INDIA
28 March 2014
India's growth drivers and Mr Modi’s economic reasoning
Mukul Asher has shared with us his thoughts on India's growth drivers and the economic reasoning of Mr Modi, India's likely next Prime Minister.
Mukul Asher has shared with us his thoughts on India's growth drivers and the economic reasoning of Mr Modi, India's likely next Prime Minister.
The discussion of growth drivers is of national significance for three reasons. First the proportion of votes in the coming General Election that are primarily motivated by good economic management and governance (exemplified by more reliable, and accessible, and affordable public amenities such as power, water, roads, schools, waste management, health care, and personal security) appears to be growing. Second, India’s current demographically advantageous phase exemplified by more than three-fourth of population under 35 years of age, provides a historic opportunity to realize high growth rates. Third, India’s real GDP growth rate is projected to be less than 5.0 per cent in 2013/14 (it was 4.5 percent in 2012/13, the lowest in over a decade), which is too low for economic and strategic security, and for social cohesion.
The first driver is quantity and quality of Labour, possessing skill sets, which are in demand by domestic and international organisations. Labour productivity emanating from social environment and amenities (including from preventive public health measures) and from relevant skills development for improving not just the individual but also the group performance, is thus a key component of this driver. Robust productivity measurement and benchmarking at both aggregate and disaggregate levels are essential if this driver is to contribute to growth and development. India’s current demographically advantageous phase has the potential to use this driver much more aggressively than has been the case so far.
The second driver is Capital, which refers to humanmade instruments of production. Examples of capital include various types of machines, new residential, commercial and industrial buildings, and durable business equipment such as computers.
The third driver is Land and Natural Resources. There is an element of luck or accident of geography in how much of (productive) land is in relation to the population, and the endowment of natural resources such as minerals and oil and gas a country possesses. However, such endowment must be utilised effectively to bring about broadbased sharing of its benefits; and lay foundations for the period when natural resources are depleted.
The fourth driver is the Managerial and Organisational Capabilities. It is essential to recognise that it is not the countries but firms and organisations, and individuals, which compete with each other. Thus, developing capabilities through appropriate restructuring at work processes and incentive structures to obtain better economic and social outcomes is essential. Such capabilities have become even more essential in addressing 21st century challenges.
Capabilities to manage and implement public policies and program, and ability to spot where relatively small procedural or other steps and make disproportionately large positive difference, needs to be given due weight in public policy design and in desired outcomes. The argument that policy design is appropriate but implementation is deficient and therefore desired outcomes are not being achieved is not tenable from the perspectives of effective use of economic resources, fairness or accountability.
The fifth driver is Entrepreneurship. An entrepreneur’s role is to spot and create new market niches, while helping to combine other drivers of growth. An entrepreneur faces both risk (events whose probabilities can be estimated), and uncertainty. An environment that does not unduly penalize failure in entrepreneurial activities is more likely to encourage this trait.
The Sixth driver is the capability of the organisations and individuals in a society to generate, adept, and diffuse knowledge. In the Indian context, validating and updating traditional knowledge is also needed. Knowledge management, in part exemplified by determining and day analysis capabilities, also is an integral part of this driver. Much of the growth differences in longterm trends across economies can be explained by this growth driver. Openness to the flow of new ideas, willingness to learn, and a ‘truthful’ organisation where information flows in upward and in downward direction reflects real situations and conditions are needed to take advantage of this driver.
Managing these drivers requires a technocratic and managerial more than ideological approach to the economy and society; and skills at domestic and global networking whether in the market or the nonmarket setting. In addition, managing significant risks to existing and future viability of economic activities and livelihoods arising from technological changes (including disruptive technologies such as additive manufacturing; from environment and climate change; from use of regulations and international conventions by business and other lobbies, mainly based in Europe such as Stockholm Conventions); and international economic agreements need to be institutionalised at appropriate and multiple policy levels.
The recognition of the importance of nurturing economic, political, and social institutions to ensure that they do not become impediments to growth was evident in Mr Modi’s speech in Chennai on February 8, 2014. Mr Modi has expressed his strong belief in institutionalised decentralisation of political and economic power.
His suggestion in the speech at India Today Conclave 2013 that the policy thinking should have been for a Development Guarantee Scheme (DGS) rather than implementing National Rural Employment Guarantee Scheme (NREGS) reflects his recognition of how mind –sets of policymakers and bureaucracy need to be reoriented towards improving quality of daily lives people. In that speech he persuasively argued that what India need is not more government laws but action.
In his speech to Muslim business group on February 7, 2014, he urged equality between men and women; aspiring to be not just job seekers but also jobs providers; and systematically upgrading skill sets of the community which are likely to be relevant for the Indian and global economy.
Separate summits in Gujarat with emphasis on networking and knowledge sharing in health care, agriculture, urban management, and others also illustrate the importance given to bringing the new ideas and knowledge in managing public policy challenges.
Five examples may be instructive:
First in his January 19, 2014 address to Bhartiya Janta Party (BJP) members, Mr Modi argued that in the current globalised world, developing brand India requires a combination of talent, tradition, tourism, trade, and technology. This is not only consistent with making India more open to absorbing ideas, skills and technology but also explicitly recognising the role trade and tourism can play in India’s development, without neglecting while harnessing India’s traditions and ancient wisdom for improving welfare.
India’s total international trade in 2012 was USD 1,052 Billion, equivalent to 57 percent of GDP. India’s economic interests are thus highly dependent on its competence and strategic initiatives in interacting with the global economy, including deploying softpower to its advantage.
The initiative for developing Brand India is also consistent with the idea that progress comes from recombining the manner in which resources are used in many different activities, however small. Developing several growth areas, each contributing a share to overall growth is quite conducive to broadbased and resilient growth.
Second, during the Nani Palkhiwala Lecture in Chennai on October 18, 2013 he stated that “strong economy is a driver of national security” , clearly understanding that delinking of the two as has been the norm so far, has been inappropriate. So building of stronger military sector would be combined with areas where economic weaknesses, whether in defence production, electronics manufacturing, cyber warfare, excessive reliance on international financial centres for financial and capital market services, or in stagnant and technologically backward rail network, could weaken national security. In this lecture he also recognised need for major tax reforms to make it more compatible with the growth drivers.
His insistence that an inadequate manufacturing base is a threat to economic and national security is very timely as the World Bank data suggest that share of manufacturing in India’s GDP at 14 percent in 2012 is the lowest in a decade, as compared to the national goal of around 25 percent.
In his speech in Imphal on February 8, 2014, he linked laying of fiber optics network and of road connectivity for developing strategically vital Northeast of India, whose eight states were termed Ashta Lakshmi, and linked better use of the regions’ natural and human resources to India’s security.
Third, Mr Modi has frequently argued that India needs technology and logistics, supply chain innovations driven agriculture; which in turn can provide sustained demand for manufacturing sector goods and for services. In essence, he has argued for balanced and broad based development, rather than promoting particular activity or a government scheme in isolation, thus understanding true meaning of what planning should entail.
His emphasis on agricultural sector, from which nearly half of the labour force obtains livelihood, is also evident from his understanding that natural resources such as water and land will be strategic due to their increasing scarcity, and that agricultural surpluses and their export could contribute to enhancing India’s influence globally. The initiative to set up the College of Food Processing and Technology, and Bio Energy at Anand Agricultural University is also consistent with this reasoning.
His suggestion that the land dividing the farms which is currently not utilised be turned into productive use by growing timber also suggests his ability to link better land use for obtaining higher incomes for the farmers on sustainable long term basis while benefiting the country through reduced dependence on imported timber, and through higher incomes generating government revenue.
Fourth, Mr Modi has recognised the importance of sea ports for movements of goods and people both within the country and globally. Gujarat Maritime Board (GMB) reports that about a third of Indian’s external trade is through ports in Gujarat. Mr Modi’s proposal for creating a forum by India’s coastal States to exchange views and coordinate policies to expand their role in India’s development and commercial diplomacy suggests his understanding of the interlinkages between the coastal States and their role in national development.
Fifth, Mr Modi has emphasised the insight derived from the health policy literature that it is the preventive care, broadly defined as including public health, sanitation, better water supply, improved food quality, waste management etc., which is the primary factor in reducing burden of disease and improving life expectancy. This recognition is currently missing in India’s health policy, as overwhelming emphasis is on curative rather than preventive care.
For transition to higher long term core rate of economic growth, managing the above growth drivers will also requires skills in managing India’s fragmented political and social structure, which enables progress towards making sound economic policies compatible with electoral consideration.
It is essential that the 2014 General Election enables those with proven competence as economic and political managers to be given the responsibility to meet aspirations of Indians to improve quality of their daily lives and to become a successful and competent country.
This article was originally published in Pragati: The Indian National Interest Review on February 14, 2014.
A look into the growth drivers and Mr Modi’s economic reasoning.
There is considerable analytical and empirical literature explaining factors driving broad-based economic growth over a long period of three decades or more. It may be useful to first summarise the main drivers of growth which when applied with competence, integrity, and consistency and professionalism could lead to broad-based economic growth over a prolonged period.The discussion of growth drivers is of national significance for three reasons. First the proportion of votes in the coming General Election that are primarily motivated by good economic management and governance (exemplified by more reliable, and accessible, and affordable public amenities such as power, water, roads, schools, waste management, health care, and personal security) appears to be growing. Second, India’s current demographically advantageous phase exemplified by more than three-fourth of population under 35 years of age, provides a historic opportunity to realize high growth rates. Third, India’s real GDP growth rate is projected to be less than 5.0 per cent in 2013/14 (it was 4.5 percent in 2012/13, the lowest in over a decade), which is too low for economic and strategic security, and for social cohesion.
Main Drivers of Broad-based Economic Growth
The main drivers, which are interconnected, may be summarised as follows.The first driver is quantity and quality of Labour, possessing skill sets, which are in demand by domestic and international organisations. Labour productivity emanating from social environment and amenities (including from preventive public health measures) and from relevant skills development for improving not just the individual but also the group performance, is thus a key component of this driver. Robust productivity measurement and benchmarking at both aggregate and disaggregate levels are essential if this driver is to contribute to growth and development. India’s current demographically advantageous phase has the potential to use this driver much more aggressively than has been the case so far.
The second driver is Capital, which refers to humanmade instruments of production. Examples of capital include various types of machines, new residential, commercial and industrial buildings, and durable business equipment such as computers.
The third driver is Land and Natural Resources. There is an element of luck or accident of geography in how much of (productive) land is in relation to the population, and the endowment of natural resources such as minerals and oil and gas a country possesses. However, such endowment must be utilised effectively to bring about broadbased sharing of its benefits; and lay foundations for the period when natural resources are depleted.
The fourth driver is the Managerial and Organisational Capabilities. It is essential to recognise that it is not the countries but firms and organisations, and individuals, which compete with each other. Thus, developing capabilities through appropriate restructuring at work processes and incentive structures to obtain better economic and social outcomes is essential. Such capabilities have become even more essential in addressing 21st century challenges.
Capabilities to manage and implement public policies and program, and ability to spot where relatively small procedural or other steps and make disproportionately large positive difference, needs to be given due weight in public policy design and in desired outcomes. The argument that policy design is appropriate but implementation is deficient and therefore desired outcomes are not being achieved is not tenable from the perspectives of effective use of economic resources, fairness or accountability.
The fifth driver is Entrepreneurship. An entrepreneur’s role is to spot and create new market niches, while helping to combine other drivers of growth. An entrepreneur faces both risk (events whose probabilities can be estimated), and uncertainty. An environment that does not unduly penalize failure in entrepreneurial activities is more likely to encourage this trait.
The Sixth driver is the capability of the organisations and individuals in a society to generate, adept, and diffuse knowledge. In the Indian context, validating and updating traditional knowledge is also needed. Knowledge management, in part exemplified by determining and day analysis capabilities, also is an integral part of this driver. Much of the growth differences in longterm trends across economies can be explained by this growth driver. Openness to the flow of new ideas, willingness to learn, and a ‘truthful’ organisation where information flows in upward and in downward direction reflects real situations and conditions are needed to take advantage of this driver.
Managing these drivers requires a technocratic and managerial more than ideological approach to the economy and society; and skills at domestic and global networking whether in the market or the nonmarket setting. In addition, managing significant risks to existing and future viability of economic activities and livelihoods arising from technological changes (including disruptive technologies such as additive manufacturing; from environment and climate change; from use of regulations and international conventions by business and other lobbies, mainly based in Europe such as Stockholm Conventions); and international economic agreements need to be institutionalised at appropriate and multiple policy levels.
Mr Modi and the Growth Drivers
An analysis of Mr Narendra Modi’s proven track record of initiatives in Gujarat, and his proposals and insights for India expounded in various speeches strongly suggest consistency with the insights derived from the above growth drivers and development experiences globally.Recognition of the need for multiple stakeholder cooperation:
His slogan Sabka Saath, Sabka Vikas (everyone’s cooperation for everyone’s progress) appropriately captures need for Union and State-local government to cooperate for the nation’s progress and for better governance; and for state-market social enterprise sectors to complement in addressing nation’s problems and move from financial inputs based system to one which values outcomes and efficient service delivery. This slogan is to be made effective by initiatives to take advantage of “democracy dividend” and “demographic dividend” as emphasised in his October 13, 2013 Global meet on the Emerging Markets Forum. Implicit in the above slogan is the recognition of restoring social trust and social capital for economic progress and social cohesion.The recognition of the importance of nurturing economic, political, and social institutions to ensure that they do not become impediments to growth was evident in Mr Modi’s speech in Chennai on February 8, 2014. Mr Modi has expressed his strong belief in institutionalised decentralisation of political and economic power.
His suggestion in the speech at India Today Conclave 2013 that the policy thinking should have been for a Development Guarantee Scheme (DGS) rather than implementing National Rural Employment Guarantee Scheme (NREGS) reflects his recognition of how mind –sets of policymakers and bureaucracy need to be reoriented towards improving quality of daily lives people. In that speech he persuasively argued that what India need is not more government laws but action.
In his speech to Muslim business group on February 7, 2014, he urged equality between men and women; aspiring to be not just job seekers but also jobs providers; and systematically upgrading skill sets of the community which are likely to be relevant for the Indian and global economy.
Openness to ideas and knowledge:
When combined with Mr Modi’s statement made during the National Conference on Skill Development in Gandhinagar on 25 September 2013 that “We cannot develop isolated. We have to develop in the context of global requirements and we should see we are not remaining behind” implies his openness to ideas and to knowledge, and to substantive partnerships. Such openness is also exemplifies by increasing importance given to ideas and networking during Vibrant Gujarat Global Investors Summit held every two years since 2003.Separate summits in Gujarat with emphasis on networking and knowledge sharing in health care, agriculture, urban management, and others also illustrate the importance given to bringing the new ideas and knowledge in managing public policy challenges.
Recognition of Interlinkages:
Mr Modi has demonstrated understanding of the interlinkages between particular condition or policy and other sectors and areas which need to be addressed simultaneously. He exhibits understanding of the importance of the adage that what matters is not what a country (or an individual) can buy, but what it can make that is relevant for sustained growth. In his speech at the ninth convocation of SRM University in Chennai on February 8, 2014, he explicitly identified knowledge and entrepreneurship as key drivers of India’s future growth. He has also emphasised without much more robust real time data gathering and analysis, India cannot implement outcome–oriented public policies.Five examples may be instructive:
First in his January 19, 2014 address to Bhartiya Janta Party (BJP) members, Mr Modi argued that in the current globalised world, developing brand India requires a combination of talent, tradition, tourism, trade, and technology. This is not only consistent with making India more open to absorbing ideas, skills and technology but also explicitly recognising the role trade and tourism can play in India’s development, without neglecting while harnessing India’s traditions and ancient wisdom for improving welfare.
India’s total international trade in 2012 was USD 1,052 Billion, equivalent to 57 percent of GDP. India’s economic interests are thus highly dependent on its competence and strategic initiatives in interacting with the global economy, including deploying softpower to its advantage.
The initiative for developing Brand India is also consistent with the idea that progress comes from recombining the manner in which resources are used in many different activities, however small. Developing several growth areas, each contributing a share to overall growth is quite conducive to broadbased and resilient growth.
Second, during the Nani Palkhiwala Lecture in Chennai on October 18, 2013 he stated that “strong economy is a driver of national security” , clearly understanding that delinking of the two as has been the norm so far, has been inappropriate. So building of stronger military sector would be combined with areas where economic weaknesses, whether in defence production, electronics manufacturing, cyber warfare, excessive reliance on international financial centres for financial and capital market services, or in stagnant and technologically backward rail network, could weaken national security. In this lecture he also recognised need for major tax reforms to make it more compatible with the growth drivers.
His insistence that an inadequate manufacturing base is a threat to economic and national security is very timely as the World Bank data suggest that share of manufacturing in India’s GDP at 14 percent in 2012 is the lowest in a decade, as compared to the national goal of around 25 percent.
In his speech in Imphal on February 8, 2014, he linked laying of fiber optics network and of road connectivity for developing strategically vital Northeast of India, whose eight states were termed Ashta Lakshmi, and linked better use of the regions’ natural and human resources to India’s security.
Third, Mr Modi has frequently argued that India needs technology and logistics, supply chain innovations driven agriculture; which in turn can provide sustained demand for manufacturing sector goods and for services. In essence, he has argued for balanced and broad based development, rather than promoting particular activity or a government scheme in isolation, thus understanding true meaning of what planning should entail.
His emphasis on agricultural sector, from which nearly half of the labour force obtains livelihood, is also evident from his understanding that natural resources such as water and land will be strategic due to their increasing scarcity, and that agricultural surpluses and their export could contribute to enhancing India’s influence globally. The initiative to set up the College of Food Processing and Technology, and Bio Energy at Anand Agricultural University is also consistent with this reasoning.
His suggestion that the land dividing the farms which is currently not utilised be turned into productive use by growing timber also suggests his ability to link better land use for obtaining higher incomes for the farmers on sustainable long term basis while benefiting the country through reduced dependence on imported timber, and through higher incomes generating government revenue.
Fourth, Mr Modi has recognised the importance of sea ports for movements of goods and people both within the country and globally. Gujarat Maritime Board (GMB) reports that about a third of Indian’s external trade is through ports in Gujarat. Mr Modi’s proposal for creating a forum by India’s coastal States to exchange views and coordinate policies to expand their role in India’s development and commercial diplomacy suggests his understanding of the interlinkages between the coastal States and their role in national development.
Fifth, Mr Modi has emphasised the insight derived from the health policy literature that it is the preventive care, broadly defined as including public health, sanitation, better water supply, improved food quality, waste management etc., which is the primary factor in reducing burden of disease and improving life expectancy. This recognition is currently missing in India’s health policy, as overwhelming emphasis is on curative rather than preventive care.
Challenges
It should be recognised that translating the above ideas into concrete national initiatives will meet resistance from the beneficiaries of the current arrangements, including from some sections of the Bhartiya Janata party (BJP). India’s weak fiscal and balance of payments position, persistently high inflation rates, combined with fragile global environment will further constraint policy initiatives of new government to be formed after April/May 2014 General Election. Nevertheless, current weaknesses in policy design and coherence and in organisational competence and coordination are large enough that when addressed by a decisive leadership significant positive impact on growth, employment, and investment could be relatively quickly realised.For transition to higher long term core rate of economic growth, managing the above growth drivers will also requires skills in managing India’s fragmented political and social structure, which enables progress towards making sound economic policies compatible with electoral consideration.
It is essential that the 2014 General Election enables those with proven competence as economic and political managers to be given the responsibility to meet aspirations of Indians to improve quality of their daily lives and to become a successful and competent country.
Acknowledgements
Mukul Asher is Professorial Fellow, Lee Kuan Yew School of Public Policy, National University of Singapore and Councillor, The Takshashila Institution.This article was originally published in Pragati: The Indian National Interest Review on February 14, 2014.