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State's economy: a case of arrested growth

punjab Updated: Oct 10, 2013 09:31 IST
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Punjab remains one of India's better-off states but it has slipped in the league table of income and development. How can we understand the state's recent trajectory and find clues to its possible future?


To summarise the Punjab experience after independence, what the state possessed in relative abundance was human capital. Political institutions were less developed, but by the mid-1950s, public investment was taking place in dams, canals, electric power, rural roads and market towns. This laid the foundation for the green revolution of the 1960s, fuelled by technological innovation.

Besides the previous public investments, agricultural extension as a public good played a role as well. Public procurement reduced the market risks for farmers. With agriculture, ancillary light manufacturing and services also developed, and other light manufacturing such as woollen textiles and bicycles also grew.

Private enterprise and initiative, whether on or off the farm, played a role in this economic progress; but the underlying drivers of change were technological and political. These factors began to change in the 1970s. The green revolution did not bring further innovation. Farming turned into an enterprise of diminishing returns gradually. Post-liberalisation, Punjab was among the worst placed of the richer states to benefit from this change. The state has since been a case of arrested development.

What needs to be done? The first steps have to be to control corruption and improve governance. Corruption is single biggest barrier now to Punjab's economic progress. Whether this can be overcome is perhaps the biggest question mark. Political competition does not seem to be robust enough to support good governance instead of populism and rent-seeking.

The next step has to be investment in human capital. Punjab's human capital is no longer what the state needs. The investments required are across a range of sectors, not just engineering and information technology (IT). Agricultural science, biological and life sciences, and manufacturing technology are areas where Punjab can build human capital capabilities by expanding and upgrading higher education.

Efforts have to be made on a large scale to attract high-quality teachers, and use international standards to judge performance. The recent ranking of Panjab University in a global survey is an encouraging example of what is possible. The Indian School of Business (ISB) campus in Mohali also has potential, with its specialised institutes for different aspects of management.

I have two suggestions with respect to the strategy for human capital and higher education. One is to involve foreign universities with good brands (they do not have to be top ranked) proactively, to bring in individual and organisational expertise. Another is to develop Patiala and Nabha as educational hub, to avoid further over-concentration of development around Chandigarh. Amritsar, Ludhiana and Jalandhar have a role to play in the education sector by building on strengths and local industry needs.

Investing in human capital is a complement and precursor to the final step, which is an industrial policy of right incentives to the private sector, which will help reduce the setting-up and entry costs. An example would be investment tax credits.

The famous example of Japan's strategic intent from 1950 of building a world-class automobile industry is useful to recall: the idea was to develop expertise in a product and process that maximised knowledge spillovers and grew in demand over time. In a different, more recent context, China's latest five-year plan emphasises the support of seven "strategic emerging industries", including biotechnology, new materials and energy conservation and environmental protection. The Chinese list is not an appropriate one for Punjab, but one can brainstorm about what might make sense.

The right focus will emerge from soliciting a range of inputs from business and academia, but what will be important is not to allow current business interests to determine what the future can be. Industrial policy cannot be successful if it is just another version of crony capitalism.

In essence, three key changes are critical to support a more positive future for Punjab's economy: more honest and effective leadership and governance; a massive upgrading of higher education; and a strategic vision of Punjab's dynamic comparative advantage.