The Hindu Business Line : Mystery of India's growth

India's democracy has been able to stave off the social Darwinsm inherent in the neoclassical ideology which would have transformed deprivation and subordination into a policy of systematic exclusion. Probably, the mood was set by the Nehruvian allergy to the 19th Century neo-liberal concepts. The Nehruvian economic legacy included the meta-institutions of democracy, the rule of law, free press and the technocratic bureaucracy that recent research shows are crucial to economic development, says T. C. A. Ramanujam.

"The flapping of a single butterfly's wing today produces a tiny change in the state of the atmosphere. Over a period of time, what the atmosphere actually does diverges from what it would have done. So, in a month's time, a tornado that would have devastated the Indonesian Coast does not happen, or may be, one that was not going to happen, does."

— Jan Stewart on the Chaos Theory of Lorend.

ONLY a few years ago it looked as though the Washington Consensus had engulfed the whole world including Asia. The new liberal ideology, championed by the World Bank and the IMF, had laid down as gospel the necessity for financial liberalisation both external and internal, privatisation, a regulated stock market, fiscal discipline, openness to FDI, flexible labour markets and a recognising the role of private property.

Nearly a decade after, the Washington Consensus has no takers. Several studies have emerged pointing out flaws in it. Economists have now come to believe that development depends not on specific policies but on institutional factors. Even small policy changes may pave the way for accelerated development.

Researches at Harvard's Kennedy School of Government looked at 83 instances between 1957 and 1992 in which annual GDP growth increased by at least two percentage points and the higher growth was sustained for at least eight years. These bursts of growth were not normally preceded by a big shift in policy, or by full-blown economic and political reforms such as liberalisation or a move towards democracy. This is something the authors are at a loss to explain.

Financial liberalisation does help stimulate growth for a while. More investment and exports and competitive real exchange rate can also give a temporary boost. And positive external shocks (such as a rise in the price of an exported commodity) tend to hasten growth that quickly fizzles out (Growth accelerations by Ricardo Hausmann and Dani Rodrik; NBER working paper No.10566).

A small step usually not considered to have profound significance produces a mighty impact on the economy. The authors point out how the 1964 devaluation and increase in interest rates in South Korea brought the returns in private investment closer in line with those to the economy as a whole. Market reforms initiated in China on a small scale in 1978 led to the emergence of a vibrant middle-class. According to the authors, Indira Gandhi removed shackles from enterprises and began sending pro-business signals, a decade before more formal reforms. Prof Dani Rodrik, he Harvard economist, observes: "Instigating growth is a lot easier in practice than the standard Washington recipe, with its long list of institutional and governance reforms, would lead us to believe." Looks almost like the application of the Chaos Theory to economic development. Comments The Economist (of London): "However, grander reforms do seem to be correlated with take offs in growth that are sustained over a longer period, of 15 years or more. Big reforms are not needed to start growth, but they are a great help in keeping it going."

Asian economies

China, Singapore, Korea, Taiwan and Malaysia and Indonesia have all achieved significant double-digit increase in industrial production. Japan is no longer stagnating. None of the countries bothered about Washington Consensus. According to Prof Dani Rodrik, "The Chinese economy remains among the most protected in the world." China is financing growth through a massive export surplus and a huge fiscal deficit. It has been pointed out that India is growing through the services sector and the unorganised sector both of which do not require large capital.

It has become fashionable in the past decade to criticise the Nehruvian ideas as being responsible for the low rate of growth in India. Analysing the "mystery of the Indian growth transition," Prof Dani Rodrak and Prof Arvind Subramanian, also of Harvard, point out that the so-called long and dark period of the Indian development process, when the licence-permit-quota raj was in full swing, was not all dark; fundamentals were being built up yielding rewards with a lag and sparking the IT boom. Skilled human capital was being built through technology, management and research institutes — "a sort of import substitution effort in skilled human capital that were integral to the Nehruvian vision".

The Nehruvian economic legacy included the meta-institutions of democracy, the rule of law, free press and the technocratic bureaucracy that recent research shows are crucial to economic development. The two Harvard stalwarts conclude: "It is important for India to avoid the mistakes that Latin America made in the 1990s by hastily embarking on an overly ambitious agenda of economic liberalisation and privatisation that ran ahead of the supporting institutions are the productive abilities of their economies. The habitual pragmatism and gradualism of Indian policy-making, dictated by the needs to manage pluralism and diversity — the organising principle of the "idea of India" — is here more of an asset than a liability."

The political economy of development

What factors contribute to the Indian economic growth? Economists defer. Dr Vijay Kelkar visualises a golden age of growth with India riding the wave of growth fundamentals like demographic transition, human capital accumulation, improved incentive structures, diffusion of new technologies such as IT, total productivity accelerators through network industries and so on. He even visualises a double digit growth in the next two decades, "When a satellite is put into orbit, it requires high velocity to ensure exit from the earth's gravitational force; similarly, if our economy is to exit from the gravitational pull of poverty, it requires an exit velocity of double-digit growth rate over the next two decades" (Dr Kelkar's Narayan Oration in April 2004 at Canberra.)

According to Dr Kelkar, India's democratic framework is a key growth fundamental. This view, however, is not accepted by other economists such as Dr Aravind Virmani and Dr Koushik Basu. Dr Basu has this comment to make: "Advisors from Washington D.C., and many economists recommend that the third world nations must have democracy and must open up their economy and privatise, oblivious to the fact that to ask for a democracy and then to insist what the democracy should choose, amounts to a contradiction" (India's Emerging Economy 2004, MIT Press).

India's democracy has been able to stave off the social Darwinsm inherent in the neoclassical ideology which would have transformed deprivation and subordination into a policy of systematic exclusion. Probably, the mood was set by the Nehruvian allergy to the 19th Century neo-liberal concepts. A global attitude survey by a Washington-based research centre in 2003 found that India was the most nationalistic place on earth, with 74 per cent of respondents completely agreeing that the Indian culture is superior. It is this national pride that has so far saved us from the onslaught of the Washington consensus. The mystery of India's economic growth is riddled with contradictions.

(The author is a former chief commissioner of income-tax.)