Solving India’s Income Problem (Part 15)

A Leader’s Legacy

Many countries have been transformed because of wise leaders. India has not been so fortunate. History has given India yet another opportunity. In a world where the liberal order is threatened and the twin totalitarian threats of Russia and China are creating schisms, India can be the beacon of hope. With Dhan Vapasi ensuring economic justice, with a government promising liberty by not interfering in voluntary trade and exchange, and rule of law ensuring equality, non-discrimination (generality) and “politics by principle” rather than “politics by interest”, India can create the conditions for a long period of sustained growth. This is the best legacy a leader can leave – a free and rich India which does not need generations but just the period between two elections.

In Tolkien’s “Lord of the Rings”, Elrond says, “Yet such is oft the course of deeds that move the wheels of the world: small hands do them because they must, while the eyes of the great are elsewhere.” India is small by global standards – in per capita income (a sixth of the global average) and its share of world trade (just 2%). But India can punch much above its weight in the years to come if it chooses to step away from the mistakes of the past, dismantle its anti-prosperity machine, and set course on a new direction. The Great Powers are all distracted and have their own battles to fight. India is perhaps alone among the large economies to have many things going for it – most important among them, a young population and entrepreneurs that compare with the best in the world. What is needed is that they be set free.

I imagined an India of the future – free and rich, transformed by its leader. Maybe a leader can one day look back at a legacy that generations unborn will remember:

For the first time in history, Indians controlled the destiny of their nation, not emperors, kings or kakistocrats. Freed from the chains of successive governments that had made doing business harder and harder with each passing year, the people had taken it upon themselves to use their newly found economic freedom to create better lives for themselves and their families. The Dhan Vapasi initiative had unlocked trillions of dollars from under government control and put wealth into the hands of the rightful owners – the people themselves. As sector after sector was freed up from government interventions, a virtuous cycle led to the creation of well-paying jobs and rapid economic growth. Technology accelerated the transformation as Indians built on the latest advances in computing and energy. What the West did over a century, what China took a generation, India had achieved in a decade.

If India kept its growth momentum, in less than a generation, the annual income of the average Indian would have gone up by a factor of 10. Their wealth would have increased even more. India by 2040 could become the world’s largest economy – ahead of the US and China. No other country would be producing more than India by 2040. This was something which was last true a thousand years ago.

What the…Indian Revolution did was to make Indians richer and put the nation on a path to greatness it had last seen a millennium ago – before the invasions by foreign powers began. With the advantage of its younger population, cheaper energy and piggybacking on technological innovations, India was powering ahead to become the production and innovation engine of the world.

Revolutions can go either way. While India needs one (and I have argued for a bottom-up people’s movement), the revolution with the best chance of success is one which can be led by a leader who knows the limitations of what governments can do and has faith in the ability of markets and individuals – and in India’s case, 1.3 billion individuals pursuing their self-interest. Good jobs and upward mobility will be an outcome of the spontaneous order that such a leader’s decisions will unleash. No government official has the knowledge to anticipate or predict the future. All they can do is to create the simple rules that enable mass flourishing. The next-level of decisions – manufacturing or services, domestic consumption or exports-led – will emerge from enterprises and consumers making decisions in a free market. So will creative destruction which will help direct capital to the right opportunities. This is what will solve India’s income problem and put the people on an irreversible path of prosperity.

Solving India’s Income Problem (Part 14)

Equality

In the context of equality, the Preamble spoke of status and of opportunity. India’s leaders have misinterpreted that (for their benefit) to mean redistribution. Instead of focusing on improving the lives of the poorest by giving them economic freedom, the Indian state has made redistribution of wealth a priority via taxation and hundreds of government schemes. The moment the interfering hand of government comes into an otherwise voluntary trade or exchange between two consenting individuals – that is when corruption is created. Instead of a liberal democracy, we then have a kakistocracy — a system in which the governments are run by the least qualified and the most corrupt.

The equality we need in India is that every Indian should be treated the same – especially by government and law. It means non-discrimination and non-interference. It means not taking from one and giving to another. Equality of opportunity will arise from Dhan Vapasi (economic justice) and economic liberty (freedom to trade and exchange). Equality will come when taxes are low and budgets are balanced so that government is limited to only its most important tasks (protecting property rights, maintaining law and order, and safeguarding the borders). Equality of status will come with growth which follows; no one asks surnames and caste in urban India.

This is from Parth Shah of CCS: “The governing principle of the Indian Constitution seems to be the group-differentiated rights and privileges based on religion, caste, tribe or backward status and even geography …    Two liberal or libertarian principles are most relevant … One, equality before the law—all are equal in the application of the law. The second principle … is that there should be no laws about capitalist acts among consenting adults. The state shall not intervene in any voluntary exchange between adults.”

What India needs is the generality principle in politics and governance which treats all citizens the same. Atanu Dey writes: “Generality principle is well-recognized in a court of law. All citizens are treated as equals and everyone is guaranteed equal treatment before the law. But in politics, the generality principle is not applied. It leads to what the late James Buchanan, Nobel laureate economist and public-choice theorist, called the “politics by interest.””

Atanu quotes Buchanan: ““Politics by principle” is that which modern politics is not. What we observe is “politics by interest,” whether in the form of explicitly discriminatory treatment (rewarding or punishing) of particular groupings of citizens or some elitist-dirigiste classification of citizens into the deserving and non-deserving on the basis of presumed superior wisdom about what is really “good” for us all. The proper principle for politics is that of generalisation or generality. This standard is met when political actions apply to all persons independent of membership in a dominant coalition or an effective interest group. The generality principle is violated to the extent that political action is overtly discriminatory in the sense that the effects, positive or negative, depend on personalised identification.”

Atanu adds: “Personalized identification has become something of a norm in India. Handouts are made on the basis of which religion a person professes, or caste that the person belongs to. This leads to political rent-seeking, the attempt by groups to seek differential benefits for themselves at the expense of other groups. This is not the worst of it, though. The worst part is that it fractures the polity and pits groups against each other. Politics thus becomes a zero-sum (or even a negative-sum) game in which certain groups benefit at the expense of others. What is lost in the ensuing conflict is the shared vision for the nation and a loss of communitarian values that are critical for social cohesiveness and peace. Its logical conclusion is a war of each against all or what I call a “cold civil war.””

The Constitutional Amendment India needs is what the US did with its First Amendment: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”

This is the Equality needed for a prosperous India.

Solving India’s Income Problem (Part 13)

Liberty

The Preamble speaks of liberty in the context of thought, expression, belief, faith and worship. But there is one liberty which stands above all. It is the freedom to trade and exchange. From Investopedia: “[Adam] Smith argued that by giving everyone the freedom to produce and exchange goods as they pleased (free trade) and opening the markets up to domestic and foreign competition, people’s natural self-interest would promote greater prosperity than could stringent government regulations.”

Here is a quote from Smith’s “The Wealth of Nations” written in 1776: “He generally, indeed, neither intends to promote the public interest nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

Voluntary trade is a positive-sum game; it only happens if both sides come out ahead. Trades and exchanges happen in markets. The freedom to trade and exchange – without constraints and interventions in free markets – is not an easy ask. Governments interfere in markets and use the threat of force to coerce, and in doing so start a downward slide to serfdom.

It probably sounds very counter-intuitive in a world which is erecting barriers to trade but the path India should choose is that of openness. This is the time to recreate the initial conditions of the 1800s and early 1900s that helped the US prosper and create the greatest wealth creating machine the world has ever known. The foundational ideas are simple and centred on liberty, especially economic liberty (which did not find a mention in the Indian Preamble).

There is a direct correlation between economic freedom and prosperity. Just look at this map of the world from Fraser Institute’s Economic Freedom of the World report – the more free a country, the more likely it is to be prosperous.

India is in the 3rd quartile, ranked at 89th. (This is based on 2020 data.)

Here is a summary of what the index measures:

Economic freedom is what our Constitution writers missed – and many generations of Indians are paying the price. This is the real liberty Indians need to let the ‘invisible hand’ and spontaneous order work their magic.

Solving India’s Income Problem (Part 12)

Justice

While the Preamble talks about social, economic and political justice, I believe the most important of the three is economic justice; without it, the poor will not have access to the other two. A recent article in Times of India based on a report from PRICE (People Research on India’s Consumer Economy) had this table:

The key takeaway: 67% of Indian households (comprising the Aspirers and Destitutes) have (on average) expenditure greater than income, and therefore almost no savings (and probably some debt). Given that 800 million people in India (60% of population) are still dependent on free food from the government, this is perhaps not that surprising.

This table below from PRICE is even more shocking. The bottom 60% of Indian households saw their household income decrease in the 5-year period from 2016 to 2021. (This includes the impact of the pandemic.)

Above anything else, Indians need economic justice – and filled stomachs. The solution is Dhan Vapasi – a return of their wealth that has been captured and is controlled by India’s central and state governments. As I have written previously, Dhan Vapasi is that program which can achieve the following:

  • Put money in the hands of people without enlarging the fiscal deficit
  • Get India to sustained 10% GDP growth rate
  • Not entail any government borrowing which will impact future growth
  • Attract global investors and their trillions of dollars
  • Not cause inflation
  • Be politically popular and financially wise
  • Solve the credit constraint problem that many Indians face
  • Give families the freedom to make their own choices
  • Not a violation of the fundamental rights of the people

Dhan Vapasi combines two ideas – the monetisation of surplus public assets combined with universal wealth return. India’s public wealth of $20 trillion which is locked up in land, PSUs and minerals needs to be returned to the rightful owners – the people of India, who can then decide what to do with it. Dhan Vapasi is the only fair solution which delivers economic justice to every Indian and offers them the freedom to choose. It is the first building block for a prosperous India.

Solving India’s Income Problem (Part 11)

Three Words

This is what the Preamble to the Indian Constitution says:

WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN, SOCIALIST, SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity

While much of the debate in the past few decades has focused on the addition of the words “socialist” and “secular”, what has been missed out is the importance of three words which can guide us on the journey ahead. These are justice, liberty and equality. In the rest of this series, I will discuss how a reinterpretation of these objectives can lay the foundation for India’s future prosperity.

I have been a strident critic of the Indian Constitution. While its length and legalese render it almost unreadable for the ordinary Indian, what is more appalling is its origin. Here is what I have written:

India’s pre-1947 poverty was crafted by the British and their invading predecessors. India’s post-1947 poverty was handcrafted by the composers of the 1950 Constitution. A Constituent Assembly of elitist Leftists led by their patron saint Jawaharlal Nehru concentrated powers in a Central government – exactly as the 1935 Government of India Act passed by the UK Parliament did. 242 of 395 Articles in the 1950 Constitution were copied verbatim from the 1935 Act which was designed to subjugate the people and deny them freedom. The fate of Indians – and those unborn – was decided in those crucial years between 1947 and 1950.

The continuing Colonial Constitution (with its 100+ amendments which chipped away the few remaining freedoms that Indians enjoyed) has concentrated ever-increasing power in the hands of a few at the top of government – just the way the British ruled and controlled Indians. If we did not have freedom before 1947, it is impossible to argue that we have freedom now – because the rules have not changed.

I am not the only person critical of the Constitution. Its primary author, Dr. Babasaheb Ambedkar, was under no illusions about the document drafted. The Quint quotes Dr. Ambedkar (speaking in the Rajya Sabha on two separate occasions):

… Sir, my friends tell me that I have made the Constitution. But I am quite prepared to say that I shall be the first person to burn it out. I do not want it. It does not suit anybody.

… The reason is this: We built a temple for god to come in and reside, but before the god could be installed, if the devil had taken possession of it, what else could we do except destroy the temple? We did not intend that it should be occupied by the Asuras. We intended it to be occupied by the Devas. That’s the reason why I said I would rather like to burn it.

Indians revere the Constitution – even though none bar a few have actually read it. (At 145,000 words, it is not for the faint-hearted.) Let us use the three objectives set in the Preamble as the guiding principles for India’s new direction in a fragile, uncertain world.

Solving India’s Income Problem (Part 10)

Past Writings

I have written in the past about India’s need for a new direction (what I have called, ‘Nayi Disha’). “Freedom is the bedrock of prosperity. With every new leader in power, liberty has been diminishing and government control over the economy has been increasing. Since the leaders in power are unlikely to increase freedom and reverse the anti-prosperity measures that are still widespread, it is up to the people to lead a political and economic revolution if we are to make Indians rich.”

I wrote in a recent essay: “In India, we know all too well how to destroy wealth. Suppression of freedom, high taxes on economic activity by individuals and businesses, putting hurdles on education, taxing imports (which inevitably taxes exports), delayed justice, public sector units, not decentralising governance, random government interventions, discrimination based on caste, religion and group affiliations, and control of public wealth – these are just some of the facets of the anti-prosperity machine run by those in power. India’s politicians and bureaucrats have learnt nothing in the past 75 years from the successes of the nations that created wealth for their people; they have focused on wealth capture for themselves and their cronies.”

In another essay, I wrote: “India, colonised first by the British and then subjugated by its own leaders after Independence, remained poor. 75 years after the British left, the per capita income of Indians is only $2,000, a sixth of the world average. Indians have created wealth for themselves outside India (the household income of Indians in America is the highest among all ethnicities) but have not been allowed to do so in India…Even as the liberal world order faces challenges, India has this moment in time when it can rise…A free and rich India can be the real Vishwaguru. With the West caught in the aftermath of its own financial excesses, with Russia and China being led astray by authoritarian leaders, India has a unique opportunity in its 75th year to transform itself. India’s Amrit Kal can become true if Indians embrace the ideas of freedom – not just political independence, but real economic freedom for every Indian and in every action. This is the Nayi Disha India needs.”

More: “What India is missing is quality jobs paying Rs 40-50,000 a month with a promise of upward mobility as a reward for hard work. Today’s India seems stuck between the sub-Rs 20,000 job and the high-end job in IT and specialist functions paying upwards of Rs 100,000 a month. The chasm in the middle needs bridging… India needs to prioritise economic growth. It needs policies which free businesses, people and trade – and get the government out of business. With many countries and continents under economic duress, this is a unique moment in time for India to shed the baggage of the past and reverse policies that have kept people poor.”

I had written this about two-and-a-half years ago: “Swatantrata (independence) without Samriddhi (prosperity) is a battle not even half-won. We must not rest till every child, worker, entrepreneur has been truly liberated in our country. The good news is that it is possible – because India is rich, even as Indians have been kept poor. If enough of us come together, a peaceful political and economic transformation is possible – not in a generation, but before the next election. This Indian Revolution must begin in our minds. We must begin by replacing the dated romantic ideas of what creates prosperity with the evidence-backed reality of what actually does. Each of us must be a node in this networked spread of new ideas. We must set aside differences of caste, class and community that have been used to divide us. We must unite to set India in a new direction, to choose a different future. The only questions we must ask are – If not us, who? If not now, when?”

Solving India’s Income Problem (Part 9)

Global Backdrop

India needs many doublings on its path to prosperity. But the favourable global conditions of the past four decades which helped the rise of China (and many others) are not likely to be there going forward. The post-World War peace in Europe has been broken by the Russia-Ukraine war; an energy crisis looms for much of Western Europe; free trade is being replaced by trade wars, onshoring, friendshoring and protectionism; leaders talk of decoupling and deglobalisation; inflation is at multi-decadal highs and interest rates are rising in Western nations leading to possible recession; fertility rates are falling in much of the developed world; polarisation is increasing and tolerance is decreasing; autocracy, authoritarianism and totalitarianism is on the rise; Western liberal democracies face simultaneous challenges from the far-right and far-left. As Russell Napier put it: “We’re in for a long social and political journey. What you have learned in market economics in the past forty years will be useless in the new world. For the next twenty years, you need to get familiar with the concepts of political economy.”

Here are two charts from Wall Street Journal on the new order (or disorder) in world trade and inflation. As the introduction to the article states: “The post-Cold War order promised a globe stitched together by markets and cooperation between nations. That system has fallen into disorder, and left the world with rising inflation, trade conflict, military confrontation and gnarled supply chains.”

From a recent special report in The Economist: “A great policy reversal is under way in the rich world. The tight fiscal, loose monetary policy mix that defined much of the 2010s is being upended into a loose fiscal, tight monetary policy one. The likely result is a tug-of-war between hawkish central banks and spendthrift governments that will make inflation harder to fight. It will lead to a reckoning about just how much short-term pain societies are willing to bear in the name of long-term economic stability. But it could, ultimately, help economic policy into a beneficial reboot.”

It writes: “The immediate difficulty is that big spending by governments will make it harder (and perhaps impossible) for central banks to hit their 2% inflation targets. Governments are unlikely to stand idly by as central bankers inflict pain on their economies in the name of getting inflation down. They could instead unleash fiscal stimulus before the disinflationary task is complete. The danger is even greater when economies are already buffeted by supply-side shocks, notably the energy crisis. Without fixing the underlying shortages, it is not within the gift of governments to stop the economic pain they cause—they can only redistribute to protect the poor. If politicians try to protect everyone’s living standards, they will cause prices to rise further. The long-term challenge is to avoid fiscal crises. Ageing societies are a challenge spanning the whole of the 21st century. If governments do not control their spending on the old, eventually they will run up against fiscal limits, whatever their cost of borrowing. It would be a mistake to accumulate debts simply in order to put off hard choices, using up fiscal space that may be needed in future crises.”

Bloomberg Businessweek writes: “A world where the US and its allies are in retreat is a world where illiberal states are empowered and destabilizing shocks follow…The current weakness in the global economy provides another way of thinking about the short-term effect of geopolitical shocks. Russia is already in recession. Europe is about to follow, largely because of the cutoff in gas supply. In the US, inflation—also in part a consequence of the Ukraine war—has pushed the Federal Reserve onto its most aggressive tightening trajectory since the 1980s. A Bloomberg Economics model suggests that’s very likely to tip the economy into a downturn in 2023,throwing millions out of work…The lesson of the past few years, though, is that anyone waiting for a return to geopolitical stability may be waiting a long time. History is back, and that’s bad news for prosperity.” It has the chart below.

Niall Fergusson writes: “The world today is dominated by two empires: the US, which originated in the British colonization of North America, and the ethnic-Han-dominated Middle Kingdom we call the People’s Republic of China. But a number of former empires continue to play disproportionate roles in world politics: The Russian empire limps on in the guise of the Russian Federation; the Persian empire is now the Islamic Republic of Iran; one might say the Holy Roman Empire has been reincarnated in the form of the European Union, at once extensive, German-centered and weak. It is not civilizations that clash, but empires.” He adds, in the context of the US-China tensions: “If we pursue Cold War II to the extent of stumbling into World War III.”

Against this backdrop, what should India do? What is India’s path to wealth creation and prosperity?

Solving India’s Income Problem (Part 8)

Future

Three charts from Mint in August 2022 highlight the challenge of India’s income growth:

A chart in a column by Niranjan Rajadhyaksha in Mint (June 2022) puts forth the first per capita GDP doubling challenge:

He adds: “In its new Report on Currency and Finance…, the Reserve Bank of India has estimated that India can maintain an economic growth rate of between 6.5% and 8.5% over the medium term. Rapid growth is needed not just to boost our position in international rankings, but also provide economic opportunities to a young population, especially given our failure to create quality jobs in productive enterprises. There are also shocks to consider. Indian output is still below where it would have been if the pandemic had not struck, and is expected to remain below trend for perhaps another decade. (Note: this is about the level of output rather than its growth rate.) A climate shock is on the horizon. This decade may see India narrow its income gap with countries such as the Philippines and Sri Lanka, especially the latter because of its ongoing economic tragedy. India will need more time to reduce the income gap with most of the other countries considered here. A lot will depend on whether we move ahead near the lower or higher end of the potential growth estimate made by our central bank.”

So, how does India transform? Where will India’s jobs come from – government or private, manufacturing or services, domestic consumption or export-led? How does India rise and lift incomes for its people? My take will be very different from the excellent suggestions others have made.

First, let’s take a look at the global backdrop in which India needs to grow.

Solving India’s Income Problem (Part 7)

Commentary – 4

Devashish Mitra writes on Ideas for India (October 2022):

With India’s overall per capita income 2.5 to 3 times the average income in its agricultural sector, we can expect the expansion of this sector to create only low-productivity and low-wage jobs in the absence of significant technological breakthroughs. Turning to the service sector: with only 12% of India’s population holding bachelors’ degrees or higher, and with 59% in the primary-school, middle-school and illiterate categories combined, only a small proportion of the population has any chance of qualifying for good service-sector jobs.

Thus, India must focus on manufacturing to make any significant dent in the jobs problem. As documented by NITI Aayog (2017), small firms (those with less than 20 workers) employ 75% of all manufacturing workers, but produce slightly over 10% of all manufacturing output. This implies several-fold higher labour productivity in larger firms. Besides, the average wage of a formal-sector manufacturing worker is six times the average wage in informal-sector enterprises, which are generally small, low-productivity,  unregistered, and exempt from most labour regulations (NITI Aayog, 2017). Thus, good jobs will mainly have to be created in relatively large firms, and mainly those in labour-intensive industries, since that is where output growth is bound to be accompanied by employment growth. The large scale of production is expected to reap economies of scale, leading to higher productivity and wages.

… Agriculture and services cannot be engines of job creation and growth. Therefore, giving up on manufactures and their exports is equivalent to giving up on growth and forsaking the creation of good jobs.

As the introduction to the essay states: “He posits that four factors can help the export-oriented manufacturing model succeed – further labour reforms; the signing and implementation of free trade agreements and establishing special economic zones; and participation in global supply chains. This will allow India to leverage its labour, along with advanced-country technology, to create productive jobs.”

Pankaj Chandra writes on Ideas for India: “Most small firms remain small all their life. In emerging markets, they face three key challenges: capital, relationships, and reach. Small firms compete on variety and small volumes, while a large firm competes on volumes and cost. The former has to innovate at a lower cost, while the latter owns channels of distribution and hence has a better reach in the market. The big question of our times is then: how should small firms compete and especially against large ones? Is there a model of technological development that would allow a small firm to have all its natural advantages as well as those of a large firm (that is, produce variety in small volumes and still be competitive on costs)? I argue that the challenge in India has been our inability to organise small firms as part of a network…This thereby deprives them of the ability to invest scarce capital in building distinctive capabilities; find a mechanism to form ties with competitors on shared services; and of course, be able to become part of large and distributed supply chains. Those that have managed to do so have grown out of their ‘tininess’, provided valuable products and services to their customers and have grown their endowment.”

A New York Times article in June 2022 wrote:

Even as India is projected to have the fastest growth of any major economy this year, the rosy headline figures do not reflect reality for hundreds of millions of Indians. The growth is still not translating into enough jobs for the waves of educated young people who enter the labor force each year. A far larger number of Indians eke out a living in the informal sector, and they have been battered in recent months by high inflation, especially in food prices.

The disconnect is a result of India’s uneven growth, which is powered by the voracious consumption of the country’s upper strata but whose benefits often do not extend beyond the urban middle class.

…“There is a historical disconnect in the Indian growth story, where growth essentially happens without a corresponding increase in employment,” said Mahesh Vyas, the chief executive of the Center for Monitoring Indian Economy, a data research firm.

…For Indian politicians, a high unemployment rate “is not a showstopper,” said Mr. Vyas, the economist, adding that they were far more concerned with inflation, which affects all voters.

…Analysts say [that] greater efforts [are needed] to build up India’s underdeveloped manufacturing sector. They also say that India should ease regulations that often make it difficult to do business, as well as reducing tariffs so manufacturers have an easier time securing components not made in India.

There have been many books in the past few years which discuss India’s past and future roadmap. Here is a sampling:

  • The Struggle and the Promise by Naushad Forbes
  • Unshackling India by Ajay Chhibber and Salman Anees Soz
  • Countdown by Anshuman Tiwari and Anindya Sengupta
  • India 2030 edited by Gautam Chikermane
  • Jobs Crisis in India by R. Jagannathan
  • Reviving Jobs edited by Santosh Mehrotra

So, what does tomorrow hold for India?

Solving India’s Income Problem (Part 6)

Commentary – 3

Praveen Chakravarty wrote in ThePrint (September 2022): “In the decade of the 1980s, every percentage point growth in India’s nominal GDP generated roughly two lakh new formal sector jobs. In the 1990s, every percentage point growth in GDP only generated one lakh jobs and in the 2000s, it fell to half a lakh jobs. To put another way, India’s GDP needs to grow four times as fast to produce the same number of jobs that it did in the 80s. The idea that, qualitatively speaking, GDP growth in the 80s may have been better for the average Indian family than today’s GDP growth, may sound incredulous and even facetious to the elite readers of this column, for who, life is vastly better today than four decades back. To be abundantly clear, I am not arguing for a reversal to the economic policies of the 1980s. But it is also important to be intellectually honest and acknowledge that contemporary economic models are not working for the vast majority of people in terms of improving their incomes and livelihoods. And to be sure, this is not just an India story or an indictment of one political party versus another but a global economic phenomenon, agnostic to political ideology or country.”

A Times of India editorial (October 2022) wrote, shortly after the Indian government had kicked off a recruitment drive for 1 million central government posts: “Unless manufacturing is able to absorb a far larger number of youth trying to get out of barely productive farm work, India will not escape the jobs crisis. Manufacturing’s share in employment has fluctuated around 12% in the last three decades, even though it’s the best phase of economic growth India experienced. Policy attention needs to focus on removing barriers to sectors such as textiles that have the potential to absorb a lot more young, especially women, coming off farms. When encouraging manufacturing, GoI must take employment intensity of the sector into account. In a fast-changing world, multiple reforms must operate simultaneously. Both GoI and states need to enhance the quality of their association with industries to enable quick skilling of young job seekers. Today’s jobs crisis is tomorrow’s social crisis.”

Swaminathan Aiyar wrote in Economic Times (October 2022): “The future lies in services, not manufacturing. This is good news since India has a greater comparative advantage in services than in manufacturing, and should be building on its strengths. Instead, the government seems obsessed with manufacturing and is pouring enormous subsidies into that sector. This is a mistaken priority. The services that require priority are not just high-profile sectors like IT but education and health, and both have been grossly underfunded for decades. Rising subsidies for manufacturing will cut into limited funds for human development… Some may argue that India desperately needs import substitution in manufacturing to reduce the imbalance. The right conclusion is that the trade deficit has worsened despite rising import duties for five years, plus Atmanirbhar and PLI. The approach is not working. The answer is not to pour evermore money into the wrong bucket. Economist Anne Krueger demonstrated decades ago that a dollar invested in export promotion yields more than a dollar invested in import substitution. Becker showed that investing in human capital was the best investment. Those are the right directions in which to go.”

Ajay Shah: “I’m sceptical of the state bureaucracy being able to understand and anticipate which sectors will do well and which sectors will do badly. It is very difficult to forecast the future. Only risk-taking entrepreneurs can take speculative bets, such as saying the computer hardware industry or automobile component manufacturing will do well in India. Who could have predicted that two-wheelers in India would fight off foreign competition pretty well while dozens of other manufacturing businesses would get butchered by foreign competition? It is not feasible for officials in bureaucracies to look at the industrial landscape and make speculative calls. That’s because they do not have the necessary information or the forecasting ability. Nor do they have the incentive, like private businesses do. Also, there is nobody to protect them if their speculation goes wrong; when their speculation goes wrong, they will be investigated by the Central Bureau of Investigation and the Enforcement Directorate. So, which official is ever going to take a risk? For all these reasons, the task of figuring out which sector to focus on is best left to the private sector. The job of the government is to create a broad enabling environment… The competitive advantage of operating in India is that labour is cheap. But it doesn’t mean everything has to be cheap. There will be a variety of inputs that goes into an industry and each firm has to figure out whether it is competitive to operate in India. What policymakers should focus on is just mistakes of public policy. We should focus on things like the way the Companies Act works, the way Indian capital controls work, the way income tax works, the way GST works, etc.”