India is in a headlong rush to modernize its economy. Scarcely a week goes by without news of India’s economic renaissance. To be sure, India’s economic performance of late has been impressive. India has now surpassed China and the United States as the largest recipient of foreign direct investment, while its economy is also growing faster than its giant Asian rival. Under Narendra Modi, India’s globe-trotting Prime Minister, key economic reforms have been introduced, most notably the nationwide Goods and Services Tax, all aimed at “awakening” the latent animal spirits that India possesses.
Narendra Modi has also been busily wooing foreign investors with promises of an investor-friendly environment. “I want to appeal to people from all over the world”, Mr. Modi exhorted, “Come, make in India. Come, manufacture in India”. Mr. Modi’s Make in India campaign, launched in 2014 to much fanfare, is the lynchpin in a wider reform initiative to transform India into a global manufacturing powerhouse.
Vijay Joshi, an Oxford economics professor, has “a darker view” of India’s future. Joshi offers a powerful indictment of both India’s state and private sectors and challenges many of the underlying assumptions, exaggerated claims and lofty projections that circulate around India’s economic prospects. Despite enormous growth potential, a youthful working population, robust democratic institutions and generally tolerant socially diverse landscape, India remains among the most difficult places in the world to invest for the long-term.
While Joshi points out that the Modi government has offered multi-national companies financial incentives and tax breaks to convince them to shift manufacturing to India, and that foreign firms are attracted to India by its skilful and youthful workforce and low wage environment, he also correctly highlights that foreign investors are still awaiting serious policy reforms that will improve the ease of doing business before committing to long-term investment.
Land reform remains integral to the Modi government’s broader pledge to ease barriers to investment. Joshi notes, however, that little substantive progress has been made enacting land laws to remove the overhang of stalled public infrastructure and manufacturing projects. In fairness, though, some progress has recently been made on land acquisition for the highly touted freight railway corridors projects. The onus for land reform is now likely to revert to State governments which have traditionally been responsible for carrying out most land acquisitions and are competing fiercely for job-generating foreign direct investment. Obsolete British-era land laws need changing to move India into its next phase of development.
Another brake on India’s economic growth profile that Joshi remains worried about is subdued private sector investment demand and rising levels of impaired assets in the country’s state-dominated banking system. The Reserve Bank of India (RBI) has called on state banks in particular to clean up their loan books. Surging bad loans in India’s banking system place further pressure on public finances as the central government is forced to recapitalize weaker public banks. The overhang of excess capacity blighting many corners of the economy such as construction and energy is only narrowing the options for public infrastructure investment to expand. India’s drive to contain financial risks and introduce a comprehensive economic reform agenda is gaining traction, but still more needs to be done. The focus in 2018, and beyond, will be on restructuring the debt of state-owned banks and companies.
For India to achieve high quality and enduring economic growth, the public sector and the private sector need to perform their core roles better. Great strides have been taken since the 1991 liberalization programme which has lifted tens of millions of Indians out of poverty. However, in contrast to the period from independence in 1947 till 1991, India’s economic destiny today rests largely on its capacity to carve out a slice of an increasingly competitive and technologically driven global economy. This won’t be accomplished without further urgent reforms.
To achieve success, according to Joshi, India has to get the right balance between the state and the market to suit its own unique circumstances. The Indian state rightly intervenes in market processes on distributional grounds but often in a ham-fisted and ineffectual way. Likewise, its failure to deliver on its core functions such as law and order, macroeconomic stability, public health and sanitation, and enforcement of contracts and property rights robs the country of opportunities for economic development. It often shields the public sector from private sector competition when it should encourage it in order to improve the quality of provision of public goods and services. On top of this, the Indian state must reverse the rise in corruption, rent seeking and crony capitalism which erode the democratic traditions and credentials that have served India well to date and hopefully for a long time to come.
India’s journey to achieve national unity and economic prosperity since independence has been long, arduous but nonetheless impressive. However, if India can harness its full potential, attain high quality economic growth and leverage it to achieve inclusive prosperity within a democratic polity, it will shake the foundations of the global economy in years to come. For anyone wanting to know what India must do to get there, I recommend they read Vijay Joshi’s splendid book.
Vijay Joshi. India’s Long Road: The Search for Prosperity. Oxford: Oxford University Press, 2017.
Mark Donoghue has held faculty appointments at the Australian National University, National University of Singapore and the University of Notre Dame (Australia). He is currently on the faculty of the Singapore University of Social Sciences. He has published extensively in the field of the history of economic thought and is the author of Faithful Victorian: William Thomas Thornton, 1813-1880 (Palgrave, 2016).