India Has New Government. Now What?

Newly elected Prime Minister Narendra Modi has said he’ll embrace policies of growth and help India revitalize its future. Two Columbia University professors who are authors of a new award-winning book discussed what's at stake at a recent Chazen Institute event.
Sharon Kahn |  May 19, 2014
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On the eve of the landslide electing India’s new prime minister, two Columbia University economists received accolades of a different sort last week: Jagdish Bhagwati, professor of economics, law and international affairs, and Arvind Panagariya, professor of economics, shared the prestigious George S. Eccles Prize for Excellence in Economic Writing for their book, “Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries.” Although India has been able to reduce poverty from afflicting more than half of the population in the late 1970s to roughly one-fifth today, the country’s growth rate has stalled in the past few years. During a Q&A discussion moderated by Glenn Hubbard, dean of Columbia Business School, the professors challenged notions of protectionism and wealth redistribution that has been the guiding force in India. They summarized the book's premise.... • Governments need revenues to support infrastructure and social programs. • Since the poor can’t afford these programs, and since raising taxes is not popular in a democracy, the economy needs to generate wealth that can, in turn, grow businesses and throw off rupees. • A rising economy means more and better paying jobs and a larger pie to share with the government even when the tax rate stays the same. • Eventually that money can be directed to alleviate poverty. If these ideas sound familiar, there’s a reason: they contain echoes of trickle-down economics as popularized by Margaret Thatcher and Ronald Reagan. But, during the Q&A, Bhagwati and Panagariya shied away from the term, noting the issues in India are vastly different from those of more developed countries.

The Hot Issues

Days after the Eccles Prize was awarded, Narendra Modi was elected prime minister by more votes than in any democratic election in history — anywhere. Both Bhagwati and Panagariya know Modi (in fact, a New York Times article suggested Panagaiya may be tapped as his chief economic advisor), and both authors commented on items certain to be on Modi’s agenda: Labor Laws: Restrictive labor policies have severely handicapped India’s competitiveness in global markets, say the authors. One example: the burden employers in India face when they want to terminate employees. Any disputes must be ruled on by labor courts and tribunals that “overwhelmingly rule in favor of workers,” the book states. It is “impossible for an industrial establishment with one hundred or more workers to lay off or retrench workers even if it is unprofitable and is therefore forced to close the unit.” The writers continue: “The burdensome labor laws explain why entrepreneurs in sectors such as apparel, in which labor costs account for more than 80 percent of total costs, choose to stay tiny.” For the same reason, foreign investors tend to take their business to less expensive emerging markets, say the authors. Infrastructure: Modi has indicated willingness to redirect government money spent on social programs to infrastructure such as roads, airports, and especially electricity generation. Indeed, as chief minister of Gujarat, he routinely found his way around political and regulatory barriers to grow the state's economy at 10 percent a year over the past decade, often double that of India as a whole. Corruption: The other priority on Modi’s agenda must be attacking corruption with institutional reforms and enforcement. Noting that business reforms may take a while to work their magic, Bhagwati said corruption must be dealt with immediately. “For India to deliver growth, this is an issue that can't wait 25 years.” Still, the prospect of Modi's election made the co-authors of “Why Growth Matters” optimistic. “If GDP growth could reach 10 percent on a consistent basis, India could become the third largest economy in the world in 15 or 20 years,” said Panagaiya. In fact, “since India has more people, it’s entirely possible that India could exceed China.”


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