19 August 2014
Opening Remarks by Guest-of-Honour Mr Mohan Guruswamy, Chairman, Centre for Policy Alternatives, India
Good Morning Professor Kanti Bajpai and thank you for the introduction. Dr. Tan Khee Giap and Dr. Tan Kong Yam thank you for having me back here. I realise that over the years I have been coming to the school and this is actually my seventh visit to this university. Seven days has a special significance in India these days because our education minister recently claimed that she had a degree from Yale because she did a seven day course at Yale. So I am hoping that with Kanti around here, I might get a Lee Kuan Yew school degree in addition to my Harvard education. Degrees are very important because when Kennedy was given a honoris causa Phd at Yale he said that I have best of both worlds now, I have a Harvard education and a Yale degree. So there is nothing better to top off my educationlife with a Singapore degree.
Talking about Harvard when I finished my education in 1964 and I returned to India, I went to work at the Administrative Staff College of India, Hyderabad as a Professor of Public Policy. In the course of my work I met several politicians and leaders in Delhi. A man who later on became the Prime Minister of India said to me that look you won’t understand India until you go and work in Bihar. So as a part of my job, we were given 12 weeks a year of consulting which were your own, I decided to go to Bihar and spend all of 12 weeks in Bihar. It was about the most dismal place I had ever been to in the world and to a large extent Bihar continues to be like that. It has very little infrastructure and has got a bad law and order problem. Despite having a very rich soil and very rich cultural and historical background it continues to be the last among Indian states. Following my stay there I wrote So I did a study which was grandiosely called “The Cchildren of the Ganga- an Eenquiry into the Ppoverty of the Gangetic Plainsnes”.
Given the tools with which you come out with from a school of public policy you looked at input-output. And So there is a great lesson in public administration in the United States, back in the 70s and 80s, that all problems can be handled like the World War II was won with good management and application of resources. All world problems can be solved with good management and application of resources. So Iwe looked at allocationed of resources which went to Bihar and I found that ever since the first plan began in India, Bihar was systematically underinvested in. As plans, government expenditure drives growth in many countries at early stages of development, depending on how much is spent gives youyou get different income levels and then income generates taxation then taxation gives you the share of national budget. So as these plans began, Bihar started getting less and less and by the time I reached there during the eighth plan the distance between Bihar and the rest of the country in per capita investment had become enormous.
This was one big lesson and I had an answer. When you come back young from Harvard, you have to have answers. I said Bihar has been under invested and exploited. It’s an internal colony of this country. The credit-deposit ratio further proved it because Bihar had a credit-deposit ratio of 126 which means more money was going out than invested in Bihar. It was one of the appalling things and we said unless you correct this you can’t set right India. As those who live in India, work in India know that you can’t go ahead leaving the states of Bihar and Uttar Pradesh. Together they count for about 20% of India’s population and they are the most dominant political and cultural states in India. You can’t leave them behind and go ahead. So after that I started doing these number of studies on the states and we found out very clearly that there are high performers and low performers. Each of these states are huge and enormous now and if the state of Uttar Pradesh was a member of United Nations it would be the eighth largest country in the world.
When I began first studying these issues the Gross Domestic Product (GDP) of India was less than the turnover of General Motors. In 1990 when first economic reforms were attempted in India the GDP of India was 200 billion. Today the GDP is almost 2 trillion in current terms. The GDP has grown 10 times in 24 years. And if you look at the next 36 years; benchmark 2050; 36 years is not a long time in the life of a country. It’s just a blink. It just goes like that. The GDP of India is now projected to be somewhere between $35 trillion to $55 trillion if you are looking at different growth rates. So if you look at the lowest growth trajectory of 5.6% you are looking at the GDP of $35 trillion. If you look at 8% i.e. a leap of 2% you are looking at GDP of $55 trillion and at $45 trillion India’s GDP will cross China’s GDP. And looking at present conditions many of us expect India to cross China’s GDP around 2045. At one time this looked hugely farfetched.
When I was a graduate student we had just got personal computers at the Kennedy school and we had lotus spreadsheets for the first time. So it had become easy for many of us to keep putting numbers to project with growth rates of 2%, 3 % etc., and suddenly we had started looking at the astounding figures. China was then posting 7% GDP growth rate in the early 80s and this is what happens if India joins his race. So I took it to my faculty advisor who is a great economist and I said that I would like to do this for my research and he said: “ that Well Mohan do you really think that China and India are going to be there at these levels? ; why don’t you do something practical.” Which is what happened to Edwin Land when he went for his proposal for Polaroid camera so his faculty advisor at Harvard said that do something practical. So Land went to Massachusetts Institute of Technology (MIT) and the rest is history. Anyway, my professor went on to become a great man and my studies were just left behind and I did something mundane.
Kanti mentioned something about India’s performance in the last three years with a growth rate of 4%. There was a time when India did not grow beyond 2.6%. 2.6% was considered the Hindu growth rate. With everything in India growing at 2.6%, population is growing at 2.6%, economy is growing at 2.6%, so the famous economist Dr Raj Krishna said that this is the Hindu growth rate. But now he is pessimistic at 4.6%. He feels very disappointed and sad. But you see that in the last decade India grew at 7.2% on average. This is a phenomenal and astounding growth rate. It has not happened anywhere in the world except may be in China. And in China and India we calculate our GDP rate differently. In India we calculate on the basis of consumption, they calculate on the basis of investment. So you get this little water in the milk. In China they say that all statistics have little water added to it and hence the 2% difference. But the same rates are going on if you disaggregate them. But in India you can’t tell the change because the more things change the more confusing they become. The more crowded, the more hugely alarming the problems seem to be and so we don’t really know what is happening and there is more noise. A The Chinese ambassador in Delhi once told always tells me: that “ I can’t make anything out in India, there is so much noise; how do you guys get signals out of this?”. That is probably the thing what you should be looking for; signals in this huge clutter of noise in India.
Now there are states in India which have done exceptionally well. For instance, the state of Gujarat where the current Prime Minister comes from has over the years done exceedingly well. There are states which were high flyers at one time like Punjab; where the green revolution of India began; and it still produces majority of India’s grain surpluses, growth has tapered down in the state. And Punjab has had the highest per capita investment in India since the first plan and Punjab’s growth is now down to 5.79%. Then, we have other differences in India which I am sure your study will capture such as differences in human resources development (HRD). The Multidimensional Poverty Index (MPI) varies widely from state to state. You’ve got the state of Kerala which has a Human Development Index (HDI) which puts it ahead of China and Sri Lanka. Then you have the state of Bihar whose HDI will put it at par with Chad, so there is a huge spectrum of HDI differences.
It is also evident through credit-deposit ratio as internal flight of capital is taking place from certain regions to other regions. Tamil Nadu has the highest credit-deposit ratio right now of 112. But if you look at credit deposit ratio and then you look at bank penetration, the bank penetration of Tamil Nadu, which is India’s most capital intensive state, is the same as the state of Bihar which is India’s least invested state. Actually, Tamil Nadu has 23% bank penetration and Bihar has 21% bank penetration. So what are you going to make out of this? Clearly some people are doing well and some are not doing well. Clearly most people are not doing well, and people who are doing well are doing exceptionally well. India has the largest concentration of billionaires now in Asia. There are more billionaires in South Bombay than in Singapore and Hong Kong. So you can imagine what’s happening?.
India today has a huge growing middle class with an , enormous appetite for goods. Matter of fact; the wWorld’s eEconomic gGrowth is increasingly going to depend on India’s expansion of middle class. The Chinese expansion of middle class has begun to taper off. There is no new middle class accruing in China. China has now got the problem of ageing and dependency ratios are flying out of control. Therefore, India looks much more positive. And many companies and countries are making huge bets on India because dependency ratios continues to be favourable till 2060. So you will get a huge expansion of middle class. India will another 900 million to its middle class by 2050 when its population will be around 1.6 billion.
Now this is very simple input output model and there is of course the World Economic Forum’s report. The World Economic Forum analyses the countries and have begun to analyse states in India and they have a lot of takers in India. Personally I have very little regard for the World Economic Forum’s studies and I think it’s a certain kind of economic thinking which is retrograde and regressive. This was originally, not surprisingly, proposed by Milton Freidman and his notions about idea of Eeconomic Ffreedom was translated by the Fraser Institute of Canada into this Iindex of Eeconomic Ffreedom. The Economic Freedom index is described as the extent to which one can pursue economic activity without any interference of government. Economic Freedom is built upon personal choice, voluntary exchange, right to keep what you earn and the security of property rights. Now when you look at this index you come out with some very astounding country rankings.
In that list India ranks with Nepal, Iran, Pakistan and Bangladesh in Eeconomic Frfreedom below United Arab Emirates (UAE). Anybody who has been to UAE will say that whatever happens there it is not free. Similarly for Kuwait which is a monarchy, Oman a sultanate, Jordan with a ruler in power and El Salvador. It considers Saudi Arabia as mostly free and it considers India to be mostly unfree, like China. It is absurd and nonsensical. If anybody comes to India you will realise that we are anything but unfree. We are the most free society in the world where people can say what they want, do what they want and the state has no say in that. I have seen meetings where small stakeholders tell the Prime Minister of India that it is not your country and you don’t own it, we all own the country together. Only a free society can run India, you can’t run India like the Ccommunist Pparty does in China. It is just impossible. I just reject this lock, stock and barrel. Institutes doing these kinds of comparative study work these indexes out which become very important and we have to look at them with great care.
I think there are some other issues involved too. Take the city of Nogales in Arizona. The city of Nogales is divided into Nogales in Sonora which is in Mexican state and Nogales in Arizona which is in the United States. The people are the same, the agro climatic conditions are the same, and the terrain is the same. But, Nogales in Arizona is prosperous but Nogales in Sonora is a Mexican city. So a professor at my former colleague and friend at MIT, Daron Acemoglu and a Harvard professer James Robinson studied it and wrote a great bookdid a study and a famous book called “Why nations Fail?”., and this book must be made required reading in this school, which examines why some countries do well and some countries don’t do well and it also says that everything you achievedo is due to the institutions you create. In the United States, the settlers created institutions which emphasised inclusive growth, whereas in Mexico under ain colonial regime the people who came set up an extractive regime to take up money to the metropolitan regions of the country and outside.
Pretty much same happens in India. We still have a largely extractive system which takes away money from the hinterland and brings the money to the city and to the pockets of the wealthy. So we have to look at the Indian institutions. A very serious study of any institutions in India hasn’t really been undertaken. We do it very perfunctorily and we use the same Marxist analysis. So when you use Marxist methods for quick solutions you end up with “kill them” solutions. And anybody who has been to India will realise that the police and armed forces in India are not somebody you can roll over. They have 250 years of colonial experience in tackling little insurgencies and they are not facedphased down by these things.
I think there are directional changes which come precipitated due to events. In England you had the overthrow of King James which resulted in charter of freedoms, economic freedom and political freedom which resulted in the boom and thinking of creativity which led to the Industrial Revolution. Whereas, the government of Prime Minister Narsimha Rao which was very under regarded, very underreported, underestimated Prime Minister of India who did one thing of ushering economic reforms in India very much like Chairman Deng did in China and it triggered off different kinds of growth. S and sometime in the future we will have to give him his place in history.
Then you take why some countries irrespective of who they are, do well under very differentcertain systems, like East Germany was the highest high flyer in the old Soviet block and West Germany was the high flyer in free Europe. So there are some things about national traits and characteristics. In India, why don’t you in India see a Sikh beggar, why don’t you see a poor Parsi, why don’t you see a Marwadi on the street? You will find that there are characteristics in communities and in cultures which prevent them from doing these things, which takes them to investments and being entrepreneurial and creative. Kerala which has the highest HDI index, highest literacy rates, and highest life expectancy doesn’t have any large industy worth its rial name. There is littleno entrepreneurial activity in Kerala. Kerala’s biggest export is the export of manpower and it earns almost 50% of India’s remittances. Remittances in India are huge with annual remittances of 80 billion dollars a year. If India did not have remittances then trade and current account deficits would be really out of control. Half of it comes due to Kerala, so the investment in education pays off, but the people are not entrepreneurs. So these are things which need to be studied and at some stage your school should look at them.
And finally I would like to leave this seminar with a question; “In the global system having almost 200 independent states at various stages of development, we cancan we have a wide disparity as each one of these economies represent sovereign entity bounded by a border?”. SBut when o we could have that but in a system which is bound by its constitution its history and the civilization as one, as is India is, can we afford to risk too much diversity in economic wellbeing?. Now this is the tiger we are way of riding. If Bihar continues to be one sixth of India in terms of per capita income; if Bihar continues to get less per capita investment than the rest of India; if Bihar has the highest poverty rates and Odisha has the second highest poverty rates in India; can you go forward? Now this is very critical question. You are one country where , people can physically move.
Now I will show you some quick slides. These are the changing manpower trends in India.
Why we are all so optimistic about India because expansion of the working class is only going to take place in India. Rest of the world is beginning to slow down. China actually falls below the United States in the expansion. So if you don’t have expansion of working class where is the middle class going to come from?. The So biggest challenge for Prime Minister Modi is to create 12 million jobs a year because this demographic expansion is taking place whether he likes it or not.
From 2020 the bulge is only coming from India which shows the expansion of middle class in India. And this is going to drive the world middle class expansion. If you are talking about investment, this is the time to get into India because demographically this is a great time pushing. China has a different problem of getting old without getting rich. The Chinese story is beginning to taper off. I am flagging this off again and again this year because the figures are apparent and when I meet Chinese thinkers, academics and leadership which I do fairly often, they are all worried about this. Now the dependency ratios in China as you can see are going from 40 to 64. 36 people will be working with 64 people dependent on that simply it means that. It means that China is going to become like Japan today.
In Japan today, the biggest population cohort is women above the age of 85. China is getting towards what you call a walking stick’s problem. When So you have get a favourable dependency ratio and it’s going to drive your economy. So I think you know we have to look at India again differently, institutionally, look at population factors and you will get a different understanding of India.
Thank you very much!
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