What Could Derail the India Express? Economists Speak Out

For the investors and businesses still swooning over India’s red-hot growth, a pair of economists delivered a splash of cold water to their faces on February 23 during a talk organized by the University of Pennsylvania’s Center for the Advanced Study of India.

Against a backdrop of growing concern about India’s infrastructure constraints and the need for further institutional reform, the World Bank’s Shanta Devarajan stirred the pot with what he called his “four heretical thoughts on India.” He joked that a colleague familiar with Devarajan’s provocative stance reminded him that “heretics are burned at the stake.” As something of a counterpoint, though, Arvind Subramanian of the International Monetary Fund argued that India’s infamously inefficient institutions, while certainly a drag on growth, aren’t actually all that bad in comparison to other nations.

Devarajan, who serves as chief economist for the World Bank’s South Asia region, takes issue with the popular notion that there simply isn’t enough infrastructure — power, water, transportation networks, etc. — to sustain India’s robust economic growth rate of more than 8.6%.

“All this talk about infrastructure is missing the point,” Devarajan insisted. In many cases, the problem lies in mismanagement of the existing infrastructure, which gets gummed up in patronage politics. For example, he said, the “free” provision of water means that little money exists for maintenance or upgrades that could supply water around the clock. Clean, ubiquitous water on demand, meanwhile, is one of the marks of a fully developed country. Such well-developed infrastructure makes a country more attractive to foreign investment.

Charging for water in order to improve its delivery would require governments to make decisions that are unpopular with voters such as the powerful farmer’s lobby, thereby threatening the politicians’ own jobs and power, Devarajan said. In practice and effect, “the under-pricing of water is a form of political patronage. The tragedy is, it’s the poor people in whose name this subsidization is being advocated who lose out.”

Spending on Healthcare

 Among Devarajan’s other self-labeled heresies is one involving healthcare. “Health in India is a scandal, to put it mildly,” he says. And yet Devarajan thinks it would be foolish to boost public spending on healthcare to 3% of India’s gross domestic product, as some have proposed. Such a move would just give Indians more of a horrendously dysfunctional product. Even in the wealthy state of Punjab, public sector doctor absenteeism clocks in at a substantial 40%. For the person who goes to a public hospital with a sick child or a grievous wound, this often translates to long hours spent idly waiting for emergency treatment.

When the doctor is in, quality is hit or miss. More than a few physicians, according to Devarajan, are outright “quacks.” And so, this might explain why three-quarters of the money spent on healthcare in India flows to private sector providers — market principles in action. “This is prima facie evidence that this is a private good,” he said. Devarajan’s proposed cure, in part, is to empower patients to spend set-aside money on the doctor of their choice, rather than subsidize public-sector doctors whether they show for work or not. “The money follows the patient, rather than the money follows the doctor.”

Devarajan also took aim at India’s primary education system, which he gave a failing grade despite the tempered success of the Sarva Shiksha Abhiyan, a government initiative to massively increase children’s school attendance. In Punjab, the teachers skip class 34.4% of the time — likely, he said, because economic “rents” abound. (That’s economist-speak for “moonlighting.”) As with public-sector healthcare, quality problems are magnified with public versus private school education. To wit: 65% of public school children in grades two through five can’t read at grade level, compared to about 50% literacy in private schools.

 Devarajan’s fourth heresy — “The one that’s going to get me fired,” he wryly noted — suggests that India’s poor voting majority and disadvantaged groups willingly participate in a grand, delusional cycle that prevents them from rising out of their poverty. “It may be that low-caste groups don’t vote for politicians who promise to deliver health or education,” the very deliverables that studies suggest would most improve their chances to escape poverty. Instead, according to Devarajan, it seems they tend to vote for politicians who promise goods such as road-building projects or other public works that guarantee jobs. He labeled the result a “low-level political equilibrium. There are some deep problems, mostly having to do with politics in the functioning of government,” Devarajan said.

A Nuanced View

Arvind Subramanian, a division chief for the IMF’s Research Department, thinks that people need to adopt a more nuanced view of government’s role. He lamented the popular notion of “private sector ingenuity and public sector ineptitude” as an oversimplification. India’s blistering economic growth, which took root in earnest during the 1980s, actually owes much to having serviceable, if imperfect institutions, and to considerable reform within them, he said.

The Supreme Court, for instance, “has been clawing its way back to credibility” since the 1980s. And the faintly praising quip about India’s Central Election Commission goes, “It works better than the one in Florida.” Subramanian noted that old-fashioned palm greasing and customs “leakage” remain considerable taints and constraints on the economy. A study by the anti-corruption group Transparency International India found that more than 60% of “common man” survey participants claimed they were shaken down for bribes or had to use “a connection” to get something done at a public office. Still, proponents of a “headlong embrace of the private sector” must acknowledge that “there are certain irreplaceable core public institutions, such as the police, judiciary, and customs,” he said.

Subramanian reminded the audience of a well-worn aphorism about India: “We’re great at running markets and states. The problem is we run our markets like states and our states like markets.” The fact, then, that India is becoming more proficient at running markets like markets, he said, “is a welcome development.”

Given such challenges, is it time to rein in the unbridled optimism over India’s growth prospects, or is it still “full steam ahead” for the India Express? Given the serious business consequences of routine power brown-outs, teeming and potholed roads and a host of other impediments, is it realistic to expect a 9% expansion rate to continue for any extended period of time?

India’s Central Statistical Agency on February 28 stated that the country’s growth rate had slowed to 8.6% in the last quarter of 2006, missing economists’ predictions of 9.3% and down from the previous quarter’s 9.2% growth rate. It was mostly attributed to difficulties in the farming sector — ineffectual monsoon rains last year caused crop shortfalls since irrigation is not widespread.

Wharton marketing professor Jagmohan Singh Raju counsels patience to anyone worried that India’s ride will hit the skids anytime soon because of interruptions to the flow of people, goods and commerce. He is confident that government and industry will step up to the plate, continuing to privatize in sectors that made sense. “The airports are being modernized,” Raju told India Knowledge@Wharton. “Please keep in mind that India is a democratic state and, just as is the case in the U.S., one cannot just wake up one day and decide that homes will be demolished to build freeways.

“Telecom, which used to be a bottleneck, is now in excellent shape,” Raju notes. He hasn’t forgotten about the market freefalls that previously befell other seeming miracle economies of Asia. “The domestic market is strong and growing, so it is less likely that we will see the kinds of things we saw in Indonesia, Thailand and South Korea.” Raju admits, though, that some self-inflicted pain could surface as starry-eyed investors try “to ride the wave without much thought. Some of us have not forgotten the Internet boom and doom.”

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