digital thoughts

Knowledge@Wharton published an article about India’s growth. I have given below the summary of that article.
 
For the investors and businesses still swooning over India’s red-hot growth, a pair of economists delivered a splash of cold water to their faces on February 23 during a talk organized by the University of Pennsylvania’s Center for the Advanced Study of India.

Against a backdrop of growing concern about India’s infrastructure constraints and the need for further institutional reform, the World Bank’s Shanta Devarajan stirred the pot with what he called his “four heretical thoughts on India.”

Devarajan serves as chief economist for the World Bank’s South Asia region, takes issue with the popular notion that there simply isn’t enough infrastructure — power, water, transportation networks, etc. — to sustain India’s robust economic growth rate of more than 8.6%.

“All this talk about infrastructure is missing the point,” Devarajan insisted. In many cases, the problem lies in mismanagement of the existing infrastructure, which gets gummed up in patronage politics. For example, he said, the “free” provision of water means that little money exists for maintenance or upgrades that could supply water around the clock. Clean, ubiquitous water on demand, meanwhile, is one of the marks of a fully developed country. Such well-developed infrastructure makes a country more attractive to foreign investment.

Charging for water in order to improve its delivery would require governments to make decisions that are unpopular with voters such as the powerful farmer’s lobby, thereby threatening the politicians’ own jobs and power, Devarajan said. In practice and effect, “the under-pricing of water is a form of political patronage. The tragedy is, it’s the poor people in whose name this subsidization is being advocated who lose out.”

“Health in India is a scandal, to put it mildly”

Among Devarajan’s other self-labeled heresies is one involving healthcare. “Health in India is a scandal, to put it mildly,” he says. And yet Devarajan thinks it would be foolish to boost public spending on healthcare to 3% of India’s gross domestic product, as some have proposed. Such a move would just give Indians more of a horrendously dysfunctional product. Even in the wealthy state of Punjab, public sector doctor absenteeism clocks in at a substantial 40%. For the person who goes to a public hospital with a sick child or a grievous wound, this often translates to long hours spent idly waiting for emergency treatment.

Devarajan also took aim at India’s primary education system, which he gave a failing grade despite the tempered success of the Sarva Shiksha Abhiyan, a government initiative to massively increase children’s school attendance. In Punjab, the teachers skip class 34.4% of the time — likely, he said, because teachers have side businesses. 

Arvind Subramanian, a division chief for the IMF’s Research Department, reminded the audience of a well-worn aphorism about India: “We’re great at running markets and states. The problem is we run our markets like states and our states like markets.” The fact, then, that India is becoming more proficient at running markets like markets, he said, “is a welcome development.”

Given such challenges, is it time to rein in the unbridled optimism over India’s growth prospects, or is it still “full steam ahead” for the India Express? Given the serious business consequences of routine power brown-outs, teeming and potholed roads and a host of other impediments, is it realistic to expect a 9% expansion rate to continue for any extended period of time?

India’s Central Statistical Agency on February 28 stated that the country’s growth rate had slowed to 8.6% in the last quarter of 2006, missing economists’ predictions of 9.3% and down from the previous quarter’s 9.2% growth rate. It was mostly attributed to difficulties in the farming sector — ineffectual monsoon rains last year caused crop shortfalls since irrigation is not widespread.

Wharton marketing professor Jagmohan Singh Raju counsels patience to anyone worried that India’s ride will hit the skids anytime soon because of interruptions to the flow of people, goods and commerce. He is confident that government and industry will step up to the plate, continuing to privatize in sectors that made sense. “The airports are being modernized,” Raju told India Knowledge@Wharton. “Please keep in mind that India is a democratic state and, just as is the case in the U.S., one cannot just wake up one day and decide that homes will be demolished to build freeways.

“Telecom, which used to be a bottleneck, is now in excellent shape,” Raju notes. He hasn’t forgotten about the market freefalls that previously befell other seeming miracle economies of Asia. “The domestic market is strong and growing, so it is less likely that we will see the kinds of things we saw in Indonesia, Thailand and South Korea.” Raju admits, though, that some self-inflicted pain could surface as starry-eyed investors try “to ride the wave without much thought. Some of us have not forgotten the Internet boom and doom.”

To read the complete article click here.