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Thursday, February 16, 2006

Feldstein on Economic Growth in India

Martin Feldstein discusses India's prospects for future economic growth. His solution to attaining robust growth is no surprise - get government out of the way and let markets function freely:

There's More to Growth than China, by Martin Feldstein, Wall Street Journal: ...India ... is making remarkable economic progress despite enormous structural problems. That progress will, however, be far less visible than it is in China. In India [you] will not see the ... general level of prosperity that [is] seen in urban China. But the progress in India is nevertheless real. ...

India is handicapped by a socialist past, enormously powerful labor unions, and influential entrenched business interests. The tradition of state ownership that goes back to Nehru and Indira Gandhi is hard to reverse in a country where trade unions dominate employment in the public sector and in private industry. ...

The current government is headed by Dr. Monmohan Singh, the reform-minded economist who started India's economic reforms in 1991, when he was finance minister. There should be no doubt about his commitment to reform... But the political constraints mean that the reforms are less than they should be. ...

There has been a wide range of significant macroeconomic reforms. Sound monetary policy by the central bank has reduced inflation to less than 5% ... A floating exchange rate and the accumulation of ... foreign exchange reserves reduce the risk of the kind of currency crisis that hit Asia ... A complex system of state and federal taxes ... is being replaced by a unified national VAT. The budget deficit, although still too high, has been reduced ... India's gross national saving rate is a relatively robust 32% of GDP.

The government's microeconomic policies have been less successful than its macroeconomic reforms. Energy remains a major weakness, with too little building of electricity generating capacity and a distribution system that wastes much ... The results are electricity shortages, brownouts and the ubiquitous small generators in shops and homes because the state electricity supply is so unreliable.

In contrast, telecommunications is working well because of widespread use of privately supplied cellphones... It is ironic that cellphone service is widely available at low cost because it was regarded as a luxury and therefore left to the market, while electricity is hard to obtain because it has been regarded as a necessity and therefore managed by the government. Transportation is beginning to improve. A new "open skies" agreement with Washington allows U.S. airlines to fly to any city in India ... Road travel is still difficult in India but a national network of divided highways ... is cutting time for ... traffic among major cities. ...

The system of primary and secondary public education is a terrible failure, especially for girls and low-income and rural households, with a resulting high level of illiteracy. In contrast, elite institutions of higher education produce world-class graduates among those who have been able to buy quality secondary school education. ... Despite this, high-tech industries are growing rapidly because of the combination of wages that are low even by Chinese standards, an absolutely large educated labor force and widespread knowledge of English. Information technology is only the most visible of these. ...

But industrial activity in general, particularly employment-intensive manufacturing, is much less developed than in China. Industrial development is hampered by labor market rules ... and by the continued government ownership in a wide range of industries. ... The ... establishment of new firms is also hampered by the weakness of the banking system. The commercial banks are still largely state-owned... They devote much of their lending to the purchase of government bonds. Although new private banks are expanding, there is political resistance to selling the state banks or allowing foreign banks to enter the Indian market ...

A few years ago, whenever I spoke to Indian officials about China's economic performance I was likely to hear that such comparisons were irrelevant because China was a dictatorship and India a democracy. I no longer hear that excuse. It is now common for officials to ... look at Chinese experience for guidance on what might be done in India.

The optimistic mood in India's business community, the desire for reforms by the top leadership of the government, and the growing number of relatively middle-class households provide a force for change and a source of support for new entrepreneurial activities. If the political leaders can now persuade the traditional opponents of reform that growth can benefit their constituents and that better new jobs will replace the old, India will see decades of remarkable achievement.

    Posted by on Thursday, February 16, 2006 at 01:22 AM in Economics, India | Permalink  TrackBack (0)  Comments (7)

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