The New York Review of Books, 21 November 2013

Which India Matters?

Pankaj Mishra

An Uncertain Glory: India and Its Contradictions by Jean Drèze and Amartya Sen Princeton University Press, 434 pp., $29.95

Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries by Jagdish Bhagwati and Arvind Panagariya PublicAffairs, 280 pp., $28.99

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.â€

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

“India today,†the historian Ramachandra Guha writes, “is an environmental basket-case; marked by polluted skies, dead rivers, falling water-tables, ever-increasing amounts of untreated wastes, disappearing forests.†22 Meanwhile, as Sen and Drèze write, the largely corporate-owned media, deeply indifferent to poverty and inequality, and reflexively intolerant of any remedial action by the government, produce “an unreal picture of the lives of Indians in general†by celebrating the fame and wealth of billionaires and cricket and Bollywood stars.

Indeed, perennially aggrieved columnists and TV anchors have a crucial part in “the deeper drama in India,†according to the political scientist Atul Kohli in Poverty Amid Plenty in the New India (2012). That drama is one of an elite that expands and is entrenching itself. Increasingly impatient with the rules and ethics of democracy, India’s ruling class today consists, as C. Rammanohar Reddy, editor of The Economic and Political Weekly, defines it, “of large Indian businesses, the new entrepreneurs in real estate, finance, and IT, the upper segment of the urban middle classes, the upper echelons among the bureaucracy, and even large sections of the media.â€

What’s immediately striking about this class of the relatively affluent is the degree to which it shares the same interests and beliefs, and its reflexive hostility to government spending on welfare—although political parties feel particularly obliged to indulge in such spending before elections.23 But the conservative rhetoric about buoyantly self-reliant entrepreneurs hides the fact that, as Kohli writes, the Indian state since the 1980s has been “pro-business†rather than pro-market, responsible both for the dynamic forces at the apex of India’s economy and “the failure to include India’s numerous excluded groups in the polity and the economy.â€

This “collaborative capitalism,†of which Narendra Modi, the Hindu nationalist chief minister of Gujarat, is the most egregious exponent, consists of the state extending tax benefits to India’s largest businesses and facilitating their cheap access to national resources of oil, gas, forests, and minerals.24 In turn, “the disproportionate control over economic resources,†Kohli writes, “enables businessmen to ‘buy’ politicians,†shape decision-making through the media, and even enter politics themselves.25 [. . .]

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