India’s look east window should not be jammed
Even if a middle road is followed India won’t make a success of looking East if it’s governance is not effective. Can Modi provide the strong government managing an Eastern economy requires asks Mark Tully.ht view Updated: Aug 03, 2014 01:26 IST
Since Independence India has always looked West for economic guidance. In Nehru’s time the socialists of the London School of Economics provided much of the guidance. In the years of a more liberal economy the free-marketeers of American Ivy League universities have held sway. Today there is a school of economists who think Prime Minister Narendra Modi should be looking eastward.
There is one obvious reason for that.
It’s Eastern countries — Japan, China, South Korea, Taiwan and Singapore — that have achieved the change he wants to bring about. Putting it simply, the transformation from an under-developed to a developed or rapidly developing country. But after talking to Ramgopal Agarwala, a leading member of the Look East economists, it seems to me that learning from the example of the Eastern Tigers will involve accepting that some tenets which underlie current Indian economic thinking are shibboleths.
As the Indian economy suffered so badly from excessive regulation, it’s not surprising there is a widespread belief that the less the government intervenes the better the outcome. The governments of all the fast-developing East Asian countries have played a major role in guiding their economies. China has invested massively in the public sector. So the bias against government intervention might all be shibboleths.
This leads to another shibboleth. China could not invest so heavily in the public sector if the Chinese did not generate public savings through taxation and other means. But the received Western wisdom is that taxation should be as light as possible to avoid constraining entrepreneurial energy. Ram pointed out to me how under-taxed India is. There is, for instance, no inheritance tax, no tax on long-term capital gains and no tax on dividends.
Raising more taxes combined with reducing wasteful government expenditure would mean India saved more. At present it saves 30% of GDP while China saves more than 45%. The more India saves the more it can invest in the infrastructure it so badly needs, as well as the education and health services economists of all shades agree are necessary for long-term sustainable development. If Modi looks East he may come to believe that keeping an eye on savings and consumption is a better way of gauging the economy’s health than the western fetish about fiscal deficit.
India’s disastrous experience of protection in the days of the licence-permit raj would seem to confirm that the economy should be as open as possible to international competition. But this is an over-simplification, if not a shibboleth. All the Eastern Tiger economies have grown by practising strategic protection.
Japan, China, Singapore, Taiwan and South Korea are set out to make themselves rich nations. India has concentrated on relieving poverty. There is also a widespread belief that a policy based on increasing the nation’s wealth leads to the trickle-down phenomenon, the poor having to wait for the crumbs that fall from the tables of the rich. The figures in the recently published United Nations Human Development Report show that need not be so.
But a word of warning. Turning to the East should not be an about-turn but more in the nature of a course-correction. Shedding the shibboleth about the public sector should not lead to a return to the days when the private sector was regarded as disreputable, but rather an era in which the public sector also is regarded as respectable.
Even if this middle road is followed India won’t make a success of looking East if it’s governance is not effective. Modi has sold himself to the electorate as a strong leader. Can he provide the strong government managing an Eastern economy requires?
The views expressed by the author are personal