By Professor S.P. Kothari, Advisory board member-BMU, Deputy Dean, Massachusetts Institute of Technology, Sloan School of Management.
It’s been almost a year since Mr. Modi was triumphantly installed as India’s PM. Euphoric expectations of rapid economic growth permeated throughout India and the world. The administration’s initial set of actions with a focus on good governance and domestic manufacturing have been welcome. However, in my opinion, these have been baby steps at a time when giant strides are needed to realize the expectations that India rightfully deserves. Why? Why do the challenges facing India call for dramatic policy changes? To gain a perspective, consider the global landscape of economic well-being: India’s per capita GDP is about $1,500, China about $6,000, Mexico about $10,000, S. Korea about $22,000, and the US about $54,000! This is a mindboggling range and may surprise many. The challenge of uplifting the per capita income of Indians is all the more formidable because India’s population is 1.3 billion and counting. The magnitude of the challenge clearly depends on the aspired level of income. If the goal were to catapult India’s per capita income to $5,000 in ten years. This will require about 13-14% annual growth in GDP. Hmmm. Only game-changing policies, not mere tweaks would possibly produce double digit growth rates! Sustained implementation is also necessary. Noticeable progress won’t come about overnight. China grew from a few hundred dollars per capita in the late seventies to about $6,000 today in about 30-35 years. To catch up, Modi must implement dramatic changes with alacrity and the changes should characterize permanence. Here’s my top-ten list!
1. Arrest population growth without coercion, but with incentives
India’s population is growing by 17 million people every year! This is a staggering number. Even good economic efforts are doomed to fail unless population growth is arrested. In a democratic polity coercion is out of the question. A sensible alternative is to offer economic incentives tied to education and the timing and number of childbirths. Such a policy can target the economically under-privileged. Parents would receive financial payments monthly provided their children register educational progress and girls do not bear children until the age of 18. Beyond 18, women would receive a monthly allowance so long as they get further education and have two or fewer children until the age of 30. The policy is not an entitlement, but it would hold people accountable for education and childbirths in exchange for receiving financial transfers. Payments to parents foster their greater engagement in children’s education, which thereby complements access to education. Access to education without influencing parental involvement has not been successful in India or even in the West.
The high cost of such a policy should be tempered against the immense positive impact on literacy, productivity gains and women’s economic independence and their safety. India’s literacy rate currently is around 62%. No country in the world with such low literacy rate is economically developed. Accelerating literacy is essential for economic development. The incentives-based recommendation targeting education and population won’t be easy to implement without political resolve to invest in the nation’s long-term welfare.
2. Welcome FDI, no strings attached, please!
Growth without investment is a mirage. Growth is achieved through re-invested savings, productivity enhancements, and FDI. Even with India’s high savings rate, and assuming continued improvements in productivity, economic growth beyond 5-8% would be a challenge. Additional growth to reach double digits can come from FDI.
India has had a love-hate relationship with FDI, mostly hate or fear of FDI. This is totally unwarranted. FDI is ubiquitous internationally, among the developed and under-developed countries. Japan, Korea, and recently China couldn’t have achieved growth without massive FDI. Mexico has had far more FDI than India even though its population is one-tenth of India’s. Former East Germany has done better than most of the Eastern European countries after the fall of the iron curtain in 1989 thanks to former West Germany’s enormous investment.
Conservatively, India needs FDI in excess of $200 billion a year. That is about $165 per person per year, still quite low, but much better than the current amount of $10-15 per capita or about $25-30 billion in aggregate. Focus on the per capita figure highlights that the paltry amount of investment currently couldn’t possibly make a big difference in the welfare of the average Indian.
Another potentially bigger benefit from success in attracting FDI to India is that it would also make domestic investment lucrative to Indian corporate houses. Foreign as well as domestic investment have suffered for the same reason: poor investment climate.
3. Empower people, decentralize
Compared to Europe, the US and many other developed countries, decision-making in India is horribly centralized. The average population of a state in the US is about 6 million compared to about 40-100 million in India. Consider states like UP with 200 MM, Maharashtra with 115 MM, Bihar with 101 MM, and Gujarat with 65 MM people! No matter who exhorts the chief ministers, ministers and regulators of the states in India, centralized decision making will fail to harness the benefits of local knowledge and self-determination.
To achieve distributed, local governance, reorganize India into at least 100 states. Further, even within those states, greater devolution of power is essential to make the government of the people, by the people, and for the people.
4. Privatise the public sector using a radically different approach
Notwithstanding an expressed desire and repeated policy pronouncements, privatisation of the public sector has been an elusive goal for successive administrations. The perniciousness of the challenge is rooted in the resistance from the public-sector employees (who stand to lose their life-time employment with minimal merit-based performance assessment). Allegations of improprieties in the sale of public sector equity further derail/delay privatization attempts.
Piecemeal sale of ownership interest in public sector organizations without a change in the government’s management of these organizations is of little value in making the public sector efficient. While outright sale of PSUs is the best (elusive) solution, a pragmatic alternative would be to turn over public sector institutions to their respective employees! This seems drastic, but it’s attractive. It would overcome much of the employee resistance, it would be expeditious, and it would harness efficiency gains.
The implementation must ensure (i) Competition in each sector with at least three entities in each sector (e.g., several banks, oil firms, steel firms, etc.), (ii) Publicly traded stock of each new entity, including the stock issued to employees, and (iii) An active market for corporate control, i.e., others could buy a privatised company, which would continually serve to discipline management inefficiencies. The government may retain a portion of equity rather than handing over all of the equity to employees. The biggest benefit to the economy would be that the resulting efficient private sector would generate huge revenues year after year. This revenue stream would outstrip foregone (hypothetical) revenues from the immediate sale of ownership in the public-sector units.
5. Laws are meant to be enforced
Property rights and law enforcement are the cornerstone of economic development. Investment, especially FDI, is highly sensitive to respect for property rights and speedy and fair resolution of contract disputes. The administration’s commitment to law enforcement can be signally by dramatically increasing the number of judges, prosecutors and the size of the police force.
India’s law enforcement force is woefully inadequate compared to many, especially developed, economies. To illustrate, Delhi High Court has a backlog of 466 years, with at least 40,000 more judges estimated to be needed to clear the backlog in the country. India’s law enforcement personnel number is about 130 per 100,000 population compared to Mexico’s 366 and UK’s 307.
In addition to the above measures, India must also entertain legal reforms like plea bargaining.
6. Reform securities laws
Efficient securities markets are essential for capital formation and growth. Hallmarks of a good securities market are transparency, liquidity, and an active market for corporate control. India’s securities laws should be overhauled to promote an active market for corporate control (i.e., market for mergers and acquisitions) and to make it easier to invest in Indian securities by Indians as well as foreigners.
A well-functioning market for corporate control disciplines inefficient managements and it reduces the siphoning of corporate resources by managements – both of these have been detrimental to India’s economy. Efficiency gains accrue in part because consolidation to achieve scale is feasible through mergers and acquisitions. Entrepreneurs are better rewarded for their innovations in the presence of an active market for corporate assets. Simultaneously, investment banking and related financial services markets blossom, contributing to the economy. These attributes collectively make India attractive for the inflow of FDI. Of course, to derive the benefits it’s incumbent to make investing in Indian securities a less burdensome process for foreign (and domestic) individual and institutional investors.
7. Put regulation on a diet
India needs a less, far less regulated economy with simplified laws and regulation governing domestic and international trade, foreign currency convertibility, foreign investment through mutual funds, foreign ownership of property, travel visas, etc. Travel visas might be a pet peeve of mine. Why does India require US or UK or Australian citizens a visa to enter India? Is it only to ensure reciprocity? How many citizens from these countries have attempted to enter India illegally? India’s policy of visas is nothing short of cutting your nose to spite the face! The excessive amount of regulation in India hinders economic progress.
8. Monetary policy: Keep it independent
When the deficit and interest rates move in unfavorable directions, it’s tempting for the government to prod the RBI to alter its monetary policy. The politically-motivated changes in the monetary policy are rarely in the long-term interest of the economy. Therefore, it would be wise to reaffirm the independence of the Central Bank (RBI) and its monetary policy. Of course, the Central Bank should be given its objectives, e.g., an inflation target, but simultaneously it should have the independence to implement the monetary policy to achieve those objectives. The independence serves to rein in the government’s expenditure and fiscal deficit. More importantly, the policy infuses confidence in the market, which is conducive to investment and growth.
9. Infrastructure and manufacturing investment
The Modi administration has placed a tremendous emphasis on manufacturing with the “Make in India” policy. Crucial to the success of whether it’s make in India or make for India is sound infrastructure – physical and soft. Manufacturing will not flourish until physical infrastructure, i.e., road, ports, electricity, coal, etc. is world class. Soft infrastructure includes law enforcement, regulation, securities laws, etc., which are discussed above.
Investment in physical infrastructure should be a priority of the government. Private investment in infrastructure is always difficult to attract, so the government should find the resources to invest in infrastructure. Of course, resources are scarce and therefore it’s imperative that many sectors that currently suck up government resources, e.g., airlines, railways, banks, etc., should be appropriately owned and operated by the private sector. Not only that these will be more efficient, but they are likely to generate revenues in the form of income tax and other levies.
The debate over make in India versus make for India is unnecessary. India should strive both. Reality is that India’s enormous 1.3 billion population cannot just rely on the make in India approach, which rests on the premise that India would manufacture for exports. To make a difference for the domestic populace, make for India is equally necessary.
10. Grandfather the past, look to the future
Every government sets out to undo individual past misdeeds – resist such temptation. Affected individuals’ resistance and appearance of partisanship almost certainly take the administration’s eye off the ball and work against economic growth. Instead offer an amnesty period and opportunity for redemption for those who have committed actions that have been against the interest of growth and freedom. This gives individuals a chance to redeem themselves and become good citizens, without imposing punitive penalties.