Mira Kamdar’s recent piece in the World Policy Journal illustrates this well. By Ms. Kamdar’s account Indians are heading down an inevitable path to doomsday. Malthusian population pressures, resource scarcity, global warming, environmental degradation, industrial capitalism, and political corruption have combined with an inherently fractured society that is likely to erupt in caste, religious, and class warfare, terrorism, and self-destruction. Mix in the recent US-India civilian-Nuclear deal and the presence of unstable neighbors – Pakistan, Bangladesh – along with an aggressive China, and Ms. Kamdar offers up all the ingredients for a nuclear holocaust. The only uncertainty we are left with is: which doomsday will India break into first — internal implosion or external explosion?

And if this is not enough, Kamdar has one more concern: Indians are taking to cars rather than following the example of bicycle aficionados in Amsterdam, Paris, and New York.

All this, because Ms. Kamdar wishes to disabuse her readers of taking too seriously the rosy-scenarios painted for India in the 5 year old Goldman Sachs BRICS (Brazil-Russia-India- China) report. Perhaps the BRICS authors expected a less fundamental critique of their growth-accounting models? Instead, Ms. Kamdar offers her own BRICS dream in the very last para of her piece: India’s under-class and lower castes having finally usurped political power will magically transform Indian democracy, to root out corruption, poor governance, and “…will have delivered quality education and healthcare, housing, clean water and sanitation…. Its policies will reflect the active civic engagement of an informed electorate, becoming a model for the world of the advantages of truly democratic governance. Now that is what I call dreaming with a BRIC.”

An ongoing doomsday scenario in India that ends in a future utopian vision for India: Ms. Kamdar offers no intellectual bridge from here to there. So how can one trust the reality of either worldview?

Perhaps if she had considered the half-century lost under the unproductive haze of the License Raj; or the pernicious harm done to Indian polity by a caste based reservation system that actually reversed upward caste mobility and institutionalized caste divisiveness in Indian society — an outcome that ironically is the one real ingredient in Ms. Kamdar’s utopia; or, if Ms. Kamdar had considered the woeful neglect of land markets in India instead of choosing to paint the Nano plant site controversy in West Bengal in class-warfare terms; or, that even assuming the worst case global-warming outcome and its impact on agricultural productivity in India, opening up the rural economy to trade and investment offers the individual farmer more, rather than less, options – of goods, technology, and mobility – when dealing with a changing environment.

All of the problems Ms. Kamdar touches on are real and require incremental but genuine responses – to be provided by markets, entrepreneurship, leadership, and good governance. And these responses will by necessity emerge from what India is and not from some radicalized new society that Ms. Kamdar dreams.

Too bad Ms. Kamdar has chosen to neglect the reality and promise of progress in India, while conjuring up wild lurches between doomsday and utopia. One can only hope that the readers of WPJ are more grounded than the author.

Guest post by Nimai Mehta, Assistant Professor of International Trade and Business at American University, Washington DC.

What is the biggest lesson from the Great Depression? In my view, it is that monetary policy and the financial sector play a crucial role in economic development. Let me put it more precisely: good monetary policy is unlikely to accelerate the speed of economic growth – after all we have more income year after year because mankind comes up with new ideas, with new products, with more efficient ways of producing output. However, bad monetary policy can easily derail economic development. It is true for rich and poor countries alike.

Why are financial markets and the banking sector so important? Banks fulfill a very important role in the economy by matching borrowers and lenders. When we deposit $100 in a bank, the bank keeps, at most, two to three dollars in its vaults (in fact the money is often in the central bank), the remaining $98 or so is lent to a borrower.

Most businesses require loans for their normal operations. When the banking sector does not work properly, businesses cannot get loans and they have to curtail their production and lay off workers. As they curtail production, they demand fewer products from their suppliers and therefore their suppliers have to reduce their output and fire workers. If manufacturers cannot sell their goods because the firm downstream does not need as many products as before, they cannot generate enough revenue to repay their earlier loans. Businesses go bankrupt and banks experience further problems as their balance sheet deteriorates due to non-performing loans. At this point, banks want to lend even less because of the uncertainty generated from bankruptcies. As they lend less, the vicious circle continues – with producers cutting production and firing workers. On the top of this, depositors start worrying about their deposits because the non-performing loans have made some banks go belly up – your bank has lent out your money to borrowers who cannot return it. Depositors start withdrawing their cash and banks have even fewer possibilities for lending as they have to hoard cash in case there is a run on the bank. If the financial sector does not work, the real economy can go into a deadly spiral and shrink by 30 per cent as during the Great Depression.

And one thought like Ilian that this would be obvious to all the policy makers. However all the lessons from the Great Depression seem to have been lost within three-quarters of a century. It seems, to paraphrase Marc Bard, that politics [especially of the petty and partisan variety] eats policy for lunch seven days a week.

For much of human history, the trade of Europe with South-Eastern Asia, particularly India and the countries of the Malay archipelago, has been the most lucrative branch of world commerce. The monopoly and control of this trade route was thus much prized by nations, from the early Roman empire, to the Byzantine empire, and later in the 15th century the Italian cities of Venice and Genoa. Then the Portuguese found the sea route around Africa and spent much of the 16th century swiftly proceeding to become the dominant power in this trade, cutting not just the Venetians, but also the Sultans of Alexandria and Constantinople, effectively cutting the supply chain a few layers. It was a remarkable achievement for a tiny country which had to contend with the Italians and the Sultans, and yet built fortifications along the Indian Ocean rim to protect its trade.

In 1580, Spain annexed Portugal in Europe, and the Spaniards, rather stupidly in hindsight, decided that they were not interested in preserving what the Portuguese had worked so hard and energetically to establish – a monopoly of the most lucrative trade route in human history. The reason is interesting.

While Bartholomeo Diaz and Vasco Da Gama were finding the Eastward trade route to India, Spain dispatched one Christopher Columbus on a misguided Westward journey to India. Now the “India” or “Indies” that Columbus found quickly became the exclusive domain of Spain, where they found that they could simply dig up precious metals like gold and silver. They decided that it was good to keep your gold and silver in the country than to use it. And trade with India virtually meant that gold would leave your country and end up in India.

Without the lure of trade, Spain had little incentive (despite stated intent) to prevent the budding merchant powers like Holland, England and France from entering this trade. From the time Sir Thomas Roe got trading rights from Mughal Emperor Jehangir around 1605, the British East India company spent the next hundred years becoming the dominant power in this trade route.

Note that at this time, India was still just a prized trading partner. Territorial expansion, much less an empire were a distant dream, minus the resources that the Industrial Revolution would bring and the presence in India of powerful rulers like Aurangazeb and Shivaji.

So even while the shareholders of the East India Company were rolling in cash, a powerful backlash was building up against the company in England, on the basis of the same false mercantile theory that had held back Spain a century ago. The company was accused of impoverishing England by despatching bullion to India.

Fortunately for England, she had a strong merchant class who from real experience of distant commerce correctly understood that gold must be allowed to find its own natural price level, or must simply fall in value.

The rest as we know is history. England went on to build one of the largest and definitely most sprawling empire in history, became the most powerful and richest nation in the world. Other European powers achieved similar though modest in comparison successes. Spain went on to lose most of her colonies in the New World and the old, even before the English empire had reached its peak.

And what of the nation that for many centuries bled Europe of its bullion – India? 18 centuries is a long story, but it too was largely hoarded (in different ways and different places). With exceptions like the Cholas and the Marathas, few Indian rulers invested in a navy. Trade with Europe was largely dominated by foreigners, with Indians at best accounting for the first leg of the journey to the start of the land route through the Levant. Moreover the hoarded wealth was easy picking for invaders whether from the Afghan passes or the sea trade routes from Europe.

It must be noted in conclusion that the British Indian Empire was originally built as a commercial venture by a trading entity which would have been a non-starter if the British were paranoid of bullion (or excess reserves) leaving their shores.

differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies have been channeled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.

The researchers suggest that more than “the geographical and institutional factors, human capital formation, ethnic, linguistic and religious fractionalization, colonialism and globalization”, it is international trade that has had an “asymmetrical effect on the evolution of industrial and non-industrial economies” leading to a remarkable change in the distribution of world income in the past two centuries.

The expansion of international trade in the second phase of the Industrial Revolution enhanced the specialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor has induced a gradual investment in the quality of the population, expediting a demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade has generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The absence of significant demand for human capital has provided limited incentives to invest in the quality of the population and the gains from trade have been utilized primarily for a further increase in the size of the population, rather than the income of the existing population. The demographic transition in these non-industrial economies has been significantly delayed, increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skilled intensive goods and delaying their process of development.

The most interesting portion of the paper is Part 6, the one dealing with Historical Evidence, which includes an analysis of the contrasting paths of development of UK and India over the last two centuries.

The evidence demonstrates that during the nineteenth century the UK traded manufactured goods for primary products with India. Consistent with the proposed hypothesis, industrialization in India regressed over this century whereas industrialization in the UK accelerated. The process of industrialization in the UK led to a significant increase in the demand for skilled labor in the second phase of the industrial revolution, triggering a demographic transition and a transition to a state of sustained economic growth. In India, in contrast, the lack of demand for skilled labor delayed the demographic transition and the process of development. Thus, while the gains from trade were utilized in the UK primarily towards an increase in output per capita, in India they were more biased towards an increase in the size of the population.

The concluding remark about the “slow transition of less developed economies into a state of sustained economic growth” is likely to gladden the hearts of most Indians. If “international trade accentuates the initial patterns of comparative advantage” and once India has slowly transited onto the path of sustained growth, then the Indian policy makers can rejoice at having done all the dirty, hard work. The growth trajectories of population, human capital and per capita income will take care of themselves, courtesy the Unified Growth Theory. Is it really that simple?

Raj Chetty, an associate professor of economics at the University of California, Berkeley, is the winner of the The American magazine’s 2008 Young Economist Award, a research grant of $100,000 provided by the Searle Freedom Trust.
…
To be eligible for the award, economists have to be featured in the magazine’s bimonthly column entitled “The Young Economist,” which profiles talented economists under the age of forty doing groundbreaking original research.
…
Chetty, who is twenty-eight, did his undergraduate and PhD work at Harvard, became an assistant professor of economics at Berkeley at age twenty-three and an associate professor at age twenty-seven. [link]

As far as we can tell, Raj’s academic work and the Indian economy haven’t intersected. At least, not yet. The only desi link (apart from his family) we found was this interview in Rediff, which might seem a tad tenuous to some. But, what the heck! This guy is an academic superstar in the making…

Let us begin with Dr. Manmohan Singh’s address to the Japanese Business Delegation, on 20 August 2007 -

Today, the Indian economy is in a position to sustain GDP growth rates that are close to 9%. Foreign Exchange reserves stand at over US$ 200 billion. We expect to receive Foreign Direct Investment of about US$ 30 billion this year. Our savings and investment rates are close to 35% of our GDP. Our foreign trade constitutes 33% of our GDP, which is a testimony to India’s growing integration into the global economy.

On cue is the speech by Finance Minister, P. Chidambaram at the Norwegian Nobel Institute, Oslo on ‘India’s Socio Economic Agenda: Development with Democracy’ delivered in October 2007.

The India growth story has been told and retold many times and all of you are familiar with that story. Allow me, however, to narrate some highlights of that story and bring you to the present day. GDP at market prices has increased from US$ 20 billion in 1950-51 to US$ 912 billion in 2006-07 and is expected to cross a trillion dollars in the current year. In terms of purchasing power parity, India’s GDP at US$ 4 trillion in 2006-07 accounted for 6.3 per cent of global GDP. Average annual economic growth, which had been constant and tardy at 3.5 per cent during the first thirty years of Independence, increased to 5.7 per cent during the 1990s and, since 2003-04, the average rate has increased further to 8.6 per cent. 2006-07, in particular, was a splendid year with the GDP growing at 9.4 per cent. This growth has not been jobless growth. During 1999-2000 to 2004-05, India added to its workforce about 12 million people each year. During this period, the rate of growth of employment was 2.9 per cent per year. India, after China, is the fastest growing economy of the world, and together with Brazil, Russia and China is the locomotive driving world growth.

The proportion of people living below the poverty line in India has declined from 51.3 per cent in 1977-78 to about 22 per cent in 2004-05. But in absolute terms they still number around 250 million. More than one third of our 1.1 billion people live on less than one dollar a day.

…we have achieved an enrolment ratio of 95 per cent in primary education. Of the children in school, 73 per cent are now reaching Grade V.

We have managed to provide drinking water to 83 per cent of our rural population and sanitation coverage has gone up in the last decade to 22 per cent from a dismal rate of 3 per cent.

Farm loans have more than doubled in three years from Rs 869 billion in 2003-04 to Rs 2032 billion in 2006-07. Loans to students have trebled from Rs 45 billion at the end of March 2004 to Rs 142 billion at the end of March 2007. It is not widely known that India runs the largest micro-finance programme in the world. At the end of August 2007, 2.93 million self-help groups, an overwhelming number comprising women alone, had been provided credit by the banks. The total amount of outstanding credit is Rs 181 billion.

One-third of the population is below the age of 15 years. India is the only large country in the world where the size of the working age population will grow – and will exceed the number of dependent children and old persons – until 2025, the year up to which projections of population have been made, and perhaps even beyond till 2045.

While the critics sharpen their knives (and you read the comments to this post), savour the moment and feel good about the Indian economy. And do join me in wishing the Indian Economy another great year ahead — 2008.

Noted defence analyst Ajai Shukla, in his column for the Business Standard (reproduced on his blog Broadsword ), has highlighted the changing paradigm of the Indo-Russian relationship. He also suggests that India has been unable to come to terms with the altered relationship as the Russians have taken a more hard-nosed approach to their defence exports. The signs are ominous. It seems that India is operating in a timewarp and has been caught in the rhetoric of a historically “special” Indo-Russia relationship.

This perceptional error emanates from a failure to understand the basis of the “special” Indo-Russian relationship. The continued references by Indian officials (and parroted by the Russian officials) to the unique quality of Indo-Russian bipolar relations imply a common perspective in Indian and Russian strategic, diplomatic and economic interests. However, the Indo-Russian relationship has never been “special” when placed in a vacuum, devoid of outside influences. India and Russia have had, and will continue to have, certain common interests that are necessary for the development of a lasting bond; this commonality has not been in itself sufficient to solidify their relationship. Historically the glue in the Indo-Soviet/Russian “special” relationship was United States and western ambivalence towards India and Indian military needs. As the United States’ ambivalence has dissipated and India’s military-industrial complex has moved towards a higher level of self-reliance, the Indo-Russian bond has naturally cloven. The history of Indo-Soviet military cooperation can be thus summarised as a relationship determined by Indian military needs, Soviet/ Russian opportunism, and fueled by Western ambivalence.

***

As defined by Ken Booth, strategic culture is the product of a nation’s “history, geography and political culture,” and it helps to “shape behavior on such issues as the use of force in international politics, sensitivity to external dangers, civil-military relations and strategic doctrine.” History, geography, and political culture all played crucial roles in the development of India’s conventional forces and nuclear capabilities during the Cold War. India’s sudden emancipation in 1947 after centuries of subservience created “a fierce determination to preserve Indian independence no matter what the cost – an attitude often bordering on paranoia.” Any attempt by outside powers, whether Soviet or Western, to exert influence upon India was often met with open defiance. While the Soviet Union, especially under Khrushchev, would be more understanding of India’s “paranoia” and would treat India with respect, the United States often presented India with demands, even when providing food aid. Furthermore, the United States would exacerbate India’s geographic isolation by providing arms and technical data to both Pakistan and China, thus adding fuel to Indian militarism.

During the Cold War years, there existed a historical pattern in the Indo-Soviet relationship that supported India’s quest for regional security and independent global stature, and an oscillating Soviet vision of India based upon India’s changing geo-strategic and diplomatic significance. As a result, far from being an enduring and close “special relationship,” the historical foundations of the Indo-Soviet relationship reveal an opportunistic relationship in which India’s needs are a match for Soviet capabilities, and Soviet needs are a match for India’s strengths. Moreover, the strength of the Indo-Soviet relationship depended upon the short-term impact of Indo-US interactions. Additionally, major South Asian policy decisions made by the United States during the Cold War clearly depict that the cementing of the “special” Indo-Soviet relationship was a product of American inattention as much as Soviet perseverance.

When India commenced the rapid modernization of its armed forces following the 1962 Sino-Indian conflict, its initial objective was to continue and expand upon its historical Western supply-line. After failing to secure arms transfer agreements with the West, India turned to the Soviet Union out of “dire necessity.” For India, the agreement was a commercial one based on economics. Soviet military contracts usually had favorable financial terms and included provisions for production licensing. But in the long-run, these deals became a burden as India failed to secure a reliable supply of spare parts and also experienced a drop in operational readiness due to a void in indigenous maintenance capabilities. When India made a concerted effort in the 1980s to diversify its procurement portfolio, it found itself returning to the Soviet Union to satisfy its short-term military needs. With a long-term goal of self-reliance in military procurement, India had to use Soviet arms as a stepping stone between the bygone era of the British Raj and future Indian procurement autonomy.

***

The Soviet pullout from Afghanistan in 1989 and the end of the Cold War brought about a drastic change in India’s geo-strategic and diplomatic importance. It was during this transition period of the early 1990s that India emerged from centuries of subservience to (or, during the Cold War, dependence on) external powers to begin defining a global role for itself that was solely egocentric and not centered on India’s reliance on other states. On the strategic level, to rephrase Ashley Tellis’ Cold War depiction of India, the post-Cold War era became a time of transition as India evolved from being a consumer of security to being a producer of its own security. At the same time, India experienced internal economic turmoil which contributed to a sharp decrease in Indian military expenditures and arms imports. Furthermore, a rigid US approach to India, centered on nonproliferation concerns, that permeated all aspects of Indo-US relations and prevented a broadening of these relations.

As the transition from Soviet to Russian rule took place, the anti-India school of thought dominated Russian foreign policy-making. This domination resulted in a major shift in Soviet/Russian policy towards South Asia. In November 1991, when the Soviet Union was breathing its last, in a dramatic change of policy, Moscow suddenly supported the Pakistan-sponsored UN Resolution calling for the establishment of a nuclear-free zone in South Asia to the great consternation of New Delhi. The signal sent by the collapsing Soviet regime, with many of its leaders taking positions in the new Russian government, was that it sided with the West and Pakistan against India’s ambitions for regional leadership and security. In January 1992, one month after a delegation of Afghan Mujahideen traveled to Russia, Moscow severed all “military supplies, ordnance and fuel for military transport” that were sustaining the Najib government’s war effort against the Mujihadeen. India felt a certain sense of betrayal because of the reversal in Soviet policy since the Indian government had worked with the Soviet Union in supporting the Najib government and denying Pakistan the ‘strategic depth’ in Afghanistan.

It was in this atmosphere of uncertain Russian foreign policy objectives that the post-Cold War relations between Russia and India were further strained by two events. The first was the cancellation of the Glavkosmos deal for cryogenic engines by Boris Yeltsin under US pressure. The conclusion the Indians drew was that Russia’s overriding need for American economic aid has made it susceptible to American pressure. In Indian eyes, Russia was unreliable, and it had lost its international stature. During the same time frame as the cryogenic engine fiasco, the “rupee versus ruble” debate flared up in Indo-Russian relations.

The primary short-term military concern for India in the early 1990s was its limited supply of spare parts and supplies for its Soviet-produced armaments. After three decades of reliance on Soviet-produced hardware, India was in a position in 1991 in which seventy percent of Army armaments, eighty percent of Air Force armaments, and eight-five percent of Navy armaments were of Soviet origin. Lacking the indigenous capability to produce spare parts and supplies for these systems, India’s military faced an immediate crisis. In response to its economic crisis in 1990-91, India imposed a reduction in defense expenditures and a sharp reduction in arms import. After having been the top importer of conventional weapons in the world during the period from 1988 to 1992, India was ranked as the twenty-third largest importer of conventional arms by 1996. The inability of Russia to continue the Soviet flow of military hardware, coupled with the sharp reduction in Indian military expenditures, weakened the primary bond that had united India and the Soviet Union during the Cold War.

During the Cold War, decisions to sell Soviet weaponry abroad had been made by the Politburo. But in the post-Cold War era, the choice of where and when to sell Russian arms rested with the power-brokers of the Russian military-industrial complex. As Vitaly Kataev, the General Director of Russia’s Center of Military Industrial Complex, remarked, “Economics dictate the routes of trade.”

During the late 1990s, the Russian interest groups dictated military cooperation with India as India procured more hardware from the Russian defense industry than Russia’s own military forces. It was estimated that about eight hundred Russian defense production facilities were kept in operation by Indian defense contracts. During the early part of this century, Russian exports to China and India amounted to about three-fourths of the total revenue brought in by Russia’s defense industry. The foundations of the Indo-Soviet/Russian military relationship had thus experienced a tectonic shift since the end of Cold War – from Indian needs and Soviet opportunism to Russian economic needs and Indian military needs and opportunism.

***

The rising oil prices, the Russian resurgence under Putin with a more pragmatic foreign policy, coupled with the current US embroilment in Iraq and Afghanistan, have changed the rules of the game. There is also disillusionment in the Russian establishment with the ‘softness’ of the Indian state and its proclivity to align with US interests. The “special” relationship between India and Putin’s Russia exists only as a meaningless palaver nowadays.

Until the communist collapse, the Indo-Soviet relationship prospered because of the need for a balance against the West, and shared security and geopolitical concerns. The new Indo-Russian relationship is based primarily on business interests, and coloured only marginally by geopolitics and security. Outside the paradigm of arms sales, there are not many emerging trends that will promote strong Indo-Russia cooperation nowadays. The history of Indo-Russian cooperation provides a foundation for understanding the current rift in Indo-Russian relations. Indian strategic culture dictates that the likely courses of action for India in the current geopolitical context do not merge with Russian interests anymore. As Indian military needs, Soviet/ Russian opportunism, and US ambivalence do not exist to drive the Indo-Russian relationship, this relationship isn’t “special” anymore. In fact, it never was.

***

Reference –
Jerome M. Conley, Indo-Russian Military and Nuclear Cooperation: Lessons and Options for U.S. Policy in South Asia, Lexington Books, 2001.

I don’t know about the demagogues of the right or left, but this ideologue of the right seeks refuge in logic and data – and he doesn’t cherrypick data to find what suits him.

First, Dweep has managed to confuse economic growth and globalization when he interprets Prof. Bardhan as saying that “economic growth may have less to do with poverty reduction in China than previously imagined…”.  What Bardhan is saying is that globalization has less to do with poverty reduction in China than commonly believed. This is not surprising. The China of 1978 did not  require globalization as much as it required sound economic policies. Mao’s policies had reduced pretty much the entire country to starvation and occasional cannibalism. Getting out of it was not rocket science. Deng’s policies caused economic growth – and it brought a huge chunk of people out of poverty.

Next Bardhan says that “the rate of decline in poverty [in India] somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, …”   

Let’s see the poverty figures between 70 and 74:

55

52

53

54

Now let’s see the poverty figures between 74 and 87:

48

43

37

And between 87 and 93?

38

38

34

35

36

40

I have not got the figures for all years – the years between 74 and 87 are quite sparse, but I hope you can see what I am seeing. Before 74, there is no trend of poverty reduction. The number of poor people was entirely dependent on the monsoon. Between 74 and 87, you saw a real decline in poverty, and you can guess why – we enjoyed the green revolution. By the mid 80s, the revolution had run out of steam. The country settled back to its old pattern, albeit at reduced poverty rates, till the crisis of 91.

With these figures, is it fair to say that  ”the rate of decline in poverty somewhat slowed for 1993-2005″, implying that we had a high rate of decline earlier? The blame for this misrepresentation, incidentally, does not lie completely with the professor – he just chose one word poorly. In other parts of the article, he agrees with what I am saying. It is Dweep who uses the figures to declare that the figures contradict “what is now taken as an article of faith within the economic liberalization community.” I am keenly interested in knowing which article of faith that is. The story the figures tell is clear enough for me. When the economy does well, the poor do well. When it does badly, the poor do badly. The growthless year of 1991 was terrible for the poor – their proportion went up from 36% to 40% in a space of two years.

Is it true that the green revolution has done more for the poor than economic reforms? I can accept that.  The green revolution was a pragmatic step which cannot be slotted into the ideologies of the right or left. The ideologues of the left hate it, because where it was carried out, it involved junking land ceilings and letting farmers own as much land as they could and plough it with tractors. They also hate it because it is supposed to have hurt the environment.

This ideologue of the right has misgivings about the Minimum Support Price mechanism, which is an illiberal policy. Yes, it gave farmers an incentive to produce more, but it also made food more expensive. I have read glib comments on this blog saying that we shouldn’t care about food prices because rich software engineers can afford to pay a bit more for food. I am sure they can, but it is a pity about the landless labourers, who constitute 40% of the poor. They  work on land, but they also have to buy their food.

The bottomline is that the gains made from the green revolution could not have continued for ever. If the productivity gains from the revolution had continued, the government would have had to increase its subsidies to unsustainable levels. Also, we’d have the difficult question of what to do with all those mountains of food. The only way out would have been to reduce the number of people working on land, and we could have sent them… where?

I will not dwell too much on the rest of Bardhan’s article, which is a shameful apologia for China’s inequality. He thinks up convoluted statistics to claim that China is less unequal than India. Why does he use the Gini coefficient for land distribution in rural areas? Because if he had used the Gini coefficient for consumption inequality – which is the standard, China would have come way worse. China’s consumption inequality is 44% – much, much worse than India’s 32%. Also, when it comes to China, inequality is apparently a positive force. The fact that the queue is moving for others is reason for the poor to hope that their time will come. It is not clear why the same logic cannot apply to India.

What are we left with once the fog of fuzzy thinking clears? Free market fundamentalism is the only sustainable and reliable way to ensure growth. Economic growth is the only way to reduce poverty. Globalization  is a part of free markets, not a substitute for them. The fundamental things apply.

(Updated to add  a clarification for better readability) 

Despite India’s oft-proclaimed Non-aligned status in the Cold war era, India and the erstwhile Soviet Union (now Russia) have a history of supporting each other in areas of strategic congruence. After Indian independence, Stalinist Russia considered India as a “tool of Anglo-American imperialism”. Things changed dramatically after Stalin’s death in 1953 and till 1971, the trade between India and USSR was based on the Rupee – Rouble rate determined by the Gold exchange standard. In 1971, the abandonment of the global gold exchange led to a devaluation of the Rupee against other western currencies (but not gold), thereby putting the Rouble at a disadvantage. In 1971, the exchange mechanism was linked to a basket of currencies and

the economic and defence cooperation between the Soviet Union and India was financed on the basis of state credits granted to India on favourable terms. The currency of the credits was an artificial monetary unit – Rouble with base value equal to 10 Rupees that was subject to adjustment proceeding from changes in the Rupee value of a special basket of 16 currencies (the basket of the SDR unit as of 1978). This artificial “credit Rouble” and the mechanism of its rate determination were quite different from the domestic Rouble being the non-convertible domestic currency of the Soviet Union.[Link]

The trade between the two countries increased from less than 2 Crores in 1953 to about 8,000 Crores in 1990-91. In 1990-91, more than 16 per cent of Indian exports were to USSR and about 6 per cent imports came from it. Incidentally, the corresponding trade figures for 2006-07 are 0.7% for exports and 1.3 % for imports. The breakup of the erstwhile Soviet Union coincided with the Indian financial crisis of the early 90s, eventually leading to a collapse of this mechanism with the dissolution of the USSR. Protracted negotiations resulted in a new bilateral trade regime including a debt repayment agreement where both the countries

mutually decided to recalculate the Rouble denominated debt into Indian Rupees. The intergovernmental Letters of Exchange dated January 29, 1993 provide for such recalculation on the basis of the Protocol of November 25, 1978. Simultaneously the Indian Side was granted an interest-free deferment of payments for 45 years covering 37% of its debt, being called the rescheduled portion.[Link]

This debt repayment agreement provided for an annual repayment of about US$ 1 billion equivalent in rupees to Russia over a period of 12 years with smaller amounts thereafter for a further period of 33 years. The rupee debt funds are maintained in a central account with RBI and are to be used by the Russian side for import of goods and trade-related services from India while Russian exports to India are against freely convertible currencies. Approximately two-thirds of Indian exports to Russia are currently routed through the rupee debt funds.

As the official trade between both countries has reduced considerably since 1991, there has been a cumulative shortfall of about US $ 4 billion in the utilisation of the annual debt repayment commitment. The Indian finance ministry’s status report on external debt for August 2007 places the outstanding Rupee debt on the above account from Russia (USSR) at USD 1.949 billion (1.723 billion and 226 million towards defence and civilian components respectively). This unmet outstanding rupee debt prompted the Russian Ambassador at Delhi to earlier suggest that

both sides are considering the possibility of supplementing commodity exports based on Rupee debt repayments with reinvestment of a part of the debt in mutually agreed projects in India and probably in Russia as well, that, we believe, will benefit the economic cooperation between the two countries.[Link]

Russian economic resurgence in recent years has been based on the primacy of its energy trade while the services sector has been the flagship growth sector in the Indian economy. Despite economic policy changes in both countries, the economic relationship between India and Russia is dominated by defence transactions and the military industrial complex still stands at the core of strong Indo-Russian economic linkages. The major purchases from Russia in the recent years include Su-30MK FGR aircrafts, T-72MI and T-90 battle tanks, Ka-31/helix helicopters and variety of other armaments. Major deals worth billions of dollars have been inked or are under serious consideration which includes the aircraft carrier Admiral Gorshkov. The modernisation of this carrier will cost India around $700 million, and the remainder of the billion dollar deal will include MiG-29K fighters and Kamov-31 anti-submarine helicopters. Despite noises to the contrary, military operational logistics imperatives will drive India to continue importing defence equipment and hardware from Russia in the coming years.

Unconfirmed reports have it that the Russians are planning to invest the unexpended portion of the rupee debt repayment back in India with a five year lock in period. This is most likely to include setting up of service centres for defence products already sold to India. More significantly, accumulated rupee debt repayment projects could also be planned as a part of the mandatory DPP-2006 requirement of 30% offset investment in indigenous production for future acquisitions.The readily available capital of debt repayment account will provide the Russians with a distinct advantage over other competitors in the ensuing defence deals. As such, the Russians have a head start over others because of India’s long history of military hardware acquisition from Russia; continuity in operation logistics and generational consistency can only be achieved by adhering to this legacy.

With US $ 40 – 60 billion at stake over the next five years, the lure of the lucre has got the US and the Europeans defence firms already salivating.The latest geo-strategic arm twisting by the Russians is an early indicator of graver things to follow. It will be a test of resolve for the Indians to execute their defence procurement plans amidst all the conflicting pulls and pressures. Recipe for success – a concoction of realpolitik, strategic nous, sang-froid and prospicience. A dash of catholic longanimity while standing up to the bullying tactics of some old friends and many new enemies will do no harm either.

1. Only 1 in 10 companies achieve sustainable growth over a 10-year period.
2. Business life spans have plummeted to an average of 14 years.
3. CEOs are leaving their jobs twice as often as in previous decades, with today’s average tenure only four years.
4. The average period an investor holds a share of common stock has decreased from about eight years to eight months.
5. Market leaders are more quickly losing their lead positions.
6. Product lifecycles in many industries have shrunk by 70% or more.[link]

Most forces of turbulence leading to these accelerated changes in the world economy are macro-level forces that Indian companies can not avoid or ignore. The pace of change for Indian industry is thus closely related to their overseas counterparts. It is safe to presume that similar observations hold true for the Indian economy; issues that would have lasting impact on the profitability and viability of Indian businesses.

However it seems that most Indian companies, both established and emergent, have ignored the accelerated pace at which they will traverse the path of Zook’s Focus-Expand-Redefine cycle in today’s era. Nevertheless, a belated identification of the correct coordinates on the F-E-R cycle by Indian businesses can be offset by internalising the obvious lessons from Bain’s analysis now. It is high time we put forth rigorous analysis on definitive data about Indian businesses since 1991, to support such contentions about the Indian economy as well.