The Acorn’s Opinion on The Economist’s Opinion
The Acorn largely agrees with The Economist’s prognosis, but only partially with its diagnosis.
I’m referring to the “India Shining” issue of the Economist that is on the stands in India at at a special price of Rs 65 (against the usual Rs 120), thanks in part to lavish advertisements by Dr J Jayalalithaa’s Tamil Nadu (The State of today’s India), Andhra Pradesh, Jet Airways and Star TV. The irony is while Jayalalithaa and Chandrababu Naidu had to pay for the advertorials, Laloo Yadav got his photo printed based purely on merit. (Non subscribers can read some extracts at Rajesh Jain’s Emergic)
Where I agree…
I strongly agree with The Economist’s view that India is indeed poised for a high-growth phase, but for this to happen in a sustained manner a few things are essential. As I’ve argued before these are political stability, commitment to economic reform, attracting FDI, prudent government spending and investment in infrastructure. For example if over 3% of the GDP growth comes from a “good monsoon” it is vital to address this dependency, which involves focusing on irrigation, water management and again, infrastructure. With better power, roads, ports and airports India’s manufacturing sector can be competitive too.
The upshot of all this is an unwavering commitment to economic reform; not half-measures and afterthoughts. The BJP woke up late to this reality, and actually had the badge of “party of economic reform” thrust upon it. Economic reform and development may be a winning electoral mantra this time round, and the BJP’s radar has been able to sense it. It hopes to return to power with a clear mandate for reform. The Congress as I point out last week is at the crossroads looking backwards towards where it came from.
and where I dont
The Economist offers two ‘convincing explanations’ for India’s lagging behind the Asian Tigers for so many years – the conflict with Pakistan and a ’stubborn reluctance to unleash the power of the market’.
I think its only the latter. Every government from Indira Gandhi to Chandrashekhar systematically trampled down private enterprise whenever it raised its head to gasp for air.
I would assume that conflict with Pakistan could possibly have contributed to depressed growth in two ways – by diverting resources into defence expenditure, and by scaring away investors.
But both India and China have been spending between 2 to 3% of their GDP on defence for the last few years. Throughout the last decade, China continued to grow at 8% despite rising military spending. In absolute terms China, Japan and South Korea spend far more money on defence than India. On a per capita basis, Malaysia spent $90 on defence last year, compared to $17 for China and $16 for India. It is difficult to conclude that India’s defence spending is/was large enough to depress economic growth. 
The Scared Investor is another bogey. South Korea managed to sustain spectacular growth although the Dear Leader’s tanks are parked just 30 miles away. Taiwan threatens referendums and China uses the Taiwan Strait as a missile firing range every few years; but growth continues in both these countries. They may be scared, but they are investors.
I’m not arguing that conflict does not pose risks to investment – only that it is possible to have economic growth in spite of the conflicts. Talking peace with Pakistan has its own merit and peace is certainly a better alternative to conflict. However, I do not buy the thesis that Pakistan can hold India’s economic future to ransom either by trying to “bleed” India dry or by scaring the world with nuclear war.
If the government embraces the reform agenda unequivocally and makes economic development an article of faith, investors will come. China registered spectacular growth in spite of communism, corruption, opacity and absence of both a free market institutions and rule of law. It was just Deng’s resolute commitment that worked for them.
Endpiece
The Economist’s leader on services outsourcing came in the same issue. Coincidence?
Related Links: My comments on Deesha, AnarCapLib and Emergic on agriculture and the rural economy,
[...] This blog is a strong advocate of ensuring that budgetary allocations match the multifarious challenges that India’s armed forces are required to face. It has been The Acorn’s case that India can achieve far higher growth rates and improve its human development indicators by embracing free-market economics than by simply cutting down defence expenditure, as some liberal critics would argue. India’s military capabilities — from C4ISR, weapons platforms down to equipment carried by individual soldiers — do not yet match up to its geopolitical ambitions or even basic future needs. While blueprints and doctrines have been discussed and adopted by the Army, Navy and Air Force, a more fundamental long-term strategic review of India’s defence in the twenty-first century has been long overdue. Procurement scandals and political over-reactions in response have helped make such a review a political minefield that no government dares venture into. [...]
[...] One needs to look no further than China to see an example of how economic power can be accumulated without having to make territorial concessions to buy peace. China opened itself to trade and investment with India, Taiwan, Japan and other East Asian countries with all of whom it has unresolved territorial disputes. It did business with the United States despite the latter being openly committed to guaranteeing Taiwan’s security. With the its rise as an economic power China will be less likely to be forced to settle its territorial disputes by having to make concessions, especially unilateral ones. [Related Link: Defence expenditure and GDP growth] [...]