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With so many different images and stereotypes of the Indian economy in the public consciousness, characterizing its past, present, or future is no simple task, according to Raghuram Rajan, Eric J. Gleacher Distinguished Professor of Finance and former director of research for International Monetary Fund.
Rather, the history and unfolding of that economy is complex and affected by a variety of factors, sometimes conflicting, Rajan said. He spoke April 12 at the University Club in Chicago, an event organized by the Chicago Council on Global Affairs. The presentation was co-sponsored by the GSB’s Initiative on Global Financial Markets, which is funded by the CME Trust.
Before enacting reforms, the Indian government followed a set of policies promoting import substitution and emphasizing the development of state owned enterprises, Rajan said. Government restricted private enterprise through licensing laws, directed credit, preferences for small-scale industry, anti-monopoly regulations, and stringent labor laws, he said.
“This policies were partly driven by India’s sense that it needed to create more jobs, and that a lot more jobs would be available through small industries,” Rajan said. “It wanted labor-intensive growth. It wanted to reduce poverty. But for everything the government wanted, by and large, it achieved the opposite. The private sector was hesitant to hire unskilled labor, and instead focused on entering industries where it could use skilled labor that could be dismissed more easily.”
Liberalizing the economy in the early 1980s brought several changes. It opened doors for a host of new services and made Indian industry more competitive internationally. Still, India has not made the kind of progress now seen in China, partly because its industries are still strongly hampered by such restrictions as labor laws. “You need to be able to hire workers for a large order and then lay them off four months later when the job is done,” he said. “You need a certain amount of labor flexibility to be able to create more jobs, and that simply is not possible today.”
All of India’s states are all shifting toward service-oriented business, but none toward manufacturing—particularly labor-intensive manufacturing, Rajan said. Fast-growing states are focused on private-sector services, while slow-growing states focus on government-provided services, he said. “Even the states that are increasing their presence in manufacturing are not going towards labor-intensive manufacturing,” Rajan said. “They are going towards capital-intensive manufacturing.”
The “rosy view” of India’s future is that with steadily improving governance, India will create better infrastructure—especially infrastructure that improves industry’s competitiveness—and infrastructure that links farmers to markets. This will lead to more jobs and increase rural productivity, both key to reducing poverty. Without good governance, though, India faces two possible “nightmare” scenarios, one from the political left and one from the political right, he said. The left may try to expand government—not to provide better governance, but to offer patronage to supporters— while the right might argue that government is irrelevant because it is inefficient, Rajan said. “If this then leads to privatizing everything, even the essential functions of government, you will get oligarchy if you don’t have adequate oversight,” he said.
To realize the rosier view, India needs to lighten labor laws and provide better infrastructure, Rajan said. With the loosening of laws forbidding laying off workers, India’s courts must move more swiftly to protect against blatant discrimination and unfair dismissal. “The courts are tremendously slow,” Rajan said. “Workers cannot afford that kind of slow redress. They also need a stronger safety net in the form of unemployment benefits. Otherwise, fired workers will take to the streets.”
To get improved infrastructure, India needs reliable frameworks that will entice the private sector in to set up that infrastructure, as well as regulatory authorities who are independent of the government to ensure that private investors get an adequate return, he said. “You need better land demarcation and acquisition,” Rajan said. “You also need more transparent bidding when infrastructure contracts are auctioned off.” He is confident the government will follow the right path. “Indian democracy has a way of muddling through to the right answer,” Rajan said.
—Phil Rockrohr