‘Achieving Inclusive Prosperity in India: Tackling the Fundamentals’, chapter by SM Tharman Shanmugaratnam in “India on Our Minds”

Note: This chapter draws on two lectures delivered by Senior Minister Tharman Shanmugaratnam in India: the Suresh Tendulkar Memorial Lecture delivered at the Reserve Bank of India on 7 January 2020 and the Inaugural NITI Lecture on Transforming India in New Delhi on 26 August 2016.

Achieving Inclusive Prosperity in India: Tackling the Fundamentals

India has the largest unfulfilled social and economic potential of any country today. I say this as a friend, and from a country that wants India to succeed and play a full and positive role in the world.

There have been impressive strides in recent years, especially in India’s social infrastructure. The results speak for themselves – electrification, sanitation, bank accounts and a basic health safety net have been brought to the villages and the vast majority of the population. India is achieving this in a nation of unparalleled scale and diversity. It provides the world with many lessons in development.

However, India’s challenges remain immense. The central problem is a lack of jobs for the mass of young people. Failure to address this gap and meet their aspirations will have more than economic consequences. However, it can only be achieved through a bold effort to erase long-standing legacies.

In its first seven decades, government in India has over-intervened in the economy, while under-investing in human and social development. The legacy of the ‘Licence Raj’, beginning with Nehruvian state planning and import-substitution from the time of independence, and compounded over many years, still weighs heavily on the economy. The legacy of social neglect goes much further back in history, but has also persisted in independent India, including an education system that is an injustice on most young people.

Overcoming these legacies is complex, but a fundamental and pressing task. The next phase of India’s development must involve a major step-up in both social and economic transformation. The two go together. India needs stronger economic growth to create enough jobs and achieve inclusive prosperity. But without social transformation, it will not be possible to achieve economic vibrance and realise India’s potential.

It needs a greater sense of urgency in politics, society and the business community. India faces a race against demography. Its labour force is growing by 12 million young people each year, the largest in the world. But job creation is less than three million a year. Youth unemployment and underemployment is already very large, and growing.

India also faces a race against technology. The next five years are critical. If we look at what is happening globally in supply chains, and the increasingly intelligent machines and software being introduced in every sector, time is not on India’s side. It has to regear quickly to reskill and upskill people, and get them into jobs which offer a ladder of future improvement and wage increases.

India needs growth of 8 to 10 percent per year over the next 20 years, to prevent significant increases in unemployment and to get closer to realising its potential. It is much higher than the six plus percent average over the last 20 years, but a vital goal. And even with 8 to 10 percent growth, India would in 20 years reach little more than today’s level of per capita income in China.

It will require bold strokes in economic and social policy to achieve this. But we should avoid the misconception that the task is simply about reducing the role of government and growing the role of markets. We cannot get an inclusive society and vibrant economy anywhere without good government and state capacity. What this really involves in India is a reorientation in the role of government.

India needs much stronger and more effective interventions in the social foundations for prosperity, especially in education and healthcare. It also needs to move away from a long-standing statist tradition in running and regulating the economy, towards investing in public goods and enabling enterprises and workers to build up capabilities and compete globally.

The social foundations are where the gaps are most critical. There have been improvements in primary school enrolment and the transition to secondary school, but the quality of learning is still India’s biggest crisis. More than half of India’s children fail to reach the basic reading proficiency expected by the later years of primary school; many fall well below. Yet, the country also has exceptional talent. Those who go to the Indian Institutes of Technology and Indian Institutes of Management are first rate by international standards. India has the biggest gap I know of, between the talent at the top and the unfulfilled potential of the vast majority.

But it is the state of education for girls that expresses most profoundly India’s social challenges, and is rightly receiving greater attention now. It is at the heart of a vicious cycle of poverty, girls shouldering the burden of housework, their high drop-out rates from school, early marriage and poor maternal and child nutrition. These gender inequalities limit girls’ ability to live a life of their choosing, but also perpetuate broader social inequalities in the next generation. Deep-set social attitudes make this a complex challenge, but there are essential, practical steps that will enable progress. The proportion of schools with usable toilets for girls doubled between 2010 and 2018, although a third of schools were still without.      

There is cause for optimism in NITI Aayog’s state-level School Education Quality Index. It ranks states and puts information in the public eye. The results show large variation in standards across states, highlighting the gaps that can potentially be closed. The fact that some states – both small and large – have made major improvements in the space of a few years shows how long-standing legacies of mismanagement and neglect can be overcome. It comes down to the current policy focus on the governance of education, especially in the recruitment of teachers and selection of school leaders. This is the biggest decider of quality in schools, in districts and states. Transparency and incentives for local authorities, and for educationists themselves, matter greatly in education.   

In healthcare too, there are pilot projects where good results are being achieved, and which only need to be scaled up. Poshan Abhiyaan is now the world’s largest nutrition programme, aimed at expectant mothers and the first thousand days of a child’s life. It was started in Maharashtra more than a decade ago, and began showing very significant reductions in childhood stunting. State Nutrition Missions were then introduced in several other states – Madhya Pradesh, Uttar Pradesh, Gujarat and Karnataka. India now has a national Nutrition Mission.

The problems in human development are hence not insoluble. Improvements are being seeded locally, including in India’s ‘Aspirational Districts’ that have long lagged in human development, and scaled up across the country. There is a gathering momentum.  

India is also rightly focused on skills development. Like many countries – but more than most – it faces a serious mismatch between the skills that young people are equipped with and the needs of the market. It requires a reorientation of tertiary education, away from an overly academic focus, towards applied, skills-oriented curricula that give the majority of young people greater confidence as they enter the workforce and seek to build a future. Here too, progress is being made. Singapore as a much smaller nation is contributing where it can, by collaborating with the Indian government and a few state governments to develop technical training institutions that borrow from our own experience.

However, India also has to move more decisively to transform its economy. It will not solve the jobs shortage, and raise productivity and incomes significantly, without major reforms.

The solution to joblessness cannot be to keep people trapped in low-income, subsistence living in the rural heartlands. There is huge potential to lift productivity in Indian agriculture, as international comparisons make clear. Putting digital technologies in the hands of farmers will help them cut out middlemen and directly access seeds, fertilisers, credit and markets. Increased farm productivity will also help free up labour for jobs that offer better livelihoods elsewhere. Compared to East Asia, India has seen a much smaller shift of labour from low-productivity agriculture into manufacturing, infrastructural work and services in both rural hubs and the cities.

India should set its sights high in manufacturing and move quickly. It can be a major global producer in four to six industries. But to achieve this, India has to be more open to the world. No large developing country has achieved strong economic and jobs growth without strong export growth and progressive liberalisation of imports. The reason has to do with learning. Playing in the global competition, and being part of global value chains, brings a discipline of constant learning – and a whole ethos of wanting to meet the latest standards or even exceed them.

This essential lesson of the last four decades remains true even in today’s less favourable global trade climate. There is still a huge world market. India also has the opportunity today to attract global producers as they seek to avoid over-reliance on existing bases. ‘Make in India’ has to be about making for the world.

However, to achieve global competitiveness, India also needs domestic reforms to enable firms to grow larger and to develop stronger supply-side capabilities.

India’s labour market laws and rules, amongst the world’s most rigid, have led to the bulk of its manpower being stuck in an informal urban sector and very small enterprises, besides the rural economy. Bolder reforms are needed to encourage small players to grow, and enable more manpower to be employed in medium- and large-sized firms and on long-term rather than short-term contracts so that firms have incentive to invest in their capabilities. Scale economies and investments in the workforce are critical for India to sustain higher productivity and wage growth.

Secondly, central and state governments can work actively with the private sector to develop the benefits of industrial clustering – or what economists call agglomeration economies – in specific industries. Clusters of firms and R&D and training institutions can create a growth dynamic by spurring innovation and skills upgrading, creating deeper supply networks, and reducing logistics costs. Andhra Pradesh’s pharmaceutical cluster, one of the largest in the world, shows what is possible.   

Finally, India has committed itself to a more sustainable economy, the critical 21^st century goal. Together with a stronger system of basic healthcare and education, the transition towards clean energy and the green economy will be the most important externality that the state has to address in the years ahead. It is also integral to tackling the crisis of urban pollution and waste in Indian cities, and to any future conception of an inclusive society.

Cities have an important role to play in this. The rapid growth that India needs to create jobs and uplift incomes cannot rest on migration into ever larger and more congested cities. India will need new and more compact cities, including those close to the rural heartlands, which are cleaner, smarter and more inclusive. Implementation of the ‘Smart Cities’ programme, focused on water, sanitation and efficient urban mobility, will help achieve this. Indian cities can also benefit from governance changes to give urban local bodies more autonomy and hold them accountable.

I believe in India’s potential. The weight of history constrains its progress. More than half a century of over-regulation, a many-layered bureaucracy, an inward-looking orientation and protection of inefficient businesses, cannot be quickly overcome, even with promising reforms. Nor will deeply-rooted social prejudices be easily erased. However, tackling these economic and social legacies requires much greater urgency now to meet the needs and aspirations of a young population, the scale of which no country has seen before.

The reforms require a long view, and are politically challenging. They are additionally complex in a federal structure with multiple states and rolling electoral contests, which make taking the long view more difficult. But India can, and will I hope, persevere in these reforms so as to achieve its immense potential, build socially-inclusive prosperity and provide lessons to the world in sustainable development.