I4I Event: What is the way forward for the Indian economy?

  • Blog Post Date 17 December, 2018
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Ashok Kotwal

University of British Columbia

On Tuesday, 18 December 2018, I4I is organising a Panel Discussion on ‘The Way forward for the Indian economy’, in Delhi. The panellists are K.P. Krishnan (Ministry of Skill Development and Entrepreneurship), T.N. Ninan (Business Standard), Ila Patnaik (NIPFP), and Sanjeev Sanyal (Ministry of Finance). In this post, Ashok Kotwal (Editor-in-Chief, I4I) – who will moderate the discussion – sets the context and lays out the key issues for deliberation.


The I4I panel discussion taking place on December 18, 2018 will try to come to grips with the way out of the main problems facing us today. It is not intended to be just a post-mortem of the past events. Instead, it will be oriented toward discussing what is desirable and feasible given the state of the world. What follows here are the questions for the panel that seem most pertinent to me. They are not meant to rigidly define the perimeters of the discussion but only to indicate the general area that I am hoping will be covered during the evening. 

Before I raise the more long-term issues of development policy, let me bring up a couple of key issues that are perceived as posing imminent dangers to the economy.  

There has been much concern about the fragile balance sheets of Indian banks, especially those of Public Sector Banks (PSBs). There are many reasons for this state of affairs, including corruption. However, one big component of the NPAs (non-performing assets) is failed or incomplete infrastructural projects, especially in the power sector. What went wrong here and how best can we restore the health of India’s banking sector? Recapitalising the banks and the Bankruptcy Act have been some much needed measures to avoid a banking crisis. Are they adequate? 

For a long time, infrastructural deficiency has often been pointed out as a major stumbling block. Successive governments have tried to remedy this problem by building power-generation stations, roads, airports, etc. However, financing infrastructural projects has always been a problem as neither the state governments nor the central government collects enough revenue to build public goods. This is why they have had to resort to PPP (Private-Public Partnership) arrangements that led to the problem of bad loans by PSBs. However, the problem of how to finance the infrastructure still remains unsolved. What is a long-term solution to this? 

Now some questions of developmental policy… 

Economic policy at any point in time is constrained by the circumstances prevailing at that time. India in 2019 faces a very different international environment than China did in 2000 – or for that matter India in 2014. The populist nationalism in developed countries has created an atmosphere of distrust of free trade policies vis-à-vis emerging economies. Even the arrangements such as outsourcing and H1B visas for recruiting software programmers from India have come under the scanner. The East Asian policy of using manufacture exports to richer countries to draw labour from less-productive sectors like agriculture was immensely successful in reducing poverty. If India is constrained from following it due to a rise in protectionism, what is the way forward for it? 

After China joined WTO (World Trade Organization) in 1999, its task was to transfer technology from the West and aggressively capture the foreign markets with its own low-wage labour. This is how it could maintain a breathtaking growth rate and miraculous poverty decline. But technology has also marched on. In 2019, Indian workers will be competing with robots rather than high-priced American workers. How will India face this much harder challenge? The problem is not just in developing a manufacturing sector. The fast growth of the 2000-11 period was propelled by the software sectors selling business services and customised software packages to the businesses in developed countries. Much of what the Indian software sector did then can be considered routine tasks by today’s standards. The emergence of machine learning and AI (artificial intelligence) has lowered the lure of getting it done in India. What then? 

India of course has enough talent at a higher level that could perhaps compete internationally. There has been some discussion of India being at the forefront of the Fourth Industrial Revolution, generating world-beating algorithms. This is possible but given the extreme skill requirements of this sector, how many good jobs will it create for unskilled and semi-skilled masses? The period of 2004-11 was very good for growth but was also one of widening inequality as most of the income growth went to the high-skilled workers in the fast-growing sectors. The trickle-down effect depends on whether the direct beneficiaries of new technologies increase their demand for the kind of stuff that the unskilled masses produce. Would the income growth of the high-skilled engineers and managers result in an increase in the demand for the kind of stuff produced by the informal sector?

Almost two-thirds of India lives in rural areas and a little under half makes its living in agriculture. Several parts of rural India have been in distress partly due to adverse weather conditions and partly due to the ill-advised policy of demonetisation. Let bygones be bygones. The question is what is the way forward for rural India? 

There are several sectors such as garment manufacturers that may not see labour displacement by robots on a large scale. India should be able to compete with countries such as Bangladesh and Vietnam. Our inability to reform factor markets (especially labour and land markets) seems to be one obstacle. If so, why do we find it so difficult to solve this problem that other Asian countries seem to have solved? Is it because of our federal structure that has vested so much power in individual states? Is it because we are a democratic polity? 

Another obstacle may be our less-skilled labour force. Our initiatives such as Skill India and Make in India are walking uphill when our public educational system has become so dysfunctional. How do we build a skilled labour force when the basic educational foundation is so flawed? ASER (Annual Status of Education Report) results show that the quality of primary education has been declining rather than improving. What is the way out? Can technology help by making pedagogical breakthroughs (a tablet to each student)? 

One of the root causes of rural distress is that the rest of the economy is not absorbing labour fast enough to relieve the pressure on land. The average land holding per cultivator is only one acre. Lacking the prospects of fast absorption of labour from the informal sector (bad jobs) into the formal sector (good jobs), it is imperative that we look for ways to improve productivity and hence incomes of those in the informal sector. This will have a direct impact on poverty. The question is: how do we induce a productivity improvement in agriculture as well as in non-farm occupations in the informal sector? 

Also, would an increase in agricultural productivity necessarily improve agricultural incomes? Some people have claimed that output increases in agriculture result in a decline in prices and thus it is a self-defeating measure unless the excess supply finds profitable outlet through exports. The recent decision by the government to allow and encourage agricultural exports is a welcome measure. What else is needed? Would you recommend an upward revision of MSPs (minimum support prices)? 

Daron Acemoglu and Jim Robinson have argued quite persuasively in their book ‘Why Nations Fail?’ that nations that are unable to create ‘inclusive’ institutions fail because those are the prerequisites for the process that creates continuous technological progress. This is the process of ‘creative destruction’ of competitive capitalism. It keeps replacing bad ideas with good ideas. If the governing institutions (for example, judiciary, law enforcement, the central bank, media) work only in the interests of a chosen elite, the challenge of competing forces is blunted and the society will degenerate into a stagnated crony capitalism. How would Acemoglu and Robinson assess the quality of India’s institutions at this point in time? If there is any erosion, how can we stop it from getting worse? Is it inevitable that given the prevailing system of electoral finance, India will not be able to escape the curse of crony capitalism?  

Comment on the following proposition: “With so many claims on public revenue together with the need for fiscal discipline and a five-year electoral cycle, it is inevitable that long-term considerations such as ‘environment’ (for example, ground water depletion, air pollution, climate change) get shelved, to the detriment of the long-run health of the economy.” 

This event is being organised in collaboration with the International Growth Centre (IGC) India and the Indian Statistical Institute (ISI), on the eve of the 14th Annual Conference on Economic Growth and Development, which will be held at ISI Delhi Centre on 19-21 December, 2018. 

A video of the panel discussion will be posted on the I4I website in January 2019.

1 Comment:

By: Dr R Vasanthagopal

The observations made here very correct.

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