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DPM Tharman Shanmugaratnam at the inaugural NITI Lecture on ‘Transforming India’

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DPM Tharman Shanmugaratnam at the inaugural NITI Lecture on ‘Transforming India’

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SM Tharman Shanmugaratnam

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26 August 2016

Speech by DPM and Coordinating Minister for Economic and Social Policies, Tharman Shanmugaratnam, at the inaugural NITI Lecture on ‘Transforming India’ on 26 August 2016.

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'Fulfilling India’s Potential in the Global Economy', delivered as the inaugural NITI Lecture on ‘Transforming India’ on 26 August 2016 in Delhi, India^[1]

His Excellency Narendra Modi, Prime Minister of the Republic of India,

Cabinet members,

Senior civil servants and distinguished participants

Let me first say what a privilege it is for me, coming from Singapore, to be giving this inaugural NITI Lecture. I have been advised to be frank, in order to be useful. But I must emphasise at the outset that everything that I have to say, is said as a friend, and Singapore counts India as one of its closest friends.

Recasting the global narrative

We are at an unusual time in the world. It is a time of promise, but also a time of pessimism.

Much of the advanced world is mired in pessimism. Europe and Japan have serious structural problems that they are trying to overcome, without much success so far. The United States is doing better, but labour force participation and median household incomes in the US are still lower than where they were before the 2007 crisis. China, for a long time the world’s outperformer, is now going through difficult restructuring, and seeing a sharp decline in private investment growth.

But it’s not just pessimism over growth. We are seeing a new mood of distrust within society, and a mood of distrust against the rest of the world. In the US, in the 1950s, they used to speak of “we”. Today, it is “us” and “them”.

It’s a mood that comes at least in part out of prolonged income stagnation, and in Europe an extremely high rate of unemployment amongst youth.

But there has been nothing inevitable in this, and it’s certainly not an inevitable outcome of globalisation. It reflects cumulative failures in policy.

There is no place in Asia for growth pessimism, and this negative narrative about globalisation. We have tremendous opportunity ahead of us. To open up, to integrate our economies, and to achieve growth that is inclusive, enabling broad-based prosperity for our people.

India is uniquely positioned to recast the global narrative, by achieving broad-based prosperity through a deeper strategic interaction with the global economy.

India’s own needs require this. India needs to grow by over 8 per cent over the next 20 years if it is to create jobs for a youthful population; reduce its extremely high degree of underemployment; and achieve inclusive growth – including a significant shift of people from the lower income group to the middle income group, just as China achieved.

But India is uniquely positioned to recast the global narrative because it is also an open society. It is a constitutional democracy, and with a diverse population. India can show how it is possible, with an open society and an open economy, to achieve not just rapid growth, but inclusive growth for its people.

The new ambition of government

This potential is within reach. But it cannot be achieved without significant changes. It cannot be achieved on current day policies. It requires, as Prime Minister Modi just said, ’rapid transformation, not gradual evolution’. It requires bold and accelerated changes to free up India’s economy, and to invest in its people.

The challenge is less about ideology today than about legacy. A legacy of the sheer weight of laws and rules, of bureaucracy, and of vested interests in society. India has to tackle that legacy decisively to fulfil its potential.

It does not mean smaller ambition in government. It means a different ambition.

Put in the broadest way, India has over-intervened in its economy, and under-invested in social and human capital. The government has over-reached itself in regulating the economy, and under-invested in social and human capital.

To achieve India’s potential, the government will therefore have to do less in some areas, and do more in other areas.

It has to withdraw from the old roles of the State – economic regulation, and ownership and management of enterprise. Those roles restrain private investment and job creation. They also preserve incumbents, the existing players, at the cost of allowing new players to grow.

But it’s not just about what you do less of, but what you do more of – the new ambition that must inspire and energise the state.

India has to invest in social mobility, and in developing the skills and abilities of its people to their fullest potential. It has to invest in inclusive housing and cities. It has to build a first rate infrastructure, both through private and public investment. And it has to foster, innovative capabilities – the ecosystem that will help companies and individuals make the most of new, technology-driven opportunities in the global economy.

This new ambition of government will help unleash the energies of individuals and enterprises. It will help markets to work in the interests of society.

It also means, in each of these fields, a new way of doing business in government – what the world now recognises as the “Modi Way”: actions, not just ideas and promises.

To borrow what Prime Minister Modi has said recently: “Reform, Perform, Transform” has to be the mantra in every field.

A race against demography and intelligent machines

There is need for much greater urgency. But the urgency to tackle long-standing problems does not come naturally in politics, and particularly in larger and older societies.

The problems that I described in the advanced world have come about precisely because solutions have been repeatedly postponed, and problems have been allowed to grow larger – in education, in the labour market, or in the pensions crisis that grows by the day.

Singapore had no choice but to act with urgency, from the time we became an independent nation. We could not otherwise have survived. To survive, and to be relevant to the world, we had to keep improving, and each time we reached a new level of achievement, we had to look to the next. If we aimed to just get by, or to be average, we would have been irrelevant very quickly. We’ve had no choice but to do everything we do well, and where possible exceptionally well.

But that’s Singapore, a small city state that became a sudden nation, with no natural resources and no natural source of water or energy. India is a vast nation, with immense inner strengths that derive from its history. You don’t have the same existential threat.

But India too, needs a sense of urgency. You are in a race against demography, and a race against intelligent machines.

You have to provide opportunities quickly for a very large youthful population that has entered working age or will soon do so. And India like other nations will have to act soon to avoid a technological divide in its society.

Wherever we are in the world, we have to act now to equip our people with new skills. We must pre-empt a major displacement of jobs by new technologies, and instead take advantage of technology to improve the quality of jobs, enabling higher productivity and better incomes for the broad majority.

India also has to act with urgency because it still has acute shortfalls in achieving basic human needs. There has been significant progress in the last 25 years, and momentum in the last few years. But there are still large shortfalls – clean water, sanitation, electricity, housing, basic healthcare and social security. It is a huge social challenge.

Achieving over 8 per cent growth over 20 years is therefore not a luxury. India, which had the same per capita income as China in the mid-1970s, now has almost two and a half times less per capita income than China. Even with 8 to 10 per cent growth, even as you achieve a catch-up while China slows down, it still means, in 20 years’ time, India having just 70 per cent the level of per capita income of China then.

There’s no reason why India cannot erase the social and economic deficits of the past. It has the largest unfulfilled potential of any country that I know of.

But India needs a sense of urgency in politics and society, in government and amongst its people, to achieve this potential.

The reforms are underway, and there is impressive progress in some areas. You have the world’s first digital and biometric identification infrastructure in Aadhaar, which will soon have reached the entire adult population. The passing of GST legislation, the new monetary policy framework, the cleaning up of bad debts in the banks and the simplification of bankruptcy law have been major advances. Your infrastructure plans are now moving at a faster pace – especially highways and roads, railways, energy, including renewable energy, and ports.

But the reform agenda is still largely unfinished, and the pace of change has to be stepped up. Rapid transformation, not gradual evolution, to repeat PM Modi’s call. You’re on a good batting wicket. But you can’t continue scoring singles. You have to go for fours and sixes in every over, and go for a century in every other innings. That’s the only way India’s going to achieve its potential in the next 20 years, and avoid severe social tensions and vulnerabilities arising from mass underemployment.

Why India’s per capita income fell behind

Why have India’s levels of productivity and per capita income fallen behind China and several other countries in East Asia? How can more rapid growth be achieved in future? And what will lead to prosperity being broadly distributed among the population?

First, India has not been geared to exporting to the world. That’s a major shortfall in its economy, compared to several East Asian nations. India has 18 per cent of the world’s population, but less than 2 per cent of the world’s exports. Your exports per person are only one-fifth the level seen in China or Vietnam.

Second, there has been very limited shift of people out of low-productivity agriculture.

Third, there has been very little growth in formal jobs in the economy. India has far fewer of its working people in the formal economy than any other major economy does. Less than 20 per cent of India’s people are employed in the formal economy. It holds back productivity growth and improvement in skills, and the regular pay increases and chance of progression that comes with that.

Fourth, you have few large firms. You have some exceptional firms, but the gap in productivity between the large firms and the mass of small firms is extremely wide in India. It’s not a problem unique to India, but it’s much sharper in India than in most other economies – this gap between the leading firms and the rest of the economy, in productivity, technology, management knowhow, and the skills of the people employed.

We know the reasons why: India’s employment laws and land acquisition laws discourage firms from employing more people and becoming larger. What it amounts to at the end of the day is anti-employment legislation. You’re protecting the 10 to 20 per cent of people in the formal economy at the expense of the 80 per cent without formal jobs.

It’s not just bad for growth, it’s also inequitable.

These four problems are in fact inter-related: The lack of an export orientation; the limited shift out of agriculture into manufacturing and services; the lack of formal job opportunities; and the gap in productivity between the small number of large firms and mass of very small firms.

The real logic of opening the economy

So what are the reforms that are required? I can only suggest some of the broadest shifts here.

First, India must go for a deeper strategic interaction with the global economy. And I use the word strategic for a reason. It’s not just about the calculus of trade deficits and current account deficits, or about which country is gaining and which country is losing in a zero sum game.

This is about a deeper strategic interaction with the world economy that will bring a new dynamic within India, the dynamic of continuous improvement.

It’s not fundamentally about demand – i.e. about domestic demand versus external demand. It is productivity growth, which is what drives long-term growth, not demand. So the real logic of opening up to the world is not the demand side logic but the supply side logic.

It’s about constant learning and the discipline of constantly adjusting to the latest in best practices. Every time a buyer sends new specifications to the factory – something different, or a little more sophisticated, or customised to a new group of customers – there’s adjustment. It’s about installing new technologies, but much more than that. It’s about management knowhow, in supply chains, finance and HR systems, and in tracking of competitors globally. And not just the explicit knowledge, but the tacit knowledge that comes from participation in the world economy and is continuously accumulated.

It’s about the discipline of dynamism – the relentless learning and updating, and the continuous attempts to leapfrog. That is the real logic of opening up to the world.

That logic of opening up is there even if the world is growing slowly. First, India’s very low presence in world export markets, at less than 2%, provides space to grow by competing for market share. Vietnam and some other emerging players have gained market share as labour-intensive manufacturing shifts out of China.

The second point is more fundamental. For any given level of demand, you can either have high exports and high imports, or low exports and low imports. But the big difference between the two alternatives is this discipline of dynamism, the constant learning that comes from interacting with the world.

That learning amongst firms, amongst individuals, and in government itself, is the real benefit of opening up our economy to the world. And it’s a discipline where India will not just be a follower, but has the potential to be a leader in several fields.

India has come a long way in opening up its economy in the last 25 years. But it needs a much more concerted push in the next phase of this journey. ‘Made in India’ has to be ‘Made in India for the World’. And if you can compete in the world, you will be able to compete in an open Indian market.

It cannot be a half-hearted strategy. It also cannot be a strategy, which I know is sometimes proposed, where you have both an export orientation for some products while retaining tariffs aimed at import substitution in other products. It doesn’t work that way anymore, because the whole way in which production is being organised in the world today, in global value chains, involves a complex interconnection between exports, imports of inputs and domestic supplies. It is a complex and deep interconnection that defines supply chains in the world economy today.

Take China. After China entered the WTO in 2001, it brought down import tariffs. But when import tariffs were brought down, the result was a paradoxical one. Chinese exports ended up having more domestic content as a result of this liberalisation. Why? Because domestic suppliers, including a new set of domestic suppliers, were able to take advantage of cheaper, better quality imported inputs to gain competitiveness and grow. So it’s a paradoxical result – import tariffs went down, and domestic content of exports went up. But it’s not an accidental outcome. That is precisely the logic, the supply side logic, of opening up to the world.

Opening up to the world is hence not a zero-sum game. It’s not about one nation’s gain at another nation’s expense. At its heart, it’s about constant learning and innovation that takes productivity and incomes up.

But you do have to move quickly. Technology is evolving rapidly. Within 10 years, even in developing countries, job creation will be much more challenging. Intelligent machines, artificial intelligence and big data would be able to do many of the tasks that are done by human beings today, both in manufacturing and services.

But if you move today to get into the global value chains, you’ll be able to get onto an escalator of skills that will allow you to take the most advantage of these new technologies, to create new jobs. We have to get onto that escalator today, get into global value chains in both manufacturing and modern services.

India does not lack capabilities. If you look at this year’s Forbes’ ‘100 most innovative companies’ in the world, three of them were Indian companies – Hindustan Unilever, TCS (Tata Consultancy Services) and Sun Pharma.

And there are many other highly innovative companies. They are often competitive not just because of what they are doing in India, but globally. Sun Pharma has 70 per cent of its revenues from outside India, mainly the United States. Mainly in speciality generic drugs. It produces in 26 countries, although it is anchored in India.

We see that culture of innovation and excellence in several fields in India. Take medical care – you have in India some of the highest quality medical care at a fraction of the cost of the advanced world. Places like Narayana Institute of Cardiac Sciences, or the Christian Medical College (CMC) in Vellore with its first-rate academic health system. The National University of Singapore’s medical school and hospital system collaborate actively with CMC in Vellore in education and research.

We have to spread the culture of the leading and most innovative players to the rest of the field. This culture of learning by doing, and taking leaps forward that eventually makes you a leader.

Integrating India with China and ASEAN

There is also a great deal more potential for integrating our economies in Asia.

Between Asean and China, there’s a high degree of interaction. But links with India are much weaker. The total trade between India and China is only 3 per cent of the trade of India and China with the world. And the total trade of India and Southeast Asia is only 4 per cent of their total trade.

There is therefore opportunity to develop much stronger links between India and Southeast Asia, and India and China – both through higher exports and higher imports, and with FDI flowing in both directions.

And remember, Asia is very likely the biggest source of future growth in the global economy. We have to take advantage of it, and spur that growth through the supply-side dynamic that comes from integrating our economies.

What new ambitions for government?

What is the new role of the government? What are the new ambitions that must energise government?

In the economic sphere, the government’s new role has to focus first on promoting capabilities and skills that enable the whole economy to be competitive. It’s about working with industry, coordinating within each industrial cluster and supply chain, so as to speed up the spread of know-how and technologies employed in the leading players to the rest. It’s about learning from big firm to small, foreign and local. Again, it is a supply-side emphasis.

But it is also fundamentally, not just about economic policy. There is no strong economy and no strong nation without a strong society, as PM Modi has emphasised.

Above all, India’s biggest deficit lies in education, and in the unfulfilled potential of its people. Major reforms are needed to achieve that potential.

Investing in the early years

First, a focus on social mobility. It is a challenge all over the world, and an especial challenge in India. And if it is one thing we have learnt from the last 50 or 60 years of experiments everywhere in the world, to tackle inequities in education, we have to start as early as possible in a child’s life. In fact, we have to start before birth, with the mother. Pre-natal interventions, interventions at childbirth, interventions in the first 18 months are critical, followed by quality preschool opportunities as they grow.

There are some experiments taking place in India, some already giving good results. One example is an initiative in Madhya Pradesh. It is part of your Integrated Child Development Services, developed through the village level, child and mother-care centres, or Anganwadis. Just to show what’s possible – in just four years, from 2005 to 2009, the percentage of underweight children came down from 60 to 48 per cent. The percentage of children with stunted growth came down from 49 to 38 per cent. I’m sure there has been further progress since then; I don’t have the data beyond 2009. But it shows that much can be achieved through village level interventions, with mother and child, as early as possible.

Fixing the school system: organisation, incentives, culture

After the early childhood years, it is schools that are critical in developing the long-term potential of a country. I have to say, and I would like to repeat I say this as a friend: Schools are the biggest crisis in India today, and have been for a long time. Schools are the biggest gap between India and East Asia. And it is a situation that cannot be justified.

Some 40 per cent of students drop out before finishing upper primary school. Another 20 percent or so drop out before completing upper secondary school. There’s a shortage of 700,000 primary school teachers, and among those recruited, absenteeism is endemic. A large proportion of schools do not have functioning girls’ toilets. Only three quarters have access to clean drinking water.

So it was not surprising that when India took part in the OECD’s ‘PISA’ study in 2009 – which tests students in Mathematics, Science and Problem-solving – it was 73rd out of 74 countries. India opted not to take part subsequently.

And this, in a country which has exceptional talent. The people who go to your IITs and IIMs, and lead companies all over the world are first-rate. I have spent many years working in education, and India has the biggest gap I know of, between the talent at the top and the unfulfilled potential of the rest of society.

These are things which can be fixed. It is not, by the way, about ever increasing budgets. Singapore for example does not have a high education budget by OECD standards, but we end up at the top or near the top of the OECD PISA tables.

It is about a new system of governance in education – organisation, incentives and culture. How do we recruit our teachers? How do we train them up? How do we empower the administrators, head teachers, all our teachers, and how do we hold them accountable? How do we reward them? How do we provide for quality across the system and not just at its most exclusive end, so that every school is a good school?

Technology can also be an important enabler, given the magnitude of the task facing India’s school system. There is significant scope for technology-based innovations to broaden access to quality learning, including in remote areas. It can help in teacher training, and in monitoring teacher attendance and school performance. Some of India’s private sector ICT capabilities are already being deployed in schools on an experimental basis. Where they work, they can be scaled up over time.

Tackling the big mismatch between education and market demand

We go on to the post-secondary, or tertiary, education system. Here there is the challenge of a very large skills mismatch between what graduates are equipped with and what employers need.

The problem is well known in India. But it is not unique to India. All over the world – in the US, Britain, Europe, China, Japan, Korea and Taiwan – we are overproducing graduates who have gone through an academic education, but do not have the skills required in the job market.

We have over-academicised learning, starting in school and continuing through the college system. In the US, 40 per cent of college graduates end up doing a job which doesn’t require a college graduate, and this is after spending significant family resources in getting a college degree. In India, even post-graduates apply for simple government jobs that do not require a college degree.

We have to re-orient tertiary education to focus on the skills required in the real world. It is not merely for the sake of meeting short-term, market needs. It is in fact the way in which we can best develop the potential of a large proportion of our people even after they leave school – by getting them onto the skills ladder.

Look at Switzerland, which is an excellent example of success through skills-based education. Or for that matter, Singapore. We still have a majority of young people each year going through an applied or skills-based education upon leaving school. Even in an advanced economy, that’s what is needed. It is not a dead end for the individual. It’s a pathway for constant improvement and upgrading during your career.

We have to make this fundamental shift. It is not too late, and the redirection is easier in countries where tertiary education is still expanding.

We have to move away from an overly academic education, even in our universities, to one that creates bridges between the academic and the real world.

And India like many other nations has to expand pathways in vocational training, to equip a large proportion of its young with the skills to do well in an open, dynamic economy.

Skills development is indeed one of the pillars of the India-Singapore Strategic Partnership that was signed by our two Prime Ministers in November last year. The World Class Skills Centre that we developed in Delhi now has 2,000 applicants for 400 places. Our second collaboration in skills, a centre of excellence for tourism training in Udaipur, will be launched when PM Lee Hsien Loong visits in October. We are also looking into the possibility of a North East Skills Centre in Assam.

Learning throughout life: a challenge globally

Finally, human capital development is not just about what happens in the first 18 or 22 years of our lives. It has to happen throughout life.

Our most important social and economic initiative in Singapore is to develop lifelong learning. We call it ‘SkillsFuture’. We must enable regular injections of learning throughout a person’s working life, whatever the job. You may be a doctor, a technician, a chef, or you may be someone working in building maintenance. Technologies change, the needs of the market keep changing, and as individuals too, we each need to refresh ourselves as we go through life.

Lifelong learning is the whole new arena of education that has to be developed. It means not front-loading education into the first 18 or 22 years of a person’s life, and particularly not front-loading knowledge acquisition. It means developing the potential in everyone to learn something new at every stage of life.

We have to develop the infrastructure to enable continuous learning, at people’s place of work, at home or near the home, or back at school. This is a new and critical direction for us in Singapore. It is a new challenge which every nation faces.

Empowering Cities

Cities play a key role in the new ambition of government, and more so in a large, continental-scale society like India.

Cities are crucibles of both innovation and inclusivity. Why innovation? Because it’s in the cities that you can get that close working relationship between government, businesses, innovators, colleges, ITIs and schools It is this interaction that spurs innovation and continuous improvement. Why inclusivity? Because it is in cities that we can give everyone opportunity and spur social mobility. And it is in cities that we get engaged citizenry, and can make the most of smart technologies to connect them with local authority.

We can only achieve this if we empower cities. Give them the responsibility to make local decisions, give them some financial autonomy, and hold them accountable. There’s also a role for competition between cities – competition to be the best place for business, for innovation, as well as the best place to live.

Here too, Singapore is happy to play a role in India’s journey of developing Smart Cities. Apart from our businesses’ engagements, we just launched in April this year an urban management programme to share our experiences and knowhow with India’s states. Temasek Foundation and Singapore Cooperation Enterprise are collaborating with NITI Aayog on this, involving 115 officials from seven states. It aims to share Singapore’s knowhow in areas such as waste and water management, environmental friendliness and social urban planning – all the techniques that make a city a liveable and inclusive place, and at the same time a hub for innovation.

Turning social and political culture into a progressive force

A final point, about the culture that we need to achieve the goals that matter most to our future. PM Modi had also spoken about that.

At the end of the day, what we need to achieve progress is not about budgets; it’s not just about programmes. It is at the end of the day about our social and political culture. When we get the right culture, it becomes a progressive force in its own right. I will cite two issues to illustrate this.

First, the social culture that results from urban planning. Take the example of Singapore. 85% of our population lives in our public housing neighbourhoods. The neighbourhoods are planned for social integration and interaction: Between the poorer families who live in the smallest apartments and those better off who live in larger apartments. They are all a stone’s throw from each other. The neighbourhoods have shared facilities – public parks, playgrounds, sometimes rivers, eating places – everything shared, no fences, no gates.

What it means is that we create a city where no one feels they are living in a disadvantaged neighbourhood, a ghetto separate from the rest. We have disadvantaged families in Singapore, but we do not have a single disadvantaged neighbourhood, where problems can more easily multiply and become difficult to solve – as we see in parts of Europe and the US today.

It also gives us something else that is important from an economic point of view. House prices appreciate at roughly the same rate, between the homes owned by the poorer individuals and those better off. We get that for free – not through continuous budgetary subsidies, but by integrating people through social urban planning.

Most importantly, it creates a culture of comfort with each other – which in Singapore, a multi-racial society and the most religiously diverse country in the world, becomes a very precious asset. We have gained a culture of trust and social cohesion that makes it possible for us to do things together for the long term.

That brings me to the second issue. We need a sense of urgency in reforms to fix problems before it is too late, as I emphasised earlier. But we need at the same time a long term orientation, a willingness to invest now or make sacrifices now in order to see better lives further down the road. That long-termism is essential for the most important things we want to achieve.

Short-termism is the enemy of social mobility. Whether it is about investments in pre-natal care, early childhood, revamping our schools, or improving tertiary education, it takes more than two or three electoral terms before we see results.

But a long term orientation doesn’t come naturally in society and politics anywhere. In most of the advanced countries, political horizons have in fact become shorter in the last few decades. When that happens, promise are made today, with the costs paid for tomorrow. Solutions that involve any form of short term sacrifice get kicked down the road. That political culture of short-termism is at the heart of the problems that have accumulated in much of the developed world.

We have to evolve our social and political cultures, so they become an asset in facing the challenges of today and tomorrow, not a constant source of distraction from society’s real challenges. Once a population trusts politicians who explain that there are no short term answers and urge support for long term solutions, and once the population distrusts politicians who offer immediate promises, we get a culture that becomes our greatest asset for the future.

It was not always that way in Singapore, but we developed it over time. Today in Singapore you can’t make promises of quick or easy results without the electorate looking at you with some scepticism, whichever the political party you belong to. We have to try our best to keep it that way.

Developing and preserving that culture of looking long term is hence at the centre of the challenges we face around the world. We have to do all we can to cultivate it, through the education of each generation of young people, through the media and civil society, and through our politics.

Thank you very much for your attention.

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^[1]Edited transcript of extemporaneous lecture delivered on 26 August 2016.