Jawaharlal Nehru’s stirring oratory to usher in India’s independence raised the hopes of ‘midnight’s children’, only to have them dashed by the Hindu growth rate: three decades of growth averaging 1.5 per cent per capita that did little to raise living standards. As India enters its 64th year, however, palpable optimism reigns amongst midnight’s grandchildren. The Hindu growth rate is history, and having brushed off the financial crisis as a minor irritant, India is poised for near double-digit growth.
But India’s economic dynamism is a paradox. On most policy measures of market-friendliness, India lags behind sub-Saharan Africa, Latin America and Eastern Europe. It is still more closed to trade and foreign capital than most other countries; still hampered by extensive controls on economic activity, including highly regulated labour and land markets; and still dominated by a large public sector. On these metrics, India not sub-Saharan Africa should be growing at 5 per cent a year.
Even if the metric were not the level but the change over time, India’s policy effort by no means surpasses that elsewhere. True, the India of today is less of a regulatory nightmare than before 1991, but the difference is not really commensurate with the response of the economy. Indian policy reforms do not deserve the spectacular acceleration in growth that the economy has delivered.
Long-run economic growth depends not just on the environment for the private sector but also the quality of supporting public institutions. But, attributing Indian growth to India's institutions is more likely to elicit credulity than it is to persuade. To be sure, some institutions — that hold elections, preserve financial stability, and regulate telecommunications and financial services — have delivered. These exceptions apart, the Indian state — Nehru’s big project and legacy — is weak and fraying.
Indian politics is getting progressively criminalised; the writ of the Indian state does not extend to nearly a quarter of Indian territory afflicted by violent insurrectionary activity; corruption is endemic; and fiscal populism has ensured that India’s public finances are almost as wobbly as those in the debt-addled industrial countries, despite India's high growth rates which should have led to low debt levels. The odds that the Commonwealth Games will not be held at all, or be significantly scaled down, are non-negligible and rising. The contrast between these games and the Olympics staged by China in 2008 will illustrate the core weakness of Indian state capacity. As an economic institution, Mao’s Communist party has comprehensively outclassed Nehru’s democratic state.
Why then is India growing? Some conventional explanations focus on elite education and a dynamic information technology sector. These have played an important role in kick-starting growth but are too small in size and too narrow in the benefits they generate to sustain growth in such a large economy. The real explanation may be that, while policymakers have done the minimum to start growth, growth itself is now the driver of change and is begetting more growth.
This dynamic works through three channels. The first affects the private sector. High growth for three decades has both widened entrepreneurship and made the pursuit of money-making respectable. It is the bania not the babu (or indeed the Brahmin) who now rules. India, in the words of political scientist Devesh Kapur, is now a nation of hustlers, who are constantly searching for and realising economic opportunities, including ways of circumventing onerous rules — the so-called jugaad — that Swaminathan Aiyar has highlighted in his recent columns. Hustling and dhanda are now key drivers of growth.
A second mechanism ensures that the private sector replaces a non-responsive public sector. A good example is education. For long, development economists bemoaned the poor levels of educational attainment in India, directing their critique at the government’s failure to supply better education. But economic growth changed the education picture dramatically. It increased the returns to, and hence the demand for, education. And if government supply remained weak, consumers simply turned to the private sector to meet their demand. Whether it is private schools mushrooming in rural India because teachers do not show up in the public schools, or companies creating training and vocational centres to build skills for their employees because institutions of higher education are in a shambles, almost all the incremental demand for education at all levels is now being met by the private sector.
A third mechanism operates to make even the public sector more responsive because of the pressure of competition between the Indian states. A good example relates to the Nano car. The Tata Group was unable to locate its car plant in West Bengal because of the state’s investment-unfriendly policies. In the India of old, these policies would have killed the project. But in the new India, Gujarat, which is a model of high growth and good economic governance, out-enticed other states to ensure that the Nano project could survive and flourish. For the growth-begetting-growth dynamic to work it is enough for a few Gujarats to exist as a demonstration effect and force other governments to change policies in a race to the top to attract investment and create economic opportunities.
The bad news is that the rickety Indian state will seldom be ahead of the curve in initiating or galvanising economic change. That fundamental bottleneck will make Chinese-type growth rates elusive. The good news is that growth and the perceived benefits from it will generate enough pressures from below to force the Indian state to respond, even if weakly and intermittently. In the combination of a new and no-holds-barred spirit of hustling and a not-totally dysfunctional public sector reside the economic hopes of midnight’s grandchildren.
The author is senior fellow, Peterson Institute for International Economics and Center for Global Development, and author of India’s Turn: Understanding the Economic Transformation (Oxford University Press). This is an expanded version of an article that appeared in the Financial Times on August 17
