Reimagining India: Unlocking the Potential of Asia’s Next Superpower (14 page)

In earlier eras of U.S. history—such as during Ronald Reagan’s administration in the 1980s, which coexisted productively with a Democratic Congress, or Lyndon Johnson’s in the 1960s, when the Democratic chief executive needed the support of Republican legislators to push through the civil rights reforms—cross-party fluidity was common. Opposition legislators often voted with the president on a case-by-case basis. Today, such promiscuity is no longer tolerated, particularly among Republicans. America’s separation of powers has morphed into a semipermanent handcuff on government. Far from returning the United States to its roots, as some constitutional fundamentalists argue, such paralysis is new. It is hard to see what will bring it to an end.

What can the United States and India learn from each other? Leo
Tolstoy, one of Mohandas Gandhi’s heroes, said that each unhappy family was unhappy in its own way. Much the same could be said about dysfunctional systems. There is nothing as stubborn as a country’s political culture. In my observations of India and the United States, I continually run into one trait they share: Both tend to see unique faults in their own political setup. Both also imagine the grass is greener elsewhere. Americans are increasingly suffering from “parliamentary envy”—the promise of decisive Westminster-style government. And more and more Indians are nowadays musing on the benefits of the presidential system. I am often struck by this irony.

There are many words to describe what the two are suffering: “entropy,” “atrophy,” and “stasis” spring to mind. Or perhaps we should coin a new word: “vetocracy.” But neither India nor the United States is likely to change its system in the foreseeable future: Democracies rarely overhaul themselves unless forced to do so. Rather, both seem likely to remain mired in a self-fulfilling culture of declining trust in public institutions. In the United States, the electorate’s faith in Congress has fluctuated between 8 and 13 percent since 2010—a historic low. But perhaps this isn’t surprising given that the U.S. Congress has failed to pass a budget since 2009. In India, the share of elected politicians with criminal backgrounds continues to rise (lawmakers cannot be prosecuted). And what few pieces of legislation achieve consensus in today’s barely functioning Lok Sabha, the lower house of India’s parliament, should rarely be confused with policy making.

In his recent book,
The End of Power
, the Washington-based economist Moisés Naím notes that governments everywhere have found it harder and harder to exercise power as they once did. This applies to wealthy countries like the United States and poor countries like India—and even extends to autocracies such as China. It also applies to companies, armies, newspapers, and many other traditional sources of authority. Everywhere, power is becoming easier to acquire, harder to wield, and easier to lose. The rise of material aspirations and the spread of technological
autonomy are making politics (and much else) more volatile and less predictable. Indians and Americans tend to curse the unique failings of their own political classes. Few grasp how typical they are.

In pondering their governance woes, and in observing, for that matter, those of countries like Italy and Britain, it is hard to escape the thought that each would be better off if it had more effective defenses against the rolling caprice of the twenty-four-hour news cycle. If you break down public trust polling in the United States and India, unelected and independent bodies, such as the U.S. Federal Reserve and the Indian Election Commission, consistently top the rankings. Both institutions are shielded from day-to-day political interference, although they are ultimately accountable to elected officials. Neither pays much attention to ratings. Sometimes, perhaps, less democracy can mean more.

To propose detailed remedies for the political maladies of India and the United States is beyond my competence. But it would be hard to exaggerate the importance of that renewal—or how difficult it will be.

The Yale political scientist Jacob Hacker has written, “The Catch-22 of American politics is that the only viable and defensible route to fixing our broken political system lies through our broken system.” Hacker’s observation is no less true of India—indeed, it applies with all the more force and urgency to India given the country’s relative poverty and the high proportion of Indians who are young and male. These youthful multitudes, often celebrated as India’s “demographic dividend,” will need jobs. And if sufficient formal sector jobs cannot be created, they will still need income. It is not impossible to imagine India’s demographic dividend turning into a nightmare. America can afford to drift along for another decade or two. India cannot.

Arvind Subramanian

Arvind Subramanian is a senior fellow at the Peterson Institute for International Economics and at the Center for Global Development.

“Precocious” is a word seldom used in describing India, a country whose ancient civilization spawned the Sanskrit hymns of the Rig Veda, the epic poems of the Mahabharata and Ramayana, and three of the world’s great religions—Hinduism, Buddhism, and Jainism—five centuries before the birth of Christ.

And yet modern India can be described as precocious in two fundamental senses: economic and political. Indeed, India can be deemed the critical test of the viability of a unique experiment I call the Precocious Development Model.

For a host of reasons stemming from its statist policies of the 1950s and ’60s, India has embraced an economic model that relies for growth on a limited pool of skilled labor rather than its abundant supply of cheap, unskilled, and semiliterate labor. This strategy has meant that India specializes in services rather than in manufacturing and manifests traits found in much more advanced economies. Direct investment abroad by Indians is a prominent example; never before has such an underdeveloped country invested so heavily in much richer countries. The anomaly of Indian businesses running Corus Steel and Jaguar Land Rover offers vivid evidence of the Indian economic model’s precociousness.

With the experiences of Imperial Britain, Pax Americana, and more recently China clearly in mind, Lee Kuan Yew famously noted that no country in history became a great economic power without first becoming
an industrial power. India’s challenge is thus to defy the Sage of Singapore and find a trajectory to economic greatness that does not involve heavy reliance on manufacturing and cheap labor.

Politically, too, India’s precocity is remarkable, as witnessed by the democracy it has sustained at unusually low levels of income, education, industrialization, and urbanization. The Indian democracy exception is a staple of political science debates. But very few countries, especially large ones, have sustained economic growth as continuous democracies. In the postwar global economy, the dominant experience has been for some form of politically centralized authority (the military in Korea, the party in China, strongmen in Chile) to initiate and maintain rapid economic development.

The peril and potential of India’s economic future can be understood only in the context of these two types of precociousness. The interaction between India’s imperfect democracy and the limits of its skill-reliant economic model will shape the arc of the country’s development.

Let’s examine the latter factor first. After thirty years of robust economic growth—6 percent for two decades and nearly 9 percent in the last decade—the Indian economy is decelerating. India’s development model itself may be responsible for this slowdown. How so? Consider some key factors of production that determine growth.

Skilled labor has been India’s primary source of comparative advantage. But two decades of double-digit growth in remuneration of skilled labor are signaling that demand is running ahead of the ability of India’s shambolic higher-education system to turn out capable knowledge workers. Skilled labor has become a scarce resource—a stark manifestation being the well-known penchant of recently minted university graduates to hop from one job to the next.

As for unskilled labor, India’s abundance of it contributes little to growth because a panoply of regulations—a legacy of state-led development—stifles the expansion of labor-intensive industries such as apparel, furniture, and metal fabrication. At least a million low-skilled workers will enter the job market every month for the next several decades, but it is unlikely that they all will find employment given the country’s development model.

And eroding the gains generated by the private sector is the continued heavy hand of government and associated rent seeking—that is, the siphoning off of wealth, both legal and otherwise, by public officials and government agencies. Once an import-quota-license raj, in which massive bureaucracies held power of approval over minor business operating decisions and purchases from abroad, India has become a resource-rents raj, with new forms of rent seeking and corruption impairing the supply capacity of the economy. Rent seeking in land acquisition has affected the provision of infrastructure and impeded the development of large-scale manufacturing. Rent seeking in coal has affected power generation capacity. Rent seeking in allocation of frequency spectrum for mobile phones erupted into a scandal that nearly paralyzed the process of government itself.

At the same time, thanks in large part to the compulsions and flaws of its democracy, India’s macroeconomy is now one of the most vulnerable in the emerging market world. Stubbornly persistent double-digit inflation and widening current account deficits are reminiscent of Latin America in its dark era of debt crises. The underlying source of this looming instability is high and rising fiscal deficits that are now close to 10 percent of GDP. Over the last decade, both at the central and state levels, expenditures per capita—mostly on social programs—have doubled, the result of fiscal populism that in turn derives directly from the nature of the political system.

What, then, is the hope for India? The glib answer is: strong leaders who will deliver good governance and reforms, such as Gujarat Chief Minister Narendra Modi. But there may be deeper reasons to maintain faith in India’s economic possibilities.

The advantage of backwardness.
With living standards about one-tenth those of the richest countries, India is still so poor that considerable scope for growth remains via catching up to the frontier of economic
advancement. Further, demography may not be destiny, but India’s demographic dividend will surely impart dynamism—the burgeoning number of young people means more entrepreneurship, more savings, more ideas. And as long as they can be provided reasonable opportunities, growth can be lifted.

Growth begets growth.
India’s rate of economic expansion should arguably be much more modest—4 to 5 percent a year, not the 8 percent–plus of recent years—given its aforementioned impediments to market forces. On most measures of market friendliness, India lags behind Latin America and even sub-Saharan Africa. Conventional explanations of its puzzlingly rapid progress focus on elite education and a dynamic information technology sector. These have played important roles in kick-starting growth but are too small in size and too narrow in the benefits they generate to sustain momentum in such a large economy. The real explanation may be that, although policy makers have done the minimum to start growth, growth itself is now the driver of change and is begetting more.

This dynamic works through different channels. First, a three-decade-long growth spurt has fostered entrepreneurship. India, in the words of the political scientist Devesh Kapur, is now a nation of hustlers, constantly searching for economic opportunities—including ingenious ways of circumventing onerous rules—that, in turn, keep the economic engine purring. As the protagonist in Aravind Adiga’s
The White Tiger
says, “The Indian entrepreneur has to be straight and crooked, mocking and believing, sly and sincere, at the same time.”

Second, rising demand allows the private to supplant the public sector. In education, for example, where the government’s failures to provide good schools are well known, growth has changed the picture dramatically, largely because it has increased the returns from education—and hence the demand for it. Evidence is provided by the work of
the economists Karthik Muralidharan and Michael Kremer, who show that private schools are mushrooming in rural India (many prominently advertising “English medium”) because of teacher absenteeism in public schools. And companies are creating training centers to build skills in the cities (such as the Infosys Leadership Institute in Mysore) because institutions of higher education are notoriously inadequate.

Competition between states.
The weakness of the central government reflects a considerable shift in power to the states. Indeed, most issues that critically concern investors—land, infrastructure, human capital, law and order—are largely under state domain. So, hard as it may be to envision the federal government getting its act together, what happens in the states will increasingly determine India’s economic fortunes.

It is not that leadership in the states is better on average than at the center, but in a decentralized India, a few visibly successful experiments can have powerful economic repercussions. Capital and labor can and will flow from the laggard states to the performing ones, and laggards will have fewer excuses for nonperformance if the experience of a neighboring state is better. In the past, the southern states were the pacesetters. This is no longer the case today. There are encouraging improvements across India—in the north (Haryana), west (Gujarat), east (Bihar), and central India (Madhya Pradesh).

An example was the experience of the Nano, an iconic attempt to produce a reasonably priced car for India’s mass market. Overregulation discouraged its manufacturer, the Tata Group, from starting a factory in West Bengal. In the India of old, this would have killed the project. But now the better-governed state of Gujarat has taken the project instead.

Decentralization is not without risks. High-performing states tend to be run by “authoritarian democrats,” leaders who, once elected, face few checks and balances. Moreover, states have been very reluctant to extend the advantages of decentralization all the way to the local government
level, the result being a pernicious effect on urbanization. Cities in India do not have autonomy to raise resources, nor are their leaders directly accountable to citizens, resulting in crumbling infrastructure even in a city such as Mumbai.