Unshackling India for Economic Revival

VIDEO

Transcript

Rob Johnson:

(singing). Welcome to Economics & Beyond, I’m Rob Johnson, president of the Institute for New Economic Thinking. (singing). I’m with Ajay Chhibber today to discuss his new book Unshackling India: Hard Truths and Clear Choices for Economic Revival, he coauthored the book with Salman Soz. And I guess I should say I’m very excited to see you again after meeting in India when you were the evaluation minister, and I think it was about 2013 or 2014, as I recall, and I followed your work and your writings closely. And I had the good fortune when you presented in Washington and my friends, Martin Wolf and Kaushik Basu were commenting and I thought it was an extraordinary presentation, and I wanted to obviously then be able to share it with the audience of this podcast, and the Young Scholars Initiative at the Institute for New Economic Thinking.

Rob Johnson:

I want to say this particularly for the young scholars, this is the kind of model of what I think we need to do. Everybody knows how to whine about what’s wrong. You are creating a pathway to a constructive future and a vision based on a lot of experience in the Indian government, at the United Nations, at the World Bank and many dimensions, which we can talk about in bits and pieces. But I really want turn it over to you, but before we I say glide down the pathway of your vision, what inspired you to write this book?

Ajay Chhibber:

Well, thank you Rob, it’s so nice to see you again and so glad you were able to attend the U.S. book launch that you talked about, and I’m so glad to be here with you today. The book, well, I’ll just hold it up just for a second so that people can see what it kind of looks like. But there are two big motivations to write the book Salman Soz and I, we come from the same in college in Delhi and we worked at the World Bank together, but not together, actually, I never knew him either in college or in the World Bank. He’s a little bit younger than me that’s why I didn’t know him in college, but somehow our paths never crossed. So we met each other about two years ago and we liked each other’s views and we said perhaps we’ll write a book, but then suddenly we had the pandemic and then we said, “Now we must write the book because we have time on our hands and motivation to write.”

So there were two big things that were in our mind, one was that both of us have worked in many countries around the world and in India, and so Salma also worked on a range of middle income countries so did I. And we said, look, whenever we go back to India and there are some problems and you say here’s a solution that others have tried that has worked, the response you get in India is always, “Well, this is never going to work in India. India is so different. India’s very unique in some way.” But lo and behold over time you find that people would come back to those solutions struggling, but often very late.

And people also in India like to say, “We’re doing much better than we were 10 years ago or 20 years ago,” which is true to some extent, but then the rest of the world hasn’t stood still, they have gone much further ahead and we know China and South Korea, so many countries have gone way past India. So you sort of say, well, you’ve got to bring a perspective that India is doing okay in some areas, badly in others, but where is it relative to what the rest of the world is doing? And so we try to do this book as a bit of a benchmarking exercise, a kind of backward indexation which Indians love to do, but also a lateral indexation, so where are we and why are we where we are? That’s one motivation for the book.

The other motivation for the book is that India had very big reforms in 1991 when Dr. Manmohan Singh was the finance minister of India, and India got into a huge crisis after 40 years of pretty dangerous socialist policies, and then came a huge balance of payments crisis and that triggered the wave of reforms that Dr. Manmohan Singh brought about. But when he brought his reforms about, he had a clear vision of how things come together and which other buttons that I have to press now at this stage for India to propel it forward. So over a period of three to four years he was able to press those buttons with a competent team around him and move things forward. So you’ve come now some 20, 30 years later and those reforms have run out of steam, and for the last 10 years India has been drifting, especially since the global financial crisis.

And then you’ve got a new government that comes under Prime Minister Modi, and you think, wow, this is the man who’s the big reformer, he’s going to carry out some big, big reforms. And what you find and what we’ve documented in the book is that you’ve got these very one off piecemeal kind of things, because there’s nobody there either in his team or around him with that kind of comprehensive vision of what are the different wheels that have to move in some sort of tandem, whether it’s on education or labor reforms or other reforms.

So one reason to write the book we thought was let’s present a picture of how things come together to produce certain outcomes, and why does India have such a distorted structural transformation, just to give one example. So the part of the book was let’s present a picture of where India has been over the last 75 years that has brought it to this point at its 75th year of independence, and then where does it need to go over the next 25 years, and how does the different parts of that sort of gear box have to be moved in a way that will make it move forward in the right direction? So that’s the second motivation for the book.

Rob Johnson:

So when you look at as you were saying things kind of leveled off or stalled out a little bit, obviously the pandemic is a bit of a shock, the urgency of climate change on the horizon is facing us all. But how would I say, how much do those specific factors play into your design and how much was what you might call related to a structure that wasn’t functioning well before all of this came to the surface?

Ajay Chhibber:

Absolutely Rob, so what we show in the book is that what the pandemic has exposed in stark terms, what the bigger problems were, the problems were there already, the economy had already since about 2016 had started to slow down. And particularly the last two years before the pandemic, the growth of the Indian economy had gone back to pre 1990 days when India was growing at a very slow rate. One famous old economist, who was my professor at the Delhi School of Economics and I caught him in the book, Professor Raj Krishna used to say, jokingly call it the Hindu growth rate 4%, four, 5%. And what had happened was that in the last two years before the pandemic we had gone back to now four, 5% growth. So we were back to jokingly I would say back to the Hindu growth rate and obviously not a very good thing to say to a Modi government, that is kind of Hindu majoritarian is their ethos anyway, so I said, “You’ve brought us back to the old Hindu growth rate.”

But what the pandemic did is then exposed those problems and why we were in that situation, even before the pandemic we had very high rising inequality. If you look at Piketty’s book, India is either the most unequal or the second most unequal country among the large economies of the world, maybe in some Gini coefficient measure slightly less unequal than Russia, but if you look at the top 10% share of the income then India is actually even goes beyond Russia. And now what the pandemic has done is, has actually increased that inequality even further, the rich Indians have done much, much better, and the poor group have fallen even further behind. But what the pandemic has also exposed is certain things that were not so obvious such as how weak the capacity of the state was to handle the pandemic.

How many lives were lost that need not have been lost because of the weak capacity of the administrative capacity of the state. I think things needed a big change, but the pandemic has certainly been a huge wake up call that has exposed these problems to an even greater extent than was the case before. And the fact that India had a very vulnerable employment, about 80% of India’s people who actually even work. A lot of people don’t work because they can’t find jobs, but even those who can find some job to do, 80% of them have what the UNDP calls vulnerable employment, that is they have no safety net, they have no social protection.

And that was exposed during the pandemic in spades, because when Mr. Modi did his drastic lockdown and then about over a 100 million people were then streaming back from the cities to the villages, it looked like some war or story that… scenes that we India had not seen since the partition of India and Pakistan-

Rob Johnson:

It’s like The Wizard of Oz in reverse.

Ajay Chhibber:

… of so many people out on the streets. And it showed the vulnerability of this economy was huge. So I think what the pandemic has done is really exposed all this to a very great extent and the weak health system, the weak administrative capacity, the inequalities, the lack of safety nets. And that’s what we say now we need to focus on these things going forward, but also somehow to be able to revive this economy from the slump that it had gotten into even before the pandemic. So today you will hear projections from the IMF that India this year will be the fastest economy in the world. Well, the main reason for that is that we had the biggest decline during the pandemic, so that’s just a bounce back. They are projecting again that India will grow 9% next year, but I don’t see where that growth is going to come from unless we do some serious reforms, and that’s what we try and lay out in the book.

Rob Johnson:

So in your title is the word unshackling, so as we move into where India is and like you said to be silly about it, the unmasking that the pandemic has done has shown us some of the… I would say some of the needs, some of the fault lines, but what shackles be taken off to move us forward in India?

Ajay Chhibber:

The one very major point of our book is that the role of the state needs to be changed in very fundamental ways, that the state is not too large in terms of share of spending as a share of GDP. We have tables on that where we benchmark India against all the OECD countries plus several emerging market economies, so the size is not too large, but the scope of the state that is the number of things it tries to intervene into is too large. And what that does is it’s a bit like in taxation you have the Laffer curve, if you try and tax at a very high rate, you start losing tax revenue. So here I use the Laffer curve sort of same methodology to show that if a state tries to do too many things it ends up doing most of them very badly, and so the effectiveness of the state starts to go down.

Rob Johnson:

So instead of being a catalyst or a channel upward, it’s like throwing a net on top of things and stifling vitality.

Ajay Chhibber:

Yes. There’s a famous writer in India, Gurcharan Das, he said India grows at night when the state is actually sleeping. So we actually devote the first three chapters of our book to what needs to be done here. And we argue that it’s got to be a two part strategy, you can’t improve the capacity of the state overnight, that’ll take time, but the first thing you can do is reduce its scope, meaning make it focus on a fewer set of things. And Prime Minister Modi has a big slogan on this, he calls it maximum governance, minimum government, obviously, not an original one, probably taken from somewhere else. So we say, well, if that’s your slogan, then the first thing you need to do is refocus the state on fewer things and things which you have neglected badly like health and education and even defense.

If you take out the pension component of the armed forces of India, we have a very large army, the actual spending on real defense spending as a share of GDP is one of the lowest since independence, which is amazing given the threats that India faces, we have China and we have a problem with Pakistan and loads of other issues that India has to deal with, but particularly China. And to have a nationalist strong man government have the lowest spending on defense because it’s not able to move money from other various things involved in, like building toilets and things, which are not bad but that’s not what a government’s function should be, first focus on health, education, defense. So that’s one big theme we have in the book, which is where partly the title unshackling India comes from.

But then we say that it’s over centralized, China is a very authoritarian totalitarian state, but more than 50% of spending in China is done at the local government level, not even at the provincial level, certainly not at the central level, at the local government, at mayors and village communes and those sorts of level of government, in India that number is close to 4%. 4% of GDP is spent by mayors and village councils and things like that, over 50% in China to a level of… So we argue that part of the reason why this government is ineffective is that there’s a… And I use a methodology that was developed by a famous public administration expert and apply that to India, where we show that when you have things, where the level number of transactions is too high, and the outcomes are not very specific like in health and education, then trying to do those things in a overly centralized manage manner means you are not going to get the results that you need.

So that’s a big theme of our book that we show that much greater decentralization, much greater devolution to the lower level. And also that you will be able to get more for your buck at the lower level, because salaries at the lower level are much less than at the central level. So we lay all this out in the book in the first three chapters. And also that we have still while may have liberalized in 91, we still have about 250 state owned enterprises, public sector entities. We’ve just sold one, Air India, which is a marquee sort of airline, which was a bleeding ulcer rather than a crown jewel as Arun Shourie former minister who was in charge of privatization at one time describes it.

Just as we were writing our book, the sale of Air India was on the burner. And I said this should be a litmus test, can they do this or not? And they were finally able to do it and hand it back to the private company Tata from which they nationalized the airline. So that’s another big agenda that they have to pursue, that we push for over the next 10 years or so.

Rob Johnson:

When I had been traveling to India quite frequently, 2010 to 2016, I noticed quite large variations in local spending in different regions, it was not as if there was a… even if it was centrally controlled, it wasn’t allocated as though it was a national policy, it seemed kind of like there was a customized policy for each area and it appeared to me to be perhaps exacerbating inequality. And some of the leaders of regions that I would meet with would be very enthusiastic if they were in the inner circle and very despondent if they were outside.

And your fellow Indian countryman and leader Raghuram Rajan, who’s a friend of mine, and I remember him starting work as he left the central bank on his book that I think became called The Third Pillar. We made a video together and he was talking about the at global levels, but also within India, at least in our conversation that the need for low government is because you’re sensitive to what people need there. But at some level, the federal government has to unify things across regions, manage migration between regions and what you might call local officials can’t insulate their population from all the shocks that occur, you do need the combination of the big overarching government and the sensitivity down in the fields of where people live and where their yearnings are identified.

Ajay Chhibber:

Yes. So we show in our book very similar that when it comes to natural disasters, we get lots of cyclones and earthquakes and various types of countries are hit. But being a large country, we are able to handle now a lot of those disasters on our own, unlike large parts of the developing world, India doesn’t look for foreign assistance when it gets… Because you have a central government that is able to move resources and an agency like FEMA you have in the United States, we have the National Disaster Management Authority. So there are things that India is able to run an election across the whole country very well, India is able to have a pretty competent central bank, it has the manpower and the capacity to do that, but then you ask the question, why can’t it deliver basic health and education?

Because it’s tried to over centralize everything there, and these are attributes or kind of services that are best delivered at the local level, here is a country more diverse than the European Union. So if you’re trying to do whatever you are trying to do in Norway and you’re trying to do that in Greece, it’s probably not going to work right. Similarly for us, you have states at different levels of development. And even within states you have some states which are the size… Andhra Pradesh would be of the fifth largest country in the world. So you have within states you have also huge variations, so you cannot do these things at a centralized level and that’s what we try and show in the book, that you do need an overarching framework, but the implementation has to be left to the local level and the modification of that national policy has to be allowed.

We just passed the National Education Policy at the national level, but now if they try and ram that down to all the districts and all the states, it’s not going to work, you have to say, “This is the framework. Now we are going to allow different districts, different parts of the country to implement this in a local manner that meets certain broad objectives and standards, but gets delivered in different ways in different states,” so that’s where we need to be.

Rob Johnson:

It’s the old adage, different strokes for different folks, but that sensitivity to the variations in the regions I think is very important. I grew up in Detroit, Michigan, where after the devastation of the auto industry, many things were not performing and in many ways people in Detroit felt that the federal government had divorced Detroit. After the Voting Rights and Civil Rights Act were passed, democrats in the South didn’t want to transfer a lot of money to an African American majority city in the North and so it was very, very dysfunctional.

And then people swooped in whether philanthropic or government officials to take over the education system, and it felt like to the people there they have no idea what they’re doing, they don’t see the problems, they don’t feel the problems, and at the same time by the way they were building up the prison system. And then when a lot of black males were put into the prison system, which by the way, were privatized and had incentives to fill their beds, then dysfunctional families did worse in schools. And as Heather Ann Thompson wrote about, she’s a professor at University of Michigan, all kinds of teachers who were being ranked on the standardized test scores of children left Michigan because they couldn’t control their fate and it was calamity from a top down imposed thing.

Ajay Chhibber:

Absolutely. And just to give you a similar example, a friend of mine runs a very good, what Raghuram Rajan was describing a very good NGO, Seva Mandir which runs these schools in these villages. His school has one teacher and all the villages around in that area send their children to his school. And the government has nine schools with no teachers, the teachers never show up, beautiful buildings, computers, never even unpacked. This little NGO school, people are moving from other villages to this village in order to be able to send the children to this school. One teacher is running three shifts in a day, to be able to handle all these kids. So this is the reality that if you leave things down at the local level then people will know what to do.

Rob Johnson:

In the realm of education, when you take the temperature of what’s happening across the country, I can understand being more customized, being more local, being more sensitive, but are there what I’ll call mega or meta missing ingredients that you recommend in your book as a wholesale transformation?

Ajay Chhibber:

Yes. The most obvious is obviously is the amount of money. We have benchmarked India against all the neighboring countries and we are underspending hugely. For example, our public spending on health is only 1.3% of GDP, it should be at least 3% of GDP. Two thirds of the spending is out of pocket by people, they have no insurance and they go to half baked private clinics and hospitals. Same as in education, the amount of public spending in education, public schools, in the United States what we are calling public schools is very, very low, so most of the people have drifted into private education. And so you have these fly by nights little schools that come up, private sector schools, somebody will set up a school in their house in the locality and all the children will go there because when they go to the pub… at least here there’s a teacher, there’s somebody who’s trying to teach you something.

Whereas in the public school the teacher may never show up and even if the teacher shows up, he may never bother to actually teach. So you have those sorts of issues as well across not just in the rural areas, but across the whole country. So you have a governance problem and a money problem at the same time, you have don’t have enough resources and you need a governance structure which changes the whole incentives. Now what we have is we have seen an increase in enrollment, but the quality now we need to focus on, which is the direction we push for in our book, we have a very good NGO, which has been doing surveys for the last 15 years and produces the annual survey of education results, which tells you that if you went to class five or class two at what grade are these children able to perform?

And she shows systematically and does this by every state in the country how poor the core of the education is, so that’s where we need to now focus hugely, and this is where this new education policy comes in, but again, it’s how it gets implemented, will be very important.

Rob Johnson:

I was going to say from the distance, from my perspective, number one, with the advent of technology and automation, knowledge intensive human capital is becoming ever more important.

Ajay Chhibber:

Exactly.

Rob Johnson:

And secondly, when I have seen the products of the best parts of your education system, when I visited India, or when people from India come to the United States, this is not what you might call a genetic or some kind of failure, this is a missed opportunity. You have lots of brilliant people and if you were to increase the allocation of resources, the vitality, the productivity, the payoff to that input I think is almost guaranteed. And almost all of the parents I’ve ever met from India, really cherish seeing their children educated, so I think unleashing these resources is just a win, win, win for the system and individuals in the world.

Ajay Chhibber:

Exactly. Absolutely, but we trace back over the last 75 years why we came to this situation, and part of it is that in the beginning when we got our independence, we focused a lot of our resources on what I would call tertiary education, we established the famous IITs and the Indian Institutes of Technology and Science, et cetera. But most of those people, including Raghuram Rajan they all went there, they all leave the country. A lot of them just leave the country and we neglected primary education hugely, so we did not create a mass of people who were reasonably well educated. We had a small group of people who were in the best of the best, and then we had a lot of people with very, very poor or almost no education at all, so there was that problem, but that problem then is starting to being corrected now to some extent.

Rob Johnson:

I was going to say what’s dangerous about that is that people who have what you might call faith in the parable of meritocracy are saying the talented ones emerged and the others didn’t, but there’s an awful lot of statistical data. I’m thinking now about work I see in the United States where students who test very well, but are in the lowest quarter of the income distribution, have much lower chance of getting a college degree than children who are in the upper 10% of the income distribution, who finish in the lowest 25% on standardized testing. So there are a lot of things other than what you might call measures of innate ability or aptitude at work here, and it seems that investment that you’re talking about, the broad based uplift can make an enormous difference to this country, to your country I’m sorry.

Ajay Chhibber:

Absolutely. Exactly. And that’s what we are seeing. Karthik Muralidharan who teaches at University of San Diego, he’s a guy who does a lot of work and we quote him, he says, “The whole system is now basically a signaling device, it’s not a system for learning.” And the richer parents what they do is they know the child is not going to learn in school, so then they have afterschool tuition and they pay a lot of money to people who come and then teach their children what they should have been taught in school. And so you have this intense competition for very few jobs, you have intense competition for getting into a college, and so the way the richer parents do is they provide extra help to their children, which the poor cannot provide.

Then you have the digital divide, you have people who have computers and people who don’t, and we show the numbers on that as well. So you think of India as an IT power, but there is a huge digital divide within India as well. And these days without knowing computers, without doing that kind of learning you nowhere, you cannot find the jobs in today’s world unless you have that basic literacy, not just in reading and writing, but now in some at least basic computing. Now, of course, everybody has a cellphone these days, so through the cell phone and we have very low data cost, but very low speed also as we point out in the book. But nevertheless, people have at least access to cellphone, there are about a billion cellphones in the country. Pretty much everybody has access to something of that sort, so they’re beginning to catch up, but we need to push in this direction.

Rob Johnson:

I remember when INET had various projects related to curriculum reform and I was in India and someone said to me, “Don’t take the curriculum that you generate and put it in an ebook that we have to get on the internet, create an app for the telephone, so people in the cell zone can get this free textbook because it will be much more widely disseminated.”

Ajay Chhibber:

Yes.

Rob Johnson:

That’s fascinating.

Ajay Chhibber:

Absolutely.

Rob Johnson:

I’ve also heard that in many parts of African development in recent years.

Ajay Chhibber:

Exactly.

Rob Johnson:

The interesting thing to me here also just before we close out on education and you talked a little bit about it, and there’s a lady who was a famous author in Canada named Jane Jacobs often wrote about cities, but her last book was called Dark Age ahead. And she spoke about the fear of unemployment that our ancestors talked about coming from the Great Depression and the need to educate citizens, rather than just credentialize people who were getting into school to get the job they were afraid they were going to miss in a very hierarchical society economically.

And it’s kind of ironic because she was in Canada, which is less afflicted by these things, but she saw these trends coming. And the idea that comes back to my mind is you’re talking about evolving the state, evolving the different ways in which things are done, bringing things to the local level, it feels to me like citizen education is very important as distinct from getting what you might call credentials as an input to production, both matter but the balance between the two of them I think is very important to the health of the society.

Ajay Chhibber:

Yeah. We need to have a system where people are actually learning rather than just attending, and we have ended up with a system where focus was on enrollment, so enrollment went up. They finally through the school lunch program and various other programs, they managed to bring the kids into the schools. But now whether they are learning that’s the key and the learning can’t be only in the school of course, but when somebody’s there for five or six hours and they’re not learning anything, that’s a huge waste as well I think, so that’s what we need to focus on.

Rob Johnson:

I once visited a conference on the theme of economic justice and the discussion among the group got to a place where it talked about health and education. Jim Heckman, who’s worked a lot with INET, was the person who inspired me to join him and listen. But the notion of economic justice that was being used in the United States at that time is if you get paid more than your marginal product, you’re being subsidized, if you get paid less than your marginal product, you’re being exploited, if you get paid your marginal product that’s economic justice, but you could be at a place of so-called economic justice where you couldn’t support a family or a retirement or anything.

And the question became who is responsible for your marginal product and the systems of health and the systems of education have an awful lot to do with your productivity that was beyond your control, their system platforms, they’re not individual laziness initiative or what have you. And the parable that it’s all about the individual, I can understand assigning responsibility to the individual, but assigning responsibility in the context where if they are vital, give their heart to it, they get the ingredients, particularly health and education so that they are productive and can support a meaningful life, otherwise it’s not socially sustainable.

Ajay Chhibber:

And I’m glad you brought up Heckman because I am a great admirer of Heckman. When he visited India in 2013, I was in the government and I was asked to chair several of his lectures for reasons unknown to me, maybe nobody else was important enough, wanted to do it, but I was very glad to do it because I learned so much from him. And one good thing that they have done in this education policy is that they have focused also on preschool education, early child from two to five, which is a very important message that Heckman delivered during his lectures in India. The point you’re making about, so it’s not just education, now we need to then say where do we find productive jobs for these people? And in our book, we show that our labor laws are so terrible, partly we inherited them from British times, but then we added even more complications to them so that it is very hard to actually employ people.

And what it does is it makes sure that 90% of the employment is in firms, which are smaller than 10 people. In fact, 80% are in firms of size one, which means it’s just the one person, there’s no other person being employed. And that’s where the point about the marginal productivity comes in, that there are no jobs. And now we contrast India with Bangladesh next door, same basic structures, same institutions. Bangladesh then got rid of the labor laws, Pakistan did not, so Pakistan is still stuck. So when India became India, Pakistan, Pakistan and India kept the laws and both labor laws and then made them even worse. When Bangladesh got independence in ‘71, they threw out the labor laws.

So this big boom in textiles is now not just because of labor laws, there are other reasons too, but a very large part of it is. So you see a huge improvement in female labor force participation in Bangladesh and a decline in India, a decline in Pakistan. And so these girls who get some very big basic education now are able to go to the textile factories and get jobs and become far more productive, they’re still getting exploited by the definitions you gave, but they’re still getting far more productive and far better wages than they were working on the farm. So that’s a big, big story and when you point that out to people that you’re now being compared to Bangladesh, not just to Vietnam which are now… I lived in Vietnam as the World Bank director in Vietnam, and that’s a completely different… they’ve gone to a whole different level, let alone China.

But even nextdoor Bangladesh now is saying… and their textile firms are seven to eight times bigger than Indian firms, they’re able to now compete so well internationally, they’re able to provide a lot of employment. I mean they’re sweat shops, they’re not the role model of a factory, but what was your alternative, well, your alternative was unpaid work on the farm basically. I’m not suggesting that we need to produce factories like Bangladesh, but we need to have a mass of manufacturing jobs, and India has what Dani Rodrik called and we point out in the book called premature deindustrialization. The service sector has boomed, but the manufacturing sector, which is where the bulk of the employment needs to take place. If you go back to Sir Arthur Lewis’ dualistic transformation of how people move out of agriculture and out of the informal sector into more formal jobs, and more productive jobs and getting better paid, and having a wage that you know is not working poor.

In India you have a lot of people just working odd jobs, but they’re still poor below the poverty line. So that’s the kind of transformation that we need to have as we show and what would it take to do that, it would be education and basic health because a lot of kids are also malnourished. So what India has done is taken its most abundant asset, which is labor and made it very difficult to use it, it’s taken its most scarce resource which is land and wasted it. And we show in our book wasted in two ways, one is that the floor area ratio in our urban cities is one of the lowest in the world.

So when your land is so scarce you start to urbanize and then you have these sprawling cities, Delhi is 30 miles by 30 miles, that city could absorb all those people in probably one third the area that it now occupies. So you take your most scarce resource and you use it badly, you take your most abundant resource and you don’t use it at all, in fact there’s so little employment in the country, so how do you compete with anybody? And then what we did was we took the third factor which is capital and we ended up with and we show in the book, the most inefficient banking system in the world, it compares to Venezuela and Russia, which are oligarch run systems. So we show that the intermediation ratio, which is what’s the difference between the deposit rate and the lending rate in India is now five to 600 basis points.

And that’s because what we’ve done is we nationalize the banking system then all the crony capitalists and the populist politicians started handing out free loans, or re-greening the loans of crony capitalists who are willing to pay bribes to politicians. So I write in the book that this is like Murder on the Orient Express, who’s responsible for this and they’ll say, “It’s everybody, they all stuck the knife in.” It’s the regulator, it’s the crony capitalist, it’s this crooked politician or the populist politician and the bank manager, who’s basically in a state bank, you’re the bank manager because the politician wants you there to do his bidding. So we ended up with this huge non-performing assets and then the only way the bank can survive is by increasing the disparity between the lending rate and the deposit rate.

So this is where the reforms have to take place, the first generation reforms that Dr. Manmohan Singh did were basically what we call, economists call product markets. But the next stage of reforms which India needs to do are in labor, in land, in capital, and these cannot be done by the center alone because these are very heavily provincial state subjects. So we can’t do these reforms like they were done before and a lot more discussion, dialogue, et cetera, has to take place between the center and the states to make this happen, and that’s not happening.

Rob Johnson:

I’m reminded of one of my earlier podcast guests, a young woman I believe she’s from Singapore, but is at University of Michigan, her name is Yuen Yuen Ang, and she wrote a book called China’s Gilded Age: Paradox of Economic Boom and Vast Corruption. And she compared the Chinese with the 19th century Americans and the concentration in the railroads and concentration of finance and J.P. Morgan. And she was essentially saying sometimes the corruption is used as propulsion, but if you will create systemic growth or a step in the ladder onto better things, then it’s okay. But when the corruption becomes stultifying it stops the system from feeling any possibility of promise or future prospect. When we finish this podcast, I’m going to send it to her, because I want to see what she thinks would be the recipe for India in light of your book. I’ll get her a copy of your book-

Ajay Chhibber:

Thank you.

Rob Johnson:

… because it’s a fascinating set of challenges that you’re, how do I say, you’re building this mosaic of many different dimensions that need to transform at least closely in time, not necessarily simultaneously.

Ajay Chhibber:

Corruption I call it not the second oldest profession in the world, I call it the oldest profession in the world. So we’re not going to ever eliminate it altogether, but we need to get it to a level where it doesn’t become, as you said, stultifying, so how do we do that, and we argue that one is massive deregulation. We used to have when we didn’t have the mobile telephony, it was so difficult to get a telephone in India and then people would pay enormous bribes to get it, but now with the mobile telephone we don’t need to get the landline so nobody pays a bribe there. Similarly, for many other things when you had these monopolies, but more competition, more transparency, more deregulation I think is the way forward to reduce corruption. When people will have other opportunities to get the service then by itself the corruption will come down and also more IT, a lot of the services are now done through the internet, so I think that makes a huge difference also to the level of corruption.

We do have very high political corruption in India, we have electoral bonds which are completely non transparent, you’re not required to even reveal… so they’ve set up this electoral bonds and anybody can buy them, but you don’t have to reveal who you are. So a company can buy BJP related electoral bonds or Congress party related bonds and never have to reveal who they are, except of course they inform the party concerned that they’re buying their bonds and that a quid pro quo would be required. So suddenly all that corruption that was so visible has now become invisible to some extent, so you get the feeling that India is less corrupt, but it’s just become more corporatized and regularized in some way, and in that sense I guess there’s progress because it’s going more the American way than before.

Rob Johnson:

I think in the United States, as I was listening to you just now, I can see all of these dilemmas because there are what you might call platforms with increasing returns that look like a monopoly, and then there’s what you might call restrain of trade, which is increasing profit margins in reducing the dissemination of things that enhance our wellbeing. How we construct antitrust in the age of internet and technology platforms with those increasing returns characteristics is a very important challenge. And then how if we allow those monopolies, for society not to be what you might call subject to the whims of just a handful of people, when it’s meant to be a democracy is another challenge.

Ajay Chhibber:

Yes. In our book we point out that we are probably headed towards a Latin American style or a plutocracy of some sort rather than a real democracy because the number of people now, who control a very large part of the economy is growing fewer and fewer, and are all well connected with the political party in power and have very vast ambitions. We are going towards the gilded age that America got out of eventually, but we are headed in that direction and very rapidly as the Piketty book shows the increase in inequality has been the fastest in India. James Crabtree, I don’t know if you know him, he-

Rob Johnson:

I know his friends.

Ajay Chhibber:

… used to be the Financial Times correspondent in India, he wrote a whole book called The Billionaire Raj.

Rob Johnson:

Yes, I have actually have it.

Ajay Chhibber:

Yeah, there you go, so he saw it coming.

Rob Johnson:

The other person who is resonating with these thoughts is a man who encouraged me to watch for your forthcoming book Kishore Mahbubani, he’s I believe originally from India but is in Singapore, he has a new book called The Asian 21st Century.

Ajay Chhibber:

Yes, I read it.

Rob Johnson:

And he talks about how the American leadership wants us to emulate them as the head of a world system, but with all of the problems that are occurring in the United States with concentration and what he says rule… I think he wrote an article with this title in the Straits Times, for the 1%, by the 1%, of the 1%, as the democracy that everyone’s supposed to emulate in the U.S. China standoff. So he’s concerned about the evolution of the structure of the United States, and an Asian model which is less focused on individual liberty, I’m talking about philosophically, the Daoist and Indian traditions and more aware of the common good. He’s almost presenting in his previous book I think called Will China Win and in conversations I’ve had with him, that we are at a place where the tectonic plates of two different philosophical systems are in tension, but it’s hard to see how given the performance of America that people are going to emulate that system given the stage that it’s in.

Ajay Chhibber:

So I don’t know Kishore at all actually. So what happened was that I read a talk he gave recently in India on why India can beat China, and it was one of the former president lecture, memorial lecture that he gave in India last year, when I read that, I really liked it and I quote him in the book. But then I sent him the book and said, “I really enjoyed your lecture, and by the way I put you in my book but here’s my book, let me know what you think.” And he said, “Oh, I love your book.” He read it after two weeks, he said, “I love the book.” And I said, “Will you endorse it?” And he said, “Yes, I’ll endorse it.” So he’s endorsed the book. Where I differ with Kishore is on China, and the part that I differ with him is that he thinks China and India will get together, and I told him that what China wants is not an Asian century, China wants a Chinese century, they don’t want India playing any part in it.

And the joke I tell him is that in the Forbidden City, the question that people should be asking is who lost India? And the answer is, it was not who it was Xi. Because there was no reason for us to have a problem with China, except China has become so belligerent and our former Prime Minister Rajiv Gandhi met Deng Xiaoping and we had a war with them in ‘62, so we had strained relations. And they both agreed that from now on China and India will focus on economic development and not on the disputes with each other.

So that stood for about 30 years until Xi Jinping has come to power, and Xi Jinping is the belligerent one in this, because Modi has tried very hard to… he’s had seven or eight what do you call these peace summits with him, and somehow in the end still we’ve ended up with a problem. And it’s not just with India, it’s in the South China seats and with Australia, it’s with everybody, so I told Kishore that this is not… Yeah

Rob Johnson:

And with the Belt and Road Initiative and in Africa, there’s a sense… Some of my friends in India have often as they visited me in the last two or three years, expressed a lot of concern about feeling a bit surrounded. And surrounded isn’t just large, it’s about feeling threatened as well, the belligerence has got to be a part of that mix for it to be frightening, so I concur with what you’re saying.

Ajay Chhibber:

But I like Kishore otherwise.

Rob Johnson:

Yeah. Well, I just pulled up his endorsement, I’m going to share with the audience, he said, “Can India have the largest economy in the world? Yes, it can, yet success is never easy. But Ajay Chhibber and Salman Soz have done India a huge service by documenting comprehensively, the reforms, both painful and painless that India should undertake. India should set aside its partisan divide heed their wise advice. India should not rely only on its 2.7 trillion market, when a global market of $80 trillion beckons. If overseas Indians can compete successfully in global markets, so can India. And if India bravely jumps into the global market, India’s economy will explode and seize the moment.” That’s pretty enthusiastic, I’d say you’ve got A plus out of that one.

Ajay Chhibber:

But I must tell you that I’m a great admirer of Singapore. And in the book I provide a little anecdote of when Mrs. Indira Gandhi visited Singapore at the invitation of Lee Kuan Yew. And after she’d been shown around the city, this is in the ’70s, and the pesky Indian journalist asks her, “Madam aren’t you impressed with what you had seen.” And she in her very haughty arrogant manner says, “Oh, but it’s just a city, I can build 20 of these anytime.” And the journalist says, “Madam, why don’t you? It will totally transform our country.”

Rob Johnson:

That’s great.

Ajay Chhibber:

So Modi has this idea of building 20 cities along the coastline and they’re starting with two big projects now, one on the West Coast, one on the East Coast, so they’re picking up these ideas of Portland development, which is… But then at the same time, they’re reversing the reforms that were done by Dr. Manmohan Singh, which is the trade reform, and that’s the part I wanted to come to that this bit about returning to protectionism and not joining RCEP, not joining trade agreements, this reversal, what they call aatmanirbharata or self-reliance, is beginning to sound more like the import substitution which led us to the old Hindu growth rate.

And unless India gets out of this mindset they think that we have a very large domestic market. And I tell them that the second largest economy in the world is China, the third largest economy in the world is Japan, the fourth largest economy in the world is Germany, you’re fifth or sixth. The number two, number three, and number four are the most aggressive exporters in the world. So why do they not think they have a large enough market? There’s a $100 trillion dollar market out there in the world, why is your two, three, $3 trillion market, big enough? It’s not.

Rob Johnson:

And the Scandinavians while they aren’t on scale, the quality of life per capita is so high and they have that same strategy that you put forward too.

Ajay Chhibber:

Exactly. It’s like why do you guys focus on your domestic market and think it’s a large market, it’s not. And Swami Vivekananda, when he came in 1850, when he came to Chicago at the World Forum of Religions, they asked him about India and its place in the world, and he said, “Look, we enter the world like a gymnasium to make ourselves strong.” And the other example I give in the book is the cricket team of India. We learned cricket from the British and for a long time an Indian team could never win outside of India, it only won on Indian wickets, nasty wickets, but India’s cricket team did not retreat into protectionism, it kept going out and trying to… and now we are the world’s best. We can beat anybody, including England, anytime. So I said, “Learn from your own cricket team, why do you think you can… you will be world beaters in almost anything.” And that’s what Kishore is saying, “Look at the Indians who go out, they become the best everywhere so why won’t you, if you opened yourself up.” And that’s why I like his article very much.

Rob Johnson:

I’m laughing because I’m hearing a story that just echoed with my past. There was a year when I sailed in the remote islands called the Lau Group of Fiji. And one day I was sitting with some people after a church service, had a beautiful choir, and they started talking about Indian cricket and how the Fijians had to get away from playing their local games on these remote islands and travel the world, so their cricket team I think they called them in the group where the team is seven they called them, “In the Sevens, if we learn someday we will be the champion.”

And about six years later, I got up host card from a guy that was at that table and he said, “I looked up your boat and I found you through these people in Rhode Island,” and he said, “we just won the Sevens.” I think what you might my call your prescription for vitality, people use what you might call infant industry protection as a temporary way to get off the launching pad, but at some point you got to face the challenge or you’re not going to evolve and grow and be at the cutting edge and I think you’re right, you got to take that challenge.

Ajay Chhibber:

I’ll tell you one quick to on this, when I was in FCCI the Federation of Chambers of Commerce and Industry, I won’t name the person to you, but when I kept telling them, “Look why you guys want protection? If we could move the exchange rate 5%, that would give you more protection than tariffs and it would also encourage exports and discourage imports by itself.” The guy looks at me and after a little while he smiles and he’s says, “Ajay, I cannot control the exchange rate, but I can get a tariff put for my product quite easily.”

Rob Johnson:

Yeah. Yes.

Ajay Chhibber:

So there’s a whole powerful lobby of people who want these things and we have to find a way, we thought we’d gotten out of it, but now it’s come back and that’s a very dangerous thing for this country. There is no country in the world that has grown at 7% on a sustained basis unless it has had a major push on the export side.

Rob Johnson:

Yeah. It probably had major push on the export side and growth in population are both necessary conditions.

Ajay Chhibber:

Yeah. That’s how you absorb a lot of the labor.

Rob Johnson:

I know people will call me if we don’t explore the role of India in climate change. And I know that’s a part of your book because I went through that in preparation, but let’s talk a little bit about coal, transformation, scale, poverty, health systems, what are the highest and best uses of budgets and what role should the world play? I’m going to breathe the air and oxygen if you succeed. In other words, I don’t think India should be alone in investing in India’s climate transformation, energy system transformation, because you’re contributing to the global public good, after the global north has burned most of the carbon that’s put us in this CO2 problem. So what’s the domestic policy and what’s the international support that you envision is both just and vital for India’s future?

Ajay Chhibber:

So Rob five years ago if you had asked me I would’ve been very despondent on India’s position, but today and in the book we show and now of course Modi went to Glasgow and also made this announcement of 2070, and India is now leading the Solar Alliance also. The mood has changed in the country. The old mood was, “We didn’t create the problem. Why do we have to solve it? We are still very poor. We need all this development,” which is true. But now India has realized that it is… So I used to argue when I was in the UN to the Indian authorities, that it’s like cutting your own nose to spite your own face because after all you’re going to be the biggest losers as well.

We, India is going to be a big loser if climate change goes beyond whatever one and a half percent, because we have melting glaciers and I produced a whole movie on this, on the Himalayas and it was very popular, showed it to thousands and thousands of schools all over the world. And then we have several of our cities will go under water, we have typhoon… we call them cyclones in South Asia, what are call hurricanes in the Atlantic and Pacific, they call them typhoons in Japan and we call them cyclones, so all that. But now the mood has changed in India, there’s no longer this sense that, oh, this is a Western or developed country problem, they are saying, “We are going to be part of the solution.”

Then the question comes how serious, what has to be done, but I think the resistance has gone away. And now it’s a question of what’s the right path, how can we raise the money as you said, most people in India are very skeptical that the rest of the world is actually seriously going to provide much resources, because they say there’s a lot of talk and we don’t see the kind of money. But I do think that the discussion has changed and in our book we say that, in fact, India should focus on green growth for job creation also, but now I feel we are pushing on an open door in India and that this is the direction India will go.

I thought coal would still be 70, 80% of our energy mix by 2050, but I don’t think that’s true anymore, I think it’ll be much less. And as we argue in our book, we say keep the damn thing the in the ground until you find a way to… that when you use it you can cap it, capture the carbon and reuse it. But right now I said that technology is too expensive, so we are best to leave it to the ground and put a huge push towards renewables, which is what I think they are doing, they doing that in spades now. So I’m very positive that India will not be like China, which will have such large grounded thermal coal, China is now the third largest emitter in the world, and they’re not going to be able to do anything about it because they have such a large amount of installed capacity already and we don’t.

So we can make choices and as we argue in our book, let’s not follow the Chinese model, the pollute now and clean up later model, that’s a nasty, expensive model and we can leapfrog now just as we’ve done in many other areas, so that’s where I think India will go. And I don’t see any kind of resistance to it anywhere because we don’t have large grounded assets, 80% of our power capacity is still to be built, so we have choices we can make now.

Rob Johnson:

Now this is a big factor in the United States, which is I’ll use my place of origin Detroit. People watched the transformation away from auto industry, globalization, automation, what have you, and they watched Detroit and Cleveland’s people get crushed. So now people in West Virginia is saying, “Oh, it’s great climate change, wonderful for the world. How you going to take care of us? You’re not going to do to us what you did-” In other words, there’s resistance to change, if there is an adjustment assistance. The old adage in free trade theory, we can make everybody better off and nobody worse off, requires transformational compensation and adjustments and education subsidies and all kinds of things, you got to do the whole thing. In India, you do have an advantage that you don’t have a whole lot of a sector that’s going to get buried because like you said 80% is new, and it’s maybe the opportunity cost for the other sectors that they didn’t get to grow into it, but you’re not knocking down something was already built and so the resistance should be less, that’s an interesting insight.

Ajay Chhibber:

We are hoping that it would be less. And also you see, we are realizing that a lot of the pollution is not just what you are emitting to the world, but now so many of our cities have very bad air, very bad water, and so it’s in our backyard and we have to clean up the whole thing anyway, not just for the rest of the world, but for ourselves as well. So we have a whole chapter on this, we show this in a very systematic way and in a positive way going forward. But I have a feeling we are pushing on an open door on this, and the big industrialists in India are all going into renewables in a big way. The Ambanis and the Adanis of the world, their projected investments in renewable is huge. Now what we have to do is right now we are still very dependent on China for the manufacturing of many of these whatever is required for-

Rob Johnson:

Solar panels, wind turbines-

Ajay Chhibber:

… solar panels and things like that-

Rob Johnson:

… and all those kinds of…

Ajay Chhibber:

… and we have to move in that direction, so they have this PLI scheme, the Production Linked Incentive Scheme to push in that direction. Because I think now the feeling is that we cannot be reliant on China for a lot of our production.

Rob Johnson:

Well, how would I say, one hopes that the feeling that climate change is for the common good involves what you might call despite what other disputes, a collaboration on that front is we all lose if we don’t collaborate, so I think it’s treacherous, it’s frightening a bit, but I think that is the end game logic.

Ajay Chhibber:

Yes. And for us you see, there’s that movie I produced when I was at the UN on the Himalayas, so you have the North Pole and the South Pole, but the third biggest concentration of ice in the globe is the Himalayan ice belt. And that has huge implications for… I’m not a science guy but I’ve read little bit about out it, but on the monsoons, it has effects on climate that can be produced.. go at tripping points that can create irreversible situations, that can be very damaging. So for a lot of reasons, India must play a very positive role. But the interesting thing is and we had a presentation the other day, there’s a lot of this fad about net zero, net zero, net zero.

But as a lot of these people are pointing out the path to net zero is very important too, because it’s the accumulated emissions, not just getting to… So you could get to 2050 say in the Western world or China says 2060, but if China doesn’t do anything until 2040 or 2050 and then starts to… it would have eaten up the entire CO2 balance that’s left out there for us to get to. So people have become too over enamored with these net zero targets and the glide path is very important also to get to that. But I’m hopeful that India will be a positive force in the world on this issue going forward, not a recalcitrant player.

Rob Johnson:

Are there other dimensions that you’d like to explore?

Ajay Chhibber:

No, I’m good.

Rob Johnson:

Technology, governance, inclusion?

Ajay Chhibber:

There’s all those of course, technology is a huge-

Rob Johnson:

I’m tempted to say, we shouldn’t talk about quite everything so people have an incentive to get the book.

Ajay Chhibber:

Exactly.

Rob Johnson:

Because I found it both in listening to you at your speech in Washington and in talking you tonight and in reading the book, one of the most encouraging explorations. And I really want to pay tribute to you because it’s not just optimism, it’s thoughtful optimism, given your experience, your intellect, the depth of your research, it’s credible optimism. And I think this book is an extraordinary contribution, not only to the path forward in India, but to the path forward for intellectuals to make a contribution to the calming of nerves and our future wellbeing, it’s a really, really extraordinary piece of work.

Ajay Chhibber:

Thank you. I really appreciate and very much appreciate the opportunity you’ve given us to talk about our book with your audience.

Rob Johnson:

Well, the pleasure is mine, for sure, or ours there’s a a community of listeners.

Ajay Chhibber:

Thank you so much.

Rob Johnson:

I look forward to perhaps in the coming months, creating a panel, perhaps with the woman about the Gilded Age in China and somebody from African continents and we can talk about these issues, where the analogies between what you’re doing in India… I know lots of people, Michael Spence, who I worked very closely with is very interested, he’s by the way been rereading W. Arthur Lewis recently, who you cited earlier in the presentation, he had gone to Princeton where W. Arthur Lewis was a professor. But I see people thinking about what’s happening in other places, learning lessons from India, and perhaps India looks over its shoulder at what other people are doing well, and to invigorate that conversation with you very clearly at the head table is something I’d like to do as INET in the future.

Ajay Chhibber:

No, absolutely. We have to learn from each other and that’s what we try to point out in the book, that you can’t say India is sui generis, India culture is different, history is different, whatever. But people are people they react to the same incentives everywhere, of course this is embedded in the Indian system whatever change you will make, but you can’t say that I can’t learn from anybody else. The ideas are transportable, the actual implementation may change from one context to another, but the idea say cash… just to give you an example, quick one, cash transfer programs, for many years, I was pushing for those.

No, no, nobody can do this in India. And now for every scheme they call it Direct Benefit Transfer, DBT the terminology they use in India, but it’s headed in every direction and many state governments are taking it on as well. So this kind of thinking across fertilization approaches, how do you approach a problem, easily transportable, actual implementation on the ground must be localized I think. But glad to do that anytime Robin, pleasure to see you again and I’m so glad we were able to have this conversation, and I learned from you and so much as well today. Thank you so much.

Rob Johnson:

Well, I want to close with one final thought in Northern California, near Sausalito in an area called Tiburon, there was a famous psychologist named Gerald Jampolsky, and he was very inspired by The Course on Miracles, which was a book that was created. And he wrote a book in response to that, a distillation, and it’s not really just about romance, it’s about something deeper and the name of the book was Love is Letting Go of Fear. And what I see is when people are learning from each other, but things break down, they get polarized, people can see failure on the horizon, the fear stops us all from moving forward.

And when you lead by example, and people can learn from you and you learn from them and you construct together what you might call a credible, but optimistic vision, what you see is that the fear dissipates, that there’s more than just the logic going on, there’s heart as well as head. And when you contribute with that constructive vision like your book does, you’re contributing to all of our ability to help you or work in step with you all around the world. So thank you for what you’ve created as an example and as they say, if it’s a pendulum between love and fear let’s get rid of some of the fear and get on with the business.

Ajay Chhibber:

Exactly.

Rob Johnson:

Thanks for joining me.

Ajay Chhibber:

Thank you so much.

Rob Johnson:

We’ll meet again for another chapter before too long and hopefully a panel in between now and then. And check out more from the Institute for New Economic Thinking at ineteconomics.org. (singing).