The recently-released Economic Survey 2018-19 has discussed many acute challenges faced by the Indian economy like the severe agrarian crisis; the troubles of loss-making and debt-ridden public sector units; and the issues plaguing public sector banks.
According to author, Odd points highlighted now in Survey have been discussing since decade etc. The document invokes the comparison between India and East Asian countries and talks about the lessons that India can learn from the East Asian Economic Reforms.
Newly Industrialised Economies (NIEs): The East Asian Economies Success model:
In the 1970s and 1980s, examples of newly industrialized countries included Hong Kong, South Korea, Singapore and Taiwan.
A newly industrialized country is one whose economic development is between developing and highly developed classifications.
The primary sign of a country’s transition is substantial growth in gross domestic product.
Highly developed countries may see substantial opportunities in newly industrialized countries.
How Financial Inclusion happened in the East Asian Economies:
While these East Asian economies were generally successful in encouraging savings, the cost of capital was rather high, not unlike the problem in India today.
To tackle this, the East Asian economies undertook financial repression conventionally understood as a ceiling price keeping lending rates lower than market equilibrium.
The central banks of these economies maintained tight oversight, and selective capital controls ensured that the low-yielding savings did not leave their countries of origin, while limited financial development forestalled the possibility of people looking for savings alternatives.
The governments undertook sophisticated industrial policies to promote domestic investment, much of which was export-led (though not necessarily free-market based).
The governments understood that a vertical industrial policy (of ‘picking winners’) would not work without a sound horizontal industrial policy (dealing with labour and land reforms, bringing about basic literacy and raising women’s participation in the labour force).
Besides, incentives also had clear guidelines and sunset clauses and mechanisms were in place to phase out support. Thus, winners prospered while losers were allowed to fail.
Will East Asian model suit India’s need?
India’s aspiration to become a global economic powerhouse through the East Asian model is admirable, but the government seems to be facing the difficulty of translating ideas into action.
The Indian economy is facing the issues of delayed economic reform, tepid investment growth, slow industry output growth, depressed rural demand, and a 16-month streak of falling exports.
India’s claim to the world’s fastest economic growth even remains controversial as many express doubts about the new methods of GDP calculation.
It’s also worth noting that, given an unfavorable global economy and much changed economic dynamics in the past several decades, the East Asian model may no longer be valid in the 21st century economy of global over-capacity, automated production, and muted demand. Despite these setbacks, East Asian experiences still offer a few useful insights that are worthy of being considered by Indian policymakers.
What should India do?
Given the vastly different political, economic, and social structures involved, India’s East Asian dream should be tailored to the specific circumstances of India.
Financial inclusion should be encouraged, and the focus should be on actual use of the deposit accounts rather than just their opening.
While the manufacturing sector was viewed as a growth engine and open to export competition, the banking sector, in all economies, remained tightly regulated and closed to foreign banks.
To ensure that the private savings were actually intermediated into the formal financial system, failing which the cost of capital would remain high and the availability of capital for investment would be low.
To achieve this, importance was given to the establishment of a safe and secure public sector banking system (usually in the form of postal savings networks) where deposits were guaranteed by the central bank and interest incomes was taxed lightly, if at all.
To achieve the target of $10 trillion economy size by 2032, a robust and resilient infrastructure system is required, supported by adequate private investments.
As the country has only been able to put $100 to 110 billion annually into infrastructure development, this huge investment gaps of about $90 billion in the space needs funding through “innovative approaches”.
Perhaps it is not ignorance or unawareness of the right development policy and implementation strategy that is delaying India’s East Asian dream. Rather, it could be the intricacy of the political system of world’s largest democratic country, where the number of conflicts of interests is proportionate to the size of its constituents. It’s time to go beyond this grand vision for a better India.