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India's Growth Paradox



On August 15, India celebrated 63 years of independence. Many hail it as an economic powerhouse but also point to the lopsidedness of its growth. Despite being home to some of the world's leading technology companies, poverty is still widespread, physical and social infrastructure still woefully inadequate, employment opportunities still limited, and access to basic and higher education still insufficient. Nearly 40 percent of the population is still illiterate, and 25 percent is below the poverty line. India ranks 133rd (out of 183 countries) on the World Bank's ease of doing business index—169th on starting a business and 182nd on enforcing contracts—way behind several countries in sub-Saharan Africa and Latin America. As Edward Luce observed in his In Spite of the Gods: The Rise of Modern India, "India finds itself higher on the ladder than one would expect it to be. It is just that most of its people are still sitting at the bottom."

Why, then, has India grown so rapidly? Economic growth depends on policies toward the private sector and supporting public institutions. Policies have improved especially since 1991 but hardly enough to justify the spectacular growth rates of over 8 percent per year. Some institutions have done well, particularly those that hold elections, ensure financial stability, and regulate telecommunications and financial services. But these exceptions apart, the Indian state is foundering, partly because Indian politics has become increasingly criminalized, and corruption is rampant. India's (lack of) preparedness for the Commonwealth Games, which New Delhi is to host in October, illustrates the gravity of the crisis in India's governance.

Given the deterioration of the state, it is puzzling why India's economic growth is so high. Many would point to the educated elite and a dynamic information technology (IT) sector as explanations. While these have helped jumpstart growth, their effects are too small and benefits too narrow to sustain growth in a large economy like India's. The real driver of India's economic growth is growth itself: Growth that policymakers kick-started in 1991 is begetting more growth. As I argue in my op-ed in the Financial Times, this process works through three channels: First, growth for three decades since the 1990s has made entrepreneurship and money making respectable in India. As political scientist Devesh Kapur notes, India has become a nation of “hustlers” constantly looking for new economic opportunities, and ways to get around tedious regulations, which keeps growth on an upward path. Second, the private sector is increasingly responding to rising demand for public goods, which the state has been failing to supply adequately. The government's failure to provide good quality education, for example, is turning out to be an opportunity for private companies, such as the flagship IT company Infosys. Whether they are private schools in rural areas or training and vocational centers in cities, almost all the incremental demand is now being met by the private sector. Third, India's states have become increasingly competitive. If one state rejects a project, another is ready to take it. A prime example is Tata Group's relocation of its Nano project to the state of Gujarat from West Bengal.

While this three-way dynamic continues to generate growth, the decrepit Indian state is thwarting wider economic change, thus preventing India from scaling the heights China has.

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