A lot of analytical attention is being paid to the Indian economy these days. Most of the analysis has centered on when reform really started -- 1985 or 1991. One or two writers have put the date even earlier, say 1975. I prefer 1977 myself but more of that some other time.
Yesterday some economists from the International Monetary Fund presented a paper on a different aspect. Why, they asked, has India grown in the peculiar way it has done, leapfrogging over the manufacturing phase and becoming a predominantly services economy?
Why, too, do some states resemble developed country economies while having rather lower per capita incomes? And so what should be done?
The main message was pretty straightforward: the Indian economy looks so utterly strange today because India followed 'idiosyncratic' policies in the past.
The paper described with great clarity what has happened to the manufacturing sector -- that it became capital- and skill-intensive, which makes little sense in an unskilled labour-surplus economy. But we already know much of that so there is really not much that is new.
Since many more papers in this genre are going to be written in the years to come, it is necessary, perhaps, to explain that what the authors describe as idiosyncratic was really the consequence of a completely different objective function. The past cannot be understood uni-dimensionally and context is vital.
The first element in this context is that in the 1950s and 1960s this objective function was determined by the dominating concern of the political leadership to build the Indian state -- as the term is understood in political science and not accelerating economic growth as it is now when the Indian state can be taken for granted. It is not very helpful to ignore this overwhelmingly powerful driver of policy.
This is not to say that growth was a secondary objective. But the means adopted to achieve it had to serve another god, namely, horizontal equity across the states and a demonstrably powerful centre. In a strange way, we are back to that concern after 25 years of reform. The last section of the paper is devoted to what to do now.
Second, I cannot think of any other comparable country in the 80 that the authors have chosen for their analysis that had to face what India faced in the 1960s and the 1970s. From 1962 to 1977, there were a series of internal external shocks that engendered a siege mentality.
The idiosyncrasy was essentially a political response to a series of external and internal shocks stretching over a decade and half. The mindset became one of siege and India went into a coping mode politically (and therefore economically) rather than what is called the pro-active management mode now. This was in sharp contrast to the pre-1962 period.
Third, the problem with the commanding heights policy was not with the policy itself but with its management. It is now 35 years since Jagdish Bhagwati and Padma Desai put their finger on the problem: micro management, which was in the hands of the civil service, was abysmal. It has only become worse, thanks to Article 311 of the Constitution, which makes sacking impossible. This, rather than labour law, needs reform most.
The emphasis on skill development through large investments in tertiary education, which the paper implicitly criticises, was a response to the shortage of skills.
Also, I found no reference to Sukhomoy Chakravarti's writings. The paper is poorer for that, as also for not referring to the second volume of the RBI's history covering 1951-67. The third volume (1967-81) will soon be out as well. Between them, they provide a very good view of why policies were what they were.
Fourth, contrary to what the paper says, on faith I suspect, Indian labour laws are not especially out of kilter with the laws in civilised countries. The problem is with the way in which they are administered -- in a discretionary and arbitrary manner -- and some questionable interpretations handed down by the Supreme Court in the 1970s. But the Court is making amends now.
Fifth, as far as skills and capital intensity are concerned, which the paper says are too high altogether, it is like trying to gauge the size of the iceberg from its tip. The truth is that over 60 per cent of the non-agricultural economy is now invisible.
This part is of very low capital intensity and is dogged by poor skills. In that sense, it is not just that the data are c**p -- noisy is the polite jargon -- which the paper points out. It is that the data simply aren't there.
Sixth, and I hope some IMF economist will get down to studying it, the root of the policy problem lies in the Constitution, which restricts the room for manoeuvre that central governments have.
The Indian federal arrangement is designed to hold India together. This design has created a very strong slipstream from which economic policy is beginning to escape but with the undesirable consequence which the paper points out -- an increase in regional imbalances.
