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Updated: August 25, 2012 01:57 IST

Finding the will to govern the economy

Pulapre Balakrishnan
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Growth will flounder unless the government invests in infrastructure development and extension services to entrepreneurs

In less than half a decade the mood of India’s economic policy establishment has swung from hubris to dismay. The trumpeted arrival of double-digit growth did not materialise. Instead we face the prospect of sustained double-digit inflation. The polisariat, it appears, has run out of tricks. Any argument for greater global integration is unlikely to instil confidence at a time when the world economy is in the doldrums. Equally, the exhortation for “more reforms” is not likely to inspire many when reforming is what the government has claimed to be doing for two decades by now. To be precise, reforms geared at greater integration with the rest of the world have been the lodestar of the reformer. Actually, the idea that mere integration with the rest of the world would per se raise the rate of growth of the economy never had much purchase with serious economists. While the argument that exporting is extremely important for India as it is highly dependent on imports is well taken, exports do not get promoted by merely lowering tariffs or signalling to multinationals that you’re ready for business.

Infrastructure deficit

So does this mean that we should be reconciled to lower growth and higher inflation? Most certainly not. We have in India recently been witness to something akin to a secular epiphany in the collapse of the electricity grid serving over half the country. No more appropriate example is needed to show us what stands between us and prosperity. In a most immediate sense, it is human negligence abetted by unaccountability. However, in a more general sense, we might say that the event reveals that more than anything else it is the infrastructure deficit that is keeping us down. For over two decades, China has dazzled the world with not just double-digit growth but trade surpluses that have been reproduced year after year. The unmistakable foundation of this achievement is revealed by the quip “China’s competitive advantage lies in its infrastructure.” What has been left unsaid is that the competitive advantage enjoyed by its producers does not lie in low wages or the repression of unions by the communist party, though these are features of its political economy. If low wages could tilt the balance, India would be among the world’s great trading nations.

What is significant to an understanding of the relationship between growth, the degree of openness to trade and economic policy is that our current account deficit today is greater than what it was in 1991. While there is no comparison between 2012 and 1991, principally because our reserves are over 250 times greater, the yawning deficit shows that mere trade, or even industrial policy reforms are insufficient to generate a rise in export growth. Also, a worsening balance of payments has its own negative consequences such as inflationary pressure via a depreciating inflation rate.

Clearly, the reforms that have aimed to integrate India with the rest of the world have not succeeded in making India’s exports more competitive. It is germane to the argument here that by now trade, measured as exports plus imports as a share of GDP, amounts to more than half of GDP, a feature that the government’s Economic Survey of 2012 alludes to approvingly. This share is far greater than what it was in 1991, when the integration of India with the rest of the world was proffered as a panacea. And now, quite apart from the balance of payments, the growth rate itself has settled into levels not much greater than what was achieved in the late 1980s. So why are we in this predicament? Why has growth slipped, and what do we need to do to put it back up there again? For a start, the trade and industrial policy changes initiated in 1991 and classified as “reforms” barely measure up to a vision of the growth process. To the extent that quantification is meaningful in the context, they have addressed the problems of just about a fifth of India’s economy.

The flaw in the strategy pursued by governments of differing hues since 1991 is that they have focussed on what they consider the economy while ignoring the vital importance to sustained growth of the ecosystem of production. Originally conceived to understand plant life, the idea of an ecosystem and its relevance to its constituents is fruitfully applied to an understanding of the economy. For the plant biologist it is the ecosystem that is the relevant unit for analysis even for a study of the development of the plants placed within it. In nature, more generally, the dynamics are determined through repeated interaction between the biotic and the abiotic components of the ecosystem. Plants need water and soil, and water and soil are held together by the vegetation. The parallels with the economy are not far to seek, the two components being the production units, whether farm or firm, and the terrain of production. This terrain is defined by the range of services so crucial for the economic unit to carry on production in an efficient manner. We may refer to them as producer services and they include both visible and invisible ones. A shortlist must contain power, transportation, roads, water and sanitation, waste management and management information systems.

Globally these services are mostly provided by the government. This is hardly so for ideological reasons but because the private sector is either unwilling to bear the risk of investing large amounts in an uncertain activity or to accept too long a break-even period. Along with the production units the arrangement for the provision of these producer services completes the ecosystem of production. The reliable existence of these services is at least as important for the economic progress of a country as are smart entrepreneurs. It is easy to see that even the smartest entrepreneur will flounder if not supported by producer services. For the government to take the view that it has liberated the entrepreneur once it has set him loose from the Licence-Permit Raj is to duck its principal responsibility, which is to enable an entire ecosystem. While it is not at all necessary to take a dogmatic view that the private sector ought to be kept out of the provision of these producer services, it is certainly the case that right now in India this is largely the government’s responsibility. We can see this by evaluating the success of the much vaunted “PPP” route to the creation of infrastructure. You would find that not very much has been created.

I have focussed on the visible producer services, but the invisible ones are likely to be just as important. One that is egregious by its absence in India is advisory. The world over, governments have taken it upon themselves to provide advice to entrepreneurs. An intuitive approach to the role of advice is to take cognisance of extension services in agriculture. Extension is the means whereby knowledge of advances in biology and demonstrated best practices in cultivation are taken from the laboratories and research stations to the farm. They have been fundamental to agricultural transformation, even in India during the Green Revolution. In India, public expenditure on extension has declined since 1991. Outside agriculture, small firms desperately require advice on emerging opportunities, marketing channels and sourcing of material. Private consulting firms do exist but are unaffordable to the small and medium enterprise sector which dominates India’s economy. This is why, in most countries local governments have departments for industrial promotion that supply these valuable services. Something of this sort was implicit in the plan of the Janata government to set up the district industries centres, but it is not clear if they have been governed to perform.

Mystifying

The call for “more reforms” is mystifying when it is not obfuscatory. It is not clear how pending legislation in the insurance, pension or retail trade can address the deficit in producer services. Of course, some part of the solution to the electricity deficit does require reform, but this is not of the macroeconomic variety. However, this would have to be governance reform, involving the setting of targets, assigning of responsibility and the consequent seeking of accountability from public servants. The electricity sector is only an example, the entire public sector providing producer services is begging for the same kind of attention. The relevance of improved government for growth is revealed by the near perfect correlation shown by economists to exist between transmission and distribution losses and the growth of state domestic product. So when India’s premier agencies such as the Ministry of Finance and its central bank state that there is little policy space, they must refer to a very limited genre of policy, namely, the macroeconomic. Surely there is space yet for better governance. From the perspective of producer services, improved governance is India’s golden goose. The question is whether the political class has what it takes to govern this space.

(The author is on the faculty of Economics at the Centre for Development Studies, Thiruvananthapuram.)

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The aspects covered by the author are astounding; no doubt
infrastructure development is prime to Industrial growth;
however, it is also pertinent to review the various
infrastructure developments undertaken over the decades right
from the days of Nehru - towards irrigation, towards green
revolution, steel plants, Road developments, Energy requirements
Oil and Natural Gas exploration etc. While quite much has been
done; yet there is no commensurate development. The problem for
this erosion in investments is poor quality of material used,
execution and maintenance. In an atmosphere of the proverbial
‘babu-tekedar’ nexus with successive political zealots colluding
to corner increasing share of the allotted funds, the various
projects cannot but suffer substandard material and poor
execution. Only in India is this culture prevalent particularly
in the government which is the prime provider of infrastructure.
Raise the quality of people; automatically the prosperity also
will rise.

from:  M.R.Sampath
Posted on: Aug 26, 2012 at 11:56 IST

We need professionals not politicians in Parliament in 2014. Policy
paralysis, poor governance, inability to fuel growth, inability to let
any infrastructure projects take-off, scams ...........

We need to decide and "DICTATE" what we want.......for people in power
we are nothing more then STATIC NOISE in the universe and so they don't
take us seriously!!! We need to become Buzzing beesssssssssss for them
to be forced to HEAR US!!!

from:  Sarab
Posted on: Aug 26, 2012 at 11:04 IST

Aptly said - downward trend becauseGovernment is refusing to accept that accountability is not the responsibility of the government. Added to this is the ever increasing population and instead of demanding better governance,alluring government officials with bribe to get their work done. This has made government officer to be a fool to do his job without being bribed and common man a fool with out black money and politician without building asset. And be a effective politician by painstakingly pointing out the mistakes on people who question them. This will work within India, outside India we are still look like invaded country previously by british government now by bribing and corruption. So they don't need terrorist plan to create chaos in India but with a simple mass email message. This will turn around only if every family atleast one person becomes a social activist-like in US during world war-one person from a family do military service-so everyone equally contribute.

from:  marudah
Posted on: Aug 26, 2012 at 09:08 IST

So between the govt and the private sector, we cannot do this on our own apparently. The common refrain has been infrastructure, infrastructure for years and yet we have horrible infrastructure, easily among the worst on the planet. Why don't we put our paranoia and prejudices aside and get China to help? They have the know how and the money to do it, I bet they will jump at the opportunity. We may also reap a bonus of smoother, more trusting relationship with them.

from:  naveen
Posted on: Aug 26, 2012 at 08:38 IST

Great article. Well communicated. Now What ? After seeing this "political class" in
action over the past 20 years do you really think that "good governance" will ever
get traction in your lifetime ? Do you really think the "corrupt", "ineffectual" and
"incompetent" criminals in parliament and some of them in the bureacracy will
ever allow this to happen. they have gotten away with it because the "people of
india" have allowed them to do so. They have failed ot exercise their right to
demand good goverance. The Supreme Court and the CAG are just a few "diyas" in
this bleak landscape. Short of a "revolution" nothing is going to happen. Do you
think there is another "Gandhi" around ??????

from:  Gogi
Posted on: Aug 25, 2012 at 17:47 IST

The imperative for compromise within a governing coalition can be good in providing inclusive growth. Problem occurs when the imperatives of coalition politics lead to paralysis in policymaking. The coaltion becomes dysfunctional. That is what has now happened in India. The government either needs to call a mid-term election seeking a mandate for a coherent vision or needs to kick out some of the disruptive elements from the governing coalition and then take a chance in Parliament. In both cases, the government itself first has to articulate a coherent vision for public debate. Then it has to demonstrate the intellectual ability to challenge the fragmented populism of coalition partners.

from:  S.P.Chakravarty
Posted on: Aug 25, 2012 at 17:40 IST

Our economist politicians like PM and FM and government advisor economists like Rangarajan, Nontek Singh should read this exposing paper to realise that their professed globalisation or integrating with global economy have pitfalls in their thinking unless India is an exports based economy like China. US and Europe being import based economies are going down the drain and India cannot afford it. In fact we should follow China in safeguarding local industry wherever they are strong producers, WTO or not.

from:  MVJRao
Posted on: Aug 25, 2012 at 17:17 IST

It is well accepted that our politicians have failed and are not capable of implementing any measures which will curb wastage of funds meant for construction of highways or generation of power, or improving irrigation. Next question is what is the alternative? We must make the bureaucracy and the ministers and the public sector accountable. Reforms that citizens want are not reforms to welcome FDI in insurance, retail or any other sectors. Citizens want reforms that will make the government more responsive to the societal needs and reforms would bring transparency in all actions of the government. That is why, election law reforms, as also administrative and legal reforms, are an urgent necessity. We the citizens have to demand implementation of reforms on a priority basis.

from:  NarendraM Apte
Posted on: Aug 25, 2012 at 15:47 IST

n artivcle puts the infra requirement at Rs. 31lakh crores. We talk a
lot about infr but that is being actually udnertaken booils down to a
fraction. Take for instance, railways. iot has the luxury and
privilege of a budget making process but little else. Money which is
what is needed does not flow into it or at any rate those who manage
it do not want to rofck the boat. Added to that is the enw phenomenon
of decison making on railways is not at Delhi but at Writers Building,
Kolkatta. China has made giant strides in infra building. But we just
have not soken up to the need for a serious effort. Even after 65
years, travel time by trains between the Metros is not reduced. But we
talk a lot of bullet trains and shatabdis amd rasjdhanis. TN has
annoucned a master plan for Greaytetr Chenai enclosing a few mroe
districtrs into it, getting an area of some 9000 sq.kms. Good compare
this with the mega city plan of China of a new city of some 43 million
population, covering nine cities.

from:  s.subramanyan
Posted on: Aug 25, 2012 at 11:16 IST

The infrastuctural facilities will no doubt lubricate the economy's wheels to run on the path of faster growth.Such measures if synchronised with the provision of developmental schemes of reducing unemployment and poverty and ensuring their effective implimentation would make India come closer to the title of a developed nation.

from:  FAROOQ AHMAD
Posted on: Aug 25, 2012 at 11:05 IST

The article is driving the nail home.. For something as simple as a house to be able to be lived in needs power, water supply, sewage disposal, etc. Knowing how hard these basic necessities are difficult to get, one must understand the plight the entrepreneurs in India face. The roads leading to the IT hubs are not wide enough anymore. Manufacturers are finding it hard for electrifying performance.. if you understand what I mean. RBI still stuck with the interest rates to contain inflation. Are we nearing the highest point in the trajectory of "the" projectile? Is there no direction other than south to go?

from:  E M Fisher Fernando
Posted on: Aug 25, 2012 at 10:13 IST

Self interst must replace with interest in the nation, that can make the change. Politics in
India has to be redefined in a manner, those who seek to take to politics must have the prime
motive to serve and serve the public for the oath they take when they are ceremoniously sent
into parliament. If it becomes a cheap platform for people who are not good in anything and
want to live a life of luxury and glory, the nation and it's interest become secondary and the
sytem of democracy gets weakened. The meak and the gullible of the society needs to be
awakened so that they send people to parliament on the basis of the ability,dedication and
honest commitment to the country. All other considerations are to be marginalized to get a
group of parliamentarians who can take the country forward and not stuck with nepotism and
cronyism and build dynasties! India has a population with tremendous potentials to drive to
be one of the best in the world. Clean efficient governance is the key!

from:  Saratchandran
Posted on: Aug 25, 2012 at 09:50 IST

An eminently laudable article.
Can there be a (sanguine) consensually derived formula re: productivity-environment, mediated by enlightened 'governmentality'? The degree of proximity of farm-business-industry to the state seems (currently) to be improportionately greater than that of the amorphous subaltern-civil society combine. (It is not difficult to see that the former combine shares common epistemic conceptions of gain and 'development' with the state).
Farms, too, have thirsty demands on infrastructure (irrigation), (currently) met by unimaginative technicist projects and dams.
Certainly, an admirable essay melding ideologies into common national concerns (and interests?)

from:  A. Rehman
Posted on: Aug 25, 2012 at 08:30 IST

A most persuasively-argued presentation of a vexed issue. A few comments:
‘...exports do not get promoted by merely lowering tariffs or signalling to multinationals that you’re ready for business...’ ~ Truly said.
‘...No more appropriate example is needed to show us what stands between us and prosperity. In a most immediate sense, it is human negligence abetted by
unaccountability...’ ~ But, what is behind them? avarice. This is the death-knell. No solution in sight.
‘...If low wages could tilt the balance, India would be among the world’s great trading nations...’ ~This exposes the exploitative trend parading as competitive capitalism.
‘...Globally these services are mostly provided by the government. This is hardly so for ideological reasons but because the private sector is either unwilling to bear the risk of investing large amounts in an uncertain activity or to accept too long a break-even period...’ ~ This is what Nehruji said in Avadi.

from:  Soundararajan Srinivasa
Posted on: Aug 25, 2012 at 07:22 IST

Nice Article!

from:  Sanket
Posted on: Aug 25, 2012 at 06:39 IST

India's rapid economic growth in the 1990s into about 5 years ago was an accident of history. Globalization combined with the fact that decades of poor growth had left India with a large educated low cost labor force allowed for growth in the IT and offshore services sector. This brought prosperity to a small but substantial urban elite while the villages saw little improvement. To make matters worse, the Planning Commission with its focus on urban development has been a major failure.
Far more effective in bringing prosperity to the villages has been the White Revolution (of milk) initiated by Tribhuvandas Patel and implemented by Verghese Kurien. This was a grassroots development program implemented through local cooperatives and not an ivory tower in New Delhi.
Every time I talk to investors the question is the same: "Where is the infrastructure? Solar power and river linking are needed to build the infrastructure, but has to be through rural cooperatives-- not gimmicks like MNREGA

from:  N.S. Rajaram
Posted on: Aug 25, 2012 at 05:06 IST

'In less than half a decade the mood of India’s economic policy establishment has swung from hubris to dismay. The trumpeted arrival of double-digit growth did not materialise. Instead we face the prospect of sustained double-digit inflation. The polisariat, it appears, has run out of tricks."
We need to apply our minds to see what went wrong.
I am not an Economist; but a Scientist.

from:  Gopinathan Krishnan
Posted on: Aug 25, 2012 at 03:18 IST
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