On Friday, the Indian government headed by Prime Minister
Narendra Modi withdrew potentially transformative farm laws prior to their
implementation. The short-term angle is political: Modi bowed to sustained protests by tens of thousands of farmers. The
long-term angle is economic: There is now no reason to expect farmers to become
prosperous, and thus no reason to expect India to become prosperous.
Briefly on politics: It’s tempting to see this as people
power triumphing over unjustified elite decisions. But the seemingly impressive
number of protesters should be viewed against perhaps 145 million Indian farms. Protestors could reflect the
broader view, or they could be a highly visible, tiny minority hijacking the
entire country’s development.
Hijacking is not an exaggeration. It’s certainly reasonable
to wonder if giving farmers more sales options would have been botched, or even
intentionally warped by the Modi government to serve influential supporters.
But the alternative boils down to nothing. With the laws withdrawn, calls immediately
began to help farmers in other ways. All feature spending more money. All will
fail, as decades of previous such attempts failed.
India will never be
rich enough to make perhaps 900 million rural citizens prosperous through
spending. No country is. It can only be done by boosting productivity. The best
way to do so is with stronger individual rights to land. A version of land reform
in 2013, when the current opposition was in power, promised to use the power of
the state to protect against . . . the power of the state (to
expropriate land).
It accomplished little, and nothing at all in terms of
productivity. Upon assuming office in 2014, the Modi government launched a new
land reform effort. Its prospects were very much debatable, but debate became
moot when Modi withdrew that reform. The Prime Minister has backed away
from trying to give farmers more rights to land and, last week, more rights
over their crops.
Opponents of reform typically speak of protecting farmers and other land users. Since those being protected remain the poorest in the country, their victories are hollow. In the same vein, Indian labor law has protected formal sector workers by making it very difficult to fire them. Previously, establishments with 100 or more workers needed government permission to fire. Last year, that figure was raised to 300.
The result is firms refusing to hire beyond the government-dictated number of workers, a huge informal, short-term labor market, and low levels of labor force participation. Under these conditions, the demographic expansion and “sound fundamentals” Indian policy-makers love to cite border on meaningless — the contribution of prospective workers to the economy is sharply limited by policymakers themselves.
Results are frustrating for all concerned. Indian economic statistics have suffered from a variety of flaws. Using World Bank data shows income per person added about $570 from 2013 to 2019 (pre-pandemic); American income per person added $9700 over the same period. If that’s an unfair comparison, Indian income rose 45 percent while Bangladeshi rose 80 percent.
India did and can outperform most countries. But most
countries don’t bear the same expectations, both Indian hopes of a
generation-long boom and hopes of some in the US and elsewhere that India
replaces China as a global economic engine or at least in important supply
chains. The Modi government has failed for seven years to make this kind of
progress, twice abandoning its most important programs.
If another round of COVID-19 doesn’t disrupt the recovery, growth will be quick for a few more quarters. A few states and sectors will do better than average. India will still be big and will matter a good deal in regional security, climate change, and the like. But with no fundamental ownership or competition reform, the bulk of the population will remain poor and the bright economic future will remain forever distant.
The post India writes itself off appeared first on American Enterprise Institute – AEI.