With swadeshi back in fashion, who needs economic growth

One has to conclude from the behaviour of the Modi2.0 regime that India is incapable of sustained development. Not only is the economy at the bottom of the growth cycle at 5%, but the immediate future forecasts are not encouraging. Above all, the Budget showed a total lack of urgency. RBI is experimenting with twisting the yield curve and pushing liquidity into the banking system. Even so, no one can seriously believe that the target of making India a $5-trn economy will be met. Nirmala Sitharaman repeated the target of doubling farmers’ incomes by 2022 without telling us whether we were any nearer to it or what growth rate would be needed in the next two years to achieve that.

One has to conclude that Indian political leadership, across parties, does not rank economic growth very high in its preference. For a still relatively young nation state, nationalism, the respect foreigners show for India, and peculiar ambition such as India as a moral leader of the world (Nehru) or Jagat Guru (RSS) are much more satisfying to the ego of the elite than roti, kapda, makaan.

In their most recent article on Indian growth record published in the Journal of Economic Perspectives, Aravind Subramanian and Rohit Lamba list a table of a select group of countries that have a long trajectory of growth. Leading the pack are South Korea and Singapore in Asia. Each grew for 60 years continuously at above 6% per annum on average. Since at 6%, income would double every 12 years, over 60 years, income would grow 32 times. China had 5.4% per annum for 49 years. At that rate, income would double every 13 years. So over 52 years, income would grow sixteen-fold. India averaged 4.6% for 38 years, at which rate income doubles every 15 years. So, over 38 years, income goes up just five times. The magic of compound interest rate is inexorable. So, India is a relative dullard in the growth class of Asian countries. When people speak of the Asian Miracle or Asian Tigers, it is not India they speak of.

Why is this so? In terms of initial conditions, in 1945, at the end of the Second World War, India was the top economy in Asia. Japan had been destroyed by war damage, though in the 1930s, it was the most developed country in Asia by per capita income. But, even so, India had begun industrialising before Japan, in mid-19th century, and had the first railway, telegraph, and postal service in Asia. Of course, the rulers were foreigners, but the two world wars had compelled the British to push industries in India, and the native industrialists built a world-class textiles industry. At the end of the Second World War, India was seventh in terms of industrial output.

India’s problems began with independence. The new elite had big ambitions for India, but very fragile relations with numbers (something which has been continues to be true for the new elite as well). The National Planning Committee had thought it could raise India’s income ten-fold in the first fifteen years. They did not have any notion of what growth rate would be needed to achieve that. KN Raj, who had come back from LSE after his MSs in Economics, and joined the Planning Commission, said that 5% per annum would be the best India could do. Nehru denounced him for Western-induced pessimism. But, as it turned out, 5% per annum was not achieved during the Nehru years, or till 1980. Nehru’s vaulting ambition—the dream of achieving a Soviet-style heavy industry in one generation—was a total fantasy.

The first thirty years were wasted in the disastrous economic strategy of capital-intensive growth. Lamba and Subramanian date India’s trajectory of sustained growth as starting in 1980. But, that was Indira Gandhi discarding the shibboleth of national self-sufficiency and taking an IMF loan. Even so, autarky and distrust of international trade remained. Rajiv began to borrow abroad, but did not liberalise the economy. I would call the decade of 1980s growth with borrowed money, but without structural change.

The next twenty-five years, 1991-2016, were miraculous. India abandoned the illusion of swadeshi and accepted the benefits of trade like the rest of the world. India’s model for development, USSR, collapsed due to economic weakness. Luckily for India, the global economy boomed as trade expanded, and capital flows became truly global. India caught the wind and liberalised.

But, good times do not last. India had built, in the name of socialism, restrictions in the labour and land markets, and distorted the credit market by nationalising the banks. Neither Congress nor BJP has dared to reform the factor markets or cure the malaise of banking. Worse still, swadeshi is back in fashion, as is the Nehruvian contempt for the businessman (suit-boot-ki-sarkaar). India will bask in the economic stagnation which has come back. Who needs growth when you have Vedanta philosophy?