All the Wrong Turns: Perspectives on the Indian Economy by T.C.A. Ranganathan and T.C.A. Srinivasa Raghavan is yet another book on the deficiencies of formulation and execution of economic policy in India after Independence. The authors, cousins, have written six chapters covering Indian agriculture, manufacturing, international trade, banking, fiscal policy and institutions. The question that led them to write the book was: why does the Indian economy have repeated crises every decade? Their answer, in short, is that the policies are erroneous. This is independent of changes in government. In other words, there is continuity in inappropriate policies.
According to the authors, ever since Independence, Indian policymakers have been obsessed with distribution and equity, rather than with investments and efficiency. India was also, for a long period of its history, inward looking. The policymakers were wary about too much foreign investment choking off and displacing indigenous initiatives. In China, on the other hand, the emphasis put on investments and their efficiency allowed the initial creation of widely available infrastructure like roads and electricity, and new, livable urban spaces, along with a large, skilled work force. Then they allowed foreign companies to invest in China, which took place in plenty. The availability of foreign know-how helped China improve its technological base. Local entrepreneurs became more innovative, adding to the tempo of growth. India, on the other hand, lagged behind in technology and human capital by trying to do too many things in a diffuse fashion.
The discussion on India’s agriculture sector focuses on the fact that in spite of moving from a food deficit country to a food surplus one with a diverse product basket, the sector has been unable to increase productivity. Hence a large part of India’s labour force depends on this sector for low income livelihoods. New technologies have not changed fragmented land holding patterns. Rather, there has been considerable environmental damage in terms of water wastage and soil degradation. Policies that allow political priorities in granting loan waivers, or in providing free water and electricity, have distorted the incentive structure in the agricultural sector. The manufacturing sector, according to the authors, has been the worst performer with dependence on medium and low technology in spite of 70 years of independent growth. The difficulty of land acquisition has been a major obstacle in setting up modern industries. Industry has been marked by sickness owing to lack of bankruptcy rules. The sector has not been able to create adequate jobs even though it is not characterized by labour displacing high-tech. The State has always tried to retain some form of control over this sector and the opportunistic behaviour of entrepreneurs and politicians have resulted in the search for short-term profits rather than long-term growth.
As far as international trade is concerned, there has always been, even after liberalization, a cautious approach to foreign investments and imports. Exports have not grown in the desired directions, barring the high-tech information technology-enabled services exports. In terms of volume, small sector products have remained the mainstay of exports. Even in relatively low technology-intensive products like textiles, India has lagged behind. India is the third largest exporter of yarn behind China and the European Union, but sixth in finished apparel exports, ranking behind much smaller countries like Bangladesh, Vietnam and Hong Kong. Exports have always suffered from inadequate availability of supporting export-specific infrastructure.
The Indian financial sector has a complicated structure with a variety of banks. The State has no expectations from private banks and foreign banks. However, the State expects much development effort from the public sector banks, cooperative banks and regional rural banks. There is an emphasis on low cost credit solutions for the poor leading to financial inclusion. The State’s interference and collusive behaviour with many entrepreneurs have led to the massive problem of non-performing assets. Over the years, there has been an increase in the productive sector’s dependence on banks for working capital as well as capital expenditure. Bond and equity markets have not grown to the desired extent. From the central bank’s point of view, the overdependence on fiscal policy as a political tool used for the distribution of government largesse has diminished the effectiveness of monetary policy laid down by the central bank. Modern theories of economic development lay great emphasis on the importance of institutions and their relative independence from political interference in a democracy. The final chapter of the book touches upon the ineffectiveness and erosion of institutions either through political controls or through inappropriate functioning.
The book contains rich information about major economic events and policies in India since Independence and provides insightful critiques of many of those policies. The book also contains numerous international comparisons, especially with the economic policies of China.The authors stress the fact that economic policies in India lack focus because political priorities get precedence over economic wisdom, or policies are often made by Western educated economists who are unfamiliar with the Indian context. However, such a critique based on the relevance of context cannot be enriched by comparisons with other nations, precisely because the contexts in other nations are different from that of India’s. The five trillion-dollar question of what the policymakers should do now remains unanswered.
All the Wrong Turns: Perspectives on the Indian Economy by T.C.A. Ranganathan and T.C.A. Srinivasa Raghavan, Tranquebar, Rs 799
