The Indian Experience : Economics of progress, depreciation, constraints in Supply

While ‘The Indian experience’ is unique in many respects, it is also not so unique in many others; it depends on which areas we want to delve into. Economists have over the last decade defined India’s story as the triumph of free market economy over the more ‘controlled’ one and therefore have given credence to the already established string of events that have seen millions come out of poverty and depravation. The Social scientists on the other hand have seen aspects of uniqueness in the journey, as there have been different approaches visible in the same road to progress and sometimes some of these approaches have worked at cross purposes thus renewing the doubt that economic progress does not preclude a social progress or vice versa.

I think much has to do with the rising desire to showcase the ‘Indian Experience’, which is important to the Indian cause but could well be misplaced in the context of what one wants to achieve as a nation in the greater ‘League of Nations’. That rising levels of incomes is a means to taking hordes of people out of poverty and depravation is a foregone conclusion, it is not the end, as world has seen examples where this process gave strikingly different results to different sections of peoples and society within the same nation. The over-emphasis on the word ‘growth’ as opposed to ‘governance’ or ‘institutions’ describes the contradiction that the Indian experience has with many other nations who had gone through similar experiences.

Is ‘growth’ a result of actions or the means to achieve an objective, which is making the nation’s base population capable of enjoying the basic necessities of life, like clean water, sanitation, a clean environment to live, education, better conduct in dealing with conflicts facilitated by laws that look at society’s common good, etc ? Would ‘growth’ bring in these elements of welfare automatically to the common man, or is it just one of the many elements that have to be worked on by the society to be able to achieve what is described in a nutshell as the basic elements of welfare above?

Perhaps ‘growth’ is the first basic step without which it is almost an impossible task to take hordes of people out of the utter helplessness that they tread on, being deprived of the very basic privileges that constitute modern living. It is also noteworthy that every year India probably adds 60 million people in the age bracket of 20 to 30 years whose hunger for employment must be met if social upheaval is to be avoided; very few nations have this problem. So many tradeoffs have to be made and the society has to deal with these trade-offs. Therefore the bandwagon of ‘growth’ over any other initiative pervades our National psyche, but we should be aware that some other more important elements are being ignored willfully in this process and my treatise is an attempt to highlight some of them.

1. The Building Blocks of ‘Social Construction’

While I was reading Porter’s, The Competitive Advantage of Nations, I found it quite odd how the Western Nations have remained the leaders for such a long time in developing competitiveness in the various fields. This view got more reformed after going through Global Competitiveness Index surveys conducted over several years that saw only Singapore amongst the East demonstrating the wherewithal that no other eastern nation could show in the field of global competitiveness. The very word ‘competitiveness’ does not feature as an important initiative to be developed amongst the Eastern Nations, until China discovered that it is only through development of certain competencies that one could rise above the rest to do better in the markets where goods and services compete in the global world. When they started developing these competencies through state interventions, they quickly realized that this needed a social acceptance of certain norms that could mean sacrifice to some members of the society while delivering benefit to the others.

The Indian experience is somewhat different although there is a semblance of this conflict quite early in the life of the nation after it got Independence in the late forties of the earlier century. Let me start with the building blocks of social construction.

It is in the Institutions that we build or in the laws that we accept or the norms that govern our lives that I define as the building blocks of social construction. If these are weak, they end weaker in discharging the function of social progress to peoples. That we provided a weaker architecture to the Institutions that would govern our society we therefore concluded that such weakness would be the society’s optimal choice when compared against the alternatives.

The first such institution is the Constitution that governs the way two legislative houses would enact laws and norms that would eventually run the country. The second is the Supreme Court and its delegation of authority in dealing with society’s conflicts where what is right and good have to separate from what is wrong and evil. The third is the administrative wing of the government that would actually implement what is best for the country as a whole.

It is in the reasoned scrutiny of these institutions and in constant appraisal of its performance that one can seek solace that the society is actually making progress as it is the core values that these institutions stand for that defines how they would discharge their duties to meet the needs of the society. Until we assess how these institutions are run, how can we rest assured that the results of their actions would bring in greater common good to the society?

If these institutions are above scrutiny and if we see that malfeasance pervades their daily routine and never in one occasion have these malfeasance been punished by any court of law that stood the test of times, one would rather be in doubt what these institutions actually implement on the ground. The failure of the judicial arm coupled with the failure of the ‘Constitution’ to govern at the apex level where ‘common good’ is to be ascertained or tested against the alternate hypothesis through a process of democracy leaves one bewildered that it is not in the triumph of democracy that one could seek solace as with erosion of the very fabric on which these processes rest, every democratic denouement could be short of delivering the ‘greater good’ that it is supposed to further.

The lack of emphasis on the building of these foundations of social construction, demonstrates the second more fallacious institution of India, the institution of Leadership, to which I would direct by next enquiry.

2. The Institution of Leadership

The rise of the institution of leadership can only be dated back to the early part of the twentieth century when the struggle for Indian independence from the British Raj created a multitude of leaders in the length and breadth of the country, sometimes uniting people to the cause of freedom, sometimes dividing them for the greater cause of local issues that plagues the lives of peoples and societies in this diverse nation of religion and cultures. The Congress party with its leaders, educated and more enlightened by learning was the only hope to the nation that had such conflicting priorities to deal with, paved the way how the institution of leadership could be build. It indeed had a daunting task as they were the pioneers in India in terms of creating a legacy that later on would be emulated in other walks of life whether in industry or in other areas where people would come together to deliver a common cause.

There were other influences that put challenges to the institutions of leadership and there were other personal traits that took cultures and local issues to the fore front. Various regions of India responded differently to the question of institution and many segregated themselves as the greater common good for certain regions in India sometimes came in the way of keeping every region develop a unified approach. The Southern states developed institutions of leadership that gravitated around personal cults that came from high on-screen appearances as heroes in films. The Eastern States being economic laggards developed its own styles of institutions that were not entirely leader-oriented, but based on social arguments on how a group is to interact with the society. The democratic process in its turn ensured how the institution of leadership was to be sustained by the same group of people as it gave the society a tool to challenge its leadership as well. But path-breaking changes was not possible as the institution of leadership had to compromise with many other facets and challenges that did not have an easy answer as the question of economic progress plagued them in all its ferocity.

3. Economic progress and societal acceptance of choice

The leadership of our nation took to the middle ground that between progress and societal acceptance of choice, there had to be a trade-off. If an agricultural economy had to be elevated it would preclude the need for irrigation, higher proportion of land to be brought under the management to improve productivity, creation of a distribution system that eliminated middle men, creation of a road infrastructure that reduced costs and the constant need to diversify the agriculture so that alternate employment could be provided. There were more conflicts that had to be solved to be able to achieve these ends and needed societal acceptance of the choices to be exercised.

But how do societies make these choices, or decide which is better or worse and how do these societies correctly time them? What influences the societies and how is it that some sections or regions behave differently to others? What role does leadership play and what role is played by the institution of leadership?

We have two extreme examples where in a state like Gujarat the institution of leadership created a norm of development that took the state from abject poverty to a level of prosperity that perhaps only Western nations could demonstrate. They showed a double digit growth rate in both agriculture and industry thanks to some great irrigation projects in a land that had great problems of water distribution. The society in this region made some difficult decisions and took to some choices that meant sacrifice for some people. But progress at the end in this region has been quite spectacular.

On the contrary the state of West Bengal created a polity that believed that one single political party could run the state over decades and therefore did not feel the need to economically progress in its villages, the state of agriculture and industry both resulted in a downslide. Education and Health and general welfare of people had assumed a state that cannot even be compared with the lowest economies of the world in sub-Saharan Africa. The society paid a price very dearly for this and have accepted like a fait accompli that there is little light at the end of the tunnel as every progress would need sacrifice of certain sections that the society had long forgotten to accept as a way of life. There are hundreds of villages where electricity, roads, schools or health institutions does not exist. More mandays are lost in the public institutions than in the creative mandays generated by these institutions, education included. What is the value generated at the end of the day and how is it going to be measured, remains still a crucial question in this state of India.

Sacrifice for development assumes a very common topic and what could be good for one section could be wrong for the other and there must be a logical conclusion to this argument to be sought by the society, not kept in limbo just because there are other objectives to be pursued like staying in ‘power’. There must be ideals that go above the needs of politics and there are examples of many polities where one has paid the price by sticking to ideals and objectives rather than to petty political ends.

Using land for other purposes than agriculture has been an age old topic and the price to be paid brings in arguments both for and against such entitlements. Who would decide what is the best alternate use for a piece of land and what is the price to be paid for each? This is a question that must be answered by the society but this must be orchestrated by the institution of leadership that seeks to find the answer in favor of the greater number of people. This is where India has lost out, as weak institutions have tried and failed to deliver the right answer to some of these questions. However it was quite a striking feature to note that many sections of the people, the rich in particular have to go through the same sacrifice as the people who are deprived in dealing with some of the social choices. If infrastructure cannot be build because land acquisition would displace people, the sacrifice that the richer sections would have to make is also not small.

4. The question of Depreciation

That India is going through a constant dosage of investments does not need a careful scrutiny, as both in terms of domestic savings growth and in terms of investment growth in the domestic economy one would see these statistics quite inspiring.

However one would see just the opposite in the care that the nation takes in the investments made in the past as these investments have gone through the process of depreciation and since very little has been done regularly to upgrade, they appear as reminders that we appear to be very negligent about the past while have a very high expectation about the future.

I have seen rarely that in the public arena we try to re-invest in an existing asset to keep it productive and appear customer-friendly over the longer term. This has become so pervasive that even in the private investments the same negligence continues. Old factories look older, old assets look worn out, depreciated, old universities appear pale, old buildings appear to break down.

The opposite example of this is to be found in every western nation, where the old appear as a glitter, as if they were just created. A fourteenth Century market in Krakow appeared like a newly made, the houses in Venice seem like freshly painted and refurbished. Does this need more than just the will of a nation to be able to preserve our past, just by investing in them so that they do not depreciate?

I think India as a nation believes in depreciation as a fatality and is inspired by the bandwagon of new investments. While we invest in new assets it is only a matter of time that they depreciate as fast as they were created, whereas by re-investing in the existing assets the Western nations have continued to make them as productive and qualitatively better as ever.

I visited one factory in Kolkata that has grown its ROCE to 60% by reducing the denominator year after year. It is the same story of reinvestments being half than the depreciation. Thus the net fixed assets have plunged in this process. No wonder this factory and such others look like prehistoric relics of the past, no modern customer would ever wish to go there twice to visit.

The nation also bears the same setting. Some malls glitter, while the old bazaars gloom in the dirt and negligence of all around. Some factories appear like global powerhouses, while some perish in the vintage and archaic norms. This is not creative destruction, but the desire to rule incrementally as if we have a severe constraint. This constraint mindset pervades the nation and its building. It is in the core thinking of how depreciation works in an asset that must be explored. It is even true in the human assets who do not sufficiently try to re-invest in knowledge and experience and in understanding of the changing world. The human mind depreciates faster than the assets that we talked of, this is a bigger remiss for India.

5. The constraint mind set

India suffers from a constrained mindset. When a road is widened it is just widened so that it could last for another three years, till the next widening project would be ushered. When an airport terminal is made it just could last for five years at the most, such is the size of the facility. It is the constrained mindset that we were born with in the last several generations that we have forgotten to do anything that is bigger than what we have done in the past. We have forgotten that we were growing at 4% and now we have doubled that growth rate and we must in fact treble some of the investments to catch up with the needs.

Cement, Steel and Aluminum have grown in India completely aligned to the GDP number on the average, while in China these core sectors saw double the growth rate of the GDP.

The core of this problem is all pervasive and the supply constraint is the root of all problems. Say’s law, which said that ‘Supplies find their own demand’, was almost meant for India. But in vain, as we have missed to develop a consensus that the country needs more in the core sector than in the other sectors of the economy. The supply constrained mindset could only be removed as more could be invested in the core sector and the infrastructure that acts as a constant source of lubrication for the greater economy at large.

This is also the root of the inflation problem, as many try to take the simplistic assumption that Philips curve suggest that lesser unemployment generates more inflation. It is through the constant chocking of supplies that prices in every commodity had run at a higher pace than the demand increment would have otherwise suggested.

I find it quite commendable that the western nations through protracted periods of times have been able to stymie the effects of inflation while unemployment has been low (like in the Scandinavian case or the Swiss have shown). It is again in the Institutions that we must seek the answers and the approaches to be adopted, which is what my treatise has always tried to point.

 

Procyon Mukherjee
Kolkata
4^th January 2011