In the next 10 minutes, I wish to speak to you about the microeconomic fundamentals that have given us one doubling of our gross domestic product (GDP) every decade. In my reckoning, there are at least six main stories:
(i) Demographics: India has young demographics. Alongside, we are doing well on improving the quality of the workforce. Household survey data (the CMIE Consumer Pyramids database) shows that for children of age 12, literacy is now 95 per cent. We have a great surge in college enrolment: a full one-fifth of 21-year-olds now have a college degree. Every year, millions of young people are added to the labour force and their education is qualitatively superior to that of the elderly cohort leaving the labour force. We have also launched an ambitious national mission on skilling.
(ii) The second growth fundamental is international economic integration. On the current account and on the financial account, India is now engaging with the world on an unprecedented scale. Gross flows on the current account are now 63.3 per cent of GDP and gross flows on the financial account are now 55.3 per cent of GDP.
(iii) The third growth fundamental is an increasingly "capable" financial system. On an average, we invest 35 per cent of GDP every year. Finance is what determines the allocative efficiency of how this investment is done. What industries and firms get is controlled by the financial system.
(iv) The fourth growth fundamental is sophisticated firms. As all of you are aware, Indian firms are increasingly becoming capable and competitive. We used to think - and fear - that if India opened up, our so-called large firms were third world dinosaurs that would collapse in the face of global competition. Instead, we have a clutch of firms in steel, oil and gas, mining, power, information technology, and hospitality that have become multinationals and are buying out companies in the advanced economies.
(v) The fifth growth fundamental is sophistication of the workforce. A young girl of age 21, who started her labour market career in 1991, now has 21 years of experience in a competitive and globalised market economy. She has dealt with modern technology, foreign companies, and a truly competitive domestic environment. The forty-somethings of India today are qualitatively superior to the older cohorts who grew up in a closed economy and did not face modern technology or foreign companies or competition.
(vi) The sixth growth fundamental - and I know this will be contested by many - is democracy. While it is fashionable to criticise the workings of Indian democracy, when we look deeper, I think it is working reasonably well. Liberal democracy is the ultimate foundation of rule of law and legal certainty, without which nobody can trust a country or invest in it. At its best, democracy is a great conversation, where diverse views and aspirations get heard, and the issues that genuinely concern the majority of the people become the priorities of policy makers. On a bigger scale of history, when we start from 1947, I think India has fared well on the project of constructing a liberal and open democracy.
The Indian trend growth of the last 21 years was caused by several microeconomic fundamentals, and I have listed six of them. Nothing has changed on these. In fact our resolve to strengthen these fundamentals has become stronger. I believe India continues to have great prospects based on these fundamentals.
Our job is to clear our minds of old cobwebs as well as of day to day problems and stay focused on laying the long-term foundations of a capable state that is able to deliver.
While India has greatly deregulated, there is much more to be done. However, looming large is the issue of state "capacity". We need a state that has in place institutions to resolve market failures.
If you believe what our newspapers and television channels report you may conclude that no politician or civil servant is doing any work. Actually, the pace of work has been quite hectic. Let me illustrate this with examples of what have been done to improve the financial system, only in 2013. So far, we have had four historic events. A commission of eminent people has drafted a new Indian Financial Code: a path breaking piece of law that has been drafted to replace 50 existing laws governing finance with a single, integrated, coherent, modern financial law. This is a law which dwarfs the scope of the Dodd-Frank Act. We have enacted a brand new Companies Act to replace a law that was 57 years old. We have shifted the subject of commodity futures to the Ministry of Finance, something that has not been possible in the US even after the 2008 crisis. We have enacted a law establishing the Defined Contribution Pension system under a statutory regulator. The New Pension System is already one of the world's big individual account DC pension systems with over 6 million participants. Each of these four was a huge project involving enormous planning and preparation.
The genesis of the Indian Financial Code goes back to 2004. The Companies Bill was pending before Parliament for many years. The work on shifting commodity futures to the Ministry of Finance began in 2003. The National Pension Scheme was originally designed in 1999. All these projects have been largely bipartisan. We have dug in through these years, chipped away at the objections, cultivated the technical capacity, and built consensus, through which we are now able to reap the fruits of the long years of labour.
To conclude, I would urge everyone not to lose sight of the microeconomic foundations of Indian growth. The defining challenge in India however is in augmenting State capacity. How do we construct a competent and ethical state, that will minimally interfere with the rights of citizens in property and contracting, that will focus on preventing or resolving market failures, and that will successfully produce and deliver public goods? A wave of new thinking in public administration is now underway in India. We need to build completely new organisation charts within government, leading to sharply focused agencies that can be held accountable for delivery on specific objectives. Those are the first few lines of an absorbing new story that I hope will begin in the near future.
Edited excerpts from the speech made by Finance Minister P Chidambaram at the Carnegie Endowment For International Peace On "Recapturing India's Growth Momentum", October 11, 2013 in Washington
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
