Build a new economic imagination – analysis
It has been a difficult three months for India. The political response to the coronavirus disease (Covid-19) and the blockade have forced him to face realities long ignored about the Indian economy: its fragility, regional and spatial concentration, and profound structural inequality. It also made visible the sources of precarious resilience. Agriculture and associated supply chains, for example, held together despite significant disruption and falling demand. Now, as India unlocks and the focus shifts to repair and reform, policy debates must grapple with these realities. India cannot repair and reform without acknowledging its economic failures. In doing so, the accepted paths for growth, shaped by the time of 1991, are again in dispute.
Moving out of the stifling restrictions of the raj license, the need to get the state out of the way was central to the imagination of 1991. Deregulation, market competition and openness were the key mantras. This was a necessary element for economic reform. However, in its exuberance, the drive for a smaller state did not recognize that deregulation was not about leaving the state but about a changing role for the state and the construction of a new architecture of economic regulation. This required more, not less, investment in the capacity of the State: human resources and institutional systems, including processes of public responsibility and dispute resolution. The pre-pandemic slowdown was, in part, a consequence of this failure to build regulatory capacity; Our post-pandemic reforms are at a similar risk.
Consider the three agricultural ordinances enacted earlier this month. The underlying goal of liberalizing agricultural markets and giving farmers more variety is welcome. However, experience in states like Bihar indicates that deregulation, without investment in the markets, does not automatically stimulate competition. Rather, this risks the proliferation of brokers. The infrastructure for wholesale agricultural markets is woeful, and farmers have few avenues to sell products directly. According to government estimates, India needs more than 3,500 wholesale markets, and its 23,000 periodic rural markets need urgent infrastructure modernization. Opening agricultural markets to increased competition must also be accompanied by state investments in creating market infrastructure, information systems, and creating credible and responsive regulatory institutions that allow for fair trade and exchange. This is not unique to agriculture. In all the key sectors and in the fundamental reforms of the factor market, the State has a fundamental role to play.
However, regulatory capacity is only part of the challenge. As the shutdown shows, markets in India operate in a context of deep structural and regional inequalities. These inequalities require state interventions in infrastructure, to incentivize investments in the supply chain, manage risk and improve bargaining power. This is where the state has been at its weakest point. The state’s failure to build these markets lies in an economic imagination that viewed the economy in binary binaries that emphasized the tradeoffs between agricultural versus non-agricultural, rural versus urban, formal and informal. In the search for an economy that was not agricultural, urban and formal, he was unable to understand the deep links between these binaries and design a responsive policy.
This is best illustrated in the agriculture and growth approach. Consider the following: First, where agriculture has been invested, agricultural surplus has played a major role in driving industrialization and getting people off the farm. The history of the industrial centers of India, such as Tiruppur, Tamil Nadu, which grew on the back of the agrarian capital are testimony to this. Second, half of India’s manufacturing value added and off-farm employment (Census 2011) is in rural areas. Third, urbanization is driven by changing economic patterns in these rural areas as non-farm employment increases. Half of the new growth of the urban population of India between 2001-2011 (Census 2011) occurs in these rural areas that were transformed into cities. Agriculture, rural non-agricultural areas and urbanization are inextricably linked. In the political concern to get people out of agriculture, the economic narrative did not recognize these interrelationships that treated agriculture as waste, a drag on the economy, and rural, non-agricultural and urban areas as silos. We have separate departments for agriculture, rural, urban, and micro, small, and medium enterprises, and no mechanism for strategic planning and coordination between them. Urban policies and spending have prioritized “smart” cities and metropolises rather than investing in small cities (many of which are still classified as rural) and cities where most economic activity takes place. Local governments, which should play a fundamental role, are weak, leaving behind to a large extent the most pernicious elements of the raj license state that exploit the inequalities that the blockade made visible.
Addressing India’s structural inequalities and making markets truly competitive requires an integrated economic framework, one that breaks the silos and invests in agricultural, rural, non-agricultural and urban continuity. This means investing and incentivizing State capacities to collect better data on agriculture, non-agricultural sectors and urbanization, for decentralized local economic planning and investment.
Finally, the blockade must rest for the old debate about the trade-offs between well-being and growth. Well-being, due to its political imperatives, was always treated as an afterthought in the post-1991 imagination, a trade-off for the inability to attract people as active participants in the economy. As is well recognized in the economic literature, robust well-being builds human capabilities, improves productivity, and most importantly, ensures dignity. Well-being must be reimagined as the foundation of a strong economy, and the capacities necessary to provide well-being must be improved.
If India is to find its way back on a growth trajectory, economic policymaking must recognize the failures of its past. However, our current imagination of reform, as outlined in the Covid-19 budget package, remains trapped in false binaries and old frameworks. India’s economic imagination must be reoriented in the real economy. Crucially, growth needs a robust and capable state at all levels. Investing in the capacity of the State and its regulatory institutions rather than wanting the State to leave will ultimately be the true engine of growth.
Yamini Aiyar is President and CEO of the Policy Research Center. Mekhala Krishnamurthy is Principal Investigator and Director of the State Capacity Initiative, CPR and Associate Professor at Ashoka University.
The opinions expressed are personal.