Jagdish Bhagwati and Arvind Panagariya have done yeoman service to administrators, economists and politicians by bringing out an extremely well-researched book, Why Growth Matters, that gives an eclectic perspective on India’s efforts at economic growth. The exploding of certain myths and criticisms of India’s trajectory of development should not be taken as a certificate of excellent performance by the government. In fact, far from it, as the authors have not in any way concluded that India’s performance is anything to be proud of, at least in the first four decades after independence.

The book has also produced acrimony, as certain critical references to Nobel laureate Amartya Sen’s views—on the need for poverty alleviation, promotion of literacy and good health taking precedence in policies relating to growth—have led to avoidable exchanges between him and Bhagwati in The Economist, both being great friends of the country.

According to the authors, India’s march towards economic growth started really after the 1991 reforms were initiated, even though there were some feeble attempts at opening the economy toward the end of the Indira Gandhi regime. Academicians dispute as to when it began, although it means very little, except to show that even very weak attempts at liberalisation were reflected in higher GDP during 1981-88.

In chapter after chapter in the first part of the book the two have tried to answer the various criticisms that India pursued growth in its five-year plans, sacrificing poverty alleviation. There are extensive references and quotes that show that Indian planners and statesmen, while emphasising the importance of economic growth, did not neglect poverty reduction or the social sectors of health and education, as they considered growth “essentially as a strategy to achieve social objectives”.

Bhagwati and Panagariya have taken pains to refer to various objectives of the five year plans in regard to literacy, agricultural production, nutrition, increase in life expectancy, etc. The authors’ conclusion is that progress was inhibited in these areas by slow growth. In other words, they have turned the table in asserting that high GDP growth results in the development of all social sectors.

Their assertion may be only partially correct as investment in social sectors comes by and large from the government. The authors say growth has led to substantial increase in state revenues, which enables it to spend more on the social sectors. To this extent they are correct but it must also be kept in mind that the budget of the government of India has not shown a revenue surplus or a zero fiscal deficit in the last several decades.

In contrast, state governments in recent times have by and large been able to contain revenue deficits and even muster surpluses. Many of them are frittering away their resources on fanciful supposedly vote catching schemes rather than on growth-oriented schemes. Bhagwati and Panagariya could have done well to review the performance of state governments in promoting growth to buttress their case.

Endogenous growth economists have shown that there is a positive relationship between investment in human capital and economic growth. Even now, the developed countries spend over five per cent of GDP on education. There is a serious attempt at educational reform in the US and the UK. Malaysia never spent less than 3.8 per cent of GDP on education, which now is over five per cent. Other Asian tigers also laid emphasis on education in the early period of growth. Their expenditure on health was no less.

The census data for the year 2011 shows Kerala has the highest literacy level at 93.9 per cent. But both Sen and the authors ignore the fact that the people of Kerala are recipients of massive foreign remittances from relatives working abroad and that there are no perceivable initiatives for the state to become industrially developed.

India, in comparison, is still struggling to get past four per cent of GDP as annual outlay on education while the government did not hesitate to promise several billion dollars to the chronically inefficient Air India. It was education and health programmes in Kerala and Tamil Nadu that encouraged people to have small families. Their net reproductive rates now are less than 2. The states with very poor literacy and health facilities are the BIMARU states, and they are also the least developed.

The authors fail to see the symbiotic relationship between growth and better literacy and health among a country’s population. While they do acknowledge that growth requires skilled labour and the manufacturing sector has to grow more than has happened in India, their thesis appears to overlook the fact that availability of skilled labour and the talent to manage industrial growth depends on investments in education and health.

Bhagwati and Panagariya have gone to some length in their effort to repudiate Amartya Sen’s observation on a “Kerala model” on the basis of expenditure and income data. They have compared literacy levels in Kerala, Gujarat, Maharashtra, and for India as a whole for certain periods to establish that Kerala has not done as well as claimed.

The census data for the year 2011 shows Kerala has the highest literacy level at 93.9 per cent, Gujarat at 79.3 per cent, Maharashtra at 82.9 per cent, and India as a whole at 74.04 per cent. But both Sen and the authors ignore the fact that the people of Kerala are recipients of massive foreign remittances from relatives working abroad and that there are no perceivable initiatives for the state to become industrially developed.

Kerala is dependent on food imports from other states. It has huge labour problems and investors shudder at the thought of setting up any industry there. Therefore the reference to Kerala establishes only one point, that high literacy and health levels have helped its people to seek employment in the wide world when jobs within the state are limited. It is not clear what Bhagwati and Panagariya want to convey by their repudiation of the Kerala model, as it is also hard to understand whether there is a Kerala model at all to follow for the economic growth of the country as a whole.

On the question of poverty reduction they have strongly defended the Planning Commission on its poverty line of ₹32 for urban areas. While their earlier criticisms or defence of various government policies are argued logically, Bhagwati and Panagariya fail the logic test in this particular case. They have not asked whether ₹32, taken as average money requirement per day is sufficient for food, clothing, shelter, education, health, etc . for an individual in a city. Is it because an economist heads the commission and it was another economist who laid down the norm?

It is irrefutable that if India had paid as much attention to education and health as the east Asian countries in the early stages of development, its population would have been lower and skill availability much higher. The authors have ignored the fact that in the first two decades of five year plans, while there were pious intentions all round, the enforcement of plans and programmes left much to be desired.

The book overlooks the fact that the Indian government just emulated the example of immediate post-war (West) Europe, when the government was behind most industries.

Hundreds of crores of rupees were spent on soil conservation, ayacut development, and bunding of small rivers for irrigation and even consolidation of land holdings. Had they been implemented and the assets maintained well the agricultural productivity in this country would have been at world class levels. The states have neglected to spend enough on maintenance of the capital works created despite the fact that all the 13 finance commissions have pointed out this glaring omission by them. Why Growth Matters has ignored these management failures of the State.

In the 1970s, the country turned to socialism with the nationalisation of banks, coalmines, insurance and oil companies as a means to achieve its twin goals of growth and poverty alleviation. The book rightly states that this was unsustainable “with per capita incomes rising just 0.3 per cent annually between 1965 and 1975”. This “tsunami” of socialist measures drowned the prospects for rapid economic growth in India.

But the book overlooks the fact that the Indian government just emulated the example of immediate post-war (western) Europe, when the government was behind most industries.

There is no denying, however that the period between 1951 and 1974 was also a period of high growth rates in these countries.

In India, there was a failure of management, by politicians and bureaucrats, of the assets acquired through the new paradigm, nationalisation of industries and banks. The authors have by-passed this ingrained infirmity in India’s governance systems.

The first part of the book seems to be a repudiation of Amartya Sen’s stand that India should give priority to improvements in education and health. This quarrel appears to be unnecessary as in the current scheme of things the government of India is setting apart increasing amounts year after year to these two sectors.

Part II has more substantial food for thought for politicians, planners and administrators. Economic growth in India has not made any significant change in the contribution of the manufacturing sector to GDP. Comparing India and China, Bhagwati and Panagariya point to the multitude of restrictive labour laws that have incentivised the setting up of small scale units employing fewer than 10 workers. This has led to gross inefficiencies in production.

In the textile sector India has lost markets to Bangladesh and Vietnam because the industry is cluttered with very small units, unlike China or Bangladesh where thousands are employed by one single manufacturer.

To quote, “The law in the most urgent need of reforms is the 1947 Industrial Disputes Act. This legislation is stacked too heavily against the employers to leave sufficient incentive for a massive expansion of employment intensive sectors. With wages in China reaching levels at which it will be forced out of these sectors, India is well positioned to become the world’s manufacturing hub. But if the costs of employment remain as they are, that opportunity is likely to be seized by a large number of smaller countries such as Vietnam and Bangladesh.” Will the country act or will every government bring in only such legislation to capture a vote bank?

The authors should have also pointed out the thirst for acquiring foreign companies by Indian investors. Indian investment abroad now exceeds $100 billion, the returns on which are yet to be ascertained by the authorities. There is also a huge Indian guarantee behind these investments. In spite of the reform thrust, why did Indian investors go to graze pastures abroad?

The book provides a clear analysis of the efforts and failures at building infrastructure. It will benefit everyone if the government accepts the advice to privatise Air India, a behemoth that benefits only the excessively paid flight crew, the cost of their privileges, and probably the commissions that are clandestinely paid when aircraft worth billions of dollars are purchased. Strangely the opposition, which raises a ruckus on even trivial issues, has glossed over the CAG report on Air India, perhaps to reserve some space for themselves. But it is a pity that in such areas the book is silent on the loss to the economy.

On track II reforms, both Bhagwati and Panagariya seem to be obsessed with cash transfers to the poor, as anything transferred in kind may be sold in the market and the beneficiary may use the cash as he/she pleases. They object even to child-specific vouchers for education and vouchers for health care services as these could also be cashed by a collusive arrangement with the providers.

By and large in India, education for the poor has been free in all government and local body schools. This has been reinforced by the Right to Education Act of 2009 which gives the right of free education to all children between the ages of six and 14. The authors, however, condemn it as “pernicious” at one level.

According to them, it is not possible to implement as “state and local governments in India lack the capacity to enforce such a requirement”. Elsewhere, they say “it is a purely redistribution measure that gives the children from weak and disadvantaged families access to high quality private schools. While this is a worthy objective, its promotion as a right-to-education measure misleads”.

Certain sentences make little sense, for instance, “The poor and the disadvantaged who are nevertheless rich or lucky enough to live in areas where quality schools exist will gain access to such schools”. Naturally those who do not live in such areas will not have this facility. But it is no argument to say that those who could should also be denied the facility.

The alternative suggested is for the government to offer to cover the entire cost of education of the entitled poor in private schools and not allow any cross-subsidisation. This writer, having been chairman of one of the most prestigious public schools in India, knows there is enough profit in running these schools that the burden could be easily met as a matter of corporate social responsibility.

Contradicting themselves, they also suggest the issue of vouchers worth the per capita expenditure in public schools to the children and have them find a private school of their choice. Cash transfer figures as a preferred alternative to many forms of help in their book.

The immediate net result of these welfare measures is an expenditure of several billions of dollars, impacting the already strained budget of the government of India. Neither their bete noire Amartya Sen, nor Bhagwati and Panagriya, have referred to the UK’s Speenhamland Law of 1795 which assured a minimum income to the poor irrespective of their earnings.

The consequences of this law intended to protect the poor have been described by Karl Polanyi in his book The Great Transformation. “The outcome was merely the pauperisation of the masses, which almost lost their human shape in the process”.

There is already a growing complaint that the freebies being doled out in a competitive manner by one state after another in the pursuit of votes is causing a shortage of labour and also killing initiative among rural youth to learn new skills. It is hoped that government policies will be designed in a manner that promotes rapid growth and have enough measures to take care of the poor and underprivileged, but are not sold on one or other ideology propounded by famous economists, particularly at a time when economic theories are being revisited for their practical utility.

The unseemly controversy that has emerged now between Jagdish Bhagwati and Amartya Sen will, unfortunately, create more uncertainties in government decision-making, which is already beleaguered by scams and criticisms.

Why Growth Matters
by Jagdish Bhagwati and Arvind Panagariya
Public Affairs
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