India’s stalled rise – how the state has stifled growth.

By Arvind Subramanian and Josh Felman

Introduction and Authors view of the Indian economy

-The 21st century started on a positive note for the Indian economy. Other countries enviously
looked at India as it became the fastest growing free-market democracy, from a state mired
with poverty to a nation of high-tech, carpooling, middle-class society.
Powered by information technology companies such as Infosys, Tata consultancy, Wipro the
country has poised to be a global player perhaps even as an economic superpower.
-But then came the global nancial crisis of 2008. India’s three decade-long structural
transformation ground to a halt and remained at a standstill for more than a decade. By the
time Covid 19 pandemic struck, the world had turned its attention away with India’s seemingly
disappearing from the global economic map.
-in 2001, India suddenly reappeared. Foreign portfolio managers convinced that the country
was on the move again, funnelled money into the stock market, sending it soaring.
-venture capitalists poured money into the “Digitech“ (digital technology), start-ups, seizing on
India’s unique combination of computer engineering talent, dynamic entrepreneurs, and market
potential. Indeed a new “unicorn“ – a startup valued at more than 1 billion – seems to appear
every month, in cloud computing, education, entertainment, nance, payments, tourism.
All together there are now nearly 70 such unicorns in India, more than in any other country
except China and the United States.
-meanwhile international manufacturing rms have also started to look towards India as they
seek to diversify their production away from China. India has an advantage over China in
terms of huge domestic market, sizeable pool of skilled, English-speaking managers, and a vast
reservoir of young, low skilled workers.
-so the question arises: Is India back?
-without a doubt India has made impressive recent progress in building the “hardware“ of
economic successes – its physical and digital infrastructure, its ability to provide tangible basic
goods to its population and its strong base of skilled engineers and entrepreneurs. Yet at the
same time the countries continue to struggle to x its “software” which is the crucial economic
framework under which domestic entrepreneurs and foreign rms must operate.
- policies are changed abruptly, rules are altered to favour certain rms. As a result, domestic
entrepreneurs and foreign companies have been reluctant to undertake the investments
needed to exploit India’s rapidly advancing hardware.
- Whether India manages to boom again and become a serious alternative to China will
depend on whether the country can nally overcome the long-standing defect in the policy
software. If not the recent growth spurt is likely to prove another false start in a country
of immense promise.

Questions to think
1. What is the hardware and what is the software according to the authors which are the key
to economic progress of our country?. How have we fared in both these aspects.
2. Trace the economic journey of India since the 21st century
3. Has India become a Unicorn giant? Discuss
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 India’s lost decade

-to answer the question of whether India is back it is important to 1st understand when and
why India went away
-according to the author the plants that went badly wrong were the foremost reason for India
lagging behind.
- during the boom years after the turn of the millennium Indian rms invested heavily on the
assumption of continued rapid growth. However after the nancial crisis interest rates soared
and exchange rate collapsed, many large companies began to default and banks were saddled
with non-performing loans exceeding 10% of their assets.
- In response successive governments launched initiatives after initiatives to address this “twin
balance sheet“ problem initially asking banks to postpone the repayments, later encouraging
banks and rms to resolve their problems through an improved bankruptcy system.
- However with lacklustre investment and exports the economy was unable to recover its
former dynamism.
- As the growth slowed other indicators of social and economic progress deteriorated.
Continuing a long-term decline, female participation in the labour force reached its lowest
level since Indian independence in 1948. After decades of improvement progress on child
health goals, such as reducing stunting, diarrhoea and acute respiratory illness, stalled.
- And then came Covid 19, bringing with it extraordinary economic and human devastation.
With the spread the economy withered, shrinking by more than 7%, the worst performance
among major developing countries. Reversing a long-term downward trend poverty increased
substantially.
- All this was an episode which was felt after the government’s 2016 demonetisation where
86% of the currency was declared invalid overnight. And the 2017 introduction of GST that
has hit smaller companies especially hard.
- Female participation in the labour force to reach its lowest level since Indian independence
- In early 2021 the country’s population and health system were hit by a catastrophic second
wave.-India’s infection rate became one of the highest in the world, 4.5 million excess
deaths. Many of those who survived found their lives blighted: head of family‘s faced
immense medical bills, while the children were kept out of school for 18 months. In a
country where learning outcomes are already modest a generation of children have fallen
further behind
- Adding to a decade of stress stagnation the ravages of COVID-19 have had a severe effect
on India’s economic outlook. In June 2021 central banks consumer con dence index fell to a
record low with 75% of those surveyed saying that they believe the economic conditions had
deteriorated
- Disaffection is also manifest in politics. There has been an ongoing tussle between the central
government and the state governments over the sharing of revenue from the GST
- Several states have imposed new residency requirements and job seekers over the past two
years – directly challenging the principle of common national labour market.

Improving hardware, fixing software

-yet the government has been trying to strengthen the economy’s hardware and attempting to
remedy some of the problems of its software.
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 -A number of hardware improvements are readily visible. – Rail and road networks have been
expanded, with some major new highways and Delhi Mumbai freight corridor near its
completion, alleviating India’s most obvious constraint on growth.
At the same time, important infrastructure digitally has also been built. Like uni ed payments
interface or UPI which allows digital transactions to be carried out in no time.
-A more important and an economic bedrock of the political success of our leaders has been
with government’s distinctive approach towords redistributive development.
-in many other countries social spending has been traditionally focused on intangible public
goods such as health and education. In India however the investment in programs is on tangible
basic goods and services many of which are aimed at woman. This “New Welfarism”has included
bank accounts ,cooking gas ,toilets ,electricity ,housing recently water and just cash.
-to ensure that the subsidies reach the intended bene ciaries they are now provided in the
form of direct cash payments.
-At the same time the government has taken major steps to improve the
countries policies software as well.
-to encourage new entrepreneurship and new players economic investment rules have been ne
tuned. For instance in 2019 the corporate tax rate was reduced to 25% from 35%, and new
manufacturing rms were offered the possibility of securing tax rate of just 15%.
-such market friendly reforms appear to take India into a rapidly improving country. However
this conclusion is only partially true.
-even as some aspects of the policy framework have been streamlined much larger obstacles to
private sector growth have been put in place. The example is the new industrial policy which
has intended to spur strategic industries and promote “national champions”.

Aspiring outward, turning inward

-The government‘s new industrial policy is motivated by its well founded desire to attract
international manufacturing away from an increasingly uncompetitive China. Yet until now India
has not been able to attract more than 10% of its share
-in an effort to capture a far greater amount the government has launched a three-pronged
strategy called Aathma Nirvair Bharat or the self-reliant India, that is based on targeted
subsidies, a return to protectionism, and non-participation in regional trade agreements.
-The subsidies take the form of production linked incentive (PLI) for manufacturers in
designated sectors, including makers of cell phones, electronics, and pharmaceuticals. Available
to both domestic and foreign owned companies, the PLI could cost the government about 1% of
GDP over ve years.
-The government has started raising import tariffs. Since 2014 there have been some 3200
tariff increases affecting about 70% of the total imports
-The government has halted the efforts of its predecessors to join the regional trade accords,
concluding that it would be better to stay out of the China centric Asian production system.
Under the previous governments India signed 11 trade agreements, since the new government
came to power in 2014 it has signed none.
-The government has declined to be a part of regional comprehensive economic partnership
pact which is joined by nearly all Asian countries including China, Japan, South Korea and the
10 member states of the Association of Southeast Asian Nations or ASEAN.
-so the question arises be self-reliant India work?
- according to the author authors India’s approach has shifted from the old “licence raj“ to the
new “subsidy raj“.
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 - India’s population remains young, with large number of low skilled workers looking for gainful
employment in sectors that would provide them with reasonable and growing beach. To
satisfy their aspirations India needs to follow the Asian recipe of boosting labour-intensive
exports.
- The protectionist tariffs regime is unlikely to lure manufacturers away from China. Higher
tariffs will make it dif cult for rms to access the in expensive, high-quality imported inputs
on which modern production depends.
- At precisely the moment when India has its long-awaited chance to compete with China for
the rst time as a global manufacturing centre the government is making it harder to
integrate the Indian economy into the global supply chains

Stacking the deck

-The most distinctive aspect of the industrial policy is the promotion of companies that have
acquired a dominant position in particular sectors of the economy. Japan and South Korea
adopted a similar “national champion strategy decades ago with there zaibatsu and chaebol
conglomerates.
-good government assistance favourite companies can achieve huge economies of scale, create
networks and help pursue national economic goals. They can also strengthen the country‘s
position in the global market.
- In India the strategy has centred around two large business conglomerates the Adani group
and the reliance industries, led by two of the richest man in Asia Gautam Adani and Mukesh
Ambani. One positive outcome of this strategy has been the rollout of a low-cost 4G cell
phone network by Jio, reliance subsidiary, which has given hundreds of millions of Indians
access to Internet for the rst time. Another positive aspect could be that these two joint
companies meet its climate goals since they are both making large investments in renewables.
- But such bene cial developments have to be paid against the negative effects. For every
favoured rm that has been encouraged to expand, many other rms have been discouraged
by the rules that make it dif cult for them to compete with the national champions. Even as
a reliance Jio was expanding rapidly the telecommunication rms of Bharti Airtel and
Vodafone were being crippled nancially.
- The plans of Amazon, Tata group and Walmart to develop their online retail platforms in India
have been dashed by a proposed change in regulations. Domestic garment exporters have
been handicapped by the high input cost of man-made bres favouring reliance which
produces these bres.
- The cumulative impact of the national champions approach could be more serious in India
than elsewhere because Adani and Ambani conglomerates have interests that extend
throughout the economy, in defence production, ports and airports, energy, natural gas,
petroleum and petrochemicals, digital technology.
- In Japan and South Korea the economic power of the ZAIBATSU and the CHAEBOL was kept
in check because they generally operated in tradable sectors where they had to demonstrate
ef ciency by competing globally. There is a serious risk that India’s national champion
strategy could create an oligopolistic economy that will sti e innovation and growth.

Stigmatised Capitalism

-Indians still worry of slipping into the problem of “stigmatised capitalism”. Many Indians are
deeply apprehensive about the private sector – and capitalism generally.
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 - India’s private sector bears the stigma of having been made by under the license raj, an era
in which corruption was pervasive.
- Some of the taint surrounding the private sector was cleansed by the 1990s boom in
information technology which developed by virtue of its distance from the government.
- But then came the infrastructure boom during the years before the nancial crisis In which
public resources that is land, coal, telecommunications spectrum – were captured by private
rms under the previous government’s “rent raj“.
- Till date the government favours some existing enterprises and makes it dif cult for new
entrepreneurs to make a place for themselves.
- Last year the government decided to liberalise the highly regimented farming sector, a
measure that the entire policy establishment had long been urging to take. But unexpectedly
some of the intended bene ciaries in decided to oppose the measure. Partly because the
fear that the new system would prove to be an oligopoly, which would force down farm
prices
- The government tried to convince the farmers otherwise but did not succeed and had to
withdraw the law

Defective software
-The approach to design policy is also defective. The issue begins with faulty data and extends
right through the entire process from planning to implementation in the industrial programme
and the national champions strategy.
-there have been serious doubts about the quality and integrity of India’s of cial data. The
most recent budget arrested a growing trend of not recording expenditures on the government
balance sheet but even now the public lacks a clear picture of the country’s overall scal
position.
-without greater transparency it is dif cult to have con dence that the government is basing
policy on good information.
Many policies have also run aground in India’s federal structure. Nearly every major economic
issue in India today that is agriculture, health policy, power, taxes have poorly managed data.
-in such cases policy-making can be trapped in a vicious cycle in which a lack of trust on the
part of the states discourages them from implementing national initiatives properly thereby
eroding the government’s trust and discouraging it from consulting with the states on the next
policy measure.
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A chance to reboot?
-if the Indian economy can put the pandemic behind it, the coming year should be a good one
- India’s GDP has already regained its pre-pandemic level and IMF forecast that it will grow
by 8.5% in 2022 around three percentage points more than China’s.
- The question is whether the government will be able to use this growth as a springboard to
more sustained prosperity, turning India into a global manufacturing centre
- A comparison with China is instructive. Compared with China India’s population in workforce
are young. And whereas China’s hardware revolution – its huge investments in infrastructure
and housing has largely run its course, India is only just beginning.
- China is also an increasingly authoritarian country and has begun to undermine private sector
entrepreneurship and innovation through sometimes United State intervention by contrast
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 India is the worlds largest democracy with the ground work in place for an expanding private
sector.
- India’s industrial policy must be re-oriented towards lower trade barriers and greater
integration into global supply chains.
- National champion strategy should be abandoned in favour of an approach that treats all
rms equally.
- Above all the policy-making process itself needs to be improved so that the government can
establish and maintain a stable economic environment in which manufacturing and exports can
ourish.
- Unless the government can fundamentally improve its economic management and instil
con dence in its policy-making process domestic entrepreneurs and foreign rms will be
reluctant to make the bold investments necessary to alter the country‘s economic course.
- Further risks or also to be seen. The government’s growing recourse to majoritarian and
illiberal policies could affect social stability and peace as well as the integrity and
institutions such as the judiciary, the media and the regulatory agencies
- India’s security challenges on both its east and its western border have been dramatically
heightened by China’s expansionist activity in the Himalayas and the takeover of Afghanistan
by the Pakistani supported Taliban.
- If these dynamics come to dominate the Indian economy could experience another
disappointing decade. Of course there would still be modest growth with some sectors and
some segments of the population doing particularly well. But a broader boom that transforms
and improve the lives of millions is needed.
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