Friday, Oct 07, 2022

The elephant and the windsock

Budget gave clearance for the take-off. But let’s watch out for turbulence.

make-in-india-main Companies that wish to scale up are hobbled by a severe skills gap. Building more IITs, IIMs and AIIMSes does nothing to address the harsh reality that less than a quarter of university graduates are readily employable. Also, given the preponderance of the informal sector, there have to be mechanisms to give entrepreneurs access to capital. Innovations in financial inclusion have yet to make deep inroads.

Now that the much-anticipated budget is out, the big picture is clear: Finance Minister Arun Jaitley has leaned in favour of growth, business-friendliness, making #MakeinIndia more than just a hashtag. An additional $11 billion is to be spent on infrastructure, along with some nods to inclusion. This plan is no gamechanger, but the elephant has been cleared for take-off. Of course, in the coming days and weeks, the nattering nabobs on noisy news channels will work their way through the finer print and find points to quarrel over. Away from the fray, from frigid Boston, I have been following the ever-warming narrative developing around India over the past months with interest. Jaitley and his team get high marks for a plan that keeps that narrative intact. There is just about something for everybody in the budget, not only for most of the stakeholders within the country, but for those abroad who seem to have homed in on India as the global economy’s Great Brown Hope.

Illustration by CR Sasikumar Illustration by CR Sasikumar

Personally, I have been a bit taken aback at how quickly the narrative on India has turned around, from only recently being castigated as one of the “fragile five” countries, along with headlines on rape, corruption and lost competitiveness in key industries. While the Narendra Modi government has played its cards cautiously in its first year, the turnaround has little to do with specific moves that the government has made so far. With a ho-hum global economy and the emerging markets in particular having lost their former sheen, India served a need. Businesses and investors do not like a vacuum, and they would rather not stick their money under mattresses. They crave positive news, and the Indian economy had the perfect convergence of all things good. First, there was the $50 billion windfall to the economy towards the end of last year because of falling oil prices. Second, the Modi PR and diplomacy machine has done well to orchestrate photo ops and bear hugs with the right assemblage of global leaders.

Third, the strategically timed recalculation of the GDP growth rate helped catapult it from lacklustre laggard to the world’s “fastest growing large economy”; change the base year from the 12 months that ended in March 2005 to those that ended March 2012, throw in some new data on corporate activity, household spending and informal businesses and use market prices, not factor costs, to calculate growth, and presto — you have a perfect talking point: a growth rate that finally makes the Indian elephant move faster than the Chinese dragon.

I have also been surprised by the fact that, in the weeks leading up to the budget speech, the Western media had been nothing short of breathless in its coverage of India. Even the notoriously restrained New York Times decided that the most important news fit to print on February 18 on the highly prized top righthand column above the fold was a puff piece about India “surging ahead”. Not to be left behind, The Economist, a publication keenly self-conscious of the power of its covers, had the Indian elephant with strapped-on jet engines accompanied by the headline, “India’s Chance to Fly” on its cover. As if on cue, Jaitley cited the cover headline in his budget speech. And the arc of the positive narrative on India was complete.

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No doubt, jet engines on elephants make for captivating images. That said, there is a tiny detail that may have been overlooked by those mesmerised by that cover. The only other object in the cover art other than the elephant, with Modi as mahout, is a lone windsock that is indicating maximum head winds.

Now, don’t get me wrong. I am not always given to focusing on windsocks when there are flying elephants to marvel at. But it is not a bad idea for all those who must turn to the task of implementing the budget plan to spend some time peering at the windsock. Why does it point in the wrong direction? I can think of at least three messages from the perverse windsock.

First, leaning in on growth-oriented policies and making bold capital allocations for infrastructure spending are welcome, but the financial mandarins on Raisina Hill cannot ignore the hard reality that India is notoriously under-taxed. Only 3 per cent pay any income tax. Delaying cutting the fiscal deficit may be an affordable luxury in the near term, but at some point, the chicken will come home to roost. There has to be a systematic plan and a painful process of reform to raise revenues. The current budget mostly dodged the issue.


Second, lowering corporate taxes, easing the process of doing business in India and boosting the manufacturing sector will run into the unresolved tangle of questions on how to deal with land acquisition, labour law reform and a fundamental dilemma: doing business in

India is costly and frustrating. Removing these obstacles takes time, and just as the narrative on India turned positive so quickly, it can turn negative as quickly. To make matters worse, companies that wish to scale up are hobbled by a severe skills gap. Building more IITs, IIMs and AIIMSes does nothing to address the harsh reality that less than a quarter of university graduates are readily employable. More, given the preponderance of the informal sector, there have to be mechanisms to give entrepreneurs access to capital. Innovations in financial inclusion have yet to make deep inroads. A 2014 survey of 45,000 Indian adults found that only 0.3 per cent use mobile money, as compared to 76 per cent in Kenya and 22 per cent in neighbouring Bangladesh. The absence of innovative solutions to the capital constraint is a problem in a country where 65 per cent of the population
is unbanked.

A third challenge is the wretched state of public health. India spends 1 per cent of its GDP on public health, compared to 3 per cent in China. There was a measly 2 per cent increase in public health spending in the current budget, with the states being asked to chip in more. Twenty-one per cent of diseases in India are water-borne, about half the population defecates in the open and the overall availability of replenishable water is running low. In 20 years, the country’s aquifers will reach critical condition and over 100 million people will face severe water shortages. India’s water security level was deemed “hazardous” by the Asian Development Bank. The litany of diseases, from widespread malnutrition to a slew of infectious diseases, has been made only worse by deteriorating diets, migration to ever-congested cities and the degradation of the environment.


On balance, it is wise to watch the elephant as well as the windsock. Jaitley’s control tower has given the elephant
the clearance for take-off. And we are all on it for the ride. But somebody in the tower needs to be monitoring the windsock as well. Turbulence is no fun, especially when one is on a flying elephant.

The writer is senior associate dean for international business and finance at The Fletcher School at Tufts University and founding executive director of Fletcher’s Institute for Business in the Global Context

First published on: 09-03-2015 at 12:54:58 am
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