India’s COVID crisis

To understand the impact of the COVID crisis on any country’s problems as it faces the economic recovery phase from this pandemic, we highlight India’s case and its efforts to catch up in development with China.

Higher costs to achieve the same results. The cost of economic recovery has gotten much higher on many fronts. It gets manifested in the realities of political discourse on economic reforms and the use of the country’s economic resources. The pandemic has intervened to alter the nation’s development priorities.

In short, deeper political and economic sacrifices than were required earlier would now be more needed.

India’s case represents how the political economy of undertaking major reforms could be affected through democratic people’s politics, in contrast to the centralized politics of China’s one-party system.

Last decade’s rising star for growth. For the first three decades of independence from 1947, India’s economy was built on the model of self-sufficiency and welfare founded on a heavy dose of state enterprises and industrial licensing for private industry.

Over time, this socialistic structure became a burden toward improved economic performance. An economy full of stringent controls invited imbalances within the economy which fomented macroeconomic instability.

The change in government in the early 1990s permitted India’s economic reformers to restore macroeconomic stability through a control of spending, improving the fiscal base, and at the same time to undertake new directions in economic policy.

Rather than adopt drastic reforms of liberalizing or decontrolling the economy, they undertook slower incremental measures to promote greater private sector decision-making through a reduction of state guidance and regulations.

The opening of the economy improved its market position. They abolished industrial licensing and allowed companies to plan their enterprises through their investments. They allowed more competition from foreign direct investments. They gradually opened foreign trade and expanded to new players. As a result more economic activities expanded.

The benefits of the green revolution expanded the reach of agriculture productivity improvements across India during this early growth phase. Improvements diversified and increased the volume of homegrown food to support the development process. The domestic economy also expanded with new incomes from labor in newly opened employments, creating a robust growth of domestic consumption.

Development experts who have studied India’s recent growth (for instance, Bradford de Long and, later, Dani Rodrick and S. Subramanian) give credit to the slow, but steady pace of these improvements of policies to loosen the system of economic controls so that productivity improved and stimulated further growth of GDP.

Indian economists (for instance, M. Ahluwhalia, from the planning commission) emphasize the improvement of the macroeconomic framework, the importance of fiscal reforms, monetary and exchange rate policies. They emphasize the need to improve infrastructures to be able to attract and facilitate private investments flows, the importance of improving investments in human capital, reforms dealing with bankruptcy and insolvency, and improving competition within the economy.

Such paced reforms enabled incremental progress and led to the acceptance of such reforms to be accepted by new political administrations because the changes were built more on concensus rather than drastic redirections. Moreover, as confidence was instilled, it was possible to create more confidence to instill a need for deeper economic reforms.

These changes have made India’s economic growth move up in performance to 7.5 percent during the 2000s, putting India among the high-growth developing economies in Asia.

Reforms to transform agriculture and labor markets. In September 2020, the Indian parliament passed a new set of laws designed to transform industry and agriculture. The laws are hinged on improving agricultural productivity and on making the labor market more flexible. Despite the high growth rates achieved, the generation of employment in India has not yielded expected improvements in incomes of workers.

The labor market reforms are designed to allow the termination of labor contracts, rather than be tied to the rigid protection of employment.

The reforms are designed to make India a preferred destination for foreign investments. The changes are also designed to multiply good jobs in the economy.

Will the pandemic alter the political discourse for reform? These laws passed the parliament after much controversy and prolonged debates and studies, the next stage of the implementation rests on the acceptance of local rules that would be decided by different states of the Indian federation. Recourse of opposition to these reforms could be group action, legal challenges or a combination of such tactics.

Recently, farmer demonstrations against the new law on agriculture gathered force and made the government suspend the agricultural changes. This could mean a tactical, temporary retreat or a sign of weakening against a force that is gathering strength.

In the case of the labor reforms, the next order of the game is the crafting of the new rules to implement the changes in the law. This could mean a prolonged struggle or tactical retreat or new compromises. The setting for these actions is in the local governments, but they have national repercussions.

The pandemic has certainly complicated the government’s reform agenda. Certainly, the government’s political position has been altered. Whether it could mean a temporary retreat or a weakening of resolve would depend on the political realities that happen next.

At stake is the speed of the catch-up game. Today, China’s GDP per head is $10,000, which is five times ahead of India’s. At the beginning of both country’s march into the development game, many decades ago, soon after India had gained independence, both countries were at par on this measure.

References:

Ahluwalia, Montek, “India’s Economic Reforms: Achievements and Next Steps,” Asian Economic Policy Review (2 018) 14, 1–17

De Long J.B. (2003). India since independence: An analytic growth narrative. In: Rodrik D. (ed.), In Search of Prosperity: Analytic Narratives on Economic Growth. Princeton, NJ: Princeton University Press, 184–204. H

Rodrik D. & Subramanian A. (2004). From “Hindu growth” to productivity surge: The mystery of the Indian growth transition. IMF Staff Papers, 52 (2), 193–228

Megha Bahree, “India angers unions with eased rules for firing employees,” Nikkei Asia, Nov. 2, 2020.

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