As a despondent year ends, there appear rays of hope. A healing world economy should help economic growth pick up. At home, a new Central government can only be better than the current one. And in Delhi, the democratic revolt against the daily humiliation of corruption could be the harbinger of more sweeping change.
But the challenges — economic and political — are great. GDP growth has slipped below 5 per cent a year — a critical threshold. Harvard economists Lant Pritchett and Larry Summers report that countries rarely grow much faster than the world economy for extended periods. They suggest that India could enter a phase with GDP growth stuck in the 3 to 5 per cent a year range. Maintaining prolonged high growth rates is unusual because it requires uninterrupted forward-looking investment in infrastructure, education, and economic and social governance. The few countries that have broken free from regular relapses into low growth, mostly in East Asia, have worked hard to ensure such investment.
China, which Pritchett and Summers say faces the same risk as India, has bucked this tendency by continually investing in its future. Its world-class infrastructure is much admired. Today, China is staking a claim to the 21st century based on the quality of its human capital. Shanghai, a city of over 20 million, was at the top of the OECD's 2012 Programme of International Student Assessment of 15-year-olds (PISA) in maths, science and reading, giving its students a two-and-a-half year educational lead over American peers. Recent studies show that the cognitive skills being imparted by Chinese schools are robust predictors of GDP growth. China is racing ahead in R&D investment and the number of patents that the Chinese register in the US has increased from virtually nothing 20 years ago to almost on par with France.
Meanwhile, India has transitioned from promise to hubris and now to dejection. The logjam in infrastructure development has turned endemic. Even more serious is the dismal quality of education. While political parties see some value in providing better and cheaper infrastructure services, the rhetoric on education has only rarely been followed by effective action. Two of India's better states, Himachal Pradesh and Tamil Nadu, participated in the same PISA test in 2009; they competed for last place with Kyrgyzstan. Despite progress, there remain formidable gaps in the quality of primary education, the essential base for all subsequent learning.
Thus, notwithstanding heartwarming anecdotes of Indian educational and scientific success, the cold macro reality is that India is competing itself out of the global marketplace. At the low-tech end, Indian products are unable to compete with other low-wage countries; at the high end, our human capital and infrastructure fall short. At home, many Indian producers have ceded ground to Chinese manufactured imports.
At such moments, we turn with hope to new leadership. Surely a new prime minister, a new finance minister will turn things around? The drumbeat for a more "business-friendly" leader has gained steady momentum. Not just business-friendly, but one who can get things done. Indeed, the lesson often drawn from Chinese success is that India needs more authoritarian leadership — presidential government, perhaps. This is saviour fantasy and bound to disappoint. It draws the wrong lesson from China, and India is not China.
The right lesson from China is that less, not more, central control is needed. Chinese local governments have powerful incentives to support growth, through building roads and power plants, encouraging industrial investment and educating their residents. This system has its own downsides in excess investment, environmental degradation and a hukou system that restricts social and housing services for migrants. Nevertheless, authoritarian China paradoxically can be more responsive to the voice of its people — more attentive, for example, to internet chatrooms — than democratic India. Indians have greater right to protest but, for that very reason, political leaders feel there is little cost in ignoring the protests until matters become intolerable.
There are no easy fixes. All traditional political parties are beholden to a new rent-seeking culture. Whereas once rent-seeking focused on licences for manufacturing, today the focus is on government contracts. Politics and economics remain joined at the hip. Even populist programmes enrich the well-connected. It should not be a surprise that recent growth has come largely from the financial sector, trade, hotels, transportation and construction. These tendencies are precursors of long-term decline.
The emergence of the Aam Aadmi Party (AAP) holds more promise than does a national saviour. The AAP will most likely not sustain its campaign's economic undertakings, and that may prove to be its undoing. But the stranglehold of corruption stands a real chance of being weakened. India's greatest strength and achievement is its democracy. And while democracy is messy and may get messier, it is democracy that must be leveraged for economic and social progress. The international evidence is clear: in the long run, genuine democracy and economic welfare reinforce each other.
The promise lies not in the AAP scaling up to the national level but in the emergence of AAPs across the country. The real promise lies in the possibility of political entrepreneurship and the electorate leading a transformation of politics, whether through insurgent political movements or pressures to reform old parties. It lies in the competition for ideas to reset the governance structure.
India cannot be governed from the Centre. Economic reform and effective service delivery will only occur with meaningful political and fiscal decentralisation to state and local governments, supported by administrative reform. This needs to be done under the watchful eyes of local residents who can demand tangible accountability through electoral and direct measures. Only then will the space reopen for committed economic entrepreneurship. And only then will India make investments for its future.
Mody is Charles and Marie Robertson Visiting Professor at the Woodrow Wilson School, Princeton University. Walton is at the Harvard Kennedy School and Centre for Policy Research
This article was first published in the Indian Express on January 2nd, 2014.