India has an economic policy disease. While needing enormous productivity increases to become rich, it conducts policy as if it is already rich. What’s needed for a boom has been clear for a long time — land and labor reform. Instead, the discussion is of interest rate cuts and central government borrowing. Until that changes, the “India rising” story should be shelved.
There has been an overdone fuss over a quick drop in Indian gross domestic product (GDP) growth, from 8 percent a year ago to 5 percent in the most recent quarter. Most likely GDP decelerated before this year’s election but was manipulated to avoid showing this. The sharpness of the decline is probably due to official data catching up to reality.
India’s obsession with GDP is a more durable problem. GDP is merely correlated with vital outcomes such as employment and wealth; it should not be the performance benchmark. Five percent GDP growth would be adequate if household incomes outpace it, and if it is labor-intensive. We can’t tell because joblessness has never been properly measured. No one in Delhi has wanted to know.
This has become a crippling failure; the principal reason to expect a decade or more of fast growth is the surge of India’s working-age population. The primary goal of policy should thus be gainful and productive opportunities for potential labor market entrants. However, decision makers don’t even see the true state of the labor market, much less make policy on this basis.
It follows immediately that core reforms have little to do with more spending. First, measure joblessness. Second, liberalize labor markets. The vast majority of Indian firms, and all firms with 300 or more employees, cannot fire workers freely. The obvious impact is that they also don’t hire freely. They miss growth opportunities, which means the economy misses growth opportunities.
The same phenomenon put another way: India can only become richer if it becomes more productive. Productivity is hamstrung when basic hiring and firing decisions are warped by the state. Officials talk incessantly about demographic expansion, but labor policy devastatingly discriminates against making new workers productive. Against that failure, government spending pales.
Land reflects labor. The foundation of all development is escaping subsistence farming. Indian policymakers actually fear this because labor restrictions mean the economy can’t absorb the workers created if farming moves beyond subsistence. Rather than trying to boost agricultural productivity, they pass truly abysmal land laws and offer subsidies that do nothing to bring farmers prosperity.
The standard response is that such labor and land liberalization is politically impossible. India can indeed boom for 20 years, with near double-digit annual income growth, to become the third-largest national economy. But if Prime Minister Narendra Modi can’t even start to make it happen after a second, sweeping election victory, we should stop clinging to that potential and start to face reality.
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