India: Growth vs. Development Agenda

A lot has been said about the Gujarat development model and how it is all about growth and not enough about development. Fundamentally, economic growth and economic development are neither mutually exclusive nor are they perfectly correlated. High economic growth may not necessarily result in increased economic development of the overall population and targeting human development indicators will not automatically translate into higher level of economic growth.

It is unfortunate that many economists are presenting it as either-or case. There is no trade-off between those two. There are many examples of a country or a state managing to make excellent progress on economic development of its population while clocking in impressive GDP growth numbers. The debate highlights the divisive nature of the 2014 election campaign more than anything else. The United Progressive Alliance (UPA) and the National Democratic Alliance (NDA) are much closer to the centre than what media and sometimes even their campaigns are claiming.

The NDA realizes that Indian government will have to provide support to its poor population. There are too many poor people for them to be ignored and they are too poor to wait for the miracle of economic growth to trickle down to them. And it is not just about winning the votes of the poor. Uncontrolled urbanization, large scale unemployment, lower purchasing power, worsening law and order situation resulting from widespread and persistent poverty are not going to help economic growth even in the short term. Similarly, the UPA knows that lifting the poor out of poverty and making them self-sufficient is not a task that the government can do on its own. The investment requirements, in terms of physical capital and human capital, for increasing the productivity level of the average Indian worker are huge.

Without higher economic growth guiding investor confidence, India risks being stuck in the low-income trap for a longer time. Many of the changes in global economy in the last couple of decades have ensured that appealing to patriotic sentiments or using regulations is not going to work e.g. easier capital mobility. India will have to offer the private sector and foreign investors opportunities to earn consistent long-term profits. Anchoring their expectations is much easier if GDP is growing at nine per cent rather than at five per cent.

The much talked about ideological differences are about the pecking order of policy preferences rather than policy directions. We should not forget that UPA-I also had broader reforms on its agenda and UPA-II also tried, probably half-heartedly, to create a consensus on a few high impact reforms. Every government has its pet projects. Some of these are mentioned in pre-election manifestos and the elected government can confidently believe that it has the people's mandate to implement them. The main criticism of UPA-II is not/should not be of going too far to the left, but of putting unusually high weightage on a few policies while ignoring others. Of course, an uninterested PM and inconsistent decision making are to blame for this, but a major part of the blame lies in the policymakers' over-confidence.

Many economists have been warning that India would hit supply bottlenecks in terms of infrastructure and other capacity constraints which would leads to higher inflation. Similarly, there is significant evidence of rent-seeking activity increasing at initial stages of development in the absence of proper safeguards. Indian policymakers and bureaucrats needed an awakening. Strong institutions are necessary to achieve consistent economic growth and development. Not dealing with those issues during the high GDP growth periods was not a good idea. For example, in media appearances, comparing the corruption to "leakages" became official analogy. It is in fact telling of the thinking of the UPA government. The analogy implies that one way to increase the final actual transfers to the poor is to increase the overall flow. That's what the government tried to do. Had they compared the corruption to say "blockages", the policymakers would have realized that none of the social welfare policies are going to work unless corruption is fixed.

The incoming government faces a long wish list of policy initiatives - from labour market reforms in manufacturing to removing sector-wise restrictions on foreign direct investment. But the Indian economy is very different from mercantile economies like South Korea and China. Exports represent a smaller share in India, while domestic consumption accounts for two-thirds of GDP. While those countries developed their manufacturing bases by competing with domestic manufacturers in the developed world, India faces the harder task of competing with manufacturers in other developing countries. Thus India should not count on repeating the Chinese experience of successfully moving millions of people from agriculture to manufacturing. The challenge for India is to support this transition by retraining agricultural workers for more productive jobs leading to higher wages. This involves more government intervention in social development areas like education, health-care etc. Even the often discussed right-to-food bill contributes by increasing the potential GDP through increased labour productivity.

If taking economic growth for granted and focusing just on social development was UPA-II's mistake, the incoming government would be wise to learn from that mistake. If NDA forms the government, in its pursuit of highlighting the contrast from current government it should not abandon the social programs altogether. Taking economic development for granted while focusing just on GDP growth through industrialization will be equally risky.
 
(The author is Chief Economist at Empirical Foresights.)