May 19, 2013 8:27 pm

A robust defence of India’s growth story

A welcome contribution that signals the need for a deep debate about the direction of the country’s economy

Why Growth Matters: How Economic Growth In India Reduced Poverty and The Lessons For Other Developing Countries, by Jagdish Bhagwati and Arvind Panagariya, PublicAffairs, RRP$28.99/RRP£19.99

 

With an election due in 2014, India may soon face its most intriguing political choice in a generation. On one side stands Rahul Gandhi, the son of Congress party leader Sonia Gandhi, and scion of a dynasty stretching back to the nation’s independence in 1947. On the other is Narendra Modi from the Hindu nationalist Bharatiya Janata party opposition, a controversial but effective chief minister who runs the business-friendly state of Gujarat.

Both men have drawbacks. It is never clear Mr Gandhi actually wants the top job, while Mr Modi’s appeal is blemished by a massacre of Muslims that occurred on his watch in 2002. Nonetheless, the potential clash has New Delhi’s political class salivating; it could even offer something approaching a battle of ideas between the broadly centre-left Congress and the more centre-right Mr Modi.

Yet behind it lies the need for a deeper debate about the direction of the economy; a debate that is often poorly articulated by political leaders, even as India’s growth has lately come off the boil so conspicuously.

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For that reason this latest contribution from Jagdish Bhagwati and Arvind Panagariya, two Indian-born economists at Columbia University, is welcome. In Why Growth Matters, the duo provide perhaps the most full-throated defence to date of India’s economic liberalisation, which began in 1991 and is widely understood to have led to a period of fast growth over the past decade.

But not so fast: leftwing critics are undermining these achievements, the authors claim, promulgating a series of “myths” that are debunked in the first half of the book. The result is a convincing (if at times slightly wearying) litany, arguing that India’s growth spurt did indeed benefit lower caste Indians, for instance, or that it lifted many millions of people from poverty.

It is notable for its pugnacious tone too; for this is a book that comes out swinging. In its early pages the economist Joseph Stiglitz and the financier George Soros are accused of “Jurassic Park economics”, for their questioning of pro-market orthodoxies. The work of Dani Rodrik, a respected Harvard academic who backs some trade restrictions in developing countries, is dismissed tartly as “hollow”.

The Indian thinker Amartya Sen is mentioned only in passing, however, which seems odd, given Why Growth Matters is in large part a riposte to his arguments – namely that post-reform India has suffered rising inequality and performed badly on development indicators, at least when compared to poorer neighbours such as Bangladesh and Nepal.

Indeed, Prof Bhagwati and Prof Sen have been staking out their sides of this debate for years, with the former styling himself as the chief defender of further liberalisation. It is a cause he clearly relishes, although one that would benefit from considering the unpopularity of the measures he backs. If the argument for further growth-enhancing liberalisation has only upsides, the reader is left to ponder why it often has so few allies.

Despite this, the authors’ contention that India needs a further shake-up is surely correct, as is their suggested focus on rejigging outdated systems of land acquisition, planning and a tightly regulated labour market.

The latter point is especially well made: India ought to be a global giant in low-skilled, labour-intensive manufacturing industries, such as garment-making and electronics. But it isn’t – in fact the country employs only about 5m workers in manufacturing facilities with more than 10 staff, a pitiful record in a country with about half a billion workers, but where senseless regulations stop too many businesses expanding.

“Many commentators have expressed the view that we are now witnessing the beginning of the end of the Indian growth story. But these commentators greatly overstate their case,” the authors write. Yet while there are many sensible measures that could be introduced, whether they will be remains doubtful.

India’s Congress-led government has rediscovered its reformist zeal over the past six months, although it should get little credit for having dawdled in preceding years. But even with this renewed determination, relatively straightforward measures often appear unachievable amid the country’s fractious political system.

Worse, the approach of next year’s election may set back the case for further reforms, as India’s leaders avoid potentially unpopular decisions.

That would be a shame, but it provides only further reasons to hope that the contest itself provides a substantial forum for debate, whether that be between Mr Gandhi and Mr Modi or not. Indeed, the future of India’s growth story depends upon it.

The writer is the FT’s Mumbai correspondent

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