Where is the economy going?

THE AMERICAN economist, Mr. Paul Krugman, while surveying the possible trajectory of the American economy in the 21st century recently asked: ``can America stay on top?'' as it has done most of the 20th century, and answered confidently that though it ``will not dominate the world economy the way it used to'', it will not ``fall far behind'' either. Indeed it will retain ``its place as first among equals for many years to come'' because America has done nothing wrong in managing its economy so far.

What kind of a report card can an Indian economist deliver to the question: ``When will India get out of the bottom?'' India has been in the category of ``low income economies'' for decades. In 1980, India was the 15th poorest nation among 124 countries computed in terms of per capita income. Twenty years later, we are still with the ``low income economies''. The rise to the 45th (out of 210) rank we have achieved may sound impressive, but that is only because to the original list of countries that comprised the ``low income'' category a number of minuscule economies mostly from Sub-Saharan Africa and a few former Soviet nations have been added. When we look at the per capita GDP in 1995 as a ratio of what it was in 1950, India's score is 2.5 whereas China has a figure of 5 and the rest of Asia 4.6. We continue to keep the comfortable company of Latin America (1.9), Northern Africa (2.4) and Sub-Saharan Africa (1.2).

From a comparative perspective, India has not done well; what about in absolute terms? Data assembled painstakingly by economic historians in recent years throw interesting light on the pattern of India's economic past. The first half of the 20th century recorded a mere 0.48 per cent annual growth rate of real GDP per capita. This falls further to 0.45 per cent if we look at the 1860-1950 period. The second half of the 20th century (1950-95) shows a considerable improvement at 2.2 per cent. Thus at the gross level we have seen a turning point at the time of India becoming a sovereign democratic republic. When translated, this figure tells us about the economic development achieved in terms of production and availability of a large variety of goods and services, better health and progress in many areas. Substantial as it is, this level of economic growth has not been able to lift the Indian economy to a higher trajectory. Another unfortunate feature of the period has been that large proportions of the population have not shared the fruits of growth, which has pushed them into a much worse position. Economic growth is not unlike antibiotics. To get the full benefit, one has to take the whole course prescribed. If that is not done, partial consumption of the medicine, by enabling the bacteria to develop drug resistance, makes the patient worse off. Similarly, economic growth in order to increase the standard of living for everyone needs to be substantial. If rapid and sustained high levels of growth and consequent reduction in widespread disparities in income and wealth do not take place, there is little chance of India getting out of the bottom of the heap.

From the experience of the last five decades, one thing seems abundantly clear. The manner in which we achieved increased growth during the last 50 years will not help us to get out of the situation we are in. Hindsight informs us that India sacrificed both technical and economic efficiency in the conduct of its economic affairs. State direction, central planning, growth of Government, nationalisation of key economic sectors, emphasis on public sector, protection of local industries, reservation for smallscale industries, and goals of national and regional self-sufficiency were the major characteristics of the way our economy was managed. It cannot be claimed that these policies totally failed. They actually succeeded in imparting dynamism to the economy, but were inadequate to sustain the momentum of growth beyond a stage without the infusion of new ideas attitudes, players and institutions.

No policy is totally costless. A good and beneficial policy necessarily delivers more benefits than the costs incurred by society. However, if overuse of the policy or its continued use in the absence of necessary conditions takes place, costs increase exponentially swamping expected benefits. A wise ruler understands this and provides the necessary course correction before much harm is done. Such an exercise would involve an examination of how the objectives of society can be achieved in the context of the failure of earlier policies.

Unfortunately, this did not happen in India when it was perceived clearly that the old policies were not delivering the goods. Not that policies were not altered, but such action was taken only when a crisis engulfed the economy. Once new policies come into being, they become the new orthodoxy and are pursued long after they turn counter-productive. For example, in the early 1960s when India was facing a serious food crisis, a package of new policies was introduced leading to the emergence of the green revolution. Among the elements of the package were the price support system and subsidies to local fertilizer manufacturers. Once the crisis lessened these policies should have been phased out in favour of more economically-efficient measures to sustain continuous agricultural growth. This was not done, and India is bearing an unnecessary fiscal burden. The same was the case with the July 1991 economic reforms to liberalise and open the economy to benefit from the infusion of funds from abroad. It was more in response to a severe crisis in our balance of payments situation rather than a result of any deep reflection on the way our economy had behaved in the past, and the likely requirements to make it more efficient to achieve equitable growth in the altered global scenario. Once the immediate danger of national bankruptcy was over, life has come back to normal without any thought to consolidating the gains in all sectors of the economy. Indeed, self-congratulatory voices are not wanting in highlighting how we have escaped the clutches of the notorious ``Hindu rate of growth'' of 3.5 per cent and reached a higher trajectory. But are the 5.8 per cent achieved in the 1980-90 decade and the 6.1 per cent attained in 1990-98 significant considering our requirements? Or for that matter, is the 5.9 per cent annual rate of growth of gross domestic investment achieved during 1990-98 sufficient to propel us to a higher growth?

It is becoming clearer every day that a horrendous crisis is brewing in the governance of the country in general and public finances in particular. Apart from a feeble voices here and there, and occasional groans from the Finance Minister, the approaching economic crisis is not in the view of anyone. Only when the crisis actually hits, and hits hard, will any action be taken. The policy of our Governments seems to be, to use two beautiful Tamil phrases, Vandapin paarpom (see when it comes) rather than Varumun kaappom (protect before it strikes).

To go back to the question about the possibility of India getting out of the company of low-income economies, the answer is as clear as it is painful. While our ruling class's existence alternates between somnambulistic sloth and vigorous fire- fighting, the economy languishes for want of right policies and dynamic leadership. If America has done nothing wrong in managing its economy during the last two decades to stay at the top, we have done everything (more or less) wrong to continue to live in the midst of the world's poorest economies for a long time to come.