Sustaining India's Growth Miracle.
Hoag, John H.
SUSTAINING INDIA'S GROWTH MIRACLE edited by Jagdish N. Bhagwati and Charles W. Calomiris, Columbia University Press, 2008.
The book is a record of the October, 2006 conference India: An Emerging Giant and includes six chapters, Transforming India by Arvind Panagariya, Unfinished Reform Agendum: Fiscal Consolidation and Reforms, by T. N. Srinivasan, Reforming the Indian Electicity Supply Industry by Frank Wolak, The Indian Software Industry and its prospects by Ashish Arora and India: Past, Present, and Future, a round table discussion, and finally India: An Emerging Giant a speech by Kamal Nath. All chapters but the last have commentary.
The first chapter looks at a macro level view of India and its growth. The focus is on the prospects for continued high growth of GDP. The primary argument is that for sustained growth to occur there needs to be an increase in the employment opportunities for the unskilled labor. Growth to this point has generated by increases in the service area with decreases in the agricultural sector. But what appears to be happening is that people are moving from agriculture to the informal sector, very small firms. The primary growth drivers have been in the service area. What has not happened is the growth of large firms hiring substantial numbers of unskilled labor. Panagariya argues that improvements in trade restrictions should improve the opportunities for growth in this area, but the longstanding labor friendly laws have prevented the growth of opportunities for those will fewer skills. There are also bottlenecks in infrastructure. The possibility of continued growth from the information technology side are supply bound due to the lack of educational opportunities in India, a factor not likely to change quickly unless private universities arc allowed to flourish.
First, this essay is exceedingly well done and the points are clearly and precisely made. Evidence in support is also carefully marshaled. The second observation is that it would be useful to have a comparison against the broader macro economic aspects of the world and how economies generally were growing. While India was clearly near the top for growth over the latter part of the time period discussed, it is not clear when there were up times and down times more generally. Were the variations in growth a mirror of what happened in other countries? Finally, it is unclear how one defines and explains the long run growth rate, and variation about it. The contention seems to be that the long run growth rate has been increased and that the variations we see are not variations around this trend, but a movement of the trend. The difficult issue is to make sense of the determinants of the long run growth path. It seems likely that greater (to a point) reliance on markets is likely to generate greater growth. Whether the growth will be equally shared across the society even in this case is not so clear. But what also seems clear is that a too labor friendly regime may end up reducing the possibility of firms locating in India, and the outcome not likely to help those at the lower end of the economic spectrum.
In the second chapter, T.N. Srinivasan looks at reforms on the fiscal side of the house. Along the way, he also provides a brief understanding of both the history and the structure of the government and fiscal operations in India. The relationship between the central government and the states is an important part of the story. The history and overview are well done, and very helpful to one who know almost nothing about India and its internal processes. Perhaps the most important point from this history is that India has moved away from its planning roots and toward a more market like economy. Further efforts in the effort to reduce the government's presence in some parts of the economy seem likely to be important for the continued growth of the economy.
Srinivasan then offer two suggestions about further improvements that could be made. The first provides a mechanism for oversight of the various state plans that would also encourage integration of the various pieces and could also provide an opportunity for feedback en the state's funding plans. The second suggestion is to essentially decouple the central government budget from government spending on infrastructure. Part of the problem with the current set up is that the central government pays for the project and then turns it over to the state which has few sources of revenue to support the project. Once the center funds a project, it should continue the operation. Shared support by the state and the center is also contemplated.
Moving from these suggestions, Srinivasan discusses the possibility of persistent deficits and how they might be overcome. He ends up arguing that this is not likely to be a problem. He also points out that it is not clear that high deficits have caused crowding out. He argues for a balance on the current side of the account, but allows for deficit spending to support capital projects where positive externalities might generate added growth. This is another excellent chapter adding to the understanding developed in the first chapter.
The responder, Govinda Rao, seems a bit less optimistic than Srinivasan concerning the impact of deficits on growth, and sees substantial political problems ahead for overcoming the problem Srinivasan identifies. Both he and Srinivasan argue that tax reforms are an unfinished business.
The third chapter, Reforming the Indian Electricity Supply Industry, by Frank Wolak is a very nice piece of analysis that discusses the problems and possible solutions to electricity supply. The strong role of the state governments and the relative paucity of federal control together with policies aimed at providing power cheaply to all, have left the power industry in disarray. Efforts to reduce the subsidy to the poor, many of whom apparently received power free, meet with political resistance. The other side of the coin is that as a result, power suppliers are not making enough money to attract the private investment needed to allow growth in this area. Wolak provides details of the problem and also suggests a path out. This is a richly detailed, well written chapter so that even one without much knowledge of the power industry is able to see the problems.
The response by Jessica Wallack is also well done. She argues that some of the solutions offered by Wolak will not be sufficient to provide the increases in public power that are needed. There are issues, in her view, on the supply of fuels side that also cause problems and need to be faced. The problems revolve around politically feasible processes that will lead to less control by the states, and a reform of industry regulation. These are not simple problems, and will require substantial political will as well as careful thought about the best way to proceed. The problems of proceeding with reform that have been manifest in the west are lessons for India.
The fourth chapter is Ashish Arora's work on The Indian Software Industry and its Prospects. Again, well written, detailed, and done by someone who understands the industry. The main issue is' how and in what dimension the industry will grow and whether it can continue to grow as it has. Can the Indian firms move up the value chain? Policies of the government with regard to education have had a role. Arora is optimistic that the industry will mature and that growth will continue apace. Further, the expectation is that this industry will continue to be a primary mover for the Indian economy. At the same time, the industry has provided a model for other Indian industries to grow and prosper.
Frank Levy's response suggests that he is optimistic that Indian software companies both at home an in conjunction with multinational corporations will maintain growth, though the precise path will not be easy or easy to forecast. But one advantage Indian firms seem to have is in the management of work that transcends national borders.
Chapter 5 is the record of a panel discussion on the prospect for Indian growth involving Jagdish Bhagwati, Arvind Panagariya, Ronen Sen, Arun Shourie, and Frank Wisner. This chapter is particularly interesting as it brings together the political and the economic forces at work in India. The desire to maintain growth is apparent, and the need for further change in the regulatory structure is also made clear. The fact that there is political opposition is also clear and exactly how the collision of these forces will be managed is of interest, but cannot be resolved.
The final chapter is the keynote speech by Kamal Nath, Minister of Commerce and Industry titled "India: An Emerging Giant." In this piece, Nath highlights both the successes and the problems that remain. Problems include the need to change labor laws, add infrastructure, and add manufacturing jobs to allow people to move out of subsistence agriculture. In addition, India plays a role in the international trade discussions, and must fight for what is right and equitable. One impact of the economic changes that have occurred is that the people of India have rising expectations. These expectations will require additional efforts on the part of the government to make sure that the expected outcomes can be reached.
How does one evaluate a book of this kind? The first two chapters are clearly important for the discussion no matter how framed. One might wonder why these two industries were included here and not some others. Make no mistake, the industries included are important, but are there other areas that should be represented in this discussion?
There are a couple of themes that may be important. First, those contributing to this book realize that continued development is something is a multifaceted enterprise. There is not a single lever that if pulled, will make it possible for growth to continue at the 8% rate; it requires a variety of efforts and some pulling together. Whether the political will to do this is in extant is an open question. The fact that the states have as much power as they do makes it hard to see where the cooperation will be generated. Still at the Federal level, it has happened and will continue to happen at least in some dimensions.
Second, a considerable part Of the increase in growth seems to have stemmed from a move from a planning style economy to one that is more reliant on markets. While there is still room for greater market forces to be manifest, it is not clear how much more growth can be generated from this source. Third, the question remains whether there is a permanent change in the growth path for India, or if what we are seeing is fluctuations around the mean. The fact that there have been substantial structural changes in the economy argues for the former interpretation. Finally, when one looks at a growth path for GDP, one generally thinks of a logistic curve. Is it possible to maintain higher rates of growth forever? The answer would seem to be no, based on empirical grounds. Thus in some sense, the answer to sustaining India's growth is that it can happen for a while, but probably not forever. Can India catch up with the more developed countries is the more focused question. And there seems, at least as represented by the view expressed in this book, the answer to that question would be "yes!"
John H. Hoag
Professor of Economics
Bowling Green State University
Bowling Green, Ohio
