OPINIONS Stronger 'state capacity' will help India overcome obstacles, push forward economic development


Stronger 'state capacity' will help India overcome obstacles, push forward economic development

Global Times

06:14, March 25, 2019

(Photo: Global Times)

India is one of the fastest-growing economies in the world. However, the country has to overcome some overbearing obstacles as it pushes forward economic development and catches up with the latest advances in industrialization and modernization. In order to achieve such an objective, the Indian central government has to tackle two tasks that may contradict each other. 

On the one hand, the state needs to achieve greater control and better management of the macroeconomy to have a positive influence on stability, income distribution, public services and infrastructure. On the other hand, it also needs to restrain excessive government intervention in economic activities to contain parasitic interest groups within the institution and allow the market to play a greater role in resource allocation. 

These two contradictory goals may well be achieved simultaneously through enhanced "state capacity." Once this is in place, it may adjust and prevent various vested interest groups from resisting economic dynamics initiated by the state.

As a large country with a mostly rural economy and extremely heterogeneous social structure, India won't be able to catch up in modernization and industrialization solely through endogenous resources mobilized at the social level. That is why promoting India's "state capacity" is vital. 

The low level of India's state capacity is a result of its lower level of societal integration and political integration. To increase state capacity does not mean returning to a planned economy. After all, India's "state capacity" was weak even when it ran a planned economy.

After its independence, India had a large state-owned sector as part of its planned economy. However, the problem was that India failed to establish an effective political system to match its economic design. The country's so-called "state-owned" enterprises often did not abide by the state. These companies even became a political force that left significant footprints on the decision-making of the central government. 

India was neither a market economy nor a command economy, which happened to be a bad combination. For a long time, market and government failure occurred simultaneously.

India's state-owned enterprises became independent "kingdoms" that ran according to their best interests. They were not concerned with the market's reaction and, more often than not, were immune to government order. For years these enterprises continued to devour resources and haunted the nation's economy. 

The country's weak state capacity became an issue during the early stages of industrialization. As industrialization advanced, India's central government was stretched for resources. 

There is of course a deep reason behind this struggle. 

Heavy industrial and infrastructure projects have a long economic return cycle in general. India's central government was not capable of mobilizing the necessary economic and political resources to fill financial black holes in these projects. The projects that devoured their resources became systemic risks. Any shock to India's economy at the macroeconomic level would suspend or even drag down development. 

For instance, the economy did not perform as well as expected during India's second (1956-1961) and third (1961-1966) five-year plans due to a lack of resources. The GDP growth rate was about 3.5 percent from 1950s through the 1980s. When factoring in population growth, the GDP growth per capita was only 1.3 percent. 

Since the reform in the 1980s, Indian economic growth has been accelerating. It has now become one of fastest growing economies in the world. However, its state capacity, which was weak even during the planned economy era, had further downgraded under the market economy.

The state has limited effective control over some major factors influencing its macroeconomy. 

As the government cannot control random external factors such as monsoon failure or global commodity price hikes, they have sent major shocks to India's macroeconomy, creating financial fragility and risks.

To some extent, India's economic growth since Modi rose to the premiership in 2014 has been the result of "being lucky." As international oil prices plummeted, the country's current deficit has been alleviated and imported inflation has been trimmed. 

Lower oil prices saved the Indian government large amounts of subsidy bills, which assuaged pressure from a fiscal deficit. The current account deficit, imported inflation and fiscal deficit - three major problems haunting India - have been taken care of without Modi having to act on them. 

However, without radical social integration and political transformation, Modi's administrative measures seem too feeble to boost state power in the economic sector. Though Modi has been trying to push through changes in social integration and political transformation since he swept the 2014 election, the political resistance has been huge among workers and farmers. 

The efforts to simplify laws on labor relations, relax the regulation of layoffs and the minimum wage, and tighter supervision of the labor movement have dimmer prospects, even if Modi gets reelected in the upcoming election. Modi has also stumbled on land reform due to strong opposition.

Economic reform will require social and political changes to lay the ground. In this sense, India's economic reform will test the results and effects of social integration and political transformation. In return, it will also become an impetus for them.

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