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Economy still paying price for faulty policies

Over the past few years, the country has unleashed a torrent of growth and wealth creation that is transforming the lives of millions. India's economic clout is beginning to make itself felt on the international stage.

As Time magazine put it, "Western businessmen who have been losing sleep over China may be worrying about the wrong country. It is Indian corporations that are proving to be formidable competitors in the global, information-driven economy."

Just 20 years back, the rest of the world saw India as a pauper. Now it is just as famous for its software engineers, bollywood movie stars, literary giants and steel magnates.

For all this, India's achievements fall far short of its potential. Many countries far smaller than India, with little or no natural resources, which gained independence much later, have fared much better than India which has a large land mass, talented people and ample natural resources. What explains this?

The image of India as a poor country is widespread, but relatively recent. Historically, India was always famous as the richest region of the globe.

Indian citizens hopes to become a prosperous country after independence were belied because their leaders drew wrong lessons from the colonial experience and pursued faulty policies which hampered economic growth. This explains why India's performance falls far short of its promise. Some of these policies or their legacies persist even now and it is important to examine them.

India's export-import ratio was 172.5 per cent in 1840-69, 148 per cent in 1870-1912 and 133 per cent in 1913-1938. From this, Indian leaders concluded that export orientation was a tool of colonial exploitation and that free trade was imperialists' ploy to force their manufacture on India and crush the domestic industry.

They, therefore, opted for self-reliance and import substitution. They forgot that before the British came, India was a great trading power that used exports to become prosperous. Export orientation did not help India during the British Raj because the trade surplus was used to transfer wealth to Britain, instead of being reinvested in India. It need not be so in independent India.

As a result of faulty inward looking policies, India came to make goods that were costly and sub-standard, Indian industries became uncompetitive, India's share in world trade declined from 2.2 per cent in 1947 to 0.6 per cent in 1980 and controls on import and capital became inevitable.

India was colonised by the East India Company. This led to another wrong notion among Indian leaders: foreign investment leads to colonial domination. For 40 years, India took pride in keeping foreign investors away. This 'East India Company syndrome' was so deeply entrenched in their psyche that they ignored all evidence to the contrary. They sneered at Singapore, South Korea and Taiwan (puppets of imperialism) for inviting multinationals, which they thought would lead to enslavement and impoverishment. In fact, these countries prospered while India stayed poor; but Indian leaders invented a hundred excuses to pretend that their experience was not relevant to India.

The cumulative outcome of these policies brought India to the verge of bankruptcy in 1991, forcing a U-turn and a return to sensibleness. The economic resurgence seen since then needs no elaboration here.

Ironically, some of the policies from the British era persist even today. India fared poorly under liberal policies of the British rule mainly because the rulers neglected agriculture and primary education. Despite significant canal irrigation, food availability per head declined during the British rule. This meant, besides poverty, lower employment potential in rural areas i.e. unemployment.

India has continued the neglect of agriculture. India's first prime minister Jawaharlal Nehru thought agriculture had little potential for poverty removal and was just a holding ground for surplus labour untill industry provided more jobs. Only after his death, green revolution showed that a dynamic agriculture was a most powerful tool for poverty removal and faster economic growth.

At present, the green revolution has run its course. Indian agriculture is once again characterised by low productivity. The government spends massively on misdirected subsidies on food and fertilisers, but the vital task of capital formation in agriculture is still neglected. The country has again become an importer of wheat, even as farmers are committing suicide in hundreds. The share of agriculture in GDP has declined from 60 per cent in 1947 to 17 per cent now. Therefore, growth in agriculture is no longer important for the overall GDP numbers. However, more than half its people still depend on agriculture for their livelihood. So, rapid economic growth could have no meaning for rural poor, unless agriculture also participates in it.

Today, thanks to globalisation, two main drivers of economic growth, advanced technology and capital, are amply available to India. To translate these into wealth and welfare, India needs skills, infrastructure and institutions. It does have all these, but still needs large doses of each of them.

Primary education is a sine qua non for rapid economic growth. How can a country benefit from technology if workers there cannot read instructions on a bag of fertilizer?

Infrastructure necessitates investment. But investment will happen only under conditions that grant the investor-an MNC setting up a power plant, a family sending its children to school-adequate returns. Establishing those conditions is the task of economic policy.

Beyond right policies, India needs proper governance. For decades, Indian government has been spending heavily on entirely desirable projects such as primary education, agricultural extension, public health, job guarantee schemes etc. But it simply has no machinery to ensure accountability, to ensure that expenditure leads to commensurate outcomes.

Slowly but surely, India is returning to the place it held as a global trade giant long before colonial powers arrived there. However, it still ranks 127th in the human development rankings and is perceived as a corrupt country. It has miles to go before it gets anywhere near its ancient glory.