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Accounting and Reality

Rajan and Subramanian Look at India

New Economist directs us to Raghuram Rajan and Arvind Subramanian trying to pierce the veil of time and ignorance to understand the future of India. They worry mostly about the license raj and the fiscal deficit:

New Economist: From Bharat to India: There is a buzz today in India, a sense of limitless optimism. But is it justified? So ask IMF economists Raghuram Rajan and Arvind Subramanian in From Bharat To India, a commentary for India Today magazine to celebrate its launch 30 years ago:

So what does this mean for the future? Fast-growing states will need more capital, skilled workers and necessary infrastructure, on which there is a consensus in the country. India has a vibrant financial sector... but... the government appropriates significant amounts of savings to finance its deficit. Not only does this leave less to allocate to private investment or infrastructure, it is also a source of vulnerability if the country were to rely more on foreign capital. The need to force-feed the fiscal deficit to domestic banks also makes it hard for the country to open the capital account.... The greater bottleneck is likely to be skilled workers. India's universities have not expanded in a way that is commensurate with the growing skill intensity of its production. Even as India redresses its previous neglect of primary education, it needs to multiply institutions like the IITs and regional engineering colleges on which its current success is based. Unfortunately, higher education remains one of the last bastions of the licence-permit raj.

Despite these concerns, India's fast-growing states have a certain success-breeds-success dynamic which will be difficult to derail. More worrisome is job creation for India's growing unskilled labour force and the related problem of laggard states, where the majority of low-skilled, under-educated Indians still reside. Ideally, of course, such states would reform on their own-scrap archaic labour laws, improve infrastructure and business climate-and utilise their vast pools of under-employed, low-cost labour to attract investment in labour-intensive fields. They would then catch up with the leading states in India. Unfortunately, there is a reason these reforms have not been undertaken so far--few things are more persistent than bad governance.

Is India then likely to face increasing political strife as the politically powerful but laggard states hold back the economically powerful, fast-growing ones? There is a more hopeful scenario--Europe had similar disparities but through various initiatives, prosperous western Europe offered incentives for laggard nations to reform. If a loosely knit community of nations can do it, why can't a united nation of states?...