Does India need an entirely new development model?
Nachiket Mor, visiting scientist, The Banyan Academy of Leadership in Mental Health, Tamil Nadu and Sandhya Venkateswaran, senior fellow at the Centre for Social & Economic Progress
While the effects of the recent pandemic have indeed set India’s economy back several years, it is not clear if, prior to it, the development model that we were pursuing (and seem to be returning to, now that the worst of the pandemic is seemingly behind us) was the one best suited to ensuring that we realise our full potential as a country and as a people. A pre-Covid-19 estimate by Price Waterhouse Cooper had suggested that, based on current trends, even by 2050, India’s per-capita income will only be at half the current levels for developed countries.
The reforms that were begun in the mid-1980s and accelerated in the 1990s, in part owing to the severe balance of payments crisis that India experienced in 1991, led to many changes, in particular, the dismantling of the iron grip of the government, through its central planning apparatus, on the private sector. The spurt in growth that India experienced following that suggested a strong causal link with these reforms. However, while most of those changes were indeed welcome, they represented more of a withdrawal of the state from roles (such as licensing of private manufacturing capacity) that it was not well suited to play in the first place. It did not lead to a fundamental reimagination or reenvisioning of how the state would function and its role.
Therefore, the question to be considered is this: what forms the basis of decisions of withdrawal for the state, in its role and fiscal commitment, across sectors, and what should the state’s role, ideally, be? Whether it is infrastructure, agriculture, financial services, telecommunication, or human development, each plays a vital role in the country’s development and growth and can make a strong case for investment by the state. The choice of where to remain and where to exit will thus need to have less to do with the sector’s relative contribution to growth and more with the nature of the sector and how the state needs to engage with it for it to function optimally.
One possibility would be to identify sectors where markets function well and the participants in the sector perceive the private benefits to be high. In these sectors, the state recognises that its aggressive engagement could prove to be counter-productive and eschews any attempts to intervene actively or direct tax investments towards them. However, it continues to play an active governance role to ensure that systemic crises do not emerge in these sectors, or distortions such as cartelisation and anti-trust activities, which, among other things, could hurt the degree of innovation that happens. In such sectors, the state is also attentive to the fact that the optimal functioning of any market inevitably results in segments of the population being left behind as their current skill sets and occupational choices become less and less valuable, or they are unable to participate as consumers in the market on account of low incomes. Instead of distorting entire markets through fiscal and policy measures in these sectors, a much more effective strategy for the state would be to directly offer protection or purchasing power to such population segments through unconditional cash-transfer schemes. Such an approach would alleviate distress and accelerate the process of long-term adjustment towards areas in which the economy enjoys a competitive advantage.
With such an approach, the focus of investment of the state instead shifts towards sectors where the collective benefits are high or where markets do not function well even with good regulation because of, for example, serious gaps in how consumers understand the product or the service. For example, there are fields such as infectious disease control and comprehensive early childhood development, where the collective benefits far exceed the perceived gain to specific individuals or their families, resulting in low demand from them for the service. There are others, such as healthcare, which have strong innate demand from individuals and families, and their importance to national development is also high, but where market failures are so severe that even with strong regulation, they produce highly distorted outcomes. In all of these sectors, the state would need to almost entirely pay for these services using tax resources and use a combination of its purchasing power and other governance measures to exercise a high degree of control on all aspects of the sector’s functioning, including consumer and provider behaviours. Otherwise, the poor development of these critical sectors will act to severely limit the growth potential of the overall economy. Where it is confident of its capability, the state could get the public sector to directly provide the service and seek to supplant the market entirely, or it could pay the private sector to provide all or part of the service. This is the direction that, for example, all the countries with high performing health systems have taken.
In sharp contrast to this approach, the Indian state, in several sectors, such as financial services, agriculture, energy, and infrastructure, where markets and private actors are competent or where India is already a global leader, such as rural road density, continues to direct large amounts of scarce fiscal resources towards them. Consequently, it has consistently significantly under-invested in sectors with a strong collective-good character or others where market failures are high. Over the last two decades, for example, while countries such as Iran and Thailand have taken steps to sharply reduce the extent of out-of-pocket expenditures in health care by increasing the share of budget allocated to health to be as high as 15% and completely redesigning their health systems, the Indian allocations continue to languish at close to 5%. In India, needless interference by the state in well-functioning markets and a steadfast refusal to triple or quadruple the levels of investment allocated towards sectors such as public health, healthcare, and early childhood development, have hurt the ability of the economy to achieve its true potential and to achieve a rate of growth that will allow all of our citizens to enjoy at least the current developed country standard of living by the year 2050.
(Nachiket Mor, visiting scientist, The Banyan Academy of Leadership in Mental Health, Tamil Nadu and Sandhya Venkateswaran, senior fellow at the Centre for Social & Economic Progress)