Capital capers: Reading the economic cards

The chief economic advisor is not an expert on India, but he brings a fresh outlook


Ashok V Desai | May 4, 2015

Illustration: Ashish Asthana

The finance minister recruited his chief economic advisor in Washington; Arvind Subramanian has come on leave from Peterson Institute. The United States has a tradition of millionaires funding academic institutions. Stanford University is an example. It was funded by a man who got rich building railways; the land he gave Stanford made it one of the world’s biggest campuses. Arvind wrote a book some years ago in which he critically reviewed India’s reforms, called ‘India’s Turn: Understanding the Economic Transformation’. Later he wrote a book called ‘Eclipse: Living in the Shadow of China’s Dominance’. The way China has overtaken India in the past two decades, especially in manufacturing, is a matter of concern to many Indians, including those in the current government; the prime minister’s desire to Make in India illustrates this. So his government turned to Arvind, who should know if anyone does how to overtake China.

The hunger for industry makes no sense to an economist. He would believe that every country should specialize in whatever it can produce more cheaply than other countries: it does not matter whether it has an advantage in industry, services, forestry or fishing. So Arvind devoted a chapter in the last Economic Survey to manufacturing vs services. He obviously wrote the chapter, which is replete with equations and references to specialized literature.

He began with two arguments for turning to manufacturing: labour productivity is higher in industry than in the rest of the economy, and it also grows faster. So an economy can raise its growth rate by specializing in industry. But why industry? Services would serve equally well.

Here, Arvind turned to the work of Danny Rodrik, who was his colleague in Harvard 15 years ago. While Arvind was in the International Monetary Fund, Rodrik and he wrote a paper entitled “From ‘Hindu Growth’ to Productivity Surge: The Mystery of the Indian Growth Transition”. The conventional wisdom is that India’s was a sluggish socialist economy until Manmohan Singh, as finance minister, did “reforms” in the early 1990s and turned it into a tiger. Their paper argued that India’s growth accelerated a decade before the reforms, in the early 1980s, and owed nothing to the reforms. It had more to do with relaxation of industrial licensing restrictions: shaken by the oil crisis and its aftermath, the government allowed existing, licensed business enterprises to produce more and diversify. It did not allow more competition; it was more pro-business than pro-market.

For the post-reform period, however, the Economic Survey offers a different hypothesis: that growth of industry and services requires skills in the labour force, and that the share of skilled people in the labour force has grown too slowly. While it supports the idea of Make in India, it argues for skilling India, which also the prime minister has called for.

This analysis is not wrong; it is consistent with the facts the Survey has marshalled. Workers in Indian industry produce little, and it is perfectly possible that their low productivity has something to do with their poor training. But if one wants a reliable conclusion, one must try out alternative explanations; policies should not be based on bivariate correlations, but on factors that give a better explanation than the rest.

A conventional economist would look for an explanation in factor inputs and their productivity. Harry Xiaoying Wu has done enormous work in this field; what emerges from his studies is that Indian industry used capital less efficiently: its capital-output ratios were higher. This, combined with the fact that China saved and invested a higher proportion of its income, is the standard explanation of its better performance.

Wu’s and others’ conclusions about the performance of Indian industry relate only to what are called registered factories, which account for a fraction of Indian industry; most firms are unregistered, and the statistics for them are poor. But labour productivity in unregistered industry is very low; in this respect it is even less efficient than registered industry. Unless it uses capital more efficiently – for which there is no evidence – the standard explanation that Indian industry is inefficient stands. It is a pity that the Survey did not address this explanation, let alone show that its own stands up to facts better.

Arvind Subramanian was brought in quite late last year; it is possible that he did not have the time to study the Indian economy closely enough. He also brought in fresh ideas. But it is more important, especially in the Economic Survey, to be right than bright. Arvind’s predecessor, Raghuram Rajan, had taken in a number of bright research students into the drafting of the Survey with good results; Arvind could try it out. He could also outsource the Survey to the Reserve Bank; it may make it deadly boring, but it will make no mistakes.

(The article appears in the May1-15, 2015)



Other News

Ganga, Modi and people’s unwavering faith

When the truth was a few steps away from Modi’s gaze In November 2014, prime minister Narendra Modi made his first visit to his constituency Varanasi and launched a massive cleanliness drive at Asi ghat, which was covered in mud and silt. When locals sa

Schooling improved in India, shows HDI

India has slipped one spot in the Human Development Index 2016. India’s HDI value for 2015 is 0.624 — which put the country in the medium human development category - positioning it at 131 out of 188 countries and territories.   Between 1990 and 2015,

IIFCL gives Rs 3.5 crore for cancer treatment

An appeal was made to PSUs to contribute funds under their CSR Scheme towards Health Minister’s Cancer Patient Fund-CSR for treatment of poor cancer patients.    India Infrastructure Finance Company Limited (IIFCL) contributed an amount of Rs 7.5 crore in 2015-16.

Sick PSUs appraisal carried out

  The Department of Heavy Industry (DHI) has been undertaking appraisal of the status of each CPSE on case to case basis and the ones having profitability potential are supported to improve their performance while the chronically sick and loss making companies are closed down with attrac

Making Aadhaar mandatory for filing IT returns violation of constitution

The media reported very disturbing news on Tuesday. The government is seeking to amend the Income Tax Act, 1961 and to make it compulsory for taxpayers to have an Aadhaar card for filing income tax (IT) returns. If the Aadhaar number or the Aadhaar enrolment number is not provided by a taxpayer at the ti

A bucket list of stories on World Water Day

  What if there was a law for optimum use of water, conservation of rivers and underground water? It would have battled the water crisis in different regions of the country. Villagers from drought-hit regions of the country, mobilized by environmentalist Rajendra Singh have sought a


योगी ने किया सरकारी दफ्तरों में गुटखा, पान और प्लास्टिक बंद

Current Issue


Facebook    Twitter    Google Plus    Linkedin    Subscribe Newsletter