Friends of Economic Development
Foundation For Economic Development
Facilitating broad based economic growth in India
Dear Friend of Economic Development,
The budget was released this month. On FED Dialogues, we speak to ‘the most important economist in the world’, Karthik Muralidharan who tells us that budgets don’t matter, state capacity to execute them does. Karthik is the Tata Chancellor's Professor of Economics at the University of California, San Diego and co-founder of the Centre for Effective Governance of Indian States (CEGIS) .
At only 68 minutes, I found Karthik’s first ever video podcast (yes, I was surprised to learn that too) a fascinating and compact introduction to his insight-packed, widely acclaimed recent book "Accelerating India's Development: A State-Led Roadmap for Effective Governance", with a special focus on economic growth. So even if you’ve heard Karthik discuss his ideas before, there’s a lot in there that’s new. We cover his personal connection with economic growth, his recent focus on enhancing state capacity for better public service delivery, the importance of removing frictions in the economy for general welfare, and much more. I'm confident you’ll find it informative and interesting.
Our data story looks at India's (relative) stagnation in merchandise exports, which is particularly stark when compared to the success we've had in services exports. We also share our recent op-ed in Mint that calls for the need to reform laws that are bad for business. Finally, we share a few good reads on economic growth.?
Warm regards,
Rahul Ahluwalia
Founding Director, FED
FED Dialogues???With Karthik Muralidharan
Our guest for this episode of FED Dialogues, has just authored one of the most highly acclaimed books on India - “Accelerating India’s Development: A State-Led Roadmap For Effective Governance”. In this fascinating one hour conversation, Karthik gives us an introduction to the key messages of his book - the idea that the government can do much better by improving the quality of its spending, instead of focusing on the share of budget spent on key sectors, and by removing the frictions that plague Indian industry and hamper productivity, rather than offering all kinds of subsidies and incentives to a few marquee investors.
He also airs his worry that the book may give the impression that he’s a statist since most chapters talk about enhancing state capacity to accelerate growth. However, in this conversation with Rahul Ahluwalia , founder-director at the Foundation For Economic Development (FED), Muralidharan explains that “by focusing on what I want the government to do, I'm sending a strong implicit message as to what it should not do.”
Read the edited excerpts below.
RA: So, one question that I ask many people is, what was your own personal connection with the economy? How did you come to understand its importance? How did you come to appreciate that there is such a thing?
KM: I'm a child of liberalisation. I was born in 1975, turned 16 in 1991. The pivotal event in my life was getting a scholarship to go to Singapore. The dominant thought when you reach there is, this place was poorer than India in 1965. And 25 years of sensible policies had just transformed the country. The key to that was obviously economics. Economic growth just made everything possible, in terms of improving people's lives, improving the quality of public infrastructure, the quality of public facilities. There's this famous quote by Bob Lucas, who won the Nobel Prize in ’95. In his ’88 paper on the mechanics of economic development, he says, once you start thinking about the differences in income, you can't think about anything else. So, effectively, I was living that quote in my head, before I had ever read the paper. Since then, I've been hooked on to economics.
RA: There’s no end of praise for your book, ‘Accelerating India’s Development: A State-Led Roadmap For Effective Governance’. You started with research on public service delivery, but the book is a broader synthesis of many different things. So why don't you just lay out that thesis.
KM: When you take stock of the Indian economy, we have many things to be proud of. But we also suffer very fundamental challenges in the delivery of, basic education - we've got 50% of kids completing primary school?in rural India without being able to read; 35% of children are stunted; we have 13 of the 15 most polluted cities in the world. The motivation of the book in some ways?reflects what Rakesh Mohan,?who was one of the architects of the?’91 reforms, said in a review of 25 years of the reforms, that the path to accelerated growth for India?is being limited in every way by weak governance, in the delivery of essential public goods and services. One way to tell the story of the Indian economy is that we've got a top 10% that drives the economy, with high productivity in high-wage jobs, and with successful businesses.?
The good news is that the top 10% of India’s income distribution is still 140 million people. That’s a large enough population to be dynamic in innovation in new businesses and startups and be able to staff global capability centres. That’s why we have momentum, and we’ll do 6%-7% annual GDP growth this way. However, to fire on all cylinders, we want to equip the bottom 50% of India’s income distribution – who’re seen as labharthis or beneficiaries of government schemes – with the necessary skills, human development and enabling conditions so they’re able to lift themselves out of poverty and contribute to India’s growth story.
To achieve this human development, the default discourse is that we need to increase the budget. But we don’t have the money. The norm of 6% of GDP on education comes from high-income OECD countries with a tax-GDP ratio of 30%-35%. India is at 17%-18%. Second: most of our government-as-usual spending is incredibly ineffective in delivering outcomes. So, the unifying theme of high-quality research, a lot of it my own over the past 20 years, has been that investing in better governance is often ten times more cost-effective than simply spending more money on programs.
RA: There is a particular category of frictions you introduce when you’re trying to do good. You’re trying to protect the farmer but you introduce massive frictions in the farmer taking decisions that would actually benefit them and benefit the economy. MSMEs is another example. You’ve mentioned a lot of such examples in the book. Just talk a little bit more about that.
KM: So much of our perversity happens because of the excessive siloing of government departments. Our pathologies in economic efficiency come about because we are trying to protect workers from vulnerability in the economy. But instead of protecting workers, we try to protect jobs, which is where the fundamental source of misallocation comes, because economies are dynamic creatures. Companies will come, companies will go, sectors will come, sectors will go. And that reflects changes in both technology and taste. If you look at the top 10 listed companies in the US stock exchange, highest market cap, I think none of them or only one of them existed 50 years ago. I think if you look at the top 50, less than 20%, and that speaks to what Schumpeter famously called creative destruction. That's how economies stay dynamic. In India, let's think about the spillovers from our electricity policy, where we want to provide free electricity to farmers. But historically, governments have tried to cover that by overcharging industrial use. What does that do? It makes your industry less competitive, which would mean that you’re not creating the jobs. If you were creating the jobs, you might not have needed the subsidy in the first place. That’s an example of these intersectoral linkages. I'm not saying we shouldn't spend on farmer welfare. But if we can reform that to income support that doesn't incentivise continuing inefficient activity, it will actually unlock productivity.
Click here to watch the full episode on YouTube.
Data Story????
Until the mid-1990s, India made little progress in increasing its participation in the global economy. Since then, India has consistently expanded its share of global services exports from 0.5% to more than 4%. However, merchandise exports tell a different story. After rising to about 1.5% in 2011, India’s share of global merchandise exports has largely stagnated.?
Why does this matter? Our previous data stories have shown that exports are crucial for economic growth. While the global services trade is growing with technological advances, merchandise trade still remains three times larger. This presents both an opportunity and a challenge for India. The opportunity is substantial: a USD 24 trillion market for Indian goods. The challenge lies in the need for India to renew its export orientation through policies that improve the ease of doing business, lower trade barriers and leverage its comparative advantage in employment-intensive manufacturing.?
In-Focus????
领英推荐
?? "How many hours do you end up spending on regulatory matters?" we asked Agarwalji, a garment exporter. 'Around 15-20%,' he said, 'approvals and inspections, labour audit, water, building certificate, new site formalities and so on. Every day, I spend a couple of hours going through some of these.' Since this involved government officials, he couldn’t delegate it; officers would insist that the owner be their single point of contact.
This is not an exception, but a sad reality facing many manufacturers, specially MSMEs," write Ankur Kothari and Yuvraj Khetan in this piece for LiveMint.?By some estimates, formal enterprises must navigate more than 25,000 labour-related compliance requirements. This includes a web of central and state government licences, permissions, registrations and renewals. A recent report by TeamLease RegTech found that nearly 500 compliances are required to set up and run a small automotive manufacturing unit.?
Bad laws are bad for business: They must be reformed, not ignored.
To read more, click here.??
Good Stuff We Read/Listened To ?????
On the eve of the Union Budget this month, Piyush Doshi, Operating Partner at FED, and Gurcharan Das, Member of FED's Advisory Board, participated in a panel discussion on CNN-News18 where they elaborated on what should be the key elements in the roadmap for 'Viksit Bharat' or 'Developed India'. Mr Piyush explained that India is?"artificially holding back its labour by imposing the most restrictive labour laws in the world." Citing the example of China, he explained that when there's an increased supply of jobs, companies will have to compete to attract labour, so wages will naturally go up.?
Mr Gurcharan explained that?only two out of three cylinders have fired for the Indian economy, with manufacturing yet to realise its full potential. "We think India is a large market. It's not. China was a market four times bigger and they realised that even they could not succeed, depending on their market. So we have to export," he said.
Watch snippets from the full debate in this Twitter thread.?
2. ?? An insightful report in The New York Times on how manufacturing jobs improve lives, and are the best bet for improving India’s female labour force participation rate (FLFPR).?If we can?replicate the impressive growth in India’s electronics assembly ecosystem for apparel manufacturing as well, it will help elevate millions of women to better-living standards.?
Women in India Face a Jobs Crisis. Are Factories the Solution??
Read the report here.?
3. PM Narendra Modi envisions India to become a developed country by 2047.?"Is his aspiration a feasible one? Yes. Is it a plausible one? No. But it is still likely that India will be a superpower by that time, with an economy, on one measure, as large as that of the US. So, how might India get there?
Why India will become a superpower.?
Martin Wolf writes in Financial Times.
4. The Lok Sabha poll results have sent a clear message on what voters want. But a giant manufacturing leap is must for employment generation. FED's Advisory Board member Gurcharan Das stresses again why the single most important priority of the new government is to help create an Industrial Revolution.?
GOI'S Job? Find The X Factor For Factories.
Read more.?
5. How do we make sure that the plight of factory workers isn't neglected as India aggressively chases?its ambition of?growing the share of manufacturing?from 15?to 25 per cent of GDP.
Why worker housing is the key to unlocking India’s manufacturing ambitions.
Read more.?
6. Dr. Niranjan Rajadhyaksha is Executive Director at Artha Global,?an elder statesman in the worlds of journalism, policy and economics in India — and he takes the long view. He?joins Amit Varma in episode 388 of The Seen and the Unseen to talk about his life and learnings.
Episode 388: Niranjan Rajadhyaksha Is the Impartial Spectator.
Listen here.?
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