PM Modi recently launched the ‘Make in India’ campaign to attract investment and boost manufacturing. In this article, Maitreesh Ghatak contrasts the campaign with the Chinese model of economic governance, and reflects on its potential to enable higher growth and poverty reduction.
Indians who swear by China belong to two groups who at first glance could not be more dissimilar: businessmen and Maoist rebels. If you don´t like the status quo you could either plot a revolution, on which there is no greater authority than Mao. Or you could try growth through pro-business reforms, for which the world expert is Deng.
‘Make in India’ campaign vs. the Chinese model of economic governance
The ´Make in India´ campaign is clearly influenced by the Chinese model of economic governance that is all about inviting Foreign Direct Investment (FDI), cutting red tape, making sure workers work without creating trouble, farmers give up land when business needs it, and keeping in check pesky environmental activists. If income growth is indeed the objective, then the Chinese model of authoritarian economic governance does have some appealing features.
However, what is often not recalled is that the Chinese have a strong system of social security and universal access to health and education. The kind of extreme poverty India is familiar with is absent, and overall measures of education and health are much better.
Therefore, it is strange to expect that one can simply borrow the authoritarian model of economic governance without designing policies through which the benefits of growth are distributed, and that somehow combining India´s chaotic but vibrant democracy with the Chinese centralised model of economic governance will achieve the best of both worlds, namely, political freedom and economic order. As in the proverbial story of the glamorous dancer proposing to the well-known writer about having a child who would combine the former´s looks and the latter´s brains, it could go the other way.
Can ‘Make in India’ enable higher growth and poverty reduction?
Turning from possibilities to facts, the last years of the United Progressive Alliance (UPA) did see the Indian version of stagflation - low growth and high inflation -- and a sense of policy indecisiveness despite a good record earlier, and voters gave Narendra Modi a decisive mandate. Given India´s democratic system, of which we are all justly proud, unless the ordinary citizen experiences ´Achchhe din´ (better days) within a reasonable time her support will waver.
Modi is too astute a politician not to realise this. So what is his economic gameplan? And what role can ´Make in India´ play in it? In particular, what is the basis for assuming that increases in FDI will translate to higher growth and poverty reduction?
First, there is little evidence that these kinds of campaigns yield a lot of concrete results. For example, it has been pointed out in the Economic Freedom of the States of India Report (2013) that the rate of conversion of investment agreements in events such as the Vibrant Gujarat Summit to actual investment is pretty low – it was 6% for the country as a whole in 2010-11, and only 8.5% in Modi’s Gujarat.
Second, even if such campaigns result in a significant increase in FDI inflows, we need to keep in mind, at present FDI net inflows are only 1.3% of Gross Domestic Product (GDP) for India which is well below the world average for countries comparable in terms of GDP per capita. So for these to result in a significant overall increase in the GDP growth rate is a bit of a stretch.
Third, there is very little evidence that FDI has an unconditionally positive effect on growth in India or elsewhere. What is known is that a country´s capacity to take advantage of FDI is governed by the quality of its institutions, such as how developed its financial markets are. Therefore, without deep policy reforms, as opposed to the process reforms that the ´Make in India´ campaign seems to emphasise, it is not clear how much impact even substantial increases in FDI will have on overall growth in India, especially in light of how small FDI is relative to the size of the Indian economy.
Finally, there is very little evidence in the Indian context that higher growth in income leads to significant growth in employment or wages, or a significant reduction in poverty - the key determinants of ´Achchhe din´ for the masses. To measure this, people use what is called the growth elasticity of poverty, which captures the responsiveness of poverty to economic growth (extent to which poverty falls when there is a unit increase in growth). India´s performance in this respect during the post-liberalisation era has been worse than that of China and other comparable countries.
Indeed, if one looks at the Gujarat model of development, it is clear that the impressive growth rates did not translate into a corresponding change in human development indices. However, this is largely true of India during the UPA regime as well: despite a slew of anti-poverty programmes, real GDP increased at the rate of 7.6% per year, whereas the rate of decrease in poverty was only 2.2% per year during 2004-2013, and improvements in many of the development indicators were miniscule. This is not to say that growth is not important for poverty alleviation. Rather, the transmission mechanism from growth to poverty alleviation has not been strong enough. As a result, for 30% of the population - more than 350 million Indians – who live below the poverty line, the speed of benefits from economic reform trickling down through employment generation and rise in real wages has been slow. Moreover, the demands of industrialisation has created pressure on land, forest and mining resources, often bringing big business in conflict with the traditional livelihood of rural communities.
‘Made in India’ or ‘Mess in India’?
To fulfil the aspirations of the millions who voted for change, falling back on the trickle-down theory won´t work; unless the poorer sections feel concrete improvements in their standards of living, India Inc’s and the middle class’s dreams of India shining are likely to be short-circuited through the electoral process.
Structural reforms are needed to facilitate growth, make it broad-based and inclusive, and to improve the efficiency and accountability of anti-poverty programmes. This requires institutional reforms, as well as improvement in governance. In this regard, the Pradhan Mantri Jan DhanYojana (PMJDY), aimed at facilitating access of banking services to the poorer sections, is a welcome move. But that aside, it is not clear either from the Gujarat model, the recently presented budget, or the ´Make in India´ campaign, how the transition from rhetoric to results will work out.
It is still early days, and so we will have to wait and watch if the ´Make in India´ campaign will result in ´Made in India´ becoming a global brand, or whether we´ll be stuck with the more familiar ´Mess in India´.
A version of this article has appeared in The Economic Times.