A bright spot in a slowing global economy, India is poised to become the “next China” in terms of driving growth. And Prime Minister Narendra Modi, who assumed office in May 2014, is planning to do so by replicating the East Asian model of development based on infrastructure and strong manufacturing. With India facing the urgent tasks of creating jobs and improving its creaking infrastructure, the East Asian model seems to hold great promise for the country.
India’s aspiration to become a global economic powerhouse through the East Asian model is admirable, but the current Indian government seems to be facing the difficulty of translating ideas into action. Modi’s mojo is losing steam against the backdrop of delayed economic reform, tepid investment growth, slow industry output growth, depressed rural demand, and a 16-month streak of falling exports. India’s claim to the world’s fastest economic growth even remains controversial as many express doubts about the new methods of GDP calculation.
What went wrong and what can be done?
Given the vastly different political, economic, and social structures involved, India’s East Asian dream should be tailored to the specific circumstances of India. It’s also worth noting that, given an unfavorable global economy and much changed economic dynamics in the past several decades, the East Asian model may no longer be valid in the 21st century economy of global over-capacity, automated production, and muted demand. Despite these setbacks, East Asian experiences still offer a few useful insights that are worthy of being considered by Indian policymakers.
In the early 1990s, the World Bank undertook a comparative study on East Asian economic development to understand how the economies were able to achieve rapid growth. According to their conclusion, the better allocation of physical and human resources was one of the main drivers behind the “East Asian Miracle.” Instead of pursuing a discursive approach to economic development, East Asian countries chose priority policies, areas, or sectors and focused on these until they showed visible and tangible results. This “choose and focus” strategy was, in particular, the fundamental principle of Korea’s five-year economic development plan, resetting priority areas every five years as per development progress and dynamics of economic environment.
East Asian economies also set realistic goals and took pragmatic approaches, “getting the basics right,” according to the World Bank. China, more than any other country in the region, experienced how an unscientific and idealistic goal could bring the country to catastrophe — witness Mao Zedong’s notorious “Great Leap Forward,” which was supposed to transform the country from an agrarian society to an industrialized nation in a few years. This led later Chinese leaders like Deng Xiaoping and Jiang Zemin to be pragmatic and realistic in setting out China’s economic development targets.
More than anything else, East Asians have valued building credibility and creating a win-win environment, devising and implementing public policies in accordance with these values. Stability and predictability of policies was an overriding objective of policymakers, who refrained from making big promises. Various incentives were also put in place to attract foreign investment and create an environment where domestic industries can learn from foreign counterparts while the latter can easily do businesses. Foreign investments were viewed as the means to improve the skills and capabilities of the workforce and advance technology rather than as competitors with and/or exploiters of domestic industries. China’s “open door policy” clearly demonstrates how creating a win-win environment could yield rapid economic growth, technological advancement, and improvement of physical and human resources.
When looking through the prism of East Asian experiences, however, India seems to be heading in the opposite direction. Since its inauguration in May 2014, the Modi government has announced an endless list of flagship projects: Make in India, Digital India, Clean India, Start-up India, Smart City, Skill India, and more. The Indian government’s sense of urgency in developing every corner of the economy as quickly as possible is understandable. Unfortunately, the government is short-staffed and does not have the capacity to manage and oversee all these schemes. Moreover, many of these projects set unattainable and ideal goals. For instance, what India really needs at this stage of its development are fully functional cities with provision of basic services like sanitary sewage and waste system, sufficient water and power supply, and health care system, not ubiquitous futuristic smart cities.
There are pressing needs to improve policy implementation and performance as well. The Modi government is well aware of the importance of foreign capital and technology in carrying out its announced plans and has reached out to foreign investors accordingly. Yet, the threats of retrospective taxes, a sudden increase in the customs duty, the unexpected overturn of public tender awards, and abrupt curbs on benefits for investors are still prevalent, dampening much of the enthusiasm that was seen in the beginning of the Modi government’s time in office.
The government also seems to be relying on buoyed investment commitment numbers to create positive investment prospects for the country. Hundreds of thousands of rupees’ worth of investment commitments are announced during investment summits hosted by both central and state governments almost every month, if not week. However, how much of this investment will be actualized remains a big questions mark; the ratio of investment promises into real investment has typically been low in India. Modi himself was able to implement only 8 percent of investment pledges during his 11-year tenure as Gujarat chief minister.
Perhaps it is not ignorance or unawareness of the right development policy and implementation strategy that is delaying India’s East Asian dream. Rather, it could be the intricacy of the political system of world’s largest democratic country, where the number of conflicts of interests is proportionate to the size of its constituents. Indeed, without seizing enough political power, Modi cannot bring the changes he wants, and that is why his focus has tilted toward the upcoming state elections. Yet the recent less rosy prospect of Indian economy raises a question of which should come first: economic reform or political control. A grand vision is needed to win an election, but it is not enough to sustain the victory. It’s time to go beyond this grand vision for a better India.
Dr. Soyen Park is a South Korean national currently living in New Delhi, where she works as a researcher on the Indian economy.
Yizhe Daniel Xie is a Ph.D. candidate focusing on Asian Economy at the GSAPS, Waseda University, Tokyo, and a young leader at the CSIS Pacific Forum. Xie recently spent two months conducting research at a think tank ICRIER, New Delhi and prior to graduate school he worked with Industrial Bank of Korea Securities in Seoul and Goldman Sachs in Beijing.