Unit 1.

1 India’s Stalled Rise How the State Has Stifled Growth

Arvind Subramanian and Josh Felman
Introduction
➢ India’s remarkable performance in the first decade of twenty-first century.
o Fastest growing economy
o Free market democracy
o Poverty to the rise of middle class
o IT revolution
➢ Global Financial Crisis of 2008 followed by Mis-Management of Economy.
➢ India in limelight again in 2021
In the 2021 April-June quarter, the economy recorded a whopping 20.1
o Foreign portfolio investments per cent growth but then it came mainly on the back of the base effect
as GDP contracted 24.4 per cent in the year-ago period.
o Venture capital investments
Nevertheless, an 8.4 per cent growth in the second quarter (July-
o Rise in the number of unicorns September) was more meaningful as it indicated sustained recovery.
o Shifting manufacturing bases in India
"India's real GDP bounced back strongly in Q2:2021-22, hitting a growth
➢ So, is India back? of 8.4 per cent over a favourable base and exceeding the Reserve Bank's
estimates of 7.9 per cent. The GDP level surpassed that of Q2:2019-20
o Remarkable progress on developing hardware for economic progress.
by 0.3 per cent," according to an assessment by the RBI.
o Continues to struggle to fix on the software front.
Source:https://www.business-standard.com/article/economy-
o Progress on policy software is decisive.
policy/2022-indian-economy-sets-sail-with-growth-hopes-even-as-
headwinds-remain-122010100543_1.html
India’s Lost Decade
➢ When and why, India went away.
o Main reason: plans that went badly wrong.
▪ Heavy investment by the corporates in boom years > financial crisis > interest rate increased &
exchange rate collapsed > companies defaulted on loans > creation of non-performing assets
o Government response to solve the Twin Balance Sheet Problem
o Impact of reduced growth on other indicators of social and economic progress
▪ Decreased female labour force participation
▪ Decrease in the manufacturing sector share in GDP
▪ Progress on child health hampered
o Covid 19 and economic and human devastation
▪ Impact on poverty
▪ Impact of Demonetization
▪ Impact of the implementation of the GST
▪ Second wage of Covid-19
▪ State’s responses to deteriorating job market condition in India

Improving Hardware, Fixing Software

➢ Hardware front: Road, Rail, UPI system
➢ Software front:
o New Welfarism and its achievements
o Major improvements
▪ Rules governing the economics investments
• Reduction in corporate tax rate
• Settling tax disputes with Cairn Energy and Vodafone
• Privatizing the national airline
▪ Reforms in pipeline
• Monetization of the public sector assets
• Liberalization of the farm economy
• Cleaning up India’s old labour laws
▪ Software front reforms far behind the hardware front reforms
• E.g. Industrial policy

2023 WINTER INDIAN ECONOMY II UNIVERSITY OF DELHI

Aspiring Outward, Turning Inward
➢ New Industrial Policy
o Making India a production hub
▪ Three-pronged strategy
• Atmanirbhar Bharat
o Targeted subsidies
o Return to protectionism
o Nonparticipation in regional trade agreements
▪ Will self-reliant strategy work?
• Doubtful
o Subsidy raj is quite like license raj
o Ignores the employment front challenges that India faces today
o Protectionist tariff regime will not help manufacturers from China
o Staying away from trade agreements costs access to the world market

Stacking the Deck

➢ Most distinctive aspect of the industrial policy
o National champion strategy
▪ Arguments for the strategy
• Economies of scale
• Network effects
• Help achieve the national goals
• Strengthen country’s position in the global market
▪ National champions in India
• Adani Group led by Gautam Adani
• Reliance Industries led by Mukesh Ambani
▪ Positive potential of these national champions
• Low-cost 4G
• Global climate change goals
▪ Costs associated with national champions strategy
• Discouragement to other firms
• Access to international firms has been limited
• Domestic firms marred by high input costs
• Large interests of “2As” > concentration of economic power
• Overall: undermining of the investment climate
▪ Comparison with Japan (Zaibatsu) and South Korea (Chaebol)
• Zaibatsu and Chaebol’s case
o Kept it check by the governments
o Tradable sectors
o Competition in global market
• India’s case
o Domestic infrastructure sectors
o Shielded from international competition
o Towards an oligopolistic economy
o Limitations on wide ranging innovation and growth

Stigmatized Capitalism
➢ In the past
o Public perception
o Rise of today’s biggest entrepreneurs
o Information boom of 1990s
o Infrastructure boom before financial crisis
➢ In present
2023 WINTER INDIAN ECONOMY II UNIVERSITY OF DELHI
 o The 2A variant
➢ Public perception
o Unfavourable to market-based reforms
▪ Recent example:
• Farming sector reforms

Defective Software
➢ Faults or less transparency in Data
o Examples
▪ Recent budget
▪ Health data
➢ India’s federal structure and vicious cycle of policy making at central level
➢ Policies plagued by sudden changes or discontinuity
o Farm income
o Widening tax base
o Foreign investment
➢ Chronic inconsistency with policy framework

A Chance to Reboot?
➢ If pandemic is over, India is in a good position.
➢ Main question:
o Whether the government will use this opportunity to turn India into a global manufacturing hub.
o Strengths and Requirements

▪ Comparison with China

China India

Relatively ageing population than India’s Population and workforce is young

Hardware revolution is almost over India has just the beginning
An Authoritarian country The largest democracy of the world
▪ A reboot to country’s software is needed.
• Change in industrial policy approach
o Orientation towards lower trade barriers
o Greater integration into the global supply chains
o Dropping the national champions strategy
o Improving the policymaking process
o Creating more space for foreign investment
o What is likely to happen?
▪ Little indications of change
▪ Hardware improvements will continue
▪ Software defects will hold India back
▪ Further risks
• Majoritarian and illiberal policies could have social, economic, and institutional costs
• Growing security challenges on both the eastern and western borders
o Final words

Link for complementary lecture for this reading:

➢ Arvind Subramanian & Raghuram Rajan (Discussant) – Is the Indian Economy Back?

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2023 WINTER INDIAN ECONOMY II UNIVERSITY OF DELHI