Indian entrepreneurs lack animal spirits, the corporations don’t make effort and take enough risk to drive innovation which has stagnated investment in Indian economy. This is well known problem in India and I have mentioned it in my previous articles. Here is excerpts from my previous article I wrote in 2024.
Indian private sector is driven by monopolies of oligarchs that have expanded and penetrated into diverse sectors but without any innovation. A conglomerate (Adani group) owns coal & gas mines as well as ports as well as Airports as well groceries business as well as multimedia business as well as Real estate. Another conglomerate (Tata) produces automobiles as well as groceries as well as appliances as well as Information technology services as well as Real estate as well as defense equipment. Another conglomerate (Reliance/RIL) owns telecom business as well as news media empire as well as eCommerce retail business as well as Oil refineries as well as financial services etc.
Underlying factor of much of Indian private sector is oligarchical drive for expansion and rent seeking, rather than making any concrete technical progress. In this aspect, India is similar to post soviet Russia. With few exceptions (generic medicines etc), India’s exports are otherwise driven by commodities like Farm goods (Rice), precious stones and Petroleum products. Indian conglomerates are generally noncompetitive in global markets (few exceptions like IT services) even after pouring massive govt subsidies into them. Some of the conglomerates are even noncompetitive in domestic sector, relying on large state subsidies, (unmerited) govt contracts and bank bailouts (debt reliefs-evergreening of loans) to stay profitable.
To understand the reason of this problem - the lack of creative destruction and entrepreneurship - you have to understand the broader political problem with India (start here 1, 2). The problem with India is very much structural and cannot be resolved by piecemeal policies. I will also explain how attempts to nudge Indian economy with patchy policies - like Digitalization campaign, Make in India and Startup India - have failed to bring any concrete progress.
The biggest problem of India is its political system which is totally incompetent, malignant & paralyzed, incapable to do even most basic governance and policy making. On this, I won’t repeat much as everything worth stating is written in two above mentioned articles. Investment and innovation in an economy doesn’t just appear magically out of private sector but is an endogenous outcome of a complex process in an ecosystem which requires proficient institutions & policies, good governance, economic certainty & demand, Infrastructure etc. In modern economy, government itself has key role in driving innovation by incubating R&D, industrial policy and range of proactive participatory roles in economy. All these things Indian government ….. let me rephrase ……. Indian political system is incapable of doing.
Shortcuts and quick fixes to growth
Indian policy makers have tried to use shortcuts to achieve economic development. The wonders of digitalization - the use of electronic money - was projected as great panacea. Replacing informal cash transactions by digital transactions using mobile wallets and formal banking system was much hyped. Today, people buy groceries and vegetables from local vendor by mobile wallets but how has it really changed Indian economy? The poverty, the mass unemployment, the economic stagnation, the corruption, the scarcity of public goods remains the same. Even so called cash transactions have not come down and instead rose enormously after demonetization implying that although people did switch to digital money but corruption on cash transactions never stopped.
Cloud computing, digitalization of government records and services did produce some benefit but that by no means was enough to propel the economy. And much of digitalization is still patchy with faulty government portals, broken databases, lack of security and accountability. For example, what’s good about digitally filing RTI (Right to information) application when government department will just deny you the information. The process may have been digitalized but the bureaucrats behind the process and their attitudes towards public hasn’t changed. Similarly, although many government services have been digitalized, the bribes still remains the norm to get those services. Overall, the digitalization was a good start which has been lost in the execution but is conceptually a good idea. A corrupt and incompetent government bungles and messes up executing good ideas.
(Also we don’t know the true extent of lapse of cybersecurity apparatus of government which government proclaims to be full proof but time & again there have emerged scandals of massive data leaks. Full scope of these breaches are not known.)
Then there was Make in India campaign launched more than 10 years ago. The gist of it was emulating China’s manufacturing boom in Indian economy. The flying Geese came from Japan, to Taiwan, Hong Kong & South Korea and finally to China. Maybe flying Geese can also come over to India and India can build its economy by becoming a hub for global manufacturing. But India failed to expand its manufacturing share of GDP even by an inch after nearly a decade.
Here I like to expound on some reasons for failure. The companies aren’t impressed by loud trumpets and fanfare of government schemes. The companies weigh their investment prospects on merit. India’s infrastructure is broken & bad - the transit connectivity (roads, highways, freight, ports etc), reliable energy & water supply etc. There’s no proper planning for establishing industrial hubs & economic zones. Even the basic policy for land repurposing and usage is long in limbo. Then there’s lack of skilled labour, training & skill development centers, good institutions for regulation & arbitration. Basically, the ecosystem to make India a manufacturing hub is not there.
So Make in India failed to materialize. Ideally, a government with common sense would look to fix the basic problems of infrastructure, institutions and other bottlenecks but it never did. But government tried another shortcut of Startup India campaign. A call for entrepreneurs to mobilize and create new business ventures. Here in India, we have habit of jumping things. The government tries too hard to jump from A to E by skipping B, C & D in process.
Things like Startups are based on intangible investments which require good IP laws, mature financial markets and proficient institutions for arbitration among other things. If hard infrastructure is one side of things that businesses require, the other side is soft infrastructure - mechanism to resolve disputes, courts to adjudicate matters in reasonable time, laws with clarity and basically efficiency of whole legal system. But these institutions are either non existent or just not mature & efficient enough to encourage investments in India. The clogged Indian courts & lethargy of justice system is well known & not worth repeating for sake of brevity. So Startup India didn’t materialize.
Here I like to assert that although jumping developmental steps is sometimes possible but Indian economy is so backward that you cannot jump from A to E without skipping B, C & D in many areas. For example, if you have lagging telecom sector on 2G technology, you can jump to 4G & 5G technological investment. India was slow to catch up with world on digitalization but digital technology with tendency of getting cheaper & more efficient with time, you can afford to make late adjustments by skipping some steps. In early 2000s, Indian oligarchs of outsourcing industry (people like Nandan Nielkani etc of IT sector) convinced politicians that road to India’s economic growth is through digitalization.
Outsourcing industry was a easy picking fruit because government didn’t even had to pluck it, it fell on government’s lap by itself. In globalized world, the wage differential in service sector between developed nations and third world nations meant that businesses outsourced a part of their services to India. For a brief period 2000 - 2020, India enjoyed this fruit. Digitalization was a simple enough idea because it sidestepped the messy problems like Land reforms which India could not achieve even after more than 60 years of Independence by 2000s. Here, the Neoliberal mindsets of people like Manmohan Singh (India’s much acclaimed former Prime minister) and outsourcing oligarchs converged and gave birth to digitalization of India’s welfare system.
Vast majority of Indian population is poor and depends upon some kind of welfare support (food grain, subsidy on cooking gas, rural employment guarantee etc). The premise was that there’s a lot of corruption & misappropriation of public money in this system, so tying every government welfare program with Biometric (finger prints, eye scans) record of every Indian citizen will absolve the system from corruption and financial misappropriation. This was proclaimed to be critical piece for good governance in India. But good governance requires creating good institutions, Court system and healthy legal system, public accountability mechanisms etc, all which government completely ignored. Why? Because it appeared messy.
There’s a lengthy debate about the right to privacy and security concerns of government’s Biometric program but let’s sidestep it. Creating a Biometric based welfare system didn’t mean that government had to ignore other critical areas for building institutions of good governance. So the blunder of government was not really Biometric program, problematic as it may well be, rather the problem was government believing it to be a solution of everything.
Another warning sign that India’s institutional set was failing badly came in early 2010s with popping of Real Estate bubble. Markets create growth but they also create conflicts which require institutional mechanism for resolution. India witnessed real estate boom starting in late 2000s which created big investments in new housing projects in major cities. But there was no institutional and legal protective mechanism for home buyers to keep real estate companies in check. Millions of people invested their savings in home ownership and so started the boom. But then variety of problems occurred - land disputes, siphoning of funds, bad investments, corruption etc. Many real estate projects got stuck and investments failed. But there was little remedy for home buyers to reclaim their savings or get a delivery of homes in stalled projects. There was no proper mechanism for bankruptcy resolution and restructuring of real estate companies that were insolvent. Result? - Millions of people lost their savings and cities were left with abandoned ghost townships. Indian government did wake up to the crisis and created specific institutions like IBC & RERA courts to clean up the mess but it still is too little and too late.
Similarly, the failure to nurture institutions and trying shortcuts is visible broadly in economy. As financial services & banking have been digitalized, it also created lucrative business for organized crime to scam people in newer ways. India invested very little to overhaul its justice and law enforcement system which made cyber criminals to operate with impunity. Another problem India faces is very low participation of women in labor force. This has variety of reasons like lack of formal economy, educational disparity, social backwardness etc but one reason is also that Women are generally unsafe in India which acts as a deterrence for them to explore employment opportunities. The crime against Women is at alarming levels and government only reacts in knee-jerk way like provisioning of death penalty for serious sexual crimes. But stricter laws & special provisions alone are not a remedy for this, real solution lies once again in overhauling the entire justice and law enforcement system in India.
Investment often requires resolving complicated sociopolitical conflicts - land reform, urbanization, human capital development (more on this below), center-State relationship etc. Even after nearly 80 years of independence, India hasn’t made sensible land reforms and land usage policies. The infrastructure remains broken (light years behind China which India wants to emulate). The courts don’t function or work only at snail’s pace with tens of millions of legal disputes pending in various courts and corruption rampant there. Today, Agriculture Land needs to repurposed for industry & factory, rural India has to be urbanized for creating cities & townships. Farming has to be mechanized extensively. New jobs in economy will be knowledge based and in service sector, not in farm sector & manufacturing. All this transformation has to be achieved to adapt to 21st century economy but present political & institutional setup of India is too paralytic and dysfunctional to make it happen.
Here I like to expound on need for independent & proficient institutions in healthy functioning of Democratic governments. Some foolish pundits in India promote the idea that corruption & bribery is good as it bypasses bloated government bureaucracy & paralytic institutions in India. Corruption & bribery cannot substitute for institutional mechanism for sustainably resolving sociopolitical conflicts & establishing rule of law. While Bribery is a quick fix to speed up things, it also creates an arbitrary and socially destructive mechanism of government functioning that lacks rule of law, competence and fairness. Organized crime groups thrive in such environment. It’s no surprise that Mafias have penetrated Indian politics - a phenomenon referred as criminalization of politics. Land Mafia, Sand Mafia, Mining Mafia, Timber & forests Mafia etc - various sectors of economy are grabbed by organized crime groups who also control politics.
Foolish Indian pundits cheerfully equate India’s corruption with China. Autocratic China also lacks certain formal mechanisms for governance but that doesn’t mean that there is lack of competence and planning in government administration. Lack of formal institutional mechanisms is in fact subsumed to an extent by internal deliberation by proficient technocratic planners in China. China’s party apparatus comprises of scientists, engineers, Statecraft professionals & technicians. India’s political system comprises of uneducated, incompetent and moronic gangsters whose sole purpose is marauding society.
In an autocratic regime like China, the Communist party apparatus is technocratic brains of government. In a democratic regime, the brains of government is the proficient institutions. In developed western nations, these institutions are called Weberian - technical, high skilled, efficient bureaucratic, impersonal - which run national affairs like clockwork. In Indian democracy, neither do we have competent & skilled political leadership, nor do we have Weberian institutions. Is it surprising that nothing gets done in India?
India failed to adapt to economic & technological transformation over the decades. Below I mention the consequences of this failure.
Closure of curtains on opportunities and rising contradictions of Indian economy
New technology trends - AI, sophisticated Robots & automation - will change India’s economic competitiveness on global stage dramatically. AI revolution will wipe out much of India’s software and outsourcing industry. Bots will replace telemigrants in many areas. Software management, digital services & routine tasks will be greatly automatized & cloud controlled, minimizing the use of labor. Gone will be the days when middle & lower skill workers in India with good English speaking & computer skills have comparative wage advantage over western nations. Automation will be a lot cheaper. Humans can’t compete on costs with automation no matter if they work 70 hour or 100 hours a week.
Demographic dividend is already becoming a demographic nightmare. Windows of opportunities don’t stay open forever. From 1990s to 2000s, India had an opportunity to emulate China’s model of lifting economy by developing itself as a manufacturing hub by attracting global industry through comparative wage advantage. But that window has now closed or considerably shrunk. Sophisticated automation & industrial robots drive production in manufacturing today which closes opportunities for India’s young population. What jobs can hundreds of millions of Indian youth find? Not in Manufacturing. In services? A lot of it will be automatized due to AI. That leaves only low wage services like food delivery and janitorial work. In fact, these food & grocery delivery jobs are increasingly a major service sector jobs in economy. The problem is that they pay very little & there’s no social mobility in these dead end jobs.
The contradictions of Indian economy will grow bigger & bigger as India fails to modernize. The worst of it is agriculture sector which has very low productivity and burns half of India’s labour force. Unsustainable farm practices (ground water exploitation, overuse of fertilizers etc) is doing tremendous ecological damage to India. India is big exporter of water intensive crops like Rice & Sugar. This gives short term gains to farmers who’re overlooking the long term ecological damages. More than half of India is already facing acute water scarcity and farm production will increasingly face disruptions due to Climate Change (erratic monsoons, flash floods, temperature variations etc).
India’s automotive industry is obsolete based on polluting & inefficient oil & gas internal combustion engines (ICE) while world is moving towards EVs. The pollution in Indian cities have reached cataclysmic levels - 5 times, 10 times, 50 times the safe air quality limits - creating variety of serious health problems. Indian auto markets is a dumping yard for foreign automakers as well who find it convenient to dump their obsolete ICE technology in Indian markets. Here I like to expound on idea that you need a cumulative progress to build industry. That means taking timely incremental steps. Making incremental progress may appear slow but down the line it unlocks enormous rewards when you reach a certain momentum. Then your steps grow by leaps & bounds.
Silicon valley in America didn’t emerge overnight, it emerged through a complex decades long evolutionary process. The evolution of computers began with US Space program and military industry which slowly culminated into private software development which served both defense industry & private sector. The private sector applications of software industry widened, internet emerged and networks were created. Then came the tech services boom (& bust) which propelled technology companies. Many failed but also winners emerged out of them which reaped astronomical rewards. Then emerged social media, smartphone revolution, mobile applications and all kinds of internet stuff. Fast forward a little we now have large scale investments in AI.
Another example. China first produced conventional ICE automobiles and became a global manufacturing hub for auto spare parts. Then Chinese companies very timely got into Batteries, semi conductors and EV technology, building a robust supply chains of EV technology, spare parts, charging ecosystem which was also propelled by renewable power boom. Then China combined semiconductor industry, AI and EV to build self driving vehicles - these are now common in Chinese cities. In near future China may go into Air Taxis and next generation personal transport.
Once a nation develops an ecosystem - set of cohabiting industries - it achieves a distinct first mover advantage over other countries. Today, it’s difficult to re-create Silicon Valley in any other country. It’s difficult to beat Chinese EV companies in global or domestic market (foreign countries are relying on tariffs & import restrictions to protect their domestic EV automakers from Chinese competition). The first movers establish unassailable lead and reap big rewards. On the other side, the nations which refuse to move timely or don’t move at all in modernization, start developing internal contradictions which keeps on increasing.
Today, India faces an uphill battle to make EV transition. Reason is that Indian companies failed to take timely transitional steps and rather invested heavily in obsolete ICE Capital. Delaying the transition meant that ICE industry got bigger & bigger and so transition costs got higher & higher. Suddenly, it becomes too difficult and disruptive to start adopting new Capital intensive technology when you have accumulated a large Capital of obsolete technology. The problem also lies with the Indian government. Had government pushed for stricter transition targets & provided adequate incentives for automakers, the road to transition would’ve been easier.
India’s energy system is obsolete although some improvement with Solar energy capacity are made recently. Much of the Coal power plants operate on obsolete emission standards. The grid system is dilapidated. The Nuclear energy sector is almost non existent in overall energy share despite India commissioning first Nuclear power plant more than 50 years ago. Recent renewable energy is an easy picking fruit and a great boon for India which has for long struggled with energy scarcity. Interestingly, even as energy scarcity is not a problem as it was until two decades ago, still there’s not a great pickup in industrial capacity. This indicates that a whole set of things mentioned below needs to be done to encourage industrial development instead of piecemeal approaches and shortcuts.
EV transition also requires modernizing grid & creating charging ecosystem. India never made all that investment. The current dilapidated grid cannot stand the power requirements of wider EV use. This goes back to my point that delaying investments continue to pile burdens and future problems. Time is of the essence and timely industrial transition & institutional modifications are necessary to keep economy healthy.
Another area where India suffers greatly is urbanization drive. Indian cities are unplanned, crumbling, filthy & polluted mess. Industrial, commercial, Agriculture & Residential zones all overlapping each other. Since government didn’t create right policies and institutional mechanisms for proper urban development, the vacuum was filled by land mafias who settled vast majority of population in illegal colonies & slums. In National Capital Delhi, half of population lives in illegal colonies & slums. When millions of people are settled in illegal colonies, it’s difficult to get them evicted. Then for vote bank politics, political governments regularizes illegal colonies. This unplanned growth created strain on ecology as ground water extraction & deforestation went unchecked. Small scale factories were also setup in these unplanned colonies which aggravated pollution.
If you look Metropolitan cities today - Delhi, Mumbai, Bangalore etc - they are unfixable mess. Re-zoning and relocation to clean up these cities is almost impossible given the great magnitude of conflicts and legal problems it now entails. If you genuinely want to redevelop Indian cities today, you wonder where to start in this mess. The underlying problem is failure to timely make a proper land policy - policy to convert agriculture land for urbanization, to repurpose agriculture land to industrial use, redevelopment of residential buildings, zoning to separate various activities like industrial, commercial, residential etc.
The dynamics of 21st century economy
The manufacturing sector was thought to be the key to unlock India’s demographic potential. Tens of millions of people were supposed to go into manufacturing which would pay better wages than farm sector. This thinking is similar to China’s economic strategy on 1980s, 90s & 2000s. Three things need to be understood in this regard.
1) While India’s manufacturing industry failed to take off due to above mentioned problems. Even if we remedy the problems and nurture manufacturing industry starting today, it won’t create the same high scale of jobs as it would’ve two decades ago. The reason is technological transformation of automation & robotics which has wiped out comparative wage advantages of low wage labor in third world as it once enjoyed. The technological transformation will even wipe out many service sector jobs that were once secure.
But main point is that manufacturing industry, although must be encouraged & nurtured, won’t be remedy to India’s demographic crisis.
2) While manufacturing jobs of present & future are scarce due to changing nature of technology, still another reason that manufacturing jobs are hard to come India’s way is that China isn’t letting go of manufacturing. Western world let go off manufacturing easily as transnational companies chased comparative wage advantage outside of first world. But China’s economic & industrial policy go much deeper than simplistic market mechanisms. The synergy created by diverse set of sectors - manufacturing, semiconductors, AI & Digital technology, infrastructure & renewable energy etc is so powerful that China doesn’t want to let go off any of these wheels from its economic engine. In short, China doesn’t plan to de-industrialize like America did several decades ago. China is climbing up the value added chain but it’s not letting go of the lower rungs of ladder.
3) To adapt in 21st century, India needs to think differently and think broadly. India missed out on opportunity in exploiting the benefits of transformation where first world outsourced its manufacturing to countries like China. India will also suffer from technological transformation that will soon wipe out a lot of outsourced jobs in telemigrants & software services. How will India put its hundreds of millions of youth to work? Even when times were favorable, India bungled on opportunities. What will happen when times get tough? With economic uncertainty and crisis also comes political & social instability.
Policy ideas and reforms
Government has to invest aggressively in building infrastructure, developing good institutions, resolve complicated issues like Land reform, invest in public goods (basic education, human resource development, water & electricity supply to cities as well as industries etc), build planned cities and economic zones, draft good policies etc. Only when government nurtures such an ecosystem, the private sector may be confident to make investment. But even all this is not sufficient to jump start investment in India. More needs to be done.
You see, India is a laggard nation which at current stage cannot be competitive with other nations. Other nations (like China etc) which have already developed their ecosystem of corporations and manufacturing industry have distinct first movers advantage over Indian counterparts. This comparative advantage of Chinese corporations cannot be emphasized enough and thus Indian companies are currently no match to compete head to head with them in global as well as local markets. So India needs a competent industrial policy. Analyst Kyle Chan proposes the kind of industrial policy India needs (1, 2).
India needs to do three things. 1) Open its economy in orderly manner to expose Indian private sector to foreign competition. This will force Indian enterprises to either become efficient or close down if they cannot. 2) Entice foreign corporations into India by orderly giving them slice of Indian markets. As we remove bottlenecks of Infrastructure etc mentioned above, foreign firms will find prospects in Indian markets and start investing. 3) Make foreign firms access to Indian markets on conditionality of local tie ups with Indian firms so as to make India climb up in value added chain and enabling technology transfer to Indian firms.
Foreign firms will get profits out of Indian markets. Indian firms will earn profits but also get technology & experience which will propel India’s manufacturing system. This is similar to China’s strategy to develop economy. Also India needs to suppress idiotic Swadeshi movement of localized production of goods - this has no value in today’s globalized world. India needs to throw the incompetent, un-innovative and rent seeker oligarchs under the bus. These special interests groups since long have been manipulating government to sustain their noncompetitive, inefficient and corrupted empires.
Another shortcut India often tries is amending labour laws. Although some labour laws need amendment but the benefits of other reforms are much exaggerated. A failure of Indian policy makers is their narrow minded approach of trying to reap benefits in global competition by diluting labour laws. With sophisticated automation, AI and newer technologies on horizon, Indian labour laws are not the real impediment to investment but the whole variety of above mentioned problems. Today quality of labour is preferred over quantity. That’s why government’s investment in education & human capital development is critical.
Profit motive deters investment in poor and backward economy - Remedy is Capital investment by Government
Here, I like to expound on another fallacy in thinking of policy makers who urge private sector to make big investments. Indian Prime minister - a comical character with no knowledge of economics - demand private sector to take big risks and make large investments (1, 2). Private sector works on profit motive. It will produce and invest subject to condition that it can harness sufficient profit in the process. But in a backward economy like India where majority of population is in abject poverty, the profit incentive is very little for private corporations to make large investments. It’s simple math. Output from production & investments has to be consumed by somebody. The equation must balance. But with a depressed demand in a typical poor economy like India, there is not much incentive to make investment if there are no consumers.
The problem of profit motive can be compensated by government which has power of sovereign money. The government can work on long term investment goals without compulsions of profit motive. But this power of sovereign money has to be used responsibly otherwise it can create inflation. The problem with India is that politicians and bureaucracy are highly corrupt & incompetent. The resources of treasury are looted for personal gains (awarding government contracts to crony oligarchs), building symbolic vanity projects, giving freebies & loan waivers (populist vote bank politics) etc. This spending doesn’t create productive investment and down the road only creates inflation.
The failed public projects are notorious in India. The bridges that collapse, the highway roads that caves in at first rains, dam projects that trigger landslides - all these are common examples of shoddy public works & corruption. A new $100 million tunnel project in New Delhi was built without proper technical planning, causing it to flood in rains thus making it unsafe. Government wastes big money to build vanity projects. These projects are also meant to siphon public money into crony enterprises which are connected to politicians. Many politicians are in fact businessmen with stakes in various companies. Recently, $390 million was wasted on public project of building a tall statue. What’s the benefit of that?
Indian Neoliberals created PPP (public private partnership) model to build infrastructure but it’s just another scheme to siphon public money into coffers of cronies. In such schemes, government shares financing cost of project with private firm. Then government transfers lease or ownership rights of Capital asset to private firm which it exploits by extracting excessive rents. Toll expressways and Metro rail systems are common examples of these projects. This is similar to privatization model of post Soviet Russia where organized crime has plundered State assets for their personal gains. The result of the above mentioned abuses and corruption of government is that people see government solely as a source of looting public money.
Neoliberal pundits push for PPP and privatization model for infrastructure development but this is not conducive to Indian economy. A lot can be learned from China where Chinese State owned enterprises (SOE) build critical infrastructure. China’s SOEs are not lethargic incompetent institutions like Indian public enterprises. Kyle Chan gives insight into structure and functioning of China’s SOEs and how they are indispensable in China’s economy policy. Similar practice needs to be adopted in India to restructure government enterprises. India’s infrastructure development, at current state of economy, has to be built very much by government.
Much of India’s R&D spending is currently driven by government. This is not a bad thing and this spending actually needs to go much higher along with reforming human Capital development (discussed below). Private sector will start making more investments and R&D when economy matures. When private sector sees more certainty in economic climate and better growth prospects, it will automatically start planning long term.
The problems in Human Capital development
Recently, India is centralizing human capital development with hyper-competitive higher education system. I will write a separate article to explain major problems in this approach. India’s education system (human capital development) is a grossly inefficient machine that destroys human Capital. India uses top down approach to harness human Capital. The condition of primary & secondary schools is pathetic, teachers in these schools are grossly incompetent. Little or no investment is made in primary & secondary education to nurture child potential at early age. Rather, the government uses hyper-competitive exams system to filter out few selected candidates and awards them seats in higher education. The whole process is like creating 50 higher education & employment opportunities while destroying potential of 500 students & candidates. Ashoka Mody briefly mentions this point in relevance to IITs in his book.
Even after filtering few selected candidates for education & employment opportunities, it doesn’t create significant result in terms of innovation and economic development. For three reasons.
1) As explained above, the private sector that employs these people don’t innovate & invest due to variety of problems in Indian economy. Private sector works on profit motive and demand deficient Indian economy along with deep rooted structural problems deters private sector to make investment.
2) Technical progress & innovation comes not just from theoretical knowledge but through aggressive implementation of knowledge into practical things. A fast moving economy which produces and builds more stuff will try newer things and more creative ideas - this is what drives innovation. A demand deficient economy which may have good human capital in terms of theoretical knowledge but produces and build on lower scale will likely have less innovation & slower rate of technical progress.
3) While a good degree of competition is healthy in an education system to explore human potential, it’s grossly wasteful to take a top down approach in developing human capital by shunning 90% of people. The pool of human capital has to be developed more broadly and diverse opportunities should be created across the pool, not just the top. An economy with diverse opportunities that utilizes larger pool of human capital will have more synergies for innovation in various sectors of economy. An economy with small pool of human Capital, limited scope of production and deficient demand will be slow in innovation.
When talking about problems in labour markets and human capital. While cretin politicians are busy with amending labour laws, they overlook the gross distortions in development of human capital created by idiotic quota reservation policies. Reservation in academics, employment and promotions on basis of caste, domicile, tribe etc needs to be abandoned. This is a political dynamite because political parties of all stripes have created such a strong inertia behind these idiotic policies that repealing them is very difficult. Today, some political cretins are even proposing reservation in private sector jobs. A sure shot recipe for disaster.
The remedy to economic disparity that victimizes poor people should be government’s investment in public goods - quality education starting from good primary schools & up to university level and free of cost to poor people, expanded intake in colleges & universities (the seats in higher education have to be greatly increased), rationalizing admission process & other social benefits, expanding new training institutes & courses for adult education & skill development etc. Give as much public goods as possible to poor people to help them compete but ensure that selection, promotion and employment is done on merit (whenever you mention about competence & merit as basis of economy, bastard Indian liberals develop an incurable itch).
Above, I mentioned need for reforming India’s State owned enterprises on model of China. These enterprises should be strictly organized on basis of merit (competence) and no recruitment should be made on basis of any Caste or domicile reservation.
Conclusion
I mentioned some ideas to make economic transition by well crafted industrial policy, reorganization of India’s State owned enterprises, aggressive government investment in infrastructure and R&D, developing human capital more broadly and gradually opening Indian markets to external competition. While India can certainly nurture manufacturing industry with these policy actions, the amount of employment generated in the process will still be insufficient to accommodate vast amount of young demography. While allowing certain market mechanisms to correct economic imbalances in India are necessary, markets alone cannot propel Indian economy without government participation where necessary. I explained how profit motive deters private investment in poor Indian economy and indispensable role of government to compensate deficient demand.
India also needs to develop good institutions especially legal & court system & policy mechanisms to resolve conflicts in market economy. Time and again India’s political system has failed the country. The incompetence & bungling, the policy paralysis, the populist politics, focusing only on short term goals and rampant corruption has severally slowed down economic progress of India since its independence. Economy needs timely adaptation to technology and delaying economic transition for so long has created grave contradictions in Indian economy which gets more difficult to resolve with passing time.
Delaying economic transition and ignoring the signs of stress in economy will create political and social instability. For a short term, the people can be duped by Caste politics & religious populism but not for too long. At some point, India also have to realize that the post-Independence political system in India cannot produce any solutions for 21st century.
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