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Which India Matters?

Jonas Bendiksen/Magnum Photos
A man hammering inks and dyes rejected from nearby factories into powder that can then be resold, Mumbai, India, 2006

In 1961, soon after arriving in Japan as the American ambassador, Edwin O. Reischauer held a public conversation with the Japanese economist Nakayama Ichiro.1 Their differences of perception illuminate many dilemmas of a developing nation like India today. The American diplomat, a particularly sanguine exponent of “Modernization Theory,” believed that rapid economic growth was well on its way to making Japan a Western-style developed nation and a model for other non-Communist Asian countries. The Japanese economist worried that economic growth that didn’t take account of the social and political changes accompanying it was unhealthy, and created more problems than it solved.

Like all modernizing countries with large rural populations, such as India and China, Japan was hobbled by an economy with two distinct sectors: one was defined by modern technology, a high ratio of capital to labor, and high worker productivity and wages; the other had all the opposite traits. Rapid, unbalanced economic growth aggravated the innate inequities of the “dual structure,” which in Nakayama’s vision had serious political consequences. Countries that develop without drawing large parts of the rural population into the modern sectors of the economy were prone to social unrest and authoritarian regimes. Nakayama knew this from bitter experience of the war that Japan, beset by severe internal crises in the 1930s, had subsequently waged against many Asian countries and the United States.2 Accordingly, he was keen to see postwar Japan develop an open, egalitarian, and pacifist democracy.

Largely due to the macroeconomic approach of Nakayama and his colleagues, which emphasized labor over capital productivity and technical training for people moving out of the agrarian economy, Japan achieved sustained growth for close to two decades.3 Helped considerably by American procurements during the Korean War and infusions afterward of aid, investment, and technological innovations, Japan then turned into a major exporter of goods and capital to East and Southeast Asia.4 Japan also became an example to the region with its land reforms, industrial policy, well-designed state intervention in markets, investments in education and health, which created a skilled and productive labor force, and economic nationalism—the features that when carefully adopted helped in the remarkable economic emergence of such countries as South Korea, Singapore, Taiwan, and Thailand.5

Most of these developing states in East and Southeast Asia, however, came late to electoral democracy. India’s own, much greater, challenges in the previous half-century are highlighted by the fact that this bewilderingly diverse and oppressively hierarchical society set out in the late 1940s to simultaneously build, without possessing much basis for either, an egalitarian democracy and a modern industrial economy.6 Decades of colonial rule had damaged India, saddling it by 1947 with an underproductive agricultural economy, a weak industrial base, and extremely low levels of literacy (27 percent for men, 9 for women).7 Even more urgently than their counterparts in Japan or South Korea, Indian leaders had to be sensitive to the needs of the poor, especially those among the low castes, and improve their capacities to build the basis for both an equitable society and sustained economic growth.

In the early decades, India did make some gains in heavy industry and agriculture.8 Investments in higher education created, among other things, generations of highly skilled upper-caste Indians, many of whom can be found today in senior corporate and university positions in the West.9 Poverty failed to decline appreciably despite Indian economic planners’ obsession with growth. As the Columbia University economist Jagdish Bhagwati put it, looking back in 1985 at his work in the 1960s with India’s Planning Commission, their “basic theme, i.e. growth with a view to eliminating poverty” was “too optimistic.”10

Long-term investments in education and public health were needed. But in these primary tasks, India’s rulers failed disastrously. Their “breathtakingly conservative” approach to social services can be blamed, as Amartya Sen has often argued, on “the elitist character of Indian society and politics.” “Democracy in India,” B.R. Ambedkar, the leader of India’s low-caste Hindus and the main author of India’s constitution, famously warned, “is only a top dressing on an Indian soil, which is essentially undemocratic.” Certainly, for people who claimed to be, and are still often mistakenly derided, as “socialist,”11 India’s rulers neither matched the educational accomplishments of some socialist countries, nor did they help unleash, like their counterparts in South Korea and Japan, entrepreneurial energies in the country’s protected private sector, which accounted for the bulk of manufacturing output.12 Instead of making the public sector more accountable, they imposed, as Bhagwati has often lamented, irrational restrictions on business, spawning the “license-permit Raj” that mostly enriched corrupt politicians and officials.

The liberalization of the Indian economy in 1991, and successive governments’ increased business-friendliness, inspired fresh hopes that India’s extreme inequalities could be alleviated. India’s economy had grown, moving from a rate of 5 percent in the 1980s to nearly 10 percent until slowing down dramatically to less than half that rate in recent months. In India in Transition: Freeing the Economy (1993), Bhagwati was among the first to hail his old college friend Prime Minister Manmohan Singh, then the finance minister, for leading India to a fresh “tryst with destiny.” By then Bhagwati had turned into, in his own words, the “world’s foremost free-trader.” Claiming to be the intellectual inspiration behind the 1991 reforms, he declared, “We are finally in the spring of hope.”13

The period after 1991 did manifest some vivid and impressive signs of India’s transformation by consumer capitalism. Helped by cheap credit, Western brands finally became accessible to a middle class long starved of them by an economic regime that substituted Indian products for imports. Many of India’s old corporate families, such as Tata, acquired major international companies. The potential size of India’s market—1.2 billion consumers—managed to provoke a great deal of hype among hopeful businessmen, boosterish investment consultants, financial journalists, and day-tripping columnists in the West. (Interestingly, Chinese commentators and investors as- sessed India’s progress much more soberly.)

Yet today India’s economy manifests more serious impediments to widespread growth than any of the other Asian economies. Economic growth has been led by the services sector—a loose category that includes information technology, telecommunications, banking, and real estate and contributes nearly 50 percent to the GDP—rather than manufacturing, which has powered the growth of other East Asian economies.14 Agriculture, which still employs a majority of India’s population, remains stagnant.15 A small, well-educated workforce enjoys rising salaries, but there have been only very small increases in wages and productivity for people trapped in the bottom half of the dual economy: agriculture and the so-called “informal” or unorganized sector, which employ more than 90 percent of India’s labor force.16

“The bulk of India’s aggregate growth,” the Cornell economist Kaushik Basu warns, “is occurring through a disproportionate rise in the incomes at the upper end of the income ladder.”17 By 2010 India’s one hundred wealthiest people had increased their combined worth to $300 billion, a quarter of the country’s GDP. Recent corruption scandals involving the sale of billions of dollars’ worth of national resources such as mines, forests, land, water, and telecom spectrums reveal that crony capitalism and rent-seeking, rather than entrepreneurial dynamism and innovation in a free market, are the real engines of India’s economic growth.

Furthermore, to a large extent this growth does not create jobs—an alarming fact about an overwhelmingly youthful country that adds 12 million to the workforce each year and whose present economic pattern obliges it to move many millions more to urban areas from a crisis-ridden agricultural sector where hundreds of thousands of farmers have committed suicide in recent years. According to a widely cited report by Michael Walton, an economist at Harvard University, the quality and distribution of India’s rate of GDP growth are structurally “disequalizing,” i.e., causing more inequality. It’s not only that India isn’t “overflowing with Horatio Alger stories,” as The Wall Street Journal put it. It is also developing all the ingredients necessary for a Latin American–style oligarchy.

Why Growth Matters, however, is a passionate case for more privatization and liberalization, and less protection for labor. Bhagwati and Arvind Panagariya, who holds a professorial chair named after his coauthor at Columbia, claim that India has already been transformed “from a basket case into a powerful engine of growth.” They are convinced that faster growth and freer markets remain the best remedy for poverty, inequality, pollution, and ill-health.

A contrasting view—that “there is something defective in India’s ‘path to development’”—and a very different list of priorities appear in An Uncertain Glory: India and Its Contradictions. Amartya Sen and his frequent collaborator, the Belgian-Indian economist Jean Drèze, acknowledge that aggregate economic growth is important for generating public revenue, which can be used to reduce poverty. But “it is only one of many different concerns that need attention.”

Amartya Sen has never wavered from his belief that, as he wrote in these pages in 1983, “growth rate is a very daft—and a deeply alienated—way of judging economic progress.” Sen and Drèze warned as early as 1995 that reforms that boost growth, though important, were not enough to improve the living conditions of the poorest, let alone dismantle caste and gender hierarchies and generate employment. They “have to be supplemented,” they wrote, “by a radical shift in public policy in education and health.”18 Brazil, for instance, grew only 1 percent compared to India’s 5 percent from 1993 to 2005 but reduced poverty much faster. Bangladesh, which is only half as rich as India measured by per capita income, now exceeds India in, among other social indicators, life expectancy, child mortality, and immunization. And China, by investing a greater proportion of its revenue in education, health, and nutrition, has created a more solid basis for economic growth—although Sen has often pointed out that under China’s authoritarian system, in which public criticism is suppressed, such catastrophes as the death of over 30 million people by famine could take place.19

Hoping to present material for “informed and reasoned public engagement,” Sen and Drèze carefully explain such issues as health care, education, corruption, lack of accountability, growing inequality, and their suppression in India’s elite-dominated public space. It is only the poor record and capacity of the Indian government that make one question their advocacy of urgent state action on behalf of the poor.

The 2011 census revealed that half of all Indian households have to practice open defecation. Nearly half of all Indian children are underweight (compared to 25 percent in sub-Saharan Africa), and as Sen and Drèze point out, despite a rise in literacy rates, “a large proportion” of them “learn very little at school.” Almost all Indians buy health services from private providers, exposing themselves to crippling debt as well as quackery. Inequalities have widened between classes, regions, and rural and urban areas. More worryingly, they seem unbridgeable owing to the lack of adequate education and public health. Not surprisingly, poverty declines very slowly in India, slower than in Nepal and Bangladesh, and unevenly.20 Calorie and protein intake among the poor has actually dropped.21

  1. 1

    For a fascinating discussion of the challenges confronting postwar Japanese economists, see Laura E. Hein, “In Search of Peace and Democracy: Japanese Economic Debate in Political Context,” The Journal of Asian Studies, Vol. 53, No. 3 (August 1994). 

  2. 2

    Nakayama suspected that the ruling elite’s pathology of endless growth had led his country into domestic repression and external aggression. Reischauer, like all teleological-minded modernizers, was inclined to see Japan’s aggression as a blip on its way to the modern world, one caused by bad decision-making and aberrant militarism. Such a view was in line with the American attempt to present Japan as an exemplar of benign Westernization to non-Communist Asia during the height of the cold war. This “normalization” of Japan extended to whitewashing the war crimes of Emperor Hirohito. Many scholars of pre-1945 Japan did not buy the “Reischauer Line,” as the evolutionary modernization argument was subsequently called. An early and prominent dissenter was the Canadian diplomat E.H. Norman, who pointed to the facts of uneven development and widespread poverty in pre-war Japan. See John W. Dower, “E.H. Norman, Japan, and the Uses of History” in Ways of Forgetting, Ways of Remembering: Japan in the Modern World (New Press, 2012). 

  3. 3

    The debate between Reischauer and Nakayama took place just before economic growth in Japan began to reveal its costs, provoking a strong “down with GNP ” protest movement. Environmental spoliation and urban overcrowding on a large scale mocked the original goal of raising living standards. The “dualism” Nakayama feared did vanish, but it reincarnated itself in gaps between permanent and temporary jobs, male and female workforces. 

  4. 4

    A classic account of Japan’s economic rise is Chalmers Johnson, MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975 (Stanford University Press, 1982). 

  5. 5

    For an insightful analysis, see the articles in The Political Economy of the New Asian Industrialism, edited by Frederic C. Deyo (Cornell University Press, 1987), especially the one by Bruce Cumings. A more journalistic and contemporary account is in Joe Studwell, How Asia Works: Success and Failure in the World’s Most Dynamic Region (Grove, 2013). 

  6. 6

    The uniqueness of this experience is best illustrated by the fact that much of Europe introduced universal suffrage and social welfare programs in the early twentieth century after building a capitalist and industrial economy, constructing a bureaucratic state, and achieving a degree of prosperity. Democracy in India, promulgated before the preconditions for it existed, has seemed to hamper both economic growth and national cohesion—one reason why many in the country’s middle classes revere such authoritarian figures as Singapore’s Lee Kuan Yew. 

  7. 7

    Much scholarship has been devoted to the destruction of India’s vibrant eighteenth-century economy by British imperialists. Some new evidence is presented in Prasannan Parthasarathi, Why Europe Grew Rich and Asia Did Not: Global Economic Divergence, 1600–1850 (Cambridge University Press, 2011). 

  8. 8

    Deepak Nayyar argues that India’s economic performance in the 1950s, 1960s, and 1970s was a great departure from the past, and not much inferior to that of comparative countries. See Deepak Nayyar, “India’s Unfinished Journey: Transforming Growth into Development” Modern Asian Studies, Vol. 40, No. 3 (July 2006). For a panoramic account, see Stuart Corbridge, “The Political Economy of India since Independence” in Routledge Handbook of South Asian Politics: India, Pakistan, Bangladesh, Sri Lanka, and Nepal, edited by Paul R. Brass (Routledge, 2010). 

  9. 9

    For a full account of the making of this elite that the writer Vijay Prashad calls “twice blessed,” first by India’s world-class institutions and then by immigration reform in the United States, see Anita Raghavan, The Billionaire’s Apprentice: The Rise of the Indian-American Elite and the Fall of the Galleon Hedge Fund (Business Plus, 2013). 

  10. 10

    Dependence and Interdependence: Essays in Development Economics, Vol. 2, edited by Jagdish Bhagwati and Gene M. Grossman (Basil Blackwell, 1985). 

  11. 11

    For a skeptical view of Indian “socialism,” see Kaushik Basu, “The Enigma of India’s Arrival: A Review of Arvind Virmani’s Propelling India: From Socialist Stagnation to Global Power,” Journal of Economic Literature, Vol. 46, No. 2 (June 2008). 

  12. 12

    The “socialist” Indian state is commonly blamed for putting India’s economy into a protective straitjacket, and for a feeble industrial policy that led to India’s failure to capitalize, along with East Asian economies, on the new openings for world trade in the 1970s. Vivek Chibber, among others, has argued that Indian industrialists successfully campaigned against state-led development of the kind South Korea benefited from. See Locked in Place: State-Building and Late Industrialization in India (Princeton University Press, 2003). 

  13. 13

    Bhagwati helped seed the euphoric notion—commonplace now among most commentators on South Asia—that India began to move out of decades of socialist stagnation after seeing in 1991 the light of free trade and globalization. In fact, growth had started accelerating in the 1980s, helped by the government’s pro-business reforms. Irrational exuberance in the West, and effective networking at such forums as Davos by Indian politicians and corporate chieftains, account for the breathless and repetitive descriptions of India as a “tiger” economy in recent years. There was little reason to compare it to China’s immensely larger, more productive, and broad-based economy. 

  14. 14

    The overall share of manufacturing in the GDP has stagnated at 16 percent. It partly accounts for India’s tiny 1.4 percent share of world trade, compared to China’s 15 percent. 

  15. 15

    Despite its serious flaws, China has managed relatively smoothly its structural transformation from an agrarian to an urban, labor-intensive economy. In India, jobs in manufacturing as well as agriculture have actually shrunk in the previous decade. The construction sector has absorbed many of the displaced job-seekers, but they will be unemployed again when the real estate boom ends. See Hans P. Binswanger-Mkhize, “The Stunted Structural Transformation of the Indian Economy,” The Economic and Political Weekly, June 29, 2013. 

  16. 16

    Wages in China’s manufacturing sector have grown by 12 percent since 2000, compared with 2.5 percent in India. There are also more workers without social security than before in India’s organized industrial sector. Thus, economic growth has not benefitted even employed workers, let alone the vast majority of the unemployed and unemployable. See Himanshu, “Growth Versus Redistribution,” Mint, July 19, 2013. The social anthropologist Jan Breman, a long-standing observer of India’s uniquely large “informal economy,” writes perceptively in his new book about the abysmal working conditions of the poor in Gujarat, a high-growth state. See At Work in the Informal Economy of India: A Perspective from the Bottom Up (Oxford University Press, 2013). 

  17. 17

    Basu is a former economic adviser to the Indian prime minister Manmohan Singh. See his “India’s Dilemmas: The Political Economy of Policymaking in a Globalised World,” The Economic and Political Weekly (February 2–8, 2008). 

  18. 18

    See India: Economic Development and Social Opportunity (Oxford University Press, 1996), p. 16. 

  19. 19

    See his essay “Press Freedom: Who Is It Good For?,” to be published in the autumn issue of Index on Censorship

  20. 20

    The measurement and estimates of poverty are vigorously contested. But it is fair to say that by even the most conservative estimate, the absolute number of poor in India is enormous, and may exceed the entire population of the United States. See Sabina Alkire and Suman Seth, “Multidimensional Poverty Reduction in India between 1999 and 2006: Where and How?,” Oxford Poverty and Human Development Initiative Working Paper No. 60, March 2013. Increasing inequality only slows down the rate of poverty reduction. See Himanshu, “Poverty and Inequality in India–II: Widening Disparities during the 1990s,” The Economic and Political Weekly, Vol. 39, No. 39 ( September 25–October 1, 2004). 

  21. 21

    See Harsh Mander, Ash in the Belly: India’s Unfinished Battle against Hunger (New Delhi: Penguin, 2012). 

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