25th Foundation Day Lecture at the Center for Public Policy
at the Indian Institute of Management Bangalore
Arun Maira, July 10, 2024
PUTTING THE WIND BENEATH THE INDIAN ECONOMY'S SAILS
The three Ls of public policy
“There comes a tide in the affairs of men which, if taken at the flood, can lead onto good fortune”, said William Shakespeare. This describes India’s demographic challenge. India needs to put the wind beneath the economy’s sails to take advantage of its demographic opportunity before it is too late.
The results of the recent elections confirm what is bothering most Indians, cutting across religions and castes, in all states. It is the shape of the economy. India’s GDP is growing. India’s is the fastest growing economy in the world, even faster than China now. But we must be careful. Doctors advise that a fat and large body is not a healthy body. Obesity can be life-threatening.
The Ram temple in Ajodhya was opened with great fanfare by the Prime Minister before the elections. He also travelled across the country promising Modi’s Guarantee of a better future for all. Psephologists had predicted that the BJP would sweep in with the wind blown into its sails by the Prime Minister’s vigorous campaign. The results stunned the party. Post- election analysis revealed that Hindutva politics, and the God-like personality cult created by Mr. Modi, have not gone well with Indian citizens.
The world’s largest election concluded last month after a long and bitter campaign. 642 million citizens voted. India’s GDP is growing, and stock markets are booming. India is shining. Two young Indians celebrated their wedding with rich and famous people from around the world on a cruise ship in the Mediterranean. The poor people in India were out of their conscience and their sight.
Mr. Modi is not responsible for the poor shape of India’s economy. In the 1990s, the Indian economy began to move faster but it took a wrong direction. It was blown off its course by an ideological wind—the Washington Consensus—that began to blow around the world.
Trade was opened. Make in India was neglected. Indian consumers could buy goods from around the world. However, their incomes have not kept pace with their aspirations and are falling behind inflation. While billionaires can spend hundreds of million rupees on pre-wedding parties, hundreds of million Indians cannot afford medical care and other necessities.
Keynesian economics had ruled the world in the first half of the twentieth century. The thrust of government policies then was to improve citizen welfare. Policies tilted towards creating employment. Governments also spent on health, education, and social security. Standards of living improved.
A cold wind from the Chicago School of economics changed the direction of economics from the 1970s. In Britain, the iron lady Thatcher smashed labor unions and unleashed the financiers in the City of London. “Government is not the solution, it is the problem”, President Ronald Reagan declared in America.
Economists celebrate 1991 as the year India’s economy was liberated with reforms to make the economy less socialist and more capitalist. Economic reforms have stayed on that course since then through UPA and NDA governments. Whenever economic growth slows, economists urge the government to reform even faster. By reforms these economists mean less government and more business. And less public and more private.
Modi ka Guarantee, or even Rahul ka Guarantee, cannot work for the masses if economic policies don’t change course.
I am honored to deliver the 25th Foundation Day lecture at the Center for Public Policy at the Indian Institute of Management Bangalore.
I begin with the question: what is “public policy”? Public policy is a process of Listening and Learning. And public policy must be more Local, less central.
Keep these three Ls in mind: Listening, Learning, and Local. They are the themes of my lecture.
I begin with Listening.
I thought I would hang up my work boots after 45 years in the private sector, as an executive and director of large corporations, and a consultant to business leaders in USA, Europe, South America, and India. The day I retired in June 2009 and arrived in Prague with my wife for a holiday, I received a call from Dr. Manmohan Singh, who had become Prime Minister for his second term. It was the end of my retirement. He asked me to join him as a Member of the Planning Commission and serve the country. It is what I have wanted to do all my life. I said, “Yes, Sir”.
I asked him if his office may have called the wrong person by mistake. Because I was not qualified to be a member of the Planning Commission. I was not an economist, nor a retired cabinet secretary. He said he was aware of that, and that is why he wanted me. The Planning Commission had enough good economists—he was one himself, and many people with experience in the government. He wanted an outsider, who would bring a fresh perspective, to answer the question, “How come, even with such eminent economists in the country, and also advice of the best economists from advanced countries, the lives of the poorest people in India had not improved as much as they had in China?”
India and China were in the same league in the 1980s. Similar size populations. Comparable levels of incomes. The Chinese economy has grown much faster than India’s since then. Now China’s economy is in the same league as the US, and India’s economy is only one fifth China’s.
What was especially galling was that India had missed the manufacturing bus. By the 1980s, before the celebrated opening up of the Indian economy in 1991, Indian manufacturing was ahead of China. The Tata Engineering Company where I was a director, was already exporting Indian designed and manufactured trucks and buses to 50 countries, in competition with European and Japanese manufacturers. Power equipment made in India at BHEL was superior to Chinese equipment. Yet, by 2009 China had become the factory of the world. Its manufacturing sector had grown about ten times larger than India’s. And India was even importing Chinese power equipment for the mega power plants that the government was promoting to increase electricity production in India. India must take a fresh look at its industrial policy to increase employment, he said. Something had gone wrong in the 1990s. Given my experience, he wanted me to concentrate on it.
Our paradigm of planning and policy seemed flawed, Dr. Manmohan Singh said. What India needed was a “systems reforms” commission, not a planning commission. Moreover, it should become an “essay in persuasion”, he suggested, i.e., a force for persuasion for change, not a maker of budgets.
When I joined the Planning Commission, the government was facing lots of criticism about levels of poverty in the country. The Planning Commission defended the Tendulkar poverty line with graphs showing how much poverty had been reduced.
My seven-year-old grandson from the US visited us soon after I joined the Commission. I proudly drove him through the streets of New Delhi in my government car with the red beacon on top. He was not impressed. He was concerned about the poor people cooking, bathing, and sleeping on the streets in India’s capital city. “What is the government doing?” he asked. “Counting daisies?” “What do you mean counting daisies?” I asked. “Look at all the poor people”, he replied. “Can’t the government see them? What is it doing for the poor people?”
I took Viren to the Planning Commission. I showed him its large offices, and volumes of plan documents with their tables and graphs. He was not impressed. “Don’t count the poor people Dadaji”, he said. “Listen to them. And then they won’t be poor anymore”.
It takes a child to tell an Emperor that he is not wearing any clothes. Economists now realize that poverty is a multi-dimensional phenomenon. It cannot be measured only in quantities of calories and money. Well-being has many facets that cannot be quantified. Viren’s advice was profound. When you listen to a poor person with respect, you give her dignity. By listening to her you also understand why she feels poor, and what will help her the most.
Economists everywhere, even in the Planning Commission, are trained to count and calculate, rather than to listen and learn. Social scientist A.O. Hirschman had pointed out that his contemporary, Milton Friedman, expressed difficulty in accepting the notion that people should desire to express their views to make them prevail. Friedman described people’s desire to be heard as a resort to “cumbrous political channels”. He would much rather they resort to ‘efficient market mechanisms’ and use their money rather than their mouths to make their opinions known. Cash is easy to count. But poor people don’t have enough money to make their preferences count in cash registers.
Quantitative economics is not fit to guide public policy. Economists like to listen only to unemotional data. Their science does not have the tools to listen to the voices of real people.
According to free market fundamentalists like Friedman, markets should regulate governments; governments must not regulate markets. Thereby the rich govern in capitalist economies. They manage politics and direct policies.
From Listening, I now turn to Learning.
A fundamental flaw in economics is the model of an economy as a system in general equilibrium. The model cannot explain how innovations happen that change the economy’s shape. Rational economics has no place for the creative force of human aspiration.
An innovation is the creation of something new that did not exist before. The creation of something known in a novel way is also innovation. Innovation is a process of experimenting and learning in action.
David Ricardo’s theory of international trade said that countries should produce only what they can produce better than others and buy the remainder of what they need from others. The British should buy port wine from Portugal, which has a better climate for producing wine; and the Portuguese should buy cloth from Britain. His theory did not explain how the British learned to produce cloth in the first place, and learned to produce it more competitively than Indians, who had been producing and exporting the finest textiles in the world for centuries. Ricardo’s theory could not anticipate how, in the 20th century, Japan, with no natural resources, learned to manufacture better products, and cost competitively too, than nations with the raw materials.
Industrialisation and economic development are processes of nations learning to do what they could not do before. Many stakeholders must learn together to create a nation’s competitive advantage. Enterprises within the nation must learn, as Japanese automobile companies did to produce even products than their competitors. Workers in the enterprises must learn skills they did not have before. Above all, the country’s policymakers must learn how to nurture the learning required by the nation’s enterprises and its people. All are stakeholders of an organic system, and all must learn together.
Economic history, since Ricardo’s time, has revealed that, in an interconnected world in which nations trade with each other, the only sustainable competitive advantage of any nation, and any enterprise, is its ability to learn and improve faster than any potential competition.
I will now focus on a strategy for India.
India needs a competitive growth strategy to catch up with countries who are ahead of it.
A good competition strategy must be based on the resource that a corporation or a country has more of than its competitors. If a country sits on large petroleum resources, its national strategy must be founded on the use of hydro-carbon resources for growth. Indeed, this is how Saudi Arabia has become very wealthy. It has world-scale, and world-class, petroleum refining and petrochemical industries. A country with larger copper and mineral resources than other countries can build its economy on the strengths of its mineral extraction and process industries, as Chile has.
What is the resource India has more of than any other country in the world? It is young people. India’s growth strategy must be founded on the employment of larger numbers of human beings in its economic enterprises. They are abundant, willing to work, and willing to learn. Our large population of people seeking employment can be India’s assets: they can provide Indian enterprises a competitive advantage.
In conventional corporate accounting, human beings do not even appear on the asset side of the register, along with other assets, like buildings and machinery. Human beings are accounted for on the cost and income side. To be used only when required for production.
The values of all assets on the balance sheet depreciate over time. Accounting law requires that companies report depreciation of their assets’ values. Human beings are unusual assets. They are the only assets whose value can increase over time. Human beings have an ability to learn and to improve their own capabilities. Provided of course they are enabled to. And not only can human beings improve their own capabilities, they can also improve the performance of the company’s machines, and the efficiency in use of other materials, if they are motivated to.
Thus, human beings are the only appreciating assets a company has, and a country has. Japan does not have petroleum, mineral, or chemical resources. Despite this, Japanese companies in many industries became world-beaters because they made Japanese workers their competitive advantage.
A dictum of management is that you manage what you measure. “Productivity” is a central concept in national and company economics. Productivity is a ratio of input and output: a measure of how much input is required to produce the desired output. The output is the numerator and the input the denominator. There are two ways to improve any productivity ratio. The easier way is to reduce the quantity in the denominator. The more difficult way is to keep the denominator constant, and yet produce more output.
The most important productivity ratio any manager should be concerned with is how to get the most output from the scarcest or most expensive resource the enterprise has. A universal practice, in corporate, as well as national accounting, is to measure productivity as output per unit of labour. This presumes that human labour is the scarcest resource and that it should be substituted by capital.
However, labour is the most abundant resource India has, and unfortunately the least utilized. Whereas financial capital is relatively scarce. Therefore, the productivity of the Indian economy should be measured by how many good jobs each unit of financial capital produces. Companies too should re-examine their strategies for global competitiveness. They should value the potential of Indian people. Engage them, nurture them, care for them. They will be your competitive advantage. Nurturing Indian citizens as appreciating assets, not as burdens, will make India’s growth more inclusive and faster too.
A paradigm shift in economic policies is required to power the growth of GDP. Incomes must grow faster in the lower parts of India’s economic pyramid to create a larger market for businesses. The thrust of policies must change from the ease of doing business and improvement of investors’ profits, to the ease of earning and living of common citizens.
After the global financial crisis in 2008, when millions of citizens in the US and Europe lost their homes and livelihoods, policymakers vowed, never again. They would establish a “new normal”. A few lifeboats were put out. However, the Titanic did not change course. The furniture on the upper deck was plushed up, while inequalities within countries increased further. Then came the even larger Covid crisis. While millions lost their livelihoods, stock-markets boomed.
In 2008, a high level, international commission chaired by Noble Laureate economist Michael Spence brought together 22 policymakers, academics, and business leaders to examine various aspects of economic growth and development. Montek Ahluwalia, Deputy Chairman of India’s Planning Commission was a member. It published its Growth Report in 2009. Spence, presenting the findings in New Delhi, said that prevalent market liberal economic theories explained how to make economic growth faster. They don’t explain how to make growth inclusive at the same time. The theory of first increase the pie and then wait for the trickle down has continued around the world and in India too. The old normal continues.
Dr. Manmohan Singh’s government had realised the necessity of speeding up inclusion in India’s economic growth. It had also realised that faster economic growth could not be at the cost of environmental sustainability. Therefore, the goal of India’s 12th Five Year Plan, the last one the Planning Commission made, was “Faster, Inclusive and Sustainable Growth.”
Let’s compare the vital statistics of the world’s three largest countries—the US, China, and India. The US and China are the world’s largest economies, and China and India are the world’s most populous countries.
India and China have around 1.4 billion humans each living in them. The US, with 331 million, has around one -fourth India’s and China’s populations.
Compare their land areas. China is 9.7 million square kilometres. The US, only a tad smaller, is 9.4 million square kilometres. India is much smaller: 3.3 million square kilometres.
Thus, Indians have only one-third as much land as Chinese have, and one-twelfth what US citizens have. Therefore, Indian citizens must husband their land and water resources with much greater care than US and Chinese citizens.
When I joined the Planning Commission, we assessed the impact of India’s GDP growth, which was amongst the fastest in the world, on people and the environment. The growth of countries in South Asia, S.E. Asia, and BRICS, was compared using the international Sustainable Economic Development Assessment framework (SEDA). It measures growth along three tracks: economic growth, inclusion in growth, and environmental sustainability. The assessment revealed that the growth of the Indian economy, though amongst the fastest in the world then, was the least inclusive, and the least environmentally sustainable, even amongst India’s sub-continental neighbours.
Every unit of India’s GDP growth was producing the least number of additional jobs compared to all these countries. This was an ominous warning. With its vast population of young people, who were expected to provide a demographic dividend to India’s growth, the economy must generate jobs for them. Because, unless they are employed and earn sufficiently, they will not provide the required big boost to consumption and savings. The warnings were not heeded. Ten years later, slow growth of farmers’ incomes, and unemployment and under-employment, have become the Achilles Heel of the Indian economy.
The assessment also revealed that, with every unit of GDP growth, India’s natural environment was being damaged more than in all other countries. Ground water levels were dropping fastest in India; soil quality was degrading; and Indian cities were the most polluted.
The paradigm of first more GDP, and then redistribution continues. This is the global economic paradigm; our economists have been following along.
In the drive for faster economic growth, we are building more man-made infrastructure—more roads, more dams, more ports, more urban infrastructure. In the process we are damaging the infrastructure Nature provides for taking care of itself and of us too.
Land is flattened and water bodies are covered to build modern urban infrastructure. The consequence is both, diminishing water resources, as well as floods that overwhelm cities. Mountain slopes are cut to build roads and towns. The consequence is landslides that destroy property and lives. River sand is mined for urban construction, and rivers change course and flood. Breakwaters to build ports are causing beaches to erode pulling down buildings along the shore.
The economic activity for altering Nature’s infrastructure— cutting of slopes, levelling the land, filling water bodies, etc. adds to GDP. Adding man-designed, and man-built concrete and steel infrastructure on top adds even more to GDP. Finally, even activities for clearing the rubble after disasters and rescuing people add to GDP. GDP keeps going up with more modern, man-made, infrastructure while Nature’s infrastructure is destroyed.
A new paradigm is required for India’s, and the world’s progress. Continuing to solve systemic problems with the same approach that has caused them is madness, Einstein said. Which brings me to the third leg, the third L of the policy stool—the Local.
In 2015, all countries adopted the 17 UN Sustainable Development Goals to be achieved by 2030. Time is running out. Climate change is racing ahead; inequities are increasing.
The SDGs describe 17 complex combinations of environmental, social, and economic problems. All 17 problems do not appear in every country, and when they do, they do not appear in the same form. For example, problems of the oceans are immediately life-threatening to island countries but not to land-locked countries yet. Environmental problems are not the same in Canada and Barbados. Opportunities for decent work (SDG 8) are inadequate everywhere, but much fewer in countries in the Global South than in the rich North.
No country has only one of the SDGs problems. Every country has at least six or seven. Mathematical calculations show that even seven problems (out of a possible seventeen) can combine in 98 million different ways. Clearly one global solution, for the environment, society, or economy, cannot apply everywhere
A new paradigm is necessary for solving the systemic problems of increasing inequities, continuing climate change, and collapsing global financial and trade systems. These problems are inter-related. They cannot be solved separately. Top-down universal solutions, by global and national experts, will not work. Because these problems take different shapes in different places.
Local systems solutions cooperatively designed and implemented by communities is the only way that inter-connected problems, of inclusive and sustainable growth, can be effectively solved, to achieve the SDGs. Local is the solution of the global.
To conclude, I return to the power of Listening.
We need to listen to each other within our communities and in our countries, with respect for each other. By listening to other points-of-view we will be able to understand our own realities, and we will learn what we must improve together to make the world better for everyone.
The world is being divided into fragments by narrow domestic walls. Social media is poisoning our minds against our own neighbours. We must learn to listen. Especially to people who we think are not like us. Then only will we learn to live in harmony.
I will end with a simple, but powerful solution. It is a poem on Listening.
“It is time to press the pause button.
Put our smartphones on silent.
Shut out the tweets, trolls, and soundbites.
And stop the windmills in our minds.
It is time to listen.
To listen to the whispers in the trees.
To the caring in our hearts.
And most of all, to the voices of
People Not Like Us.
Then we will learn
And find solutions for living together
On our shared Earth.”
I end with a note of gratitude to the Centre for Public Policy and all of you.
I thank you for listening to me.