Is the Indian economy running out of steam already?

DELHI -- In their new book, Jagdish Bhagwati and Arvind Panagariya, two leading economists, warn Indian lawmakers that without fresh reforms India will once again stagnate.
Written by Betwa Sharma, Correspondent

DELHI -- Twenty years have passed since India's economic reforms were set in motion.  After a patch of slow growth in 2011, some economists are pushing for fresh policies to fortify and enhance growth.

India's economic prowess has given it unprecedented global clout, a seat on the G20 and a fighting chance for a permanent seat on the U.N. Security Council. Recognizing Delhi's dominant role, President Barack Obama hosted Prime Minister Manmohan Singh for his administration's glitzy first state dinner.

Still, many berate the break that India took from its socialist past. The Left accuses liberalization for increasing both inequality and poverty in a country of 1.2 billion people. Jagdish Bhagwati and Arvind Panagariya, two economists based at Columbia University, refute these objections in their soon-to-be-released book "India's Tryst With Destiny-Debunking Myths That Undermine Progress and Addressing New Challenges."

Panagariya told SmartPlanet that the book aims to counter negative perceptions about reforms before it's too late. "So it was time for those playing for the reforms to expose the lack of evidence on many of the claims the left critics have made to undermine the progress on reforms," he said.

"There has been a near standstill on the reforms aimed at sustaining and accelerating growth while the developments in the social sector have involved ill-thought expansion of expenditures and legislation without adequate attention paid to the engineering of the programs," said Panagariya. "These deficiencies have now begun to reflect themselves in deceleration of growth, which will inevitably impact the growth in revenues and our ability to implement the social programs," he added.

The authors first present their case against "myths" like--"growth is not necessary for poverty alleviation"..."reforms do not explain the faster growth in India since 1991"..."there has been no reduction in poverty after the post 1991 reforms"..."trade openness has exacerbated poverty"..."reforms have led to increased poverty"..."reforms have led to increased suicide by Indian farmers."

They, then, articulate Track 1 and Track 2 reforms. The first track deals with policies that generate revenue and the second for programs that distribute this wealth among the neediest. The current social programs like the National Rural Employment Guarantee Act (NREGA) and the upcoming Food Security Bill, according to them, are not and will not produce the best results. The economists make a case for cash transfers to avoid leakages and distortion of the labor market instead of the NREGA system that involves payment in lieu of 100 days of unskilled work to every rural household.

The authors write that economic growth in India has been far less inclusive in India than say South Korea or Taiwan because of the slow movement of workers from the agricultural to the industrial sector. The economists argue that the scores of "entrepreneur unfriendly" labor laws make it difficult for businesses to expand--especially for a firm that employs more than 8 people. "The whole set of labor laws need to be reformed or rewritten," said Panagariya.

History that resonates today

The book's title comes from Prime Minister Jawaharlal Nehru's speech made on the eve of India's independence in 1947. "Long years ago we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom."

The authors advance the theory that Nehru, contrary to popular perception, was not a die-hard socialist but a pragmatist first and then a socialist. It was his daughter, Prime Minister Indira Gandhi, who cast India in a hardcore socialist mould starting with the nationalization of banks.

In a speech made on Jan 18, 1948, Nehru said, "there is no such thing as freedom for a man who is starving." "Under Nehru the private sector grew much more," argued Panagariya. "Under Indira Gandhi socialism came into full bloom and myths found fertile ground."

But many of the earlier sentiments resonate today. The recent opposition to the entry of Wal-Mart in the multi-brand sector is a peek into the nation's psyche. Anna Hazare, the face of India's anti-corruption movement, described foreign direct investment as a tool of colonial repression. Followed by millions, the elderly Gandhian-activist said that the British came to trade and then colonized. "And now we're calling them again," he said.

Reactions to the draft

The book will be tested by the impact it has on Indian lawmakers who are caught between a rock and a hard place-- votes or the right policy. During a panel discussion on the draft of the book organized by the National Council of Applied Economic Research, Jay Panda, an Indian parliamentarian, described the book as "sweeping but accessible."

Panda differed with the theory that Nehru was a pragmatist first and a socialist second. Recalling that Nehru had described "profit" as a "dirty word," the politician suggested that Nehru was a socialist first but also a pragmatist. Panda added that if Nehru's daughter had not been such a "control freak"--"the Indian economy could have been put on its rails in the 70s."

Bibek Debroy, from the Centre for Policy Research, pointed out the irony of Nehru's first speech. First, he said, the rest of the world was wide awake at India's midnight hour and second that the world had chugged along while India "lost a couple of developmental decades."

But Debroy also assigned blame to India's economic fraternity. The policies of India's political masters, he said, "were endorsed by the likes of us." The economist urged the authors to be much more aggressive in attacking the political knowledge that led to the economic traditions that had failed. "What does socialism, democracy and secularism mean today," he asked.

James Lamont, with the Financial Times, pointed out a failure on the part of the media and the policy makers to communicate macro economic policy to the people or politicians, which leaves them "completely unprepared for reform."

(The piece is based on a pre-publication draft. The content of the finished book could change).

PHOTO--Betwa Sharma

This post was originally published on Smartplanet.com

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