September , 2020
A New Paradigm for New India
12:47 pm

Ramgopal Agarwala


It is clear that China is a hegemonic power which wants to dominate Asia in the near future and the world later on. If China succeeds in its programme, India will effectively lose its sovereignty and that is simply not acceptable to the Indian government and its people. India jointly with other like-minded nations must persuade China to accept the need for a truly multi-polar equalitarian world.


India can do that only if it rises in economic and military strength to catch up and even surpass China and not by joining any efforts for containment of China. For that purpose, the Indian economy needs to grow by at least 7% per year for the next three decades while also achieving the goals of inclusiveness, cleanliness, and transparency.


This goal is achievable but for that we need a new paradigm which truly practices sabka saath sabka vikash (development of all with participation of all) - both domestically and internationally. We also need stable government policies for the next few decades which has support of the masses as well as the business community and a government which can be an umbrella organisation bringing under its fold all parties and paradigms, something similar to what happened under Mahatma Gandhi in India’s struggle for independence. In my opinion, there is too much divergence of views on economic policies in India today. India is in some ways a house divided against itself. This is no way to assure a steady growth over the next few decades. We must find a paradigm that can provide the basis of unity.


There is much excitement in India about the reforms initiated in 1991 and frequent calls are made for resurrecting the spirit of 1991 reforms. In my opinion, 1991 reforms do not provide a basis for the new paradigm that India needs now. I was the ‘Acting Chief Economist’ for the Asia Region in the World Bank at that time and had the privilege of observing these reforms from the side of Bretton Woods institutions. I remember the Indian authorities as reluctant acceptors of these reforms. The quip from the then Prime Minister that decision-making is easy when there is no alternative was illustrative of the government’s attitude - which was widely shared by opposition parties and many in the public. The achievements of the 1991 reforms were much below expectations and they will certainly not deliver the present Prime Minister’s vision of making the 21st century India’s century. Nor are they fully compatible with the vision of Atmannirbhar Bharat as proposed by the present Prime Minister. For achieving the new goals of New India, we need to depart from the 1991 spirit and develop a new paradigm which may be much closer to what China actually did in becoming the largest economy in the world in a space of thirty years.


The China Development Bank (CDB) was founded in 1994 as a policy financial institution under the direct leadership of the State Council. It opened its doors on January 1, 2004. On that date I had the dubious task of delivering by hand to its President a letter from the Vice-President of the World Bank saying that in the light of the Bank’s experience with development finance institutions around the world, it was a mistake to set up a specialised finance institution. It was better to rely on universal commercial banks for funding of infrastructure projects as other projects. The Chinese authorities politely thanked the World Bank for its concerns but went on to use the CDB to fund its infrastructure investment programme.


India took a different route. When under the pressure of the balance of payments crisis in 1991 India had to accept the policy packages proposed by Bretton Woods institutions, it also agreed to dismantle the development finance institutions such as ICICI which it had set up earlier with the World Bank’s assistance. It turned with some fanfare to the universal banking model with commercial banks becoming the main conduit for long-term funds needed for infrastructure investment. The results were not pretty. The commercial banks generally operate on the basis of short and medium-term deposits and are not geared for funding long-term investments. Nor do they have the monitoring and supervisory capacity for such long-gestation infrastructure projects. As time moved, the commercial banks were saddled with huge non-performing assets - particularly in the long-term funding area and there is no good solution in sight.


Similarly, in the area of trade liberalisation and privatisation of state-owned enterprises, China steadfastly refused to follow Bretton Woods advice. They were keen observers of what the shock therapy on trade liberalisation and privatisation had done in the former Soviet Union. On the trade front they followed a firm strategy of import-saving but with emphasis on improving productivity of protected enterprises so that they become export competitive within a given time frame. By late 1990s the research we in the World Bank did with the Chinese authorities showed that China had succeeded in putting water in their tariffs in most sectors in the sense that effective protection rates in these sectors had become negative and enterprises in these sectors were ready to compete on the world stage. So, when the entry into the WTO came, China was ready to reduce tariffs and push exports. On SOEs reform, the strategy was to go slow and allow the private sector to grow so that the role of SOEs shrank and when alternative jobs were available, scope of SOEs was reduced gradually.


India on the other hand went ahead with trade liberalisation without adequate efforts for improving the productivity of enterprises and making them competitive before liberalisation. The result was a wholesale deindustrialisation in many sectors. Even though the objective of 1991 reforms were to end the license/permit raj to boost the manufacturing sector, the share of manufacturing in GDP which was increasing at a decent pace in the pre-1991 era became stagnant after 1991. This ratio which increased from 15% in 1960 to 17% in 1990 was 15% in 2019.


In most areas of reform, Chinese reform process was homemade (swadeshi to use an Indian term). Whether it was liberalisation of pricing and production in agriculture or setting up special economic zones or independence of the Central bank and organisation of the financial sector or “picking the winners”, Chinese ignored external advice and did things their way.


India by contrast was following the Bretton Woods advice though not as literally as many in Africa and Latin America had to do. Whether it was fiscal discipline or independence of the Central Bank or inflation targeting or financial sector reform, it was basically following what came to be known as the Washington Consensus. In recent Indian terminology, China since 1991 was following an atmanirbhar abhiyan in thought and action while India was working under external hangover.


The contrasting results are vivid.


· Per capita income in current US dollar (GDP) which was nearly equal between India and China in 1991 ($303 for India and $333 for China) diverged sharply during the years that followed and China’s per capita income became ($9770) - nearly five times of India


· GDP per person employed (in constant 2017 PPP$) which was higher in India than in China in 1991 (5214 vs. 2760) witnessed a sharp reversal by 2018 (6538 vs. 27877)


· Imports of goods and services as percentage of GDP which increased moderately from11% in 1991 to 19% in China by 2018 registered a sharp increase from 8% to 24% in India


· Physicians per 1000 people which increased from 1.6 in 1991 in China to 2.0 in 2017 registered a decline in India from 1.22 in 1991 to 0.86 in 2018.


A similar picture of poor performance of India over the last 30 years in relation to China emerges in a wide spectrum of economic and social indicators. The lessons for the future are clear. India needs a new paradigm quite different from 1991. The new paradigm has to be made in India and derived from widespread consultations.


For macro-economic management, the present silos of fiscal and monetary management fostered under Washington Consensus must go and key issues like fiscal deficit, interest rate, liquidity and exchange rate must be considered. The financial system should remain largely in the public sector and be able to finance a sharp increase in investment rate to about 40% GDP. DFIs should be reestablished. Import-saving should be encouraged and supported but with a timeline for export competitiveness. Current account deficit must be eliminated within the next five years. Role of Foreign Institutional Investors (FIIs) must be reduced and speculative activities in stock markets should be discouraged. A new balance needs to be established between top-down and bottom up planning, between state and markets, between leapfrogging to new technology and nurturing old traditional crafts, between urban and rural areas, between material growth and ecological sustainability.

The opinion/s expressed in the article are that of the author's and do not necessarily represent or reflect the policy or position of this magazine.




Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <blockquote> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.