Which India Matters?

In 1961, soon after arriving in Japan as the American ambassador, Edwin O. Reischauer held a public conversation with the Japanese economist Nakayama Ichiro.¹ Their differences of perception illuminate many dilemmas of a developing nation like India today. The American diplomat, a particularly sanguine exponent of “Modernization Theory,” believed that rapid economic growth was well on its way to making Japan a Western-style developed nation and a model for other non-Communist Asian countries. The Japanese economist worried that economic growth that didn’t take account of the social and political changes accompanying it was unhealthy, and created more problems than it solved.

Like all modernizing countries with large rural populations, such as India and China, Japan was hobbled by an economy with two distinct sectors: one was defined by modern technology, a high ratio of capital to labor, and high worker productivity and wages; the other had all the opposite traits. Rapid, unbalanced economic growth aggravated the innate inequities of the “dual structure,” which in Nakayama’s vision had serious political consequences. Countries that develop without drawing large parts of the rural population into the modern sectors of the economy were prone to social unrest and authoritarian regimes. Nakayama knew this from bitter experience of the war that Japan, beset by severe internal crises in the 1930s, had subsequently waged against many Asian countries and the United States.² Accordingly, he was keen to see postwar Japan develop an open, egalitarian, and pacifist democracy.

Largely due to the macroeconomic approach of Nakayama and his colleagues, which emphasized labor over capital productivity and technical training for people moving out of the agrarian economy, Japan achieved sustained growth for close to two decades.³ Helped considerably by American procurements during the Korean War and infusions afterward of aid, investment, and technological innovations, Japan then turned into a major exporter of goods and capital to East and Southeast Asia.⁴ Japan also became an example to the region with its land reforms, industrial policy, well-designed state intervention in markets, investments in education and health, which created a skilled and productive labor force, and economic nationalism—the features that when carefully adopted helped in the remarkable economic emergence of such countries as South Korea, Singapore, Taiwan, and Thailand.⁵

Most of these developing states in East and Southeast Asia, however, came late to electoral democracy. India’s own, much greater, challenges in the previous half-century are highlighted by the fact that this bewilderingly diverse and oppressively hierarchical society set out in the late 1940s to simultaneously build, without possessing much basis for either, an egalitarian democracy and a modern industrial economy.⁶ Decades of colonial rule had damaged India, saddling it by 1947 with an underproductive agricultural economy, a weak industrial base, and extremely low levels of literacy (27 percent for men, 9 for women).⁷ Even more urgently than their counterparts in Japan or South Korea, Indian leaders had to be sensitive to the needs of the poor, especially those among the low castes, and improve their capacities to build the basis for both an equitable society and sustained economic growth.

In the early decades, India did make some gains in heavy industry and agriculture.⁸ Investments in higher education created, among other things, generations of highly skilled upper-caste Indians, many of whom can be found today in senior corporate and university positions in the West.⁹ Poverty failed to decline appreciably despite Indian economic planners’ obsession with growth. As the Columbia University economist Jagdish Bhagwati put it, looking back in 1985 at his work in the 1960s with India’s Planning Commission, their “basic theme, i.e. growth with a view to eliminating poverty” was “too optimistic.”¹⁰

Long-term investments in education and public health were needed. But in these primary tasks, India’s rulers failed disastrously. Their “breathtakingly conservative” approach to social services can be blamed, as Amartya Sen has often argued, on “the elitist character of Indian society and politics.” “Democracy in India,” B.R. Ambedkar, the leader of India’s low-caste Hindus and the main author of India’s constitution, famously warned, “is only a top dressing on an Indian soil, which is essentially undemocratic.” Certainly, for people who claimed to be, and are still often mistakenly derided, as “socialist,”¹¹ India’s rulers neither matched the educational accomplishments of some socialist countries, nor did they help unleash, like their counterparts in South Korea and Japan, entrepreneurial energies in the country’s protected private sector, which accounted for the bulk of manufacturing output.¹² Instead of making the public sector more accountable, they imposed, as Bhagwati has often lamented, irrational restrictions on business, spawning the “license-permit Raj” that mostly enriched corrupt politicians and officials.

The liberalization of the Indian economy in 1991, and successive governments’ increased business-friendliness, inspired fresh hopes that India’s extreme inequalities could be alleviated. India’s economy had grown, moving from a rate of 5 percent in the 1980s to nearly 10 percent until slowing down dramatically to less than half that rate in recent months. In India in Transition: Freeing the Economy (1993), Bhagwati was among the first to hail his old college friend Prime Minister Manmohan Singh, then the finance minister, for leading India to a fresh “tryst with destiny.” By then Bhagwati had turned into, in his own words, the “world’s foremost free-trader.” Claiming to be the intellectual inspiration behind the 1991 reforms, he declared, “We are finally in the spring of hope.”¹³

The period after 1991 did manifest some vivid and impressive signs of India’s transformation by consumer capitalism. Helped by cheap credit, Western brands finally became accessible to a middle class long starved of them by an economic regime that substituted Indian products for imports. Many of India’s old corporate families, such as Tata, acquired major international companies. The potential size of India’s market—1.2 billion consumers—managed to provoke a great deal of hype among hopeful businessmen, boosterish investment consultants, financial journalists, and day-tripping columnists in the West. (Interestingly, Chinese commentators and investors as- sessed India’s progress much more soberly.)

Yet today India’s economy manifests more serious impediments to widespread growth than any of the other Asian economies. Economic growth has been led by the services sector—a loose category that includes information technology, telecommunications, banking, and real estate and contributes nearly 50 percent to the GDP—rather than manufacturing, which has powered the growth of other East Asian economies.¹⁴ Agriculture, which still employs a majority of India’s population, remains stagnant.¹⁵ A small, well-educated workforce enjoys rising salaries, but there have been only very small increases in wages and productivity for people trapped in the bottom half of the dual economy: agriculture and the so-called “informal” or unorganized sector, which employ more than 90 percent of India’s labor force.¹⁶

“The bulk of India’s aggregate growth,” the Cornell economist Kaushik Basu warns, “is occurring through a disproportionate rise in the incomes at the upper end of the income ladder.”¹⁷ By 2010 India’s one hundred wealthiest people had increased their combined worth to $300 billion, a quarter of the country’s GDP. Recent corruption scandals involving the sale of billions of dollars’ worth of national resources such as mines, forests, land, water, and telecom spectrums reveal that crony capitalism and rent-seeking, rather than entrepreneurial dynamism and innovation in a free market, are the real engines of India’s economic growth.

Furthermore, to a large extent this growth does not create jobs—an alarming fact about an overwhelmingly youthful country that adds 12 million to the workforce each year and whose present economic pattern obliges it to move many millions more to urban areas from a crisis-ridden agricultural sector where hundreds of thousands of farmers have committed suicide in recent years. According to a widely cited report by Michael Walton, an economist at Harvard University, the quality and distribution of India’s rate of GDP growth are structurally “disequalizing,” i.e., causing more inequality. It’s not only that India isn’t “overflowing with Horatio Alger stories,” as The Wall Street Journal put it. It is also developing all the ingredients necessary for a Latin American–style oligarchy.

Why Growth Matters, however, is a passionate case for more privatization and liberalization, and less protection for labor. Bhagwati and Arvind Panagariya, who holds a professorial chair named after his coauthor at Columbia, claim that India has already been transformed “from a basket case into a powerful engine of growth.” They are convinced that faster growth and freer markets remain the best remedy for poverty, inequality, pollution, and ill-health.

A contrasting view—that “there is something defective in India’s ‘path to development’”—and a very different list of priorities appear in An Uncertain Glory: India and Its Contradictions. Amartya Sen and his frequent collaborator, the Belgian-Indian economist Jean Drèze, acknowledge that aggregate economic growth is important for generating public revenue, which can be used to reduce poverty. But “it is only one of many different concerns that need attention.”

Amartya Sen has never wavered from his belief that, as he wrote in these pages in 1983, “growth rate is a very daft—and a deeply alienated—way of judging economic progress.” Sen and Drèze warned as early as 1995 that reforms that boost growth, though important, were not enough to improve the living conditions of the poorest, let alone dismantle caste and gender hierarchies and generate employment. They “have to be supplemented,” they wrote, “by a radical shift in public policy in education and health.”¹⁸ Brazil, for instance, grew only 1 percent compared to India’s 5 percent from 1993 to 2005 but reduced poverty much faster. Bangladesh, which is only half as rich as India measured by per capita income, now exceeds India in, among other social indicators, life expectancy, child mortality, and immunization. And China, by investing a greater proportion of its revenue in education, health, and nutrition, has created a more solid basis for economic growth—although Sen has often pointed out that under China’s authoritarian system, in which public criticism is suppressed, such catastrophes as the death of over 30 million people by famine could take place.¹⁹

Hoping to present material for “informed and reasoned public engagement,” Sen and Drèze carefully explain such issues as health care, education, corruption, lack of accountability, growing inequality, and their suppression in India’s elite-dominated public space. It is only the poor record and capacity of the Indian government that make one question their advocacy of urgent state action on behalf of the poor.

The 2011 census revealed that half of all Indian households have to practice open defecation. Nearly half of all Indian children are underweight (compared to 25 percent in sub-Saharan Africa), and as Sen and Drèze point out, despite a rise in literacy rates, “a large proportion” of them “learn very little at school.” Almost all Indians buy health services from private providers, exposing themselves to crippling debt as well as quackery. Inequalities have widened between classes, regions, and rural and urban areas. More worryingly, they seem unbridgeable owing to the lack of adequate education and public health. Not surprisingly, poverty declines very slowly in India, slower than in Nepal and Bangladesh, and unevenly.²⁰ Calorie and protein intake among the poor has actually dropped.²¹

“India today,” the historian Ramachandra Guha writes, “is an environmental basket-case; marked by polluted skies, dead rivers, falling water-tables, ever-increasing amounts of untreated wastes, disappearing forests.”²² Meanwhile, as Sen and Drèze write, the largely corporate-owned media, deeply indifferent to poverty and inequality, and reflexively intolerant of any remedial action by the government, produce “an unreal picture of the lives of Indians in general” by celebrating the fame and wealth of billionaires and cricket and Bollywood stars.

Indeed, perennially aggrieved columnists and TV anchors have a crucial part in “the deeper drama in India,” according to the political scientist Atul Kohli in Poverty Amid Plenty in the New India (2012). That drama is one of an elite that expands and is entrenching itself. Increasingly impatient with the rules and ethics of democracy, India’s ruling class today consists, as C. Rammanohar Reddy, editor of The Economic and Political Weekly, defines it, “of large Indian businesses, the new entrepreneurs in real estate, finance, and IT, the upper segment of the urban middle classes, the upper echelons among the bureaucracy, and even large sections of the media.”

What’s immediately striking about this class of the relatively affluent is the degree to which it shares the same interests and beliefs, and its reflexive hostility to government spending on welfare—although political parties feel particularly obliged to indulge in such spending before elections.²³ But the conservative rhetoric about buoyantly self-reliant entrepreneurs hides the fact that, as Kohli writes, the Indian state since the 1980s has been “pro-business” rather than pro-market, responsible both for the dynamic forces at the apex of India’s economy and “the failure to include India’s numerous excluded groups in the polity and the economy.”

This “collaborative capitalism,” of which Narendra Modi, the Hindu nationalist chief minister of Gujarat, is the most egregious exponent, consists of the state extending tax benefits to India’s largest businesses and facilitating their cheap access to national resources of oil, gas, forests, and minerals.²⁴ In turn, “the disproportionate control over economic resources,” Kohli writes, “enables businessmen to ‘buy’ politicians,” shape decision-making through the media, and even enter politics themselves.²⁵

A major voice in the echo chamber of India’s elite belongs to rich and powerful Indians abroad, especially in the United States, many of whom were naturally enthusiastic about, and now wish to direct, the progress of the poor country they had to leave in the 1960s and 1970s. Their reestablished links with the old country have underpinned the new strategic and economic relationship between India and the United States.²⁶ This diaspora has “promoted a friendly image of India,” Bhagwati and Panagariya write in their new book, and “with their analysis and advocacy…kept pressure in favor of continued reforms.” Indeed, one of the most distinguished figures of this impressively credentialed Indian-American elite—which includes the venture capitalist Vinod Khosla, Vikram Pandit, the former CEO of Citibank, and (until his conviction on insider trading) the investment banker Rajat Gupta—is Jagdish Bhagwati himself.

Educated at Oxford and Cambridge, together with Manmohan Singh, Bhagwati worked with Amartya Sen at the Delhi School of Economics before moving to the United States in the 1970s. In the changing ideological climate of Anglo-America in the 1980s and 1990s, he emerged as a major advocate of free trade and globalization. “We were economic theorists,” he recalls in his new book, “and later turned to policy analysis that would help transform India and the world.” His pioneering work on trade policy became central in shaping the Anglo-American assumption, also known as the “Washington Consensus,” that was the dominant ideological orthodoxy before the economic crisis of 2008: that no nation can advance without reining in labor unions, eliminating trade barriers, ending subsidies, and, most importantly, minimizing the role of the government. From his perch at Columbia and the Council on Foreign Relations, Bhagwati has provided intellectual authority and sustenance to those who think that India, by prioritizing wealth-creation over health and education, can become a “role model” for “other developing nations.”²⁷

Adversity in this endeavor—manifested by India’s falling growth rate as well as rising inequality and violence—seems to have made Bhagwati particularly cross with his fellow Oxbridge-educated Indian economists who are still riding the “bus” that he and Manmohan Singh, he claims, have “gotten off.” “They fancied themselves,” he writes in one of the book’s many polemical asides, “as Rosa Parks; in truth they were just intellectually lazy and unwilling to learn from the ruin they had visited on India and its poor.”

The people Bhagwati considers intellectually lazy or dishonest are a diverse lot. In his new book, he accuses Joseph Stiglitz and George Soros of practicing “Jurassic Park Economics” and derides the works of Dani Rodrik, the well-known economist at the Institute for Advanced Study, as “hollow.”²⁸ He has denounced Oxfam as well as Muhammad Yunus, the Bangladeshi economist who won the Nobel Peace Prize for promoting micro-credit ventures among the poor. But no one has impersonated Rosa Parks more vexingly in Bhagwati’s mind than his former colleague Amartya Sen.²⁹

Why Growth Matters provides further variations on Bhagwati’s insistent complaint that Sen has used his prestigious Nobel Prize as a “weapon of mass destruction” against India’s potential for economic growth. Much of the book consists of an attempt to mock and repudiate Sen and Drèze’s ideas, even where the two are not named; it then deplores what Bhagwati and Panagariya see as the sentimental liberalism embodied by such institutions as the World Bank and the World Health Organization.

Were health and education neglected during India’s early decades? Not at all, the authors assert. Slow growth and limited revenues were to blame. Does India today resemble America’s Gilded Age in the privileges of its upper classes? “The allegation is not persuasive.” What about inequality? When mobility is high, as they claim it is in India, “the poor may react by celebrating the conspicuous inequality.” Is India doing worse than Bangladesh in human development despite its much higher growth? “These inferences are plain wrong.” What about corruption? The reforms Bhagwati advocated “bid good-bye to many forms of corruption.” Does the decline in Indian calorie consumption, as shown by WHO statistics, reflect increased hunger and poverty? The decline could be due to “a shift from coarse grains” to “rice and fruits.” In any case, Bhagwati and Panagariya add, without saying how it can be done, “malnourished families should be shifting their diet to more milk and fruits.”³⁰

There is much about this shadow-boxing that makes one wonder if Bhagwati, moving like many intellectual elites between the bubble of universities and think tanks and the private hothouse of professional rivalry, has lost touch with how the other half—or the 99 percent—lives.

Bhagwati and Panagariya don’t examine in any depth the nature or likely sustainability of India’s economic growth, which, based primarily on extraction—of natural resources and cheap labor and foreign capital inflows—rather than high productivity and innovation, seems to have run up against its built-in limits.³¹ They urge India to develop more Chinese-style low-skilled, labor-intensive industries. They are right to blame mindless regulation for India’s lost lead over a smaller and poorer country, Bangladesh, of clothing export. But then, investors keep shifting factories to low-wage countries because of the mobility of capital and the fierce trade competitiveness that Bhagwati recommends as a sure formula for prosperity.³² His fervent advocacy on behalf of India’s potential clashes with the fact that globalization can shrink a nation’s comparative advantage pretty quickly, and, even when usefully deployed, can entrap late-industrializing national economies in low income.

Why Growth Matters does offer some practicable improvements to India’s poor social infrastructure, for example, training programs for nurses and collectively insuring residents of rural regions against major illnesses. But too many of its recommendations seem indistinguishable from the talking points of Paul Ryan: the authors advocate vouchers for schools and hospitals, and targeted rather than universal health coverage. As for extensive environmental destruction, “the correct way to diagnose this issue is to say that we have a ‘missing market’ regarding pollution.” How such a market could come into effect and reduce pollution they do not make clear.

Predictably, Bhagwati and Panagariya propose direct cash transfers for performance of specific jobs rather than guaranteed wage employment in public works. Exemplifying another right-wing article of faith, they admire the weakness of labor unions in not only Taiwan, South Korea, and China, but also Bangladesh, which allows “firms to hire and fire workers under reasonable conditions and maintain a balance between the rights of both workers and employers”—words that would have sounded bizarre even before the collapse in April this year of a garment factory in Dhaka that killed more than a thousand workers, exposing yet again the slave-labor conditions of many unprotected toilers in the globalized economy.³³

Looking back at the conversation between Nakayama and Reischauer, and its echoes in Bhagwati’s disagreements with Sen, it seems clear that for postwar Japanese economists and policymakers, eliminating poverty and reducing inequality were profoundly political—and ethical—challenges. Writing in the early 1970s, Reischauer seemed to concede the argument to his Japanese interlocutor by admitting a “broad causal relationship between imbalanced growth and eventual instability.”³⁴

Nakayama’s implicit argument—that high economic growth can empower an insular, selfish, and antidemocratic elite in an unequal society—seems particularly applicable now to a cruelly stratified country like India, where, as judges of the Indian Supreme Court recently put it, “predatory forms of capitalism, supported and promoted by the State” are pushing the poor “to the wall.” This is exemplified vividly by the tribals protesting their dispossession by mining companies and local governments in central India—people often led by armed Maoists.³⁵

Rising social unrest is making an insecure Indian elite gravitate to such hard-line leaders as Narendra Modi, whose well-advertised toughness with labor unions and PR-enhanced business-friendliness make him the preferred choice of many corporate leaders, economists, and commentators as India’s next prime minister.³⁶ Bhagwati, for instance, has described Modi as a “positive role model” with “an unblemished record of personal integrity.” As chief minister of Gujarat, Modi was allegedly complicit in the killing of over a thousand Muslims there in 2002 and was barred from traveling to the United States as a result. But he still embodies managerial efficiency and iron discipline to those disturbed by the political assertiveness of the poor and the disaffected.³⁷

In fact, the political energies of the hundreds of millions of the poor and disaffected are still underdeployed. Could they lead to a more accountable and responsive state and, in the long run, to a more egalitarian and democratic India? Sen and Drèze seem convinced that the poor themselves rather than technocratic elites can help remove poverty and inequality by keenly participating in the public sphere.

This “bottom-up” democratization may seem like a remnant of modernization theory. And Sen and Drèze offer no clear vision of the economic—as distinct from political—process that would help their cause of equity, and also check environmental destruction. But the poor in India still have a great “capacity to aspire,” as the social anthropologist Arjun Appadurai claims in his new book.³⁸ And their collective efforts can make the state more accountable and efficient—a possibility that Bhagwati and Panagariya ignore while lamenting the state’s incapacity and corruption. In the state of Tamil Nadu, for instance, mobilized lower-caste groups not only achieved political power. They also, as Sen and Drèze have written, established a social infrastructure—schools, health centers, roads, public transport—that is now envied across India.³⁹ Sen and Drèze also reveal how democracy in its simplest manifestation, the scramble for votes, can drive successful implementation of welfare programs such as the Public Distribution System.⁴⁰ They see more hopeful signs in the recent mass agitations against corruption and violence against women.

Many observers of India are generally impressed by the procedures of Indian democracy, with its routine elections. India, Bhagwati and Panagariya assert, “has all elements of a liberal democracy with the poor and the underprivileged having access to effective politics at the ballot box.” But as Sen and Drèze point out, “the success of a democracy depends ultimately on the vigor of its practice.” Certainly, creeping authoritarianism of the kind witnessed in India can make political reform from below seem more urgent than economic engineering from the top. “Educate, agitate, and organize,” the disenchanted low-caste author of India’s constitution B.R. Ambedkar exhorted. Many more Indians will have to exercise these democratic rights if they wish to transform the profoundly damaging elitist character of Indian society and politics.