Double talk on double-digit

India doesn’t need to buy peace from its neighbours to sustain economic growth

At a talk I gave recently, one person asked if the numerous crises in India’s immediate neighbourhood limit India’s growth. This was some time after Prime Minister Manmohan Singh, at a press conference in May, asserted that “India would be unable to realise its full economic potential if it couldn’t reduce tensions with its neighbours, especially Pakistan”.

“Not at the moment, and not for the foreseeable future” I replied, “because the biggest bottlenecks to sustainable economic growth are domestic.” Only after the most important reforms—creating a national common market, unshackling agriculture, liberalising labour laws and fixing the education system—run their course might the situation in the neighbourhood begin to matter.

In a recent paper demographics and India’s labour force, Tushar Poddar and Pragyan Deb of Goldman Sachs estimate that they see the Indian economy growing at a base rate of 8% per annum. With the required reforms, the growth rate will increase to 9%. With wrong policies, there is a risk that the growth rate will fall to 6.5%. [See recent articles by Niranjan Rajadhyaksha & V Anantha Nageswaran for a discussion on sustaining high growth rates].

The neighbourhood doesn’t register much in these assessments. In fact, Dr Singh himself concedes as much. “A number of inherent strengths in the country‚Äôs economy,” he said this month “can contribute to rapid growth in the future and they should be harnessed to push up economic growth to double digits.” In other words, Dr Singh the economist contradicts Dr Singh the geopolitical strategist.

The prime minister’s concession underlines the simple fact the most brazen of Pakistan’s skulduggeries are but a pimple on the posterior of the India economy. You don’t need to have grand “composite dialogues” with Pakistan’s impotent politicians to sustain India’s economic growth.

On the contrary, the question for India’s neighbours is whether or not they want to benefit from India’s growth process? It’s their decision. Sri Lanka and now Bangladesh appear to have embarked on trajectories that make the most out of opportunities provided by both India and China. Pakistan—perhaps because its unaccountable elite are buttressed by liberal Western aid—is unconcerned with improving the lot of its own people. That is its own problem. This does not mean it is not in India’s interests to improve trade with its crisis-ridden neighbour. It only means that it won’t hurt the Indian economy much if it doesn’t happen.

Once the Indian economy exhausts all the potential from the necessary next wave of reforms the condition of the neighbourhood might begin to impose constraints on its further growth. That point is at least two decades away. And it is by no means certain that it’ll matter even then, for it is possible that the neighbourhood will matter even less.

The Sonia Gandhi-led Congress Party is equivocal (okay, very unwilling) on using its political capital to carry out the reforms that are necessary for sustainable double-digit growth. Dr Singh is committed to losing his political capital on pursuing talks with Pakistan that are unnecessary for that purpose. Don’t be fooled.

From the archives: The Reagan Parallel, June 2004

Rising food prices = opportunity for India’s farmers

And the cost of lost opportunities

For all its rhetoric about protecting rural India, when the real opportunity came, the UPA government decided to deprive the farmer of a chance of making a better livelihood.

Now everyone knows that rising food prices are bad for the economy, and very much so for the poor. Yet it is possible to protect those at greatest risk through the use of targeted food subsidies and even direct cash transfers. Such an approach would have been doubly beneficial: first, farmers would have enjoyed greater incomes from high international prices and second, farmers would have responded to the price signal by growing more food-grains, thereby increasing the global supply and helping check inflation.

Barring exports was the dumb thing to do. It harms farmers. It prevents them from making more money at a time when they could have made more money. It prevents them from investing in better seeds, fertilisers and farming technology that could increase agricultural productivity (India’s is among the lowest in Asia). Capturing productivity gains would have had long-term benefits.

In its “new deal for global food policy” the World Bank says as much:

While higher grain prices are clearly a burden to poor net purchasers of food, they also present an opportunity to stimulate foodgrain production and enhance the contribution of agriculture to medium-run growth. For example, higher prices weaken the rationale for costly floor prices or import tariffs for grain, and may facilitate the implementation of politically difficult trade reforms. Higher grain prices can also help to reverse a generally declining trend in government, private sector and donor investment in the agricultural sector.

Agricultural producers such as Brazil, Malaysia and Thailand have made significant progress in agricultural commercialization in recent years, and have increasingly undertaken investments in research and extension necessary to promote increased agricultural productivity and reduced agricultural risk.

However, some of the short-run policy options discussed above may limit the scope for longer-term solutions. For example, policy responses that seek to control markets through mandated grain prices, export restrictions, forcible procurement, or direct government involvement in marketing activities are likely to lower the food supply response over the medium term. In contrast, alternative measures such as the piloting of market-based risk management tools in Malawi, and the improvement of publicly accessible market information systems in India and Mali, are all likely to mobilize significant new resources in the private sector to cut marketing costs and improve efficiency of grain markets over the medium term. [WB]

Related Links: In addition to the World Bank’s excellent backgrounder see this post by Alex Evans at the Global Dashboard. Update: Paul Collier’s op-ed in the Times makes some very good points.