An IITB alumnus, Dr. Ajay Shah is one of India’s most influential economists, something that has been recognized by the Business Standard and Indian Express. He has held positions at the Centre for Monitoring Indian Economy, Indira Gandhi Institute for Development Research and the Ministry of Finance, and now works at NIPFP where he co-leads the NIPFP-DEA Research Program. He blogs frequently and his blog has won the ‘Best South Asian blog’ award by BH Economics Blog Awards, twice. In this exclusive article penned for us, he talks about the necessity for us to be active participants in the Indian growth project and the role of ideas in shaping society.
There has never been a better time to be born an Indian. Looking backthrough 5000 years, the world has never fallen into place in a more favourable way for the young in India today. At the same time, a glorious future for India is not inevitable destiny. All of us need to get involved, to a greater extent, into the larger public policy and political debates of the day.
After 1947, for many decades, India was mired in the `Hindu rate of growth’ of 3.5%. At a time when population growth was 2.2%, this means that per capita income grew by 1.3% per year. At this rate, per capita income doubled every 53 years. In other words, a man would have children, and his children would have children, by the time a doubling was felt. This glacial pace of change set off immense social unrest and political instability. Those early decades were a daunting time for the Indian project. When the Emergency was announced in 1976, to many observers, that was the end of the Indian story: we had turned
into yet another thuggish third world country where people were crushed under some tinpot dictator.
Luckily, we escaped from that trap. In 1977, the Janata Party moved slightly away from the socialism that peaked during the Emergency. By 1979, this started yielding results: GDP growth went up to 5.5%. In this period, India stayed a closed economy. In 1991, the opening up began. GDP growth went up further to a trend rate of 7%. By this time, population growth had declined to 1.5% per year. So at present, we have trend growth in per capita GDP of roughly 5.5 per cent per year. This yields a doubling every 12 years. This is shockingly different. A man experiences two doublings by the time his first child is born.
Rapid growth has changed everything for us. It has brought us a modicum of social stability. Sophisticated observers no longer worry about India breaking up or about communist revolution.
If we look forward into the future, mechanical trend extrapolation will say that we will continue to get 7% growth, through which
aggregate GDP will double every decade, i.e. in your next 50 years GDP will go up by 32 times (and might endup bigger than the GDP of the US). This happy future, rooted in mechanical linear trend extrapolation, will assuredly not come about.
History is littered with examples of countries which sprinted for a short time and then choked on problems. These include the USSR, Japan, etc. It is relatively easy to get a growth engine going for a short time. But any package of policies that works for a short time tends to become obsolete, partly owing to the very growth that it engendered. What works in 2000 is less useful in 2010 because one doubling has taken place; 2010 is another day altogether. Just as firms need to comprehensively reorganise themselves across each doubling of revenues, countries need to comprehensively rethink all aspects of government across each doubling of GDP.
Countries that work, that succeed in generating sustained growth and prosperity through the decades, are those that continually diagnose and solve problems. This is intimately connected to the structure of the political system. Open societies are better able to continually identify weaknesses, criticise them, throw out failed rulers from positions of power, come up with new ideas in policy even when they offend the powerful, and execute a continuous if painful process of policy reform.
We in India are a moderately well functioning democracy. In some respects, we are in good shape in that our Constitution is well accepted. We will have elections for sure; every ruling coalition knows that it faces electoral accountability.
But in other features, our political system suffers from fundamental flaws. We have poor freedom of speech: our Constitution did not protect freedom of speech, so the three evils of laws against obscenity, defamation and hate speech are being used to throttle free speech. Our Constitution designed for first-past-the-post elections, but all over the world today, there is increasing realisation that proportional representation works better. India is a poster child of the problems that are caused by sectarian parties only aiming to please 25% of the population since only 25% of the vote share is required to win many a seat. Our Constitution did not enshrine property rights as fundamental; so individuals are constantly exposed to expropriation by the State.
The journey that India faces is one of making the best of this buggy DNA. In time, we should hope that we will fix these bugs: Hopefully our Constitution should get amended to categorically protect free speech (as was done in 1776 by the more capable authors of the US Constitution). Hopefully, our election system should move away from first-past-the-post. Hopefully, property rights should become a fundamental right. But these are very difficult changes and will take decades to come about.
In the meantime, all of us need to get involved in the the Indian development project. It is a fascinating puzzle: the biggest ever
story, in human history, of a country that tries to break away from poverty under conditions of representative democracy. It requires a very high intellectual capacity, to constantly study the system, analyse the evidence, diagnose problems, and propose solutions. At the same time, we are not in the position of a system designer where it is easy to make changes to the system once a flaw has been understood. We are in a democracy, where power is dispersed, where the only way change is achieved is when there is a broad consensus in favour of change. All of us, then, matter in that process of debate and discussion through which problems are understood and solutions agreed upon.
Each of us needs to put a little more time and effort into the fascinating intellectual puzzles of understanding what makes a country tick, into understanding the bottlenecks with cold rationality and by applying the scientific method, into obtaining a sense of the solutions that might work. We should read about these things, we should think about these things, we should write about what we believe in, and we should persuade others about how we can do things better.
When faced with gigantic questions of State, all too often, we tend to feel apathetic – how can the effort of one person matter? Many years ago, Vijay Kelkar emphasised to me: In an open society, nothing matters more than ideas in the long run. As John Maynard Keynes said: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”
The most important puzzle that we face in India today is about how to construct the State. This ranges from fundamental problems — such as the flawed DNA of our Constitution – to practical problems – such as the appropriate utilisation of the electromagnetic spectrum. All these questions require us to get involved, learn the issues, think about what works best, bring the best brainpower and the best scientific methods and the best empirical evidence to bear on the problem. And it requires us to speak: to talk about how we think, to blog about it, to participate in the public debate. The best ideas will go nowhere unless they turn into the broad consensus; consensus-building is as much our job as the scientific work.