The new Government under Modi has received a huge mandate. It is essential that it moves swiftly to correct some of the distortions, which represent historical flaws
The economic situation across the world is fraught with several uncertainties today, which are clearly the result of a number of political developments that have taken place in recent times. One major factor that is likely to lead to an overall decline in global economic activity is the trade war between the US and China, possibilities of resolving which seem extremely distant at this point of time. There are some economists who have taken the position that perhaps by the end of this year and in 2020, the world could face an economic recession.
In the case of India, we do have a new Government, which has received a massive mandate under the leadership of Prime Minister Narendra Modi. It would be extremely important for a quick set of moves by the new Government so that there is very little loss of time in correcting some of the distortions, which represent historical flaws. We also need to account for global factors such as an economic slowdown in large parts of the world and a possible decline in external trade. In these columns earlier, it was emphasised that wherever we have trends that are unfavourable and which may result in some kind of catastrophe or disaster, there is a need for bringing about disruptive change. Examples of these can be seen with some economic policies and changes in institutions attempted in India itself and in other countries to bring about major corrections in past trends.
It is, therefore, particularly important that we size up the current situation so that the Government implements a major set of measures by which disruptive change can be introduced, which gets away from the trends and pathways which define the past.
Indeed, this is an important juncture when given the massive majority of the Prime Minister’s new Government, we could ensure that consensus is achieved. It would be useful to carry out some degree of historical analysis of how the Indian economy has performed since independence. There was a lost opportunity in the initial decades after independence when India registered a rate of growth, which can at best be described as anaemic. In the first three decades after independence, per capita income increased at barely one per cent on an annualised basis. While this certainly did not improve the economic lot of the common man on the street, it was also responsible for a lack of investment in modernisation, industrialisation, improving livelihoods in rural areas and most importantly, in the development of human capital.
It was vital to understand at that stage that perhaps the very basic services that society in India was deprived of in earlier years included education, health, investments in infrastructure, transportation and communications, which would certainly have opened up the Indian economy to a far more dynamic rate of growth. No doubt the prevailing philosophy during those earlier years was one of Fabian socialism. Even in the case of investments in industry, the Industrial Policy Resolution of 1956, which clearly enunciated that the commanding heights of the economy should be in the hands of the public sector, was a drag on ensuring a rate of growth, which would have provided higher welfare to Indian society.
A higher growth rate would have generated surpluses that could have been invested in some of the basic services mentioned above. But the mindset of those responsible for administering development activities after independence continued with approaches rooted in colonial practices and the institutions they had at their disposal remained unaltered and dominated by stagnation and chronic inertia.
In comparison with other developing countries, the share of manufacturing in the Indian economy also remained stagnant and much of the investment in manufacturing came from the public sector. There was an inherent hostility towards private sector investments and regulatory institutions carried this bias within the restrictions of a Soviet-style planned economy. There was inadequate attention paid to professionalising regulatory institutions and raising the level of expertise for objectivity in economic decision-making.
India, therefore, accounted for a share of only nine per cent of the Gross Domestic Product (GDP) in 1950-51, reaching 16 per cent in 1961 and 20 per cent only in 1996; Brazil accounted for 29 per cent in1971; China for 35 per cent in 1971; and in 1996 South Korea accounted for 27 per cent, Malaysia 28 per cent and Thailand 26 per cent respectively. A large part of the investment was through the public sector in large industrial units.
Mahatma Gandhi throughout his life emphasised on the development of villages as India’s foremost priority. This was neglected, which is the case even today. Urban growth is a fact of life and cities need major investments to ensure their sustainability. But unless rural areas are developed to create livelihoods and employment potential, urban locations would be overwhelmed by migrants from villages moving to towns and cities and living under miserable conditions.
One major option for generating resources for priority sectors would be in respect to disinvestment. Despite past policy favouring this option, performance on this front has been less than satisfactory. In a conversation that this writer had with a former Prime Minister suggesting the privatisation of Air India, he received the response, “Privatise Air India. But that’s our national carrier!” Meanwhile, Air India has slipped further into the red, even as the current CMD, competent as he is, is doing everything possible to stem the rot.
Arvind Panagariya, the first Vice Chairman of NITI Aayog, has suggested that the new Government must show “strong commitment to fiscal consolidation, consolidation of Central ministries, aggressive privatisation of public sector undertakings and creation of a new international trade negotiation entity to fast-track the economic growth of the country.” All these recommendations, if accepted, would also require substantial institutional reform and professionalisation of decision-making within the Government.
An outcome of privatisation should also involve imaginative measures for uplifting the rural economy, which requires viable investments, particularly in small and medium enterprise; generation of requisite skills; market access and connectivity; and basic services, such as education and health care. In the words of Mahatma Gandhi, a “village has to be self-sustained and capable of managing its affairs…the Government of the village will be conducted by the panchayat…These will have all the authority and jurisdiction required…..” Can we transform India’s economy and its rigid institutions to fulfil Gandhiji’s vision and reduce our line Ministries to break down the insular silos that exist? Can we privatise India’s public sector undertakings efficaciously and provide resources for building the capacity of panchayats?
(The writer is former chairman, Intergovernmental Panel on Climate Change, 2002-15)
