July 23, 2008

India’s Growing Pains in the Global Economy

Charles Calomiris discusses India’s adaptation to participating in global markets, its challenges in sustaining growth and its rivalry with China.

Sustaining India’s Growth Miracle is a compilation of papers presented at a 2006 conference on India’s economic growth. Can you talk about the conference and the book?
The conference was a comprehensive, multiperspective examination of India’s potential bottlenecks. It prompted a lively conversation between academics, politicians and economists.

We brought academics with specific knowledge together with policymakers and generated a conversation in an attempt to create something relevant and deep. In these conversations, the participants were encouraged to think about where things should and are likely to go, and about what’s happening at a higher level of political reality and how these pieces fit together.

One of the things we were trying to do in the book was to get the conversation to come alive in a way that it rarely does. In that sense, the book builds a bridge between public policy and the academic world.

The book looks, over three or four decades, along each of the dimensions of the authors’ expertise, at how India’s economic achievements have evolved and where the remaining problems are. These perspectives likely will remain relevant for at least several years; India is a democracy in which things move very slowly and although a lot of things are happening, progress is not sudden.

What are the biggest challenges India faces in sustaining its growth?
There are several challenges. One is the need to better coordinate and to improve fiscal policy incentives in terms of the management of taxes, subsidies and expenditures. This requires keeping the budget sufficiently manageable in size and also trying to find a way to keep government spending meaningful and helpful, and avoiding free-riding among various government entities. All of this is very challenging in every country, especially in India because of the structure of decision making and the relationship between the various regions and the central government.

Another challenge is resource issues. One of the things that came out of the conference was that not charging for electricity has other kinds of resource-use implications — for example, for water use. The lack of reliability, the high production cost and the inability to charge for electricity are major issues. Though the government is taking this problem seriously, charging for electricity is a terribly difficult political issue because so many people have free (pirated) electricity and nobody wants to give that up. The problem of electricity is a huge fiscal drain on the government. So the electricity policy connects with the fiscal side and with efficient resource use. The problem is that people don’t want to give up the subsidies. So the question is, how do you get from here to there?

Does China, a nation whose economy boomed much earlier and faster than India’s, pose a threat to India’s growth?
The comparison with China is particularly relevant from the perspective of another obstacle, which Arvind Panagariya’s chapter focuses on. He shows that the labor-market regulations are important in explaining why India hasn’t been able to generate the kind of progress in large-scale manufacturing, which is China’s strength and the key to its success.

The Indian government’s approach to regulating the labor market creates an especially high set of costs in large-scale manufacturing that tend to push employers to maintain smaller establishments or avoid manufacturing altogether. An employer or an entrepreneur thinking about getting into a business can effectively do a lot better by avoiding all the red tape and all the costs associated with the labor regulations by staying away from large-scale manufacturing. For global firms, the choice may be to avoid India and just go to China.

What advantages does India have over China?
Many. One is that India is an English-speaking nation and, although the gap is narrowing substantially, China is not. Especially in the services industries, people can do a lot of things in outsourcing to India because of the access to education in English.

India’s second advantage is a good level of achievement in education of the Indian people. China is currently lagging behind in some areas and faces some questions about maintaining educational opportunity in its rural areas.

The last advantage is the most obvious one, which is political. Being the world’s largest democracy brings a lot of positives, despite the negatives associated with over-regulation, a bloated bureaucracy and populist policies that crimp growth. It’s clear that, over the last several decades, India’s democracy has not always been a friend of growth in India because of the need for consensus. Also, populist rhetoric can sometimes lead a democracy to do things that are contrary to the interest of its people. At the same time, if you can overcome the populist/socialist mindset — and climb out of what one might call a mistaken-belief equilibrium — democracy can then be a powerful engine for progress. That is, once the popular will favors growth-oriented policies, democracy, rather than being an impediment to progress, can actually help galvanize people and help create institutions for consensus building that allow things to progress on a more stable path going forward. Has democracy held India back relative to China? Undoubtedly yes. However, looking forward, India has now learned the advantages of growth-oriented policies, and China faces a lot of political challenges that India doesn’t face, precisely because India is a democracy.

How has India’s place in the global political field changed over the last several decades?
I think that global political economy and India’s ideological predisposition contributed to India’s isolation during the Cold War era. India was opposed to the kinds of things that have proved to be big parts of the solution to its poverty, especially participating in global markets. There was a protectionist view of the local industries and maintaining a commitment to workers’ rights rather than a commitment to creating jobs. If India were a rich country, that would be fine, but poor countries first need to find people jobs. That’s not saying that workers should not have rights, but that there is a need to balance the creation of jobs and the rights of workers who already have them; India’s lack of balance in this regard worked against its growth.

One could argue that part of what inspired India to change was China. When India saw China, the other huge and impoverished economy in the world, its very poor next-door neighbor, start doing great things, it took notice. In Latin America, similarly, the progress of Chile in the 1980s had a similar effect on Argentina in the early 1990s.

Globalization allows countries to learn from each other’s experience: a country can see the visible advantages of orienting itself toward being able to take advantage of participating in global markets to elevate its people out of poverty. Many people were skeptical of this back in the 1950s and the 1960s when socialist, protectionist dogma reigned in many developing economies. Now the successes of China and India make it evident that such skepticism is no longer reasonable. The main contribution of globalization in both countries has been to reduce extreme poverty and to create a burgeoning middle class.

There seems to be a push to bring the uneducated sector of India, which includes farmers, to work as factory laborers and to educate their children in the IT sector. Could this have adverse effects on India’s agricultural industry?
Not so long ago, the majority of the American population was involved in agriculture. During the 20th century, the United States hugely depopulated the agricultural sector. And what’s happened to agricultural production in the United States? It has skyrocketed. Farming has become a modern industry, with huge economies of scale, huge technological advancements and enormous growth. India, too, will gain efficiency in agriculture and a more rational use of resources, especially if transportation costs are reduced and electricity is provided to the agricultural areas. So, just using the United States’ experience as a guide, as India’s population moves out of agriculture, they won’t necessarily produce fewer agricultural products; rather, agriculture will become a more efficient and perhaps even a high-growth sector.

Charles Calomiris is the Henry Kaufman Professor of Financial Institutions at Columbia Business School.

Read the Research

Jagdish Bhagwati, Charles Calomiris

"Sustaining India's Growth Miracle"

View abstract/citation 

Have You Read Columbia Business?

Columbia Business School’s alumni magazine connects alumni with each other and the School; celebrates alumni milestones and accomplishments; and chronicles the impact of Columbia Business School alumni, faculty members, and students on the global business landscape.

Read Columbia Business>