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The Smart Techie was renamed Siliconindia India Edition starting Feb 2012 to continue the nearly two decade track record of excellence of our US edition.

March - 2006 - issue > In My View

India: The Past in its Future

Raghuram Rajan
Wednesday, March 1, 2006
Raghuram Rajan
Starting around 1980, the Indian economy became a veritable dynamo, posting an average growth of nearly 6 percent per year over the last twenty-five years. Despite the inevitable unfavorable comparisons with China, very few countries have grown so fast for such a prolonged period of time, or reduced poverty so sharply. We should indeed be proud of what India has achieved, and clearly, many of us are. There is a buzz today in India, a sense of limitless optimism. But is it justified?

To answer this question, let us start by asking how we got here. The best description of India’s path is really “constrained adaptation”. “Constrained” because of the numerous policies and regulations inflicted on us by an untrusting government and “adaptation” because Indians are by nature entrepreneurial. As a result, the law of unintended consequences was at work big time—what the policies produced was very different from what was intended.

What are the lessons we can draw from our past? First, our past policies, no matter how distorted, gave us a set of capabilities—in skilled manufacturing and in services. Our comparative advantage now lies in these areas. We should not sacrifice all this in a blind attempt to follow the Chinese path of unskilled, labor intensive manufacturing. No doubt, we need to improve the incentives for the creation of unskilled jobs—not just by getting rid of the archaic job protections of the past, even while building a genuine safety net for all workers but also by improving infrastructure, especially in laggard states and rural areas so these areas connect better to the larger economy. But we also need to create a greater supply of skilled workers by energizing higher education. We need 50 IITs, not 7. The government need not do this—it has, however, to clear the way for private enterprise to flourish.

Second, we should realize the government cannot simply legislate outcomes. People react to government policy, so what is intended and what materializes can be very different. Government has to focus on getting the incentives right, and thereby enlist the energy of the people in support of change, rather than force them to use their energy to outwit the government.

This mindset that believes in the extraordinary powers of the government is not entirely a relic of the past. If we suffer from a shortage of university teachers, it is better to examine why no one wants to teach—could the fact that teachers in top management schools earn less than fresh graduates be a factor—than to resort to the old command economy tactic of banning schools from expanding abroad.


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