Build a new economic imagination

This has been a difficult three months for India. The policy response to the coronavirus disease (Covid-19) and the lockdown has forced it to confront long-ignored realities about the Indian economy — its fragility, regional and spatial concentration and deep structural inequity. It also made visible sources of precarious resilience. Agriculture and associated supply chains, for instance, held together despite significant disruption and fall in demand. Now, as India unlocks and the focus shifts to repair and reform, policy debates must contend with these realities. India cannot repair and reform without acknowledging its economic failures. Doing so places accepted pathways for growth, shaped by the 1991 moment, back in contention.

Coming off the stifling restrictions of the licence raj, the need to get the State out of the way was central to the 1991 imagination. Deregulation, market competition and opening up were the key mantras. This was a necessary element for economic reform. However, in its exuberance, the push for a smaller State failed to recognise that deregulation was not about State exit but about a changing role for the State and building a new economic regulatory architecture. This required more, not less, investment in State capacity — human resources and institutional systems, including processes for public accountability and dispute resolution. The pre-pandemic slowdown was, in part, a consequence of this failure to build regulatory capacity; our post-pandemic reforms run a similar risk.

Consider the three agricultural ordinances promulgated earlier this month. The underlying objective to liberalise agriculture markets and give farmers greater choice is welcome. However, experience in states such as Bihar point out that deregulation, without investments in markets, does not automatically spur competition. Rather, this risks the proliferation of brokers. Infrastructure for wholesale agricultural markets is woeful and farmers have few avenues to directly sell produce. According to government estimates, India needs more than 3,500 wholesale markets and its 23,000 rural periodic markets need urgent infrastructure upgradation. Opening up agricultural markets to greater competition must also be accompanied by State investments in creating market infrastructure, information systems and building credible and responsive regulatory institutions that enable fair exchange and trade. This is in no way unique to agriculture. Across key sectors and in core factor market reforms, the State has a critical role to play.

However, regulatory capacity is only one part of the challenge. As the lockdown shows, markets in India operate in a context of deep structural and regional inequalities. These inequalities necessitate State interventions in infrastructure, in incentivising supply chain investments, managing risk and enhancing bargaining power. This is where the State has been at its weakest. The State’s failure to build these markets lies in an economic imagination that viewed the economy in false binaries that emphasised trade-offs between farm vs non-farm, rural vs urban, formal vs informal. In pursuit of an economy that was non-farm, urban and formal, it failed to understand the deep links across these binaries and design responsive policy.

This is best illustrated in the approach to agriculture and growth. Consider the following: First, where agriculture has been invested in, agricultural surplus has played an important role in driving industrialisation and moving people off the farm. The history of India’s industrial hubs such as Tiruppur, Tamil Nadu, which grew on the back of agrarian capital are testimony to this. Second, half of India’s manufacturing value addition and off-farm employment (Census 2011) is in rural areas. Third, urbanisation is fuelled by changing economic patterns in these rural areas as non-farm employment increases. Half of India’s new urban population growth between 2001-2011 (Census 2011) is in these rural areas that morphed into towns. Agriculture, non-farm rural and urbanisation are inextricably linked. In the policy preoccupation with moving people out of agriculture, the economic narrative failed to recognise these interlinkages treating agriculture as a residue, a drag on the economy and rural, non-farm and urban as silos. We have separate agriculture, rural, urban and micro, small and medium enterprises departments and no mechanism for strategic planning and coordination across them. Urban policies and spending has prioritised “smart” cities and metropolises rather than investing in small towns (many of which are still classified as rural) and cities where the bulk of economic activity takes place. Local governments, which ought to play a critical role, are weak, leaving behind largely the more pernicious elements of the license raj State that exploit the very inequalities the lockdown made visible.

Addressing India’s structural inequalities and making markets genuinely competitive requires an integrated economic framework, which breaks silos and invests in the continuum of agriculture, rural, non-farm and urban. This means investing in and incentivising State capacities to collect better data on agriculture, non-farm sectors, and urbanisation, for decentralised, local economic planning and investment.

Finally, the lockdown must lay to rest the old debate on trade-offs between welfare and growth. Welfare, because of its political imperatives, was always treated as an afterthought in the post-1991 imagination, a compensation for the failure to bring people in as active participants in the economy. As is well recognised in economic literature, robust welfare builds human capabilities, enhances productivity and most importantly ensures dignity. Welfare needs to be re-imagined as the foundation of a strong economy and the capabilities needed for delivering welfare must be enhanced.

If India is to find its way back on a growth trajectory, economic policymaking will need to acknowledge the failures of its past. Yet, our current reform imagination, as indicated in the Covid-19 economic package, remains trapped in false binaries and old frameworks. India’s economic imagination needs to be refocused on the real economy. Crucially, growth needs a robust and capable State across all levels. Investing in State capacity and its regulatory institutions rather than wishing the State away will ultimately be the real driver of growth.

Yamini Aiyar is president and chief executive, Centre for Policy Research. Mekhala Krishnamurthy is a senior fellow and director of the State Capacity Initiative, CPR and associate professor, Ashoka University

The views expressed are personal