India - The emerging giant, or has it emerged?

The latest book by Prof. Arvind Panagariya, India: The Emerging Giant (Oxford University Press, 2008), has generated ample interest among the academia and policy makers, both in India and abroad. This is of course expected.

As The Economist in its March 8, 2008, issue observed, for publishers, India's emergence has become something of an emerging market in its own right. The present piece flags some issues that come out as reflection triggered by the book.

Panagariya's book is a worthy sequel to the works of Professors Jagdish Bhagwati, Padma Desai, and T N Srinivasan. The successes (as well as their absence) since the 1990s have been documented in great detail, presenting his original evidence in addition to surveying the existing body of works.

However, as admitted by the author himself, the book, out of necessity, loses out on some of the situational complexity - particularly regional dimensions of the economy. Nevertheless, the book comes out as an outstanding contribution to the literature on India's economic development.

Panagariya periodises GDP growth experience in four phases (with growth rates in parentheses): (i) 1951-1965 (4.1%), (ii) 1965-1981 (3.2%), (iii) 1981-1988 (4.8%), and (iv) 1988-2006 (6.3%).

The growth debacle during 1965-1981 has been a particularly interesting theme of Panagariya. How worse is Phase II vis-a-vis Phase I, in view of the fact that Phase II had been full of crises like droughts, the Bangladesh war, and the oil price shock? Panagariya thinks it would be wrong to absolve the economic policies during the period for several reasons.

First, during 1965-75, the world economy grew more rapidly and generated growth opportunities for developing countries.

Second, India stands in sharp contrast to similarly placed countries at that stage.

Third, with savings and investment growing substantially, the decline in growth indicated lack of productivity growth.

Finally, the tightening of controls in this period, including through the enactment of the Urban Land Ceiling Act, the amendments to the Industrial Disputes Act and bank nationalisation, had an adverse effect on growth in the long run.

While Panagariya's basic contention on the detrimental effect of controls in the Indian economy could be true, it would be interesting to see how the growth rate of Period II would fare without the crisis years (1965-67).

The deleterious impact of the controls introduced in Phase II is now widely recognised, but the question remains: Were all policy outcomes of Phase II necessarily unwelcome?

Just to mention two specifics. First, the Green Revolution, which was operationalised during this period, made a sea change in India's food production. The introduction of high-yielding varieties of seeds after 1965, increased use of fertilisers and improved irrigation made possible the much-needed increase in production to make India self-sufficient in foodgrains.

Second, while from the vantage point of the 21st century the positive outcomes of bank nationalisation may not be self-evident, the opening of bank branches in un-banked locations seemed to have been, in part, responsible for diversification into non-agricultural production and employment, as documented by Rohini Pande and Robin Burgess, with whom Panagariya has his points of difference.

This could be suggestive of the fact that lack of access to credit has been an impediment to further structural change and poverty reduction in India. Surprisingly, Sukhamoy Chakravarty's Development Planning: The Indian Experience (1987), which documented the Indian planning experience in great detail, is conspicuously missing from an otherwise impressive bibliography in Panagariya's book.

Panagariya postulates that there are limits to poverty alleviation through greater agricultural employment, currently at around 60 per cent of the total labour force. Thus, for effective poverty eradication, agricultural employment needs to shift to industry or services.

Moreover, the adage "rural = agriculture" is no longer valid for a country like India. Non-farm rural activities, employment and consequently incomes have been increasing over the years and an increase in urban expenditure is often associated with an increase in rural non-farm employment.

One of the side effects of economic reforms launched in 1991 was the rapid increase in income inequality with the rich getting richer faster than ever before. Recent works at the IMF (e.g. "India: Is the Rising Tide Lifting All Boats?" Petia Topalova, IMF Working Paper, March 2008) show conclusively that, in the 1990s, the richest few percentiles of the population enjoyed a larger share of the gains from economic growth compared to the previous decade.

This had significant effects on income inequalities, within states, across states, and between rural and urban areas. India has now contributed, along with China and Russia, 40 per cent of the global growth. Nevertheless, to maintain this growth momentum, India's growth strategy would need a reorientation with focus on agriculture.

The book interestingly places tackling subsidies and civil service reform in the same chapter. Is it to convey the impression that the Indian civil service is a subsidy programme in itself? As an ex-civil servant, my own views on the subject may be considered less than objective.

Nevertheless, I found Panagariya's discussion rather one-sided. Civil service is an essential part of the structure and mechanism of any modern state. Undoubtedly civil service and public sector reform is the one area of structural reform which successive governments in India have not seriously attempted.

Panagariya recalls some political practitioners on the subject to show how the civil service could tie the system in knots. Compared to international experience, there are areas, such as the management of the natural disasters and management of logistics and all other elements of a huge electoral exercise in the world's largest democracy, besides implementation of politically agreed reforms themselves, where the civil service has fulfilled its responsibilities effectively.

India's efforts at fiscal consolidation and tax reforms - both at the Centre and the states - have been impressive. The FRBM targets are expected to be achieved. Referring to the work of Willem Buiter and Urjit Patel, Panagariya strikes a note of caution on the need to continue to observe fiscal restraint - "tying Ulysses to the mast lest the siren song of fiscal retrenchment...tomorrow but fiscal expansion today...continue to lead the policy makers astray." ("Excessive Budget Deficits, a Government abused Financial System and Fiscal Rules", Indian Policy Forum, 2,1-38).

Stephen Cohen remarked, "One is...tempted to ask whether India is destined always to be 'emerging' but never actually arriving" (India: Emerging Power, Brookings Institution, 2001). Judged by this, one would love to see the book titled 'India: The Emerged Giant'. Hopefully, Panagariya would be writing such a book in the future. For now, though one would tend to agree with Panagariya's assessment, the full emergence of India is awaited with efforts to rev up the economy and strengthen the process of inclusion with widening opportunities and narrowing inequalities. After all, it would not be Quixotic to attempt at "reaching for the unreachable stars".

The author is Executive Director for India, Sri Lanka, Bangladesh and Bhutan at the International Monetary Fund, Washington D.C.