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November 2013

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The Crying Need for a New Indian Economic Model
by Jon P. Dorschner

This has been a bad year for the Indian economy, which is experiencing ever more sluggish growth. The projected growth rate for 2013 is only 5%, the slowest pace in 10 years. Of particular note is the falling value of the Indian Rupee, which has lost 10% of its value against the U.S. dollar this year.1  

While there are varied explanations for this decline, it marks a crisis of confidence in the Indian economy, demonstrated by both foreign and Indian investors. Indians are converting their Rupees to American dollars at ever growing rates, both to purchase goods and services abroad and as a hedge against further declines in the Rupee. The Rupee’s decline can cost Indians dearly, as evidenced by the August 23, 2013 announcement that the decline has decreased the value of the assets of Mukesh Ambani, India’s wealthiest person, by 24%.2 

Another troubling sign is a fall in foreign investment. In the past fiscal year foreign investment in India totaled $46.6 billion. This year, it is projected to decline to $36.9 billion. For the first time in history, investments by Indian businesses outside the country have exceeded Foreign Direct Investment. This is a key-contributing factor to India’s current account deficit of 4.8% of GDP. The decline in investment, the falling rupee and projected slowing of growth in the manufacturing sector are causing many economists to predict further declines in India’s economic growth rate. 

Economists agree that corruption is a key contributing factor to declining Indian economic performance.  India’s economy has fallen as its ranking on the Transparency International’s Corruption Perception Index has increased. India scored its first high ranking on the index in 2007, when it was ranked number 72 of 180 countries. The ranking has steadily increased over time. In 2013 India was ranked 94 out of 176 countries. 

These discouraging trends have resulted in differing prescriptions for remedy.  Those with a neo-liberal viewpoint continue to call for further liberalization of the Indian economy, stating that India has failed to cut red tape, and further open the country to foreign investment. Critics of neo-liberalism claim that this very liberalization is the cause of India’s economic woes. 

While India’s economy is exceedingly complex, and defies easy categorization, India has taken the neo-liberal prescription about as far as it can go. Economic reform has lifted millions of Indians out of poverty, but is no magic bullet capable of turning India into an economic powerhouse. Corruption is a key factor.  One third of India’s politicians are currently under investigation for criminal offenses, including felonies.  Few ever see the inside of a courtroom. Much of India’s political class acts in concert with corrupt economic elites to rob the state. Bribery, tax evasion, and embezzlement have grown to such levels that they prevent the normal functioning of government and the economy. India’s economy is now held hostage to corruption, which will prevent economic progress altogether if not effectively checked and reversed.    

One of the key reasons why corruption has grown to such epidemic proportions is the introduction of an American style consumer economy. Prior to economic reform, India followed a Nehruvian economic formula stressing a mixed economy, strict controls on imports, and the imposition of large duties, subsidization of domestic production, a strong public sector, and a powerful economic and political role for labor unions.  The Rupee was a nonconvertible currency and therefore did not face challenges from stronger currencies.  Most now accept that these policies, as implemented, restrained the growth of the Indian economy to a “Hindu rate” of economic growth that barely kept pace with the growth in the population. While the Nehruvian economy built a sizeable industrial base, vastly increased agricultural production (the Green Revolution), and checked the growth of poverty, it did not lower significantly the overall poverty rate.      

Despite this, few proponents of neo-liberal economics are prepared to give Nehru the credit he deserves.  During the Nehru years corruption and criminality by political and economic elites were kept under control.  These two trends skyrocketed only after economic liberalization. When economic controls were removed, corrupt practices increased. A new capitalist class acted in concert with willing politicians to gain maximum benefit.  While economic outputs increased dramatically, the corrupt elites prevented the implementation of a just and fair distribution system. Instead, they corralled most of the wealth for themselves and allowed only small amounts to “trickle down” to others. We have seen similar trends in countries all over the world. 

In addition, the introduction of a consumer economy vastly increased demand for consumer goods, especially those imported from abroad. While the elites set the trends for conspicuous consumption, the middle classes quickly aped these trends and tried to keep up within their limited means. The Indian working classes and low-income groups then felt compelled to adopt the middle class model as the principal indicator of social mobility and economic success. They then vastly increased their own demand for consumer goods, although severely hampered by poverty.  

Since economic liberalization, the Indian population has been bombarded by advertising and social pressure to consume at ever-greater levels. There was considerable pent-up consumer demand when liberalization was inaugurated, as most of the Indian population had been restricted to consuming Indian made goods, which were often of inferior quality and selection when compared to those made in other countries.  Foreign companies were quick to take advantage of this demand and create a market for their goods in India.

When a country adopts a consumer economy, luxuries quickly become necessities. Families feel they must obtain an ever-growing variety of high quality consumer goods. In India, as consumer demand rose, wages and salaries failed to keep up.  Corruption became the standard method to increase the family income and provide access to consumer goods.Under this pressure, the practice of corruption has lost its negative sanction. Those who embezzle or accept bribes for performing their jobs increasingly feel that this is the norm and not a cause of shame or embarrassment. This is especially true when investigative media uncovers case after case of high-level corruption. The average worker feels little restraint when he/she sees that elites freely practice corruption on a large scale with no legal penalty. 

When India became independent, Mahatma Gandhi was revered throughout the country as the father of the nation. Gandhi had criticized western countries for their emphasis on “materialism,” which we would now call consumerism. He praised India for its “spiritual” values and said that these should be the centerpieces of India’s economic and cultural development. Gandhi often stated that India should not attempt to mimic the western economic system based on ever-expanding material wealth. 

Gandhi quoted Henry David Thoreau and urged Indians to engage in “Simple Living – High Thinking.” While Gandhi’s economic thinking has often been criticized as overly idealistic and unrealistic, I believe he was correct in stating that India should create an economy that stresses the universal provision of basic goods and services over one that creates social classes based on consumption and wealth with widely divergent incomes. This is particularly important in the Indian context, in which 50% of the population lives in absolute poverty and has no access to even basic education, health, employment, nutrition or housing. In this context, there is no place for a consumer economy that urges individual consumers to acquire as much wealth and luxury as possible.  In this context, only an egalitarian model is workable. 

Gandhi rightfully urged the Indian government to focus on providing basic nutrition, education, housing, and health care to the population at large, with the goal of lifting the persons on the bottom of the Indian economy out of absolute poverty and placing them in a position where they can experience true social mobility. These ideals were widely touted in the early years of India’s independence. Nehru was correct in adopting this frame of reference. His stated goals were correct.  He was also correct in attempting to devise a series of policies aimed at achieving these goals. 

His execution was poor, however. Instead of adopting an Indian model, he became overly enamored with the Soviet development model, which focused on the development of heavy industry, top-heavy government, and a planned economy with stated goals. This model proved to be inappropriate for the Indian context and failed to provide the promised results. However, the neo-liberal model is also from a foreign cultural context and will also fail to provide the goods. 

India will only overcome its corruption problem when it has made a conscious effort to move away from the consumer economy. Gandhi said that India is an inherently spiritual culture and that Indians are capable of finding satisfaction in the simple joys of life. The modern India with its ever-greater emphasis on consumption as the measure of success has rejected this Gandhian emphasis. 

Perhaps it is not too late to return to a simpler way of life and away from corruption. The Indian middle class is the engine of change. Its growing addiction to material goods has made it the enabler of India’s corrupt elites. If the middle class changes its value system, it will serve as a role model for others. Many in India are quick to state that they are sick and tired of corrupt leadership and are ready for change. The middle class has been influential in decrying violence against women, and is beginning to protest corrupt practices. Perhaps it can serve as the core around which the society in general can mobilize to change the quality of national leadership.    

India should attempt to devise its own economic model that tempers the excesses of neo-liberalism with a healthy dose of Gandhian and Nehruvian thinking. 

There are two areas in which India can apply these ideas and show the world the uniqueness of its economic model. These are the creation and maintenance of a uniquely Indian infrastructure and the adoption of an environmentally sound economic growth model based on sustainability rather than consumption.

India has already demonstrated its ability to “leapfrog” over technologies in the area of telephone communications.  India has been widely praised for moving straight into cellphones rather than trying to install a “landline” system that would be obsolete before it was installed.  As a result, Indians now have access to telephone technology unprecedented in the developing world.

India could undertake the same “leapfrogging” in other areas of infrastructural development.  For example, it would be a serious mistake for India to spend enormous funds it does not have to produce a road system to support private automobiles.  Instead, India should leapfrog straight from the oxcart age into state of the art public transportation.  India will never have the resources to provide private automobile ownership to a majority of the population.  Rather than spending enormous sums to benefit the middle class, India should provide public transportation to everyone in the country at the lowest possible cost.

Other countries, such as the United States, will at some point, have to stop subsidizing the private automobile and make the necessary public infrastructure investments to create a viable public transportation system.  India can spare itself this painful step by abandoning the private car right now in favor of busses, light rail, subways, and bicycles.

I will provide one other example.

India is not energy self-sufficient.  The only fossil fuel it has in abundance is coal.  This fuel is out of date because it pollutes the environment and is responsible for harmful levels of carbon emissions.  India is now in the top three carbon emitters due to its heavy reliance on coal (the other two countries are China and the United States).

Instead of attempting to keep up with ever-increasing energy demand by relying on fossil fuel, which either must be imported or be polluting, India should embark now on a plan to leapfrog from fossil fuel to renewables.  India should commit to a renewable energy economy with the goal of converting as quickly as possible.  India will then spare itself the enormous environmental consequences that the industrialized west and China have had to endure.  India would then also gain international prestige as the forward-looking country that overcame its fossil fuel addiction.

If a developing society like India’s with a long history of endemic poverty adopts a consumer economy, it is a recipe for disaster.  We see the signs of this disaster every day in the gloomy economic reports.  A society obsessed with obtaining ever greater material wealth will not preserve its environment, conserve resources, and ensure clean drinking water, and air for future generations.

For India, these are issues of life and death.  Over a billion Indians are dependent on a fragile environment for their survival.  They do not have the luxury of ignoring the growing signs of impending environmental disaster.  Now is the time to adopt a new economic model based on Indian cultural values that will meet the real challenges facing the country.bluestar

Notes


1. The economic figures used in this article are from BBC News (Business), August 14, 2013

2. Bloomberg News, August 23, 2013


American Diplomacy is the Publication of Origin for this work. Permission to republish is freely granted with credit and a link back to American Diplomacy.


Author A native of Tucson, Arizona, Jon P. Dorschner earned a PhD. in South Asian studies from the University of Arizona. He currently teaches South Asian Studies and International Relations at his alma mater, and publishes articles and books on South Asian subjects. From 1983 until 2011, he was a career Foreign Service Officer. A Political Officer, Dr. Dorschner’s career specialties were internal politics and political/military affairs.

He served in Germany, India, Pakistan, Bangladesh, Nigeria, the United States Military Academy at West Point and Washington. From 2003-2007 he headed the Internal Politics Unit at the U.S. Embassy in New Delhi, India.

In 2007-2008 Dr. Dorschner completed a one-year assignment on an Italian Provincial Reconstruction Team (PRT) in Tallil, Iraq. From 2009-2011 he served as an Economic Officer, in Berlin, Germany.


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