Cruel to be Kind
India's spectacular growth is only matched by its spectacular poverty, runs the trailer for a recent BBC World debate. Very true, and ultimately (as always with India) it's the very policies designed to protect the poor that damage them most.
Shockingly free-market liberal statement coming up: in order to bring people out of poverty, as has occurred in China, India needs to create the right conditions for business. Unfortunately, the very fact that India is a liberal democracy stands in the way of this, with so many interest groups protecting their own interests. The communists may do well in land reforms in West Bengal, but fail miserably when it comes to the next step in Friedrich List's stages of economic development - creating a manufacturing base.
Same goes for caste reservations (also dealt with by The Economist this month). You can't break the cycle by positive discrimination, that just makes things worse: only universal primary education is the answer.
India's economy | A Himalayan challenge | Economist.com
India has by far the most restrictive employment-protection laws for collective dismissals, scoring much worse than China and Brazil as well as all the rich countries. Manufacturing firms need to obtain government permission to lay off a worker from factories with more than 100 staff. This partly explains why most firms are so small: 87% of employment in Indian manufacturing is in firms with less than ten employees, compared with only 5% in China. Small firms cannot reap economies of scale or exploit the latest technology, and so suffer from lower productivity than big firms...
There is compelling evidence that further reforms would boost India’s growth. Industries in which the government has eased regulation and encouraged competition, such as telecommunications and IT services, have grown fast. State-owned firms still account for 38% of output in the formal non-farm business sector, yet the OECD estimates that private firms are on average one-third more productive than public-sector ones. States with looser labour-and product-market regulations enjoy higher labour productivity.
Sadly, further bold reform is currently blocked by the communist parties on which the coalition government depends for its majority. In an economy where income per head used to rise by barely 1% a year, current growth rates feel like a miracle. But to eliminate India’s vast poverty the country must try harder.
