Is India’s growth story plateauing?

A government with a mandate can bring about structural changes needed for economic growth

After a decisive verdict in the Lok Sabha election, Prime Minister Narendra Modi begins his new term faced with the difficult task of reviving economic growth and fixing India’s job problem. In a conversation moderated by Anuradha Raman, Rathin Roy and M.R. Madhavan discuss the challenges ahead for the economy and polity. Edited excerpts:

You have been saying that India is going through an economic slowdown. The government, on the other hand, says everything is fine.

Rathin Roy:If you look at the state of the economy, we’ve had very sound macroeconomics over the last five years. Our fiscal deficits have been reasonably under control. Inflation is low, and the balance of payments problem and current account deficit are also reasonably under control.

I don’t tend to get alarmed by short-term ups and downs. The trouble is a more long-term one and it’s a bipartisan problem. It’s a consequence of the way we have grown over the last 25-28 years, which is that we haven’t been an export-led economy and I am presuming that this will not happen in the near future. But you are not going to make the Indian economy rich by merely exporting. You have got to make it rich by producing what people in India consume. And the trouble is, so far we have been meeting the consumption demands of those who have become more and more affluent over the last 28 years, and that is the top 150 million Indians. When you go to Bombay and look at what they call leading indicators of economic growth, you hear about four-wheelers, two-wheelers, air conditioners and fast-moving consumer goods, but this is not what all of India consumes, it is what some Indians consume. And so far this was okay because 150 million is a big market. It’s a bigger market than Germany, so growth was just fine.

But what I am noticing now is that this consumption demand is beginning to plateau. Therefore, we really have to now think about how, without subsidies, the next 200-300 million Indians and their consumption demands can spur growth in the years ahead. And what do they consume? They consume what we consume. A nutritious meal, clothing. They would like to buy one house in their lifetime, they would like decent health and education. So unless we move away from our four-wheelers, two-wheelers and air conditioners-based economy to an economy in which these things are produced at affordable prices, growth will begin to peter out. And I wouldn’t like that because there’s huge potential in the Indian economy to change the composition of growth such that our growth is sustainable and we complete our development transformation without subsidies. A beginning has been made by thinking about agriculture as a place where we maximise output to doubling farmers’ income. That’s positive. The NDA government promised affordable housing and healthcare. So I’m quite confident that the sort of plateauing of India’s growth story can be avoided if economic actions to do so are put in place.

Affordable housing for all has been a policy of almost all governments in the past. Governments over time have placed emphasis on nutrition and health and we have several programmes targeting the population that is outside the growth story. So, what is different this time?

RR: Until this government increased the scale of it, affordable housing was essentially given to people with a subsidy. Now, here’s my proposition. If you’re earning, let’s say, twice the minimum wage in Delhi, that would mean ₹16,000-₹18,000 a month. Now, if you are earning ₹16,000-₹18,000 a month over a 30-year period, what is the likelihood that you will be able to buy a housing unit with a secure land title and amenities that some would consider minimum for someone with those kind of wages? The probability is very low. There is plenty of land available with the Government of India. But the government has given it away to media companies, group housing societies, clubs. I am saying you take the land and re-purpose its use and provide modest but decent housing to people who earn the minimum wage, through the market without subsidy.

Coming to nutrition, yes, we have talked about nutrition but I challenge any economist in this country to tell me in any part of the country what the non-subsidised price of a nutritious meal is. They won’t be able to. That’s why this doubling of farmers’ income initiative is so important because we are saying okay, if we double farmers’ income, then it is reasonable to expect that they won’t need subsidies. This is the kind of economic calculus that we have to start doing.

With textiles it is a different matter. Upmarket textiles are mostly made in India. But if you go to Fashion Street [in Delhi] and try and buy a ₹400 shirt, you will discover that it is made in Bangladesh and Vietnam. So why are we uncompetitive compared to Bangladesh and Vietnam? The answer is we are wage uncompetitive. And how are we wage uncompetitive? Wages in U.P., Bihar, Chhattisgarh and Odisha are not much higher than in Bangladesh or Vietnam. But wages in south Gujarat and Tiruppur are higher. So we are not able to make textiles in our country because we are unable to actually locate industries where wages are low. We are also increasing regional inequality because if you ask the question which I often ask, which is that since 1991 what has been the major benefit to eastern U.P., Bihar and Jharkhand, I would say it has been in the migration to the south and west of India. We have to change this. And these structural changes are what I am pointing to as barriers to India’s growth story going forward.

So, you say from 1991 respective governments have not really focused on the structural shifts that need to be made to change the growth story? Where does the fault lie?

RR: I don’t think that is the right way of putting it. If I go back and break up the objective of the development state in India, I would say that from 1950 to about 1971, the objective was self-reliance and we succeeded. From 1971 to the late 1980s, the objective was to continue with modernisation but also to end poverty and hunger. We succeeded in substantial measure. From 1991 onwards, macro-economic stability became very important as the world globalised and old formulations broke down. So, what we had to do was find our place in the growth story that was consistent with some economic liberalisation which was not terribly iniquitous, and be successful in transforming the lives of at least the first 150 million Indians. And we did that quite substantially. The period from 2004 till very recently is the period when we tried to recognise that productive inclusion was not happening. Hence we had MGNREGA, Sarva Shiksha Abhiyan. We’ve had mixed results. This is why I have been uncomfortable with the Nyuntam Aay Yojana (NYAY). The development state needs to continue the business of development. NYAY or universal basic income is not development.

You also mentioned in an interview that if we don’t look at these things, we are going to probably end up like Brazil and South Africa.

RR: That was, of course, rhetorical, but I do want to point out something that is not rhetorical. If you look at the history of post-war development, you have Japan, South Korea and now China. You can see how they have transformed the lives of the majority of the population. That’s what I call a development transformation. But if you look at countries like Brazil and Indonesia, they have not done so. Despite the per capita income of Brazil being four times that of India’s, there is endemic poverty and crime there. So there are two development stories, and a linear growth path may not actually lead to a development transformation. We have to choose in favour of getting productive inclusion into the economy. By that I mean how to get people to participate in growth and what are the factors that inhibit them from taking part... you have to fix that.

How is this huge mandate going to play out in Parliament?

M.R. Madhavan: Clearly, the structure of the Lok Sabha in terms of parties has not had any major change. The BJP had a majority on its own last time. It has a slightly larger majority on its own this time. The NDA enjoys a very comfortable majority now. The largest Opposition party is the Congress and it remains without the post of Leader of the Opposition. What is worrying me — and it has nothing to do with this Parliament or this government or the last government — is the structure that has been built up.

I would say 1985 was the break point when we ended the parliamentary system of the Indian government by passing the anti-defection law. We have a Parliament. We have a set of bosses who tell everybody under them to vote in a particular way in Parliament. The period from 1985 to 1990 was bad. After that we had coalition governments where you needed to convince your allies of what you wanted to do. But in a single majority government, you don’t need to convince anybody. So one huge check is gone and this goes against everything that a parliamentary democracy stands for. Why do we have a Parliament? We have it as there is legitimacy when representatives discuss issues in public and reach some sort of a consensus.

There was another check which developed from 1993 onwards. This has disappeared in the last five years. That is the committee system. Committees were behaving in a reasonably non-partisan manner. They were discussing Bills and coming up with good recommendations. They have continued to do that in the last five years but there was one major issue, which is that only 25% of the Bills were referred to committees. When the Bills were referred to them, the committees did a great job. For example, the Insolvency and Bankruptcy Code went to the joint committee. It made a number of changes and all of them were accepted. Committees were performing a check. But we are not referring that many Bills to the committees. I hope the new Parliament will look into that. The other check was the Rajya Sabha. That could change in 2021-22 when the BJP/NDA has 45% of the seats.

The primary job of Parliament is to hold the government accountable for its actions. I would say the burden of this will always fall on the Opposition and I hope that they learn something from the British and say, let’s form a shadow government. Let’s allocate certain people with certain responsibilities. From day one we will focus on our job. Clearly, there are over 350 with the government and we have about 200 in the Opposition, but 200 is not an inconsequential number. Let us at least organise ourselves so that we can hold the government to account for its action. Will they do that?

(Rathin Roy is Director National Institute of Public Finance and Policy and member, Economic Advisory Council to the Prime Minister of India. M R Madhavan is the president and co-founder of PRS legislative research, a public policy research institute that focuses on making the legislative process transparent and more focused.)