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    View: A strong government could be bad for Indian economy

    Synopsis

    Indian economy has an eternal paradox — weak govts have delivered better results than strong ones.

    View: A strong government is bad for Indian economy, more often than not
    Only a strong government could have come up with an idea like demonetisation, deemed too crazy to try even by a basket case economies.
    by Sadanand Dhume

    For the longest time, India had a lock on a dubious global distinction: it was home to the world’s largest pool of extremely poor people. No more. Earlier this year, Brookings Institution scholar Homi Kharas estimated that the number of Nigerians in extreme poverty – defined by the international benchmark of living on under $1.90 per day – had overtaken the number of Indians in a similar condition.

    According to the World Poverty Clock, an online database, Nigeria now houses 88 million extremely poor people compared with just 63 million in India, or 4.6% of the population. About 41 Indians escape extreme poverty every minute. This means that by 2025 less than 0.5% of Indians will be extremely poor. This will dwindle to a mere 0.1% of the population by 2030. Less than 90 years after the Bengal famine, a land that was a byword for poverty would have ended its most egregious manifestation.

    India’s achievement is creditable by any yardstick. But it occurs against a backdrop of rising prosperity worldwide. With plenty of wrong turns along the way, most of the world’s countries have arrived at a common understanding that now appears glaringly obvious: the single best antidote to poverty is economic growth.

    A small cohort of northern Europeans and their north American cousins have lost their monopoly on the magic ingredients of wealth creation – free trade, rule of law, property rights and a culture of entrepreneurship. Not all countries have embraced these ingredients in equal measure, but most of the world has at least managed to turn away from the unworkable ideas – usually anchored in leftist utopianism of some sort – that marred the twentieth century.

    In a little over a decade, extreme poverty will all but cease to exist in Asia. Most of it will be confined to sub-Saharan African countries where growth rates have not kept pace with soaring birth rates, such as Nigeria and the Democratic Republic of Congo.

    A political paradox of sorts has accompanied India’s upward economic arc. For the first four decades of independence, single-party majority governments delivered anaemic growth. India’s most dramatic assault on poverty has come in the coalition era that followed Rajiv Gandhi’s defeat in the 1989 general election.

    Between 1950 and 1980, India’s economy expanded at an annualised average of 3.6%. Per capita income grew at a sluggish 1.5% per year. These figures ticked upward in the 1980s, but the real breakthrough only came after India embraced liberalisation and globalisation in 1991. Since then per capita income has grown on average by 4.9%. Since 2004, it has grown even faster – by over 6.1% annually. In this period, India has lifted more than 350 million people out of extreme poverty.

    Why did weak governments deliver better results than strong ones? The simple answer: in India, the era of single-party majorities coincided with the heyday of state planning. After Independence, instead of embracing a market economy, where supply and demand determine production, India scurried down the rabbit hole of socialism where pointy-headed bureaucrats and their political masters called the shots.

    Under both Jawaharlal Nehru and Indira Gandhi the government raised trade barriers, nationalised private enterprises, raised extortionate taxes on the rich, and told companies how to run their business. Had they instead used their power to build infrastructure, strengthen rule of law, encourage private enterprise and educate the masses, India need not have waited this long to nearly wipe out poverty.

    Luckily the odds of India returning to full-blown socialism of the pre-liberalisation variety appear slim. But as four years of Modi have shown, a strong government’s tendency to overreach remains a recurring national problem.

    Only a strong government could have come up with a cockamamie idea like demonetisation, deemed too crazy to try even by a basket case economy like Venezuela. In a less dramatic – but nonetheless destructive – vein the Modi government has armed tax inspectors with extortionate powers, escalating the tax terrorism the Bharatiya Janata Party (rightly) protested when in opposition.

    On trade, tariff-loving bureaucrats have prevailed over liberalisers. And while an elegant simplicity marks a goods and services tax in most countries that have adopted it, in India it’s a hot mess designed to privilege discretion over clarity. Five years ago, Indian businessmen would swell with hope when they spoke about Modi. These days the dominant emotion is a combination of fear and resignation.

    This does not mean that a strong government cannot do good. Indeed, many of those who welcomed Modi’s sweeping victory in 2014 did so with the expectation that he would push through long-pending reforms in land and labour markets, and privatise loss-making behemoths such as Air India and BSNL. The argument that only a strong government can champion politically contentious reforms remains sound. That Modi has failed on this front is a separate matter.

    Why fret about this when India remains on track to defeat poverty? The answer is simple. Extreme poverty may belong in the past, but it’s not as though widespread prosperity has arrived in the present. The fight for economic liberty – making sure that lessons learned remain learned, and that old mistakes don’t reappear in new guise – is never-ending. The successes of the post-liberalisation era only prove that these are ideas worth fighting for.

    The writer is a resident fellow at the American Enterprise Institute in Washington, DC. Views expressed here are personal.


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