Abstract
This volume contains a compilation of essays written by distinguished economists and practitioners in India and abroad, to honour Montek Singh Ahluwalia, eminent economist and currently the Deputy Chairman of the Planning Commission, widely recognized as one of the main architects and drivers of the economic reform process in India. In view of Montek Singh Ahluwalia’s key role in crafting reforms that helped integrate India with the world economy, this volume in his honour brings together essays by leading experts on the Indian economy and on international economic policy. As the title of the book suggests, the aim is to cover the main aspects of India’s development in terms of reviewing past performances and developments and focusing on future challenges. The volume, edited by Shankar Acharya and Rakesh Mohan, is divided into four sections: (a) growth, inequality and reform; (b) the evolution of macroeconomic and financial policies; (c) review of progress in key sectors of the economy; and (d) India’s role and place in the global economy. It spans the main features of India’s economic development and addresses a wide range of topics such as growth, inequality, macroeconomic performance, monetary policy, capital markets, infrastructure, human resources, services, global finance, climate change and international trade.
The first three essays address the broad issues relating to overall growth, inequality and reform (by Surjit S. Bhalla, Suresh D. Tendulkar and C. Rangarajan); the next three focus on the evolution of macroeconomics and financial policies (by Shankar Acharya, Rakesh Mohan and Jamini Bhagwati); the following four essays are devoted to sectoral reviews (by Ashok Gulati, Gajendra Haldea, Isher Judge Ahluwalia, and Sunil Jain and T.N. Ninan); and the final three address the global perspective (by Martin Wolf, Anne O. Krueger, and Nicholas Stern, Ruth Kattumuri and Nandan Nilekani).
Acharya and Mohan pragmatically note in their introduction:
The essays clearly document the tardy pace of infrastructure reforms and development, the glaring deficiencies in the social sectors, particularly in education and health, and the reforms needed for modernising agriculture to meet the needs of the future…. However, we have not been able to gear up public administration-structures to improve the delivery of public or semi-public goods and services. It is this area that needs the focused attention from all levels of the government in the years to come. (p. 34)
This analytical tone is evident through the volume as the essays analyze the key economic challenges facing India today and suggest policy measures that can propel India towards inclusive growth. The volume notes that while the Indian growth experience is well documented, bottlenecks and gaps, sectoral and social issues, and the changing international arena are increasingly emerging as concerns.
In the first part of the essay, Surjit S. Bhalla provides a critique of the Indian monetary policy stance taken by the Reserve Bank of India (RBI), which in his view is primarily responsible for the break in the economic growth generated in the 1990s and after 2008. It is a very convincing view that interest rates and exchange rates are key drivers of economic growth. Bhalla argues that the RBI, with its emphasis on monetary aggregates, unnecessarily slowed down the economy when it resorted to monetary tightening as money supply grew faster than what it considered prudent. Bhalla defines the Indian interest rate story with the help of three growth rate puzzles. In summary, the unwarranted tight monetary policy and much-higher-than-warranted real interest rates brought the Indian economy crashing down from a potential GDP growth rate of 7.5 per cent to less than 5 per cent in the late 1990s. The second growth puzzle examined is the seemingly zero acceleration in economic growth despite the scale of the economic reforms introduced in 1991. He concludes that the reasons for the economy moving towards the higher potential GDP growth of around 9 per cent were: the maintenance of an increasingly competitive exchange rate since 1993–1994 and the development and expansion of the middle class.
Suresh D. Tendulkar analyzes the distinction between inequity and inequality in the context of the larger debate in the development literature on this issue. The author’s deep analysis shows his grasp over the issues. Tendulkar argues against the common perception amongst intellectuals and policymakers, that rising economic inequalities, if and when they arise during the rapid growth process, are not necessarily inequitable. He argues that the common presumption is based on a single-dimensional view of equity, which focuses entirely on the income and wealth generating process while ignoring other relevant factors that are more amenable to policy choices without adversely impacting the growth process. It is now well established that periods of high economic growth have been historically associated with increase in inequality. The rest of the book is silent on the issue of poverty and inequality during the period of high growth.
C. Rangarajan draws a lesson from the development record of the last four decades—that there can be both ‘government failure’ and ‘market failure’ and that the critical issue is not so much the presence or absence of state intervention, as the extent and quality of that intervention. Rangarajan recounts his experience of two reform episodes: first, the reform in exchange rates, which is crucial for the success of structural reforms and the trade policy of the early 1990s and second, the phasing out of the issuance of ad hoc treasury bills between 1994–1997.
The second part, containing essays written by Shankar Acharya and Rakesh Mohan, is the core of this volume. Shankar Acharya’s essay concentrates on macroeconomic performance and policies since the year 2000. He suggests that the achievement of high growth, along with low inflation and price stability, as well as sustainable external balance are the ultimate targets of macroeconomic policy. He also suggests that a set of intermediate target variables, i.e., fiscal balance, savings and investment are crucial for macroeconomic policies and outcomes. Perhaps the most important in terms of ensuring macroeconomic stability was fiscal consolidation. As Acharya points out:
In 2001, the combined fiscal and revenue deficits of the central and state government had attained record level of 9.9 per cent and 7 per cent. Fortunately both central and state government had grasped the gravity of the fiscal imbalance and begun to take effective action. Indeed it was combined effort. (p. 131)
In Acharya’s view, the ‘RBI-Government strategy for managing the unprecedented capital surge appears to have been remarkably successful’ (p.139). He cautions against the ‘trigger happy’ (p. 142) recommendations on capital account convertibility made by some official committees. According to him, it would be unwise to accelerate sharply the process of capital account liberalization in the foreseeable future. He feels that the RBI’s implementation of the managed float has served the country admirably, and should be continued.
Rakesh Mohan places the record of consistent financial sector reform in the context of risk containment and financial stability. He focuses only on the outcomes of financial sector reform. He puts India’s record in the international context and shows that, judged by the metrics of growth and inflation, Indian monetary policy ranks high in comparison with both emerging and developed countries. Mohan argues that interest rates and exchange rates are broadly market determined, even though they are affected by RBI’s market operations. Mohan’s essay also situates the Indian regulatory approach in the current international context of global financial crisis, describing in particular those regulatory measures that have restrained the Indian financial system from indulging in the kind of excess that have been observed internationally.
Jamini Bhagwati documents the development of the government securities markets over the years. He advocates the further opening of this market, and to provide more space for private sector issuance in the domestic market. He also argues for foreign placement of Indian government bonds in order to provide a benchmark for private floatation of corporate bonds.
The third part of the volume gives an overall review of sectoral analysis. Ashok Gulati is among the very few notable contemporary Indian economists to have devoted his professional life to analyzing the agricultural sector. Gulati marshals considerable empirical evidence to show that there has been no departure from 3 per cent growth in agriculture. Gulati observes that three-fourths of the resources going into agriculture are primarily as subsidies for fertilisers, irrigation and power. Only a fourth goes into investment, and 90 per cent of that into major and medium irrigation. He provides evidence to show how investment in roads, education and agriculture research and development would be much more productive than investment in irrigation and even greater than expenditure on subsidies. The most important part of his essay is that reforms in agriculture sector are essential, about which he has rightly written, ‘Reforming the three I’s: Investment, Incentives and Institutions’ (p. 214). There is much to learn from his analysis.
Gajendra Haldea has had a very close association with the infrastructure sector, both at the policymaking level as well as in the trenches, that is, of actually participating in and designing implementation procedures for public-private partnerships (PPPs). His essay voices the frustration felt by many over the lack of adequate progress in infrastructure investment over the past decade. Haldea describes briefly the pace of overall infrastructure investment over the last 10 years. He attributes this to the vested interest of public sector that has resisted the shift towards greater market orientation. Haldea also points to the existence of structuring difficulties in the few privatization attempts that have been made. Haldea describes some of the difficulties that were encountered. As for the railways, although there has been a major financial turnaround from a situation of near bankruptcy in the early part of the decade, there has been little structural change in its operation. Overall Haldea’s contribution lies in bringing into sharp focus the difficulties encountered while including the private sector in the domain of infrastructure. Since, by its very nature, the award of concessions to the private sector involves government decisions and choices, the transparent structuring of these procedures is crucial for avoiding moral hazards and crony capitalism.
One of the most enduring puzzles in Indian development is the relatively low priority accorded to essential health and education services provided to the population as a whole. Isher Judge Ahluwalia shows how overall public spending on health and education in India is significantly lower than in other emerging nations, whereas private spending is significantly high. With lower public spending, the better off essentially provide for themselves and the less well-off are left to the mercies of a poorly functioning public system. Focusing on the relatively advanced state of Punjab, Ahluwalia shows how the state has been sliding down, on a comparative scale, with respect to the rest of the country since the early 1980s. Ahluwalia finds that Punjab’s public facilities rate high in terms of the quality of the infrastructure, but not in health and education outcomes. She notes that the national disease of teacher absenteeism in government primary schools is particularly virulent in Punjab: a third of teachers are found to be absent on any particular day. Accordingly the education outcomes in these schools are poor by the standard objective national level tests. The situation is similar to public health facilities. Ahluwalia documents that Punjab performs poorly if health indicators are adjusted against income level. The most notorious social indicator for Punjab remains its low female-male sex ratio. She concludes that excessive centralization of the control of the services (health and education) at the state level and low accountability at the local level are the main reasons for the poor outcomes on human development indicators in India. Without real improvement in human resource development indicators, both qualitative and in coverage, India’s growth prospects remain threatened.
According to Sunil Jain and T.N. Ninan, the significantly higher growth of services has really been a post-reform phenomenon. Jain and Ninan believe that the service sector is here to stay and can only grow faster in the years to come.
The last three essays in the volume address India’s role in the world. One essay, by Nicholas Stern and co-authored by Ruth Kattumuri and Nandan Nilekani, stands out for its visionary analysis of the global climate deal. As the authors observe, ‘If we do not act strongly on climate change, it will undermine development…. At the same time, action on climate change cannot be successful unless it promotes development’ (p. 432).
Martin Wolf’s essay takes a ‘big picture’ took at India’s role in the world. He believes, ‘Thus, India’s aims for the world should be self-evident: in relations among states, peace; in connections among economies, openness; in management of the global commons, cooperation; and in the internal management of states, democracy’ (p. 372). He acknowledges India’s assets including size, population, economic dynamism (in recent decades), democratic traditions and multilateralism. He also notes its considerable liabilities, including persistence of mass poverty, the slow growth of organized sector employment, the large and growing dependency on foreign sources of energy, communal tensions and poor relations with immediate neighbours.
Wolf goes on to conduct a broad analysis of India’s place in the world with respect to the key dimensions of international trade: external payments, energy, climate change and security. With regard to each, he recommends a clear policy stance. Thus, in the context of trade, he emphasizes India’s need for an open world economy. He recommends a strong commitment to the successful completion of the Doha round of multilateral trade negotiations. With regard to exchange rate and convertibility, Wolf accepts the long-run goals of full rupee convertibility, a freely floating exchange rate and an independent central bank. However with caution he recommends a measured approach towards convertibility over a few years. During this period, controls should be maintained on short-term foreign currency borrowing, while progress is made on building more sustainable finances and deeper financial markets. On energy, he underlines India’s overriding interest in maintaining open world markets in oil and gas, while developing alternative energy resources, including nuclear power. With regard to climate change issues, Wolf argues that India has a strong interest in securing an effective global agreement on climate change, while ‘paying smallest possible price for reaching that agreement’ (p. 384). On security, he takes the increasingly conventional position that India should forge good relations with the United States, without incurring hostility from China or significant Islamic powers like Iran. He concludes by warning that perhaps the biggest threat to India’s security may be internal: India’s dualistic pattern of development, poor employment generation, prevalence of illiteracy and poor public provision of health and education services will undermine the sense of national cohesion, create conditions for corrupt and irresponsible politics, strengthen terrorism and threatens India’s progress.
Anne O. Krueger’s essay provides an authoritative survey of India’s foreign trade policies and their consequences for the economy. She describes the crisis of 1991 and the wide-ranging policy reforms that ensued, not only in restoring macro balance through devaluation, and fiscal and monetary policies, but also the more sustained commitment to trade liberalization, industrial deregulation, the pursuit of market responsive exchange rate policy, tax reform and the opening up to private, foreign capital inflows. She then goes on to assess, favourably, the effects of the reforms on India’s exports of goods and services and overall economic productivity. In assessing future trade prospects, Krueger identifies the following key policy challenges: fiscal imbalances, labour market regulations, agriculture interventions, bureaucratic red tape, infrastructure and remaining custom tariffs. Krueger concludes by warning that if the necessary economic reforms are not pursued with vigour, then the growth of India’s exports will slacken, and the overall rate of expansion in output and employment will also suffer. Krueger makes a strong case for encouraging the growth of labour-intensive manufacturing, which she argues is necessary for creating jobs and reducing poverty.
The essay by Stern (co-authored with Kuttumuri and Nilekani) draws heavily on the renowned ‘Stern review’ of climate change issues in 2007, and a paper presented to the Indian Prime Minister’s Climate Change Committee in 2008. Stern et al. provide a succinct and authoritative review of the technical and economic substance of global climate change and propose a possible role for India in steering this deal successfully.
However, one major drawback of this book is that it is silent on the issue of poverty and standard of living of most Indians. Also, this volume only touches upon how policymakers dealt with the financial crisis, while it would have been instructive if any of the authors had talked about Ahluwalia’s contribution to the policy deliberation during that time. On infrastructure, there is a strident attack on public sector undertakings (PSUs): their inefficiency, corruption, etc., but it fails to give credit to the PSUs for their role in creating investment demand, filling production gaps and so on. Unfortunately the various instruments of privatization, PPP, BOT have not been successful in promoting infrastructure. Gulati dismisses the concern over food security. In Isher Judge Ahluwalia’s essay on ‘public services’, there is no recognition that public services have been constrained by the fiscal reduction enforced under ‘reforms’. The suggestion that education and health services can be improved by engaging the private sector is unrealistic. Can the state underwrite a bottomless pit, given the current level of fee and medical charges by the private sector?
Nothing much about Montek Singh Ahluwalia’s contributions in the various areas are discussed in this volume, which is supposed to be the main focus of this book.
Overall, the book makes for interesting reading of India’s experiment with liberalization in the economic arena and provides deep insights into the policy interventions that are required to further energize the Indian economy. The essays are compact but at the same time touch upon a wide spectrum of issues relevant to that sector.