The State of the Indian Economy

“What’s the state of the Indian economy, and what needs to be done?” asked K. Srinivas. The Indian economy is not doing too well but neither is it in dire straits. The rough indicator of the health of an economy is its GDP growth rate. It’s around 5 percent per year, which is not really robust for a country as poor as India. That rate would be fabulous for a rich country like the US, but for India it spells continued misery.

The government, of course, would like to claim a higher GDP growth rate and do so by manipulating the numbers. But quibbling over small numbers doesn’t buy you much. Regardless of whether it is 5 or 6, the bad news is that the economy is in trouble. Why is that so?

The simple answer is poor governance. Part of good governance is the formulation of policies that promote economic growth. Good economic policies are not accidentally arrived at; they require a deep understanding of the nature and causes of economic growth.

Deep understanding of economics cannot be intuitively arrived at any more than a deep understanding of any formal discipline such as quantum mechanics can be. It requires decades of specialized study of the discipline that has evolved over time — which in the case of economics amounts to a couple of centuries of serious academic research.

Policy makers are elected politicians, guided by officials of a permanent bureaucracy. If the bureaucrats are uninformed, and the politicians cannot judge the quality of the advice they are offered, then it is unlikely that the policies will benefit the economy. The worst case is when the politicians don’t even understand that economic policies matter, and believe that political maneuverings are sufficient for economic prosperity.

Politicians are not responsible for the wealth of nations, but they can be responsible for the poverty of nations.[1] Politicians cannot create wealth because wealth creation is the result of productive activities which they are incapable of. Factory and farm workers, scientists and engineers, miners and manufacturers produce wealth. The best that politicians can do is to get out of the way and not put barriers to productive activities. But it is par for the course that politicians usually meddle in the economy and create the poverty where there could have been prosperity.

Why do governments meddle in the economy when it has been abundantly clear for decades that it is the wrong thing to do? It’s because of a dangerous combination of hubris, ignorance, avarice and the lust for power and control. It is easy to explain that only the most power-hungry and avaricious will get to positions of power in the government; that the winners of political struggles will necessarily be ignorant of how the non-political world works; their ignorance will enable them to entertain the idiotic notion that the government control will be good for the economy.

Fact is that people produce wealth, governments don’t. What is the proper function of the government? To be a referee in the economic game, not a rule maker or a player. The rules of the economic game have to be formulated outside the control of those in government. Why? Because those in positions of power would invariably choose rules that benefit them and impose costs on others.

Fortunately, the set of rules that promote economic prosperity is known. Empirical evidence shows that they work, and analytical reasoning explains why they do. They are known. What are those rules?

      1. Allow economic freedom. Meaning the freedom to produce whatever, consume whatever, and exchange at whatever mutually agreed-upon terms.
      2. Protect property rights.
      3. Prevent force, fraud and theft — with the appropriate use of force if necessary.
      4. Enforce contracts.
      5. Ensure restitution for damages caused.

Can the rule-set really be that simple? Yes, they are simple, even though the economic game as it plays out is so complex that it defies human comprehension. Simple rules sometimes underlie emergent systems with complex behavior.

The Indian government does not play by those rules. It is not in the interest of the politicians and bureaucrats to play by those rules. Every policy ever made by the government of India has violated at least one of those rules.

That is why India is poor.

NOTES:

[1] To paraphrase Peter Boettke, professor of economics at George Mason University: “Economists are not responsible for the wealth of nations, but they can be responsible for the poverty of nations.”

Author: Atanu Dey

Economist.

16 thoughts on “The State of the Indian Economy”

  1. “Politicians are not responsible for the wealth of nations, but they can be responsible for the poverty of nations.”
    This is a perfect sentence which I hunted for so long. So many of we-the-people do not bat an eyelid when political parties promise us economic well-being. The parties and government should, at best, promise to get out of the way.

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      1. Engr. Ravi:

        The generalization (“Politicians are not responsible for the wealth of nations, but they can be responsible for the poverty of nations”), like any useful rule-of-thumb generalization need not hold in every case. Unlike for scientific laws, rule-of-thumb generalizations do admit exceptions. The trick is to understand the basic kernel of truth and not be overly concerned with the exceptions. Economics, political economy, sociology, etc., are not like the hard sciences where any exception to a rule immediately invalidates it.

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  2. Mr. Atanu Dey,
    I’m no economist(I only took 1st yr Economics and 2nd yr Micro-economics) but I suspect the old libertarian philosophy might no longer applies in the coming new age of A.I./Robotics(/StarTrek) ‘communism’ that the core economy of the more advanced countries will be increasingly controlled by the tech-elite that communistic welfare is a must to placate the populace while the poorer countries will find it hard to compete with robots.
    https://www.reuters.com/article/us-adidas-manufacturing/german-robots-to-make-first-adidas-running-shoes-in-2016-idUSKBN0TS0ZM20151209
    A large country like India will always need export trade in order to import commodities like coking coal, crude oil, gold… Of course the more educated Indians can participate in the new techs but how about the poorer bulk of the population?
    Saying ‘economic freedom’ will elevate the poor 3rd world countries is like saying ‘Accepting Jesus as your Saviour’ will reserve yourself a place in the after-life paradise.
    Please prove that I’m wrong.

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    1. Lin:

      Of course you are wrong in your equating the Christian claim and the proposition that economic freedom is a necessary (note the word is not the same as sufficient) precondition for addressing the problem of poverty (and not just in poor nations but even in rich nations.) The proof of my claim is not easy to arrive at — especially for someone like you who self-admittedly is not familiar with the fundamental principles of economic prosperity and human flourishing. Not knowing something is not a character flaw. Any state of ignorance is remediable provided the desire is there and provided one is willing to put in the required time and effort. Admitting to oneself that one is does not know it all is the first step in that enterprise; insisting dogmatically that one’s untutored intuition is correct is not. Epistemic humility — the attitude that says “I don’t actually know” — is required.

      I am willing to argue my point about economic freedom. It won’t be quick since I am not that smart or hard working. In little steps, I will get there. Thanks for commenting.

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  3. I hope you are not being exclusive here: “Factory and farm workers, scientists and engineers, miners and manufacturers produce wealth.” Specifically, I hope you are not leaving out teachers in schools, colleges, and even informal vocations. The real reason India is in a rut it will never escape is that India does not have enough teachers, formal or informal, to prevent skill per capita from eroding, rather than growing, generation to generation. Count school teachers, doctors, nurses, lawyers, plumbers, carpenters, masons, electricians, car mechanics — anyone who pulls his or her own weight plus supports the march of complex civilization in India — for every single skill you will find among the lowest per-capita availability of competence in the world. No wonder when you buy a SIM as you enter an Indian airport, there are three people loitering to complete the transaction. No wonder so-called college graduates are glad to serve you at Pizza Hut. No wonder every repair person has way more business than s/he can handle and your business be damned. There’s just too much deadweight on the system. I am not lamenting that no Indian college, not even the “harder than Harvard or MIT to get into” glorious IITs can make it into the top few hundred among worldwide rankings. We simply do not churn out people trained at anything to support anything beyond hunter-gatherer level existence. The untrained, unemployed and unemployable population is rich cannon fodder for any passing ideology, be it communism or hindutva. And the damnable hubris of governments past to pretend India can “leapfrog past industrialization” by becoming “IT service nation”! As the energy and economic surplus of the prosperous west also surely dwindles, the dire truth will come out: even negative interest rates do not make India a worthwhile business destination. Why would you invest in a business in an Indian city where the employees will burn gasoline and get their lungs smoked 2-3 hours a day while traveling slower than cycling? How much vitality will they have to be productive?

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    1. To Reality Hurts:
      The pollution problems in India are certainly related to the issue: “Allow economic freedom. Meaning the freedom to produce whatever, consume whatever, and exchange at whatever mutually agreed-upon terms.”
      India in 2018 consumes about 250 million tons(of which >200 million tons are imported) of crude oil, on a per capita or per km sq basis, its way less than that of Europe but why such pollution problem? Simple answers:
      1)India buyers of automobile on average can ill afford expensive catalytic converter. Yes,it’s free market supply and demand. I read that the indian govt didn’t attempt strong regulation on auto pollution control until 2019.
      2)Of the 200 million tons of imported crude oil, a sizable % (20% -30%) are refined then re-exported to neighboring indian ocean rim countries. Oil refineries are VERY polluting but it’s a major export industry in India. Yes, supply and demand again.
      3)Besides automobile fuels, I read a high % of indian households still burn grass, wood, cow dung(undigested grass).. as cooking fuel. These complex carbohydrates are cheap but very smoky and are a major source of PM2.5 particles. Again supply and demand.

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    2. Reality Hurts:

      Your hope is well-founded; I am not limiting the creation of wealth solely to the groups I enumerated. It was just a small subset. To exhaustively enumerate occupational titles would be near impossible in the limited time we have. Just see this list of occupational categories for a feeling for that.

      Economic prosperity is not mono-causal. Lots of causes have to come together for the magic to happen. A good education system is necessary but not sufficient, which is just one of the many important institutions. You could have a very well-educated and skilled citizenry and still be dirt poor due to flawed political, economic and social institutions.

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    3. I can answer that question.

      The real reason India is in a rut it will never escape is that India does not have enough teachers, formal or informal, to prevent skill per capita from eroding, rather than growing, generation to generation.

      If there is one area where Atanu’s claim holds true in so obvious manner then it is the case of education. Indian government tightly controls all aspects of education. They control all school boards, all universities, admission criteria, fee structures, entry mechanisms, teacher training institutes, teacher appointments and so on. There is only an exception for christian and muslims schools. They are free from all this government control as a result of Article 30 and 93rd ammendment to Indian constitution.

      Since government controls all these parameters Indian teachers are one of the worst in the world presiding over one of the worst schools and colleges in the world. They are singlehandedly responsible for the abject mismanagement of the most abundant resource in India : People.

      Government control as a rot is best seen in education. As of today Christian schools are the topmost in the country. If you look at top 10 schools in Mumbai 9 are Christian run and 10th one belongs to Birla which for some reason has managed to get minority certificate.

      There is no shortage of high quality teachers for coaching centers. Not only coaching centers attract the best teachers they are also very highly paid. Also, millions of students each year willingly go to these coaching centers which proves that these teachers are giving them the bang for their bucks.

      Of course teachers create wealth like Engineers or Bakers. But at what rate are they able to create wealth totally depends on whether the society has the freedom to produce its own teachers based on market parameters or whether some moron in Delhi is doing is all that matters.

      Note: Indian junta has actively asked Indian government to control education. They want free schooling, compulsory schooling, fee control, reservations and so on. So this is the classic case of lamb going to slaughterhouse on its own. I do not have any sympathy for these suckers.

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  4. Thanks for the reply.
    you have made the basics absolutely clear. But as a commoner and a non economist I would like a bit more detail.
    I want to know how these basic principles should get devolved in to economic and cultural life of Indians like in the areas of
    Education/Primary education/Higher education
    Skilling /jobs
    Universities/Research
    Caste based Reservation
    Mother tongue/medium of instruction
    Central, state and local government
    Identity/citizenship
    Smart cities
    PSU’s /Public sector banks – throwing good money after bad
    Politics of poverty alleviation
    Bureaucracy/Corruption
    Digital V/s cash economy
    Sanatana Dharma /Hinduism / Hindutwa
    Terrorism/ Naxalism
    International trade
    War in the age of internet
    Urbanization without industrialization
    Technology (digital/ biotech, genetic, nano , renewable energy)
    Energy, fuel, transportation
    Water
    Pollution / Global warming
    Do not care attitude of middle class
    America, China and Pakistan
    Election and parliamentary democracy / Constitution
    Justice and rule of law

    I know it is a laundry list of areas I could make a quick list in no particular order(each one of us could add many more) and touching each one of them is like opening a Pandora’s box . I want to know your considered opinion on many topics like above.
    I know you have made a great beginning to address this in your “Transforming India”. Probably it is time for a enlarged rewrite in the changed context.

    Thanks again

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    1. K. Srinivas:

      The laundry-list you enumerate would seem daunting for anyone to wrap one’s head around. Addressing them piecemeal is the wrong approach. The answers to many questions that appear to be unrelated will be complicated unless one addresses them from bedrock principles. I will attempt that in a blog post, and when I do, I will post a link to it in this comment.

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  5. Good set of rules.

    The list misses some things I feel are critical.
    Common Resources
    The biggest “scams” are in acces to coal, spectrum, land (encroachment).

    Environment destruction
    The rivers are a shame.

    Encouraging Socially responsible activites

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    1. Gkrishna63:

      The rules are constitutional level rules. They are not post-constitutional level. There are rules of the game, and then there is the playing of the game under the rules of the game. If that distinction is not kept it mind, it leads to silliness in which a “constitution” ends up being 600 pages of detailed nonsense. What to do with common pool resources, with open access resources, etc, should not be the concern of top level rules which span long periods — perhaps centuries. The solution to technical problems are best left to the contemporary people, not the framers of rules.

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