Wonked!: India in Search of an Economic Ideology

By Vivan Sharan

More than two decades since India was forced to liberalize its economy, the country has undergone radical transformation – from a planned, centralized economy, to one that seeks to harness market forces and technological change.

Today, India is at a crossroads – even as political discourse has undergone churn, there is a distinct lack of conceptual clarity and well-defined economic policymaking. As a result, there is little that separates the economic and foreign policies of successive governments, despite divergent political ideologies, which has been the hallmark of Indian policymaking.

In Wonked!, economist Vivan Sharan breaks down the challenges facing the Indian economy today, while developing a framework through which broad policy strategies can be laid down based on principles acceptable to multiple stakeholders. How should the Indian digital economy be regulated in the days to come? How does one realize greater value from Indian agriculture? Why is there a shortage of electricity despite India being a power-surplus country? And what is the foreign policy outlook India must have in a world where economics and politics are coupled?

Breaking down complex policymaking issues for a general reader, Wonked! asserts the need for India to have an economic ideology that will strengthen its institutions while thinking about the needs of its citizens in the years to come. Deeply researched, cogent and bridging the divide between conflicting ideologies, this book calls upon policymakers, private sector players and the political establishment to develop a wider consensus on the paths India must pursue in the years to come.

• Language: English
• Publisher: Bloomsbury Publishing
• Release date: Dec 26, 2019
• ISBN: 9789387471184

Book preview

WONKED!

WONKED!

India in Search of an Economic Ideology

VIVAN SHARAN

BLOOMSBURY INDIA

Bloomsbury Publishing India Pvt. Ltd

Second Floor, LSC Building No. 4, DDA Complex, Pocket C – 6 & 7,

Vasant Kunj New Delhi 110070

BLOOMSBURY, BLOOMSBURY INDIA and the Diana logo are trademarks of

Bloomsbury Publishing Plc

First published in India 2019

This edition published 2019

Copyright © Vivan Sharan, 2019

Vivan Sharan has asserted his right under the Indian Copyright Act to be identified as the author of this work

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers

The content of this book is the sole expression and opinion of its author, and not of the publishers. The publisher in no manner is liable for any opinion or views expressed by the authors. While best efforts have been made in preparing this book, the publisher makes no representations or warranties of any kind and assumes no liabilities of any kind with respect to the accuracy or completeness of the content and specifically disclaims any implied warranties of merchant ability or fitness of use of a particular purpose.

ISBN: HB: 978-93-87457-83-6; eBook: 978-93-87471-18-4

2 4 6 8 10 9 7 5 3 1

Created by Manipal Digital Systems

Bloomsbury Publishing Plc makes every effort to ensure that the papers used in the manufacture of our books are natural, recyclable products made from wood grown in well-managed forests. Our manufacturing processes conform to the environmental regulations of the country of origin.

CONTENTS

1Introduction: A Nation Ideologically Adrift

2The Basics

Section 1 –Identifying Key Challenges

Section 2 –Technology and Growth

Section 3 –Protectionism and Economic Ideology

3Manufacturing

Section 1 –Is Small Beautiful?

Section 2 –The Mirage of Make in India

Section 3 –The Anatomy of Strategic Partnerships

4Agriculture

Section 1 –Politics and Agriculture

Section 2 –Many a Mile from Farm to Fork

Section 3 –Processing Another Green Revolution

5Services

Section 1 –The Future of Services and Jobs

Section 2 –Will Winners Take All on the Internet?

Section 3 –Servicing the New Economy

6Infrastructure

Section 1 –The Trials and Tribulations of Indian Telecom

Section 2 –Perverse Incentives in the Energy System

Section 3 –The Infrastructural Burdens of the Middle Class

7The External Economy

Section 1 –The Limits of India’s Plurilateralism

Section 2 –Leveraging Multilateralism for the New Economy

Section 3 –A New Development Cooperation Paradigm

8Conclusion: The Building Blocks of Economic Ideology

Acknowledgements

Index

1

Introduction: A Nation Ideologically Adrift

Nearly three decades since India was forced to liberalise a closed economy following a crippling balance of payments crisis in 1991, the country has undergone a significant economic transformation. From a largely planned economy, it has learnt to leave space for market forces. In 1991, India was a $266.5 billion economy; in 2017, it grew to $2.6 trillion. It now aspires to grow to $10 trillion over the next decade or so. Approximately 45 per cent of Indians lived below the poverty line in 1991; the figure is 21 per cent today. The hope is that India will eradicate poverty at China’s scale in the not-so-distant future.

One would imagine such fundamental changes would be accompanied by serious political debates on a contemporary economic ideology or doctrine for India, particularly since politics plays a central role in guiding domestic discourse on society and markets. However, enlightened political leadership seems to be in short supply. A lack of leadership is not uncommon in developing countries, most often defined by economic scarcities rather than their responses to such scarcity. Since development necessarily involves complex negotiations between stakeholders with conflicting interests, there is little substitute for political leadership. This book argues that such leadership must be organised around sound economic ideas.

The decisive verdict in the 2014 elections brought a sense of freshness and exuberance to India’s policy discourse. The introduction of new ideas and approaches seemed imminent, particularly because of the intensity with which Prime Minister Narendra Modi and his National Democratic Alliance (NDA) emphasised the need for a clean break from the past. However, the commentariat had to revisit such expectations fairly quickly.

India’s economic discourse now resembles its foreign policy discourse. In 2015, distinguished diplomat Jayant Prasad wrote that ‘on substance, there is more continuity than change’ in India’s foreign policy.¹ In 2018, economist Ajit Ranade wrote, ‘With the first-ever absolute majority in the Lok Sabha in 30 years, the voters expected radical change in government policies and priorities’ but ‘the sobering reality is that reversing policy direction in India is like making a U-turn with the Titanic’.²

The parallels between continuity in ideas and approaches in India’s foreign and economic policy discourses are uncanny. For instance, India is just as strategically unaligned geopolitically as it is geoeconomically to the modern ‘great powers’. There is certainly little evidence to suggest that India has a strong preference for trade and investment relations with any of the great powers, and for the scant evidence of a preference, there are equally compelling counterfactuals.

Continuity has its merits when associated with overarching objectives, such as creating a ‘conducive international environment’ or increasing the ‘efficacy of old (socio-economic) programmes’, as both Prasad and Ranade point out. Big ideas disrupting the status quo can extract a large cost if the risks are not calculated correctly – such as the November 2016 demonetisation, which cost the informal sector dearly. Change cannot come at the cost of stability, and India also cannot afford more exposure to greater risks, internationally or domestically. However, continuity is often interchangeable with inertia. Risks associated with course corrections must be factored into better policy design.

While India’s policy goals cannot be expected to change radically at regular five-year intervals, it is not unreasonable to expect a renewed vision for achieving such goals. The pace of technological change has lessened the time spans within which old goals remain relevant. This is especially prominent in the case of the digital economy, where markets restructure around technological ‘disruptions’ quickly. But it would be a mistake to consider this an outlier. Even traditional markets such as manufacturing and agriculture are changing rapidly owing to changes in patterns of production and consumption in the global economy.

There is merit in applying a fresh conceptual lens to address the demands of the new century. The economic competitiveness of industries can be increased in anticipation of the ‘Fourth Industrial Revolution’, the value generated in domestic markets can be maximised, jobs need to be created at scale and the uncertainties of the global economic system must be navigated.

India today is an economy aspiring towards 21st-century goals but wedded to 20th-century policy constructs, even as 19th-century challenges persist. This book identifies these gaps in policymaking. Some themes – such as lack of state capacity to oversee market transitions, interpreting what ‘public interest’ is and whether India can be characterised as a lucrative market for the private sector – recur and are explained through their impacts in different sectors. The arguments spill over into how India deals with international economic engagements. These themes are briefly introduced below to provide context on why India needs a coherent economic doctrine.

LIMITED STATE CAPACITY

India’s public expenditure as a per centage of GDP averaged around 23.5 per cent (Table 1) over 2014–19. Relative to GDP, this is higher than the US’s public expenditure, traditionally under 20 per cent and around 21 per cent in FY 19.³ Since public expenditure is a proxy for measuring the size of a government, it can be inferred that the Indian government is not small. And yet there are well-documented shortfalls in delivering essential infrastructure and services. India consistently performs worse than Bangladesh in several human development indicators (HDI) such as life expectancy and infant mortality despite spending similar amounts on healthcare as a per centage of GDP.⁴

TABLE 1 Indian Government Expenditure by States and Centre (as % of GDP)

Source: Centre for Monitoring the Indian Economy, Union Budget FY 18

While there is no consensus in economic literature about the ideal size of a government, there is broad consensus on its basic objectives: to establish and enforce rules and property rights, to correct market distortions and promote market efficiency, and to provide public goods and allocate public resources. When the size of a government is too small, it may not be able to deliver these outcomes adequately. Economy activity in such a state may come to a standstill. Conversely, when a government is too large, it may micromanage economic activity to a point where growth is stifled and private enterprise is sidelined.

Indians should logically only aspire for a larger government if they believe that the current capacities of its government are fully utilised. The previous comparison with Bangladesh on HDI does not seem to validate this – given that healthcare indicators in the two countries diverge despite similar expenditures. Conversely, if Indians believe their government is too large, they must consider whether the government can deliver on its basic objectives effectively by becoming smaller. This dynamic balancing act can only be achieved by building institutions that nurture and guide the growth of Indian markets, something India has simply not invested in. The most visible deficits are perhaps in the case of the judiciary, where over 30 million cases are pending.

These stark realities of state incapacity inform and alter decision-making fundamentally. For instance, the judicial backlog has resulted in an impulse to rationalise the number of appellate tribunals. Appellate tribunals are meant to be the first line of dispute settlement in regulated markets, and reduced appellate capacity will inevitably throttle the functioning of such markets. I discuss the merger of a tribunal to resolve competition disputes with another that traditionally dealt with administrative matters relating to company law. It is not hard to suggest the merged tribunals can further emaciate state capacity because of its lack of specialisation, particularly since technological changes will require greater specialist capacities.

The need for creating greater specialisation within public institutions should be a mantra for building state capacity. This can be done without increasing public expenditure significantly, since additional capacity can be readily harnessed from non-government institutions and the private sector. But building state capacity through any unconventional means will require a more nuanced interpretation of the public interest.

NARROW PUBLIC INTEREST

All policymaking is ostensibly done in public interest. The notion, however, remains largely undefined in policy documents and statutes, and is a moving target subject to the discretion of the State. For instance, even the Comptroller and Auditor General of India (CAG), an institution set up to safeguard the public interest through regular audits of public accounts, fails to precisely define what it is protecting.

While non-State actors can challenge the absolute discretion of the State in determining ‘public interest’ through the judiciary, this option is limited to those who can engage in lengthy litigations. This naturally precludes a vast array of economic agents, particularly the micro, small and medium enterprises (MSMEs) that employ the vast majority of the Indian workforce. Moreover, higher courts actively discourage litigations relating to economic policies, especially when they are unconnected to violations of constitutional rights.

In policy literature, public interest is said to have at least three distinct components: political, social and economic. As India is a democracy, the political dimension is naturally to ensure maximum representation of the interests of the vast electorate, which are subject to misrepresentation. The social dimension is perhaps most justiciable as it relates to the inclusion of the interests of the last individual in society – a philosophy echoed in the Gandhian principle of ‘Antyodaya’ as well as in constitutional rights. The economic dimension is far more amorphous because it is partly contingent on an ideology or doctrine that is as yet undefined. Courts have little to contribute to this area.

As a corollary, increased focus on this dimension will require that the State strikes a balance between safeguarding the interests of both producers and consumers, a tightrope walk in an environment of economic scarcity. Therefore, the balancing act has to be transparent and benchmarked against defined outcomes, contrary to the State’s interest in retaining discretion in making such trade-offs.

This book contends that a holistic consideration of public interest is urgently required. Consider, for instance, the imperative of attracting private sector investment in manufacturing. Because of the range of disadvantages that manufacturers face in India, including infrastructural shortages, high electricity tariffs, informal supply chains and poor enforcement of contracts, there is a legitimate need to provide manufacturing investors with additional incentives on a case-by-case basis. This is particularly true for high-tech industries where the quantum of investments is necessarily large, such as in semiconductor manufacturing. Incentives for such industries would need to span a wide range including fiscal aspects such as custom duty exemptions for imports, and administrative aspects such as experimental licences and compliance standards.

While some formulaic incentives have begun to find their way into government policies, India has yet to embed an incentives framework within economic policies. The economic dimension of public interest is rarely made explicit in policies that govern domestic markets because the Indian State prefers retaining a certain high-handedness and discretion in giving economic incentives to industry. It essentially equates incentives with doles. This stems from a narrow conception of public interest itself wherein the benefits of well-functioning markets are rarely seen as consonant with long-term interests of the State. A slew of high-profile corruption cases indicate the persistence of such discretion – including the infamous ‘2G scam’ – that relate to allegations of improper allocations of public resources. The ‘first-come, first-served’ policy for maximising the allocation of 2G spectrum was contested in courts and even a lower court was able to discern that the policy was ‘not clear, definite, or explicit, and left room for misinterpretation’.⁵

The point is that India continues to ignore the economic dimension of public interest at its own peril. This must be done by legislators who are elected to define public interest. Unfortunately, the Indian Parliament functions lackadaisically when it does, and politicking in self-interest preoccupies politicians more than it ought to. The Lok Sabha met for an average of 130 days in the 1950s and 70 days in the 2000s.⁶ A much greater sense of accountability is warranted, particularly since reports on the inexorable growth of the private sector, despite the all-pervasive unaccountability of the State, are far-fetched.

EXAGGERATED OPPORTUNITIES

India has been characterised as ‘emerging market’ since the early 2000s, a characterisation which the policymakers have embraced so thoroughly that it has impaired their understanding of ground realities. Take the case of India’s digital markets. Hundreds of millions of new participants have been added to digital markets through the expansion of telecom and internet services in a very short time span. This has led to great exuberance in policymaking circles around the ‘Digital India’ opportunity. Clearly, the volumes of consumers must be creating great value for India’s companies, the logic goes.

The fact is that Indian companies are struggling to generate value within domestic digital markets despite the volumes. China has about 15 times as many unicorns – ‘billion-dollar’ start-ups – as India does, even though the Chinese economy is 2.5 times the Indian economy.⁷ Such asymmetry reflects in other types of comparisons too. India has one of the lowest average revenues per user in telecom markets despite some of the highest data consumption volumes in the world, and a tiny subscription market for digital products such as audio-visual services, which is dwarfed by small countries like Singapore.

The lack of value being created in India’s markets is worrying because its most prominent economic policy challenge is to create more jobs for the large young workforce. Job creation is a tough proposition if companies are not making money in the first place. Over one million people enter the workforce every month in India, while less than half a million jobs are being created every year. In 2018, India was estimated to have lost over 11 million jobs – a far cry from ambitions of ramping up job creation.⁸ Moreover, lack of job creation is also correlated with a lack of wealth creation. India’s wealth inequality is increasingly untenable – a trend that defies traditional wisdom about the growing prosperity within the Indian middle class.

However, correlations between value and wealth creation don’t seem to concern Indian policymakers. In the long run, if there are no producers left because they stopped earning value from their businesses, there will be no consumers left either because there will be no income. As a result, wealth will remain concentrated in the hands of a privileged few. As explained subsequently in this book, since consumers far outnumber producers, taking a consumer-centric view benefits the political class in the short run. In the case of Indian agriculture, a consumer-centric view results in greater considerations to controlling the prices, rather than bolstering or even preserving farm incomes. A consumer-centric view manages markets at the cost of the producer-economy.

Despite the challenges, achieving conceptual clarity on India’s economic future is not impossible if there is political will. This book is an exercise in showing that conceptual challenges that afflict different economic sectors can be unbundled. The history of the world illustrates that political will is a compelling and powerful force that drives markets, creates value and wealth, and safeguards public interest. An ideological benchmark can prove to be useful as a set of ideas around which political will can be rallied.

The outstanding challenge – and one that goes beyond the scope of this book – is whether Indian decision-makers will readily recognise that their own long-term interests, and those of their future generations, are intrinsically tied to the sustenance and prosperity of this great nation. The only means to ensure such political enlightenment is for citizens to demand greater accountability from the State. As of today, however, the State remains wedded to its colonial past. It controls the economy through discretionary measures that can only be qualified as deliberate flaws in policy design, all at the cost of institutions, individuals, companies and the democratisation of public interest itself.

¹ Prasad, Jayant, ‘India abroad: A year of continuity and change’, Times of India, 28 May 2015

² Ranade, Ajit, ‘Continuity through change: A case of four programmes’, Livemint, 4 September 2018

³ US FY is from 1 October 2018 to 30 September 2019; for more details on recent trends see: https://www.thebalance.com/current-u-s-federal-government-spending-3305763

⁴ In 2017–18, both governments spent around 1.3 per cent of GDP on healthcare.

⁵ Observations made by Justice O.P. Saini in a trial court in 2017.

⁶ According to PRS Legislative Research (http://www.prsindia.org/theprsblog/?tag=parliament)

⁷ In terms of GDP adjusted to purchasing power parity for 2018–19.

⁸ ‘India lost 11 million jobs in 2018, rural areas worst hit: CMIE’, Business Today, 4 January 2019

2

The Basics

SECTION 1 – IDENTIFYING KEY CHALLENGES

India faces several socio-economic challenges, some larger than others. There are three large and all-pervasive challenges which have been outlined here, and all relate to some form of growing societal inequity. They represent the broad context within which we can begin to construct an economic ideology.

THREE CHALLENGES

Despite vastly different levels of development, India is quite similar to the European Union (EU). Both are made up of regions with very distinct economic characteristics.¹ In 2017, Tony Barber of the Financial Times wrote that ‘the gap between Dutch and German living standards and those of Greece and Portugal will surely be unbridgeable far into the future’.² India’s regional disparities seem similarly unbridgeable. There is a stark divergence in the levels of economic prosperity between the northern and southern regions of India.

These differences are immediately evident in key consumption statistics and development outcomes that serve as proxy indicators for economic performance in India (Table 2). The average urban Bihari spends less than half of what the average urban Keralite spends per month.³ Health and education reflect a particularly wide divergence; the average baby born in Bihar is almost four times more likely to die at birth than a baby born in Kerala. More than a third of total Biharis are illiterate, whereas nearly all Keralites are literate. These non-trivial variations indicate the scope of regional imbalances present in India today.

TABLE 2 Key Socio-Economic Indicators

Source: NSS 68th round, Planning Commission, Census 2011; *State-wise estimates of Average MPCE as per Mixed Reference Period (MRP) for 2011–12 available at NSSO Report No. KI. (68/1.0)

No country is devoid of regional disparities. Even in the developed world, inequality among cities and regions ‘after falling in the 1990s from high levels in 1980 – has turned sharply up again since beginning of the millennium’.⁴ Regional inequality has different causes and establishing the precise contribution of each possible cause is difficult. For instance, topographical features or availability of mineral resources played a key driving role in India. The British developed port towns such as Bombay, Madras and Calcutta into trading and industrial hubs, while the country’s interiors were exploited for their resources. The inter-regional disparities this created have compounded with time.

Reduction of regional imbalances was one of the main functions of the erstwhile Planning Commission, as can be discerned from the frequent mention of related development challenges in the Five-Year Plan documents. For instance, the tenth Five-Year Plan document characterised the persistence of imbalances as a key concern, noting that ‘most [imbalances] have grown over time, widening the gap between more developed and less developed States . . .⁵ These imbalances are seen most prominently in the pace of growth, in patterns of development, in plan outlays and development outcomes, and in the fiscal capabilities of States to finance future development’.⁶

In order to create a new institutional legacy, the NDA government did away with centralised planning and replaced the Planning Commission with a government think tank called the NITI Aayog in 2015. The cabinet resolution establishing the NITI Aayog, however, surprisingly does not identify the reduction of regional imbalances as an objective. This gap was pointed out by N.K. Singh, Chairman of the fifteenth Finance Commission. In 2017, he wrote that ‘the mandate and role of the [NITI] Aayog should be redefined and enhanced to evolve models aimed at balanced regional development’.⁷ Indeed, the