has much to gain from a successful India.”
A book that should be the default choice of discerning finance professionals when they enter the store the next time.