In the past two months, South Korea has been in the news for all the right reasons. It has managed to contain the spread of the highly contagious COVID-19 disease pandemic, and has done so without imposing a dilapidating lockdown. South Korea’s success in implementing an effective strategy for testing, isolating the infected, and spreading awareness about the disease is commendable. Juxtapose that to the response of India and that of all other western nations, while India has managed to do better than the western nations, all can be seen as struggling in varying degrees to put a leash on the spread of the disease.
South Korea, therefore, presents itself to be a unique case worthy of emulation. However, about half a century ago, South Korea would have come across as an unlikely candidate for dealing with the economic shocks of a pandemic or having the state capacity to contain one. This all changed within a course of just 30 years. The story of the transformation of South Korea into an Asian Tiger Economy is an exhilarating one. In the early 1950s, South Korea and India’s per capita incomes were comparable. In the early 1960s, South Korea decided to follow a policy of export-led growth, removing trade barriers, and embracing the global market. For the next two decades, it clocked an impressive annual growth rate of 9.80% leading to rapid urbanization and the virtual elimination of abject poverty. By the 1990s, the spread of urbanization had crossed the 74% mark and the share of industry and services in the GDP stood at 91%. This story of transformation forms the bedrock of Prof. Arvind Paragariya’s vision of reclaiming India’s place at the global economic stage.
In a lot of ways, ‘India Unclaimed’ can be seen as a continuation of Prof. Panagariya’s previous book ‘India’s tryst with destiny’ co-authored with Prof. Bhagwati. In this book, Prof. Panagariya picks up from where he left off, and suggests the structural and sectoral solutions India can implement to reduce its red-tapism, increase incentives in government machinery, and reduce its presence where it is not required. The book could not have come at a more opportune time as the shocks of the COVID-19 pandemic have ravaged the domestic and the global economy. Post the COVID-19 crisis, the global economy will also be reorienting itself away from China, whose mishandling of the disease and subsequent leveraging of its dominance over essential supply-chains, has awakened the world towards the need for moving its supply-chains away from it.
The book provides a roadmap for India to absorb the outflow of manufacturing from China and covers a wide array of subjects that are essential for strengthening India’s manufacturing. It also highlights some of the fundamental malice that plagues various sectors of the Indian economy. Beginning with agriculture, Prof. Panagariya has identified key areas where government intervention leads to unlikely outcomes. For example, the Minimum Support Price (MSP) and its overwhelming emphasis on rice and wheat, not only makes the corps uncompetitive for exports but has also resulted in an alarming reduction in the water table in most areas of Punjab. Similarly, the Public Distribution System (PDS) and the procurement mammoth Food Corporation of India (FCI) are riddled with inefficiencies and reduce competition in the market. A better approach, as suggested by Prof. Panagariya, would be to implement direct cash transfer in place of subsidies, and improve competition by making FCI function within the exigencies of the market. Yet another radical but an important suggestion, is to replace MNREGA with cash transfers. MNREGA has attained a sacrosanct status, but it produces significant distortions in the market, and the rationales provided for retaining it does not meet the scrutiny. For example, the primary justification for retaining MNREGA has been that it has contributed towards improving the public infrastructure assets. However, given that MNREGA was originally an employment scheme, and the public asset creation was only the means through which employment could be achieved, it cannot now be claimed that the public asset creation must be treated as an end in itself. There are indeed more efficient delivery mechanisms for public assets creation. Ultimately, Prof Panagariya argues that the scope of growth in agriculture and its share in growth is limited and we would have to strengthen our manufacturing to attain a consistent 8% growth rate.
For manufacturing, through a meticulous analysis of data, he has shown how the productivity for an average worker in the form of Gross Value Addition (GVA) remains disappointingly low. This is primarily because the number of large-sized firms and enterprises in India is astonishingly low. The number of firms employing more than 200 workers stood at an abysmal 17.4% of the total number of firms for the year 2015/16. He has highlighted a number of reasons for such abnormality, one of them being the prohibition placed by the Small Scale Industry (SSI) reservation list brought about by the Nehru government and supplemented by the Indira Gandhi government, that starved investment by Large scale firms in various light manufacturing sectors. Others, such as archaic labor law and the socialist mindset of the judiciary have ensured that firms in India remain uncompetitive, risk-averse, and small. Prof. Panagariya has suggested various reforms in order to bring a turnaround in the sector such as reforming our labor laws, which make it difficult for the sick enterprises to shut down and place heavy compliance costs on the entrepreneurs. Other measures include avoiding import substitution, realizing the true market value of the currency by removing our emphasis on a strong rupee, and rationalizing our tariffs.
The book also offers some great insights into the trends of urbanization and offers valuable suggestions to de-congest the cities. One such suggestion is to increase the FSI in the cities. Prof. Panagariya has shown that a low FSI leads to many undesirable outcomes like relocation of the working population into the far-off suburbs which increasing travel time and traffic. It also increases road congestion due to encroachment as the constructions spill-over horizontally instead of a vertical expansion. Ultimately, it also leads to the rise of slums in the absence of affordable housing for the poorest strata. This is helpful in the times of COVID-19 pandemic as social distancing becomes increasingly difficult in congested and ill-planned cities.
The book also covers banking, securities, high education, and governance reforms. Some of the valuable suggestions include the logic of lateral entry in civil services and making it more efficient, closing down the loss-making PSUs, privatizing monetizable entities like BSNL and Air India, and overhauling UGC Act with new legislation that gives autonomy to institutions. The book offers strong and persuasive reasoning for each reform it suggests whilst demonstrating how the current set-up results in inefficient allocation and outcomes. The sheer number of subjects it covers tells you the genius of the author, many of which I have left out for the sake of brevity. I would recommend this book as a good lockdown-read for all budding economists, law students, and policy analysts alike to understand the policymaking and its outcomes.