Arvind Subramanian, former Chief Economic Advisor, and Devesh Kapur, Professor of South Asian Studies at Johns Hopkins University, on centralisation, the UBI concept and higher education in India. This session was moderated by Harish Damodaran, National Rural Affairs and Agriculture Editor, The Indian ExpressHarish Damodaran: The central thesis of your book is that India has avoided extreme instability. Our economy has hardly suffered serious bouts of hyperinflation, hyper-devaluation. In politics, too, we have had near uninterrupted democracy. But while achieving macro stability, you also talk about the endemic structural micro instabilities and co-morbidities that have plagued India.DEVESH Kapur: Yes, the interesting thing about India is how much it has avoided mass violence. India has been a complete outlier, whereas in most other countries nation-building was accompanied by mass violence. In the US, two per cent of the population was killed during the Civil War (1861-65). In China, 40-50 million people were killed in the ’50s and ’60s. In Vietnam, eight per cent of the population was killed (during the War).India very uniquely chose democracy and universal adult franchise as a key instrument of nation-building. That was an important factor why it avoided mass violence. We also chose very carefully not to go down the path of one language and one religion. We severely underestimate how difficult it is to build a nation that is so diverse. Look at what happened to the Soviet Union, Yugoslavia, Sudan and Nigeria or the political disorder in our neighbourhood, from Sri Lanka to Pakistan and Bangladesh. We have shown that India had student violence and labour protests that rose and peaked in the ’80s. But these, like riots and insurgency-related fatalities, followed an inverted U-curve, gradually declining in the subsequent decades. This happened as labour power weakened and more students started going to private colleges, where no one can or wants to protest because you pay high fees.ARVIND Subramanian: We had peak inflation of 30 per cent in 1974. I’ve always believed that being a central bank governor in India is relatively easy because high inflation affects the poor and no ruling party can afford that. Indian democracy itself had a strong preference for low inflation, which only kind of got codified (with the RBI’s inflation targeting). Thus, democracy has also had a role in avoiding economic disorder.Harish Damodaran: Another theme of your book is precociousness — how India has moved from agriculture to services, bypassing manufacturing, which you call precocious servicification. Also, doing more and even exporting high-skilled rather than low-skilled activities.Subramanian: There are several dimensions to precociousness. First is the political side — democracy before development. But there’s also an economic dimension. The East Asian countries and China first went for rapid agricultural productivity, which created demand for products requiring low-skilled manufacturing that took off and also became export-oriented. From there, they graduated to high-skilled manufacturing and then to high-skilled services.Story continues below this ad Arvind Subramanian, former Chief Economic Advisor to the Government of India.In 1978, China and India were very similar — a lot of people in agriculture and a lot of heavy industry. It’s when the agricultural boom happened that China transformed into a manufacturing economy. Why did we skip this transition to formal manufacturing? Between 1950 and 1980, we crushed the private sector, created an inefficient public sector and promoted an inefficient small-scale sector. The real puzzle is that after 1990, when licensing, small-scale reservation and other constraints were gradually eliminated, why didn’t formal manufacturing take off? We got growth but didn’t get the structural transformation. To give an idea, China and India account for 20-22 per cent each of the global labour force. But China has a 40-50 per cent share of the global exports of apparel, footwear and other such unskilled labour-intensive manufacturing goods, whereas India has just three-four per cent. If we had done something close to what our labour endowment was, think of how much more manufacturing, employment and female employment we would have got. On the other hand, we have exported high-skilled talent via immigrants, who have done very well.On building infrastructure | In the last 75 years, India added a billion people. In the next 75 years, India will add zero. The number of school-going age children peaked by 2015… It offers an opportunity to shift away from quantity to qualityPrecociousness is too much agriculture, too little manufacturing and prematurely too much IT services. Why did this happen, especially after liberalisation? One reason is we didn’t have the agricultural productivity growth that could generate the demand for low-skilled manufacturing. The second is the panoply of government regulations, resulting in what we call midgets making widgets. A Foxconn factory in China, for instance, employs 1-1.2 lakh workers. You need that scale to be competitive in exports. We don’t have that scale or high employment. Third, many young Indians spend over six years on writing exams for joining government service. That is a waste of not just their labour but also labour that’s not available for low-skill manufacturing. It’s a kind of Dutch disease that the government has exerted on manufacturing. Along with high-skilled services, it is a double-Dutch disease that is also an explanation for the precociousness.Sukalp Sharma: Is the nature of our polity holding us back? How do you view the debate around one nation, one election?Kapur: Democracy is such a capacious term. For many, it is just elections. But democracy is also a frame of mind, about tolerance, accommodation and all of those things. One of the most self-evident weaknesses is that you cannot have elections now without money. Interestingly, the more competitive your democracy is, which we think is healthy, the more the demand for money. Even panchayat elections are not cheap.Story continues below this adSecond, there are more frequent elections. The average electoral cycle from 1950 to 1967 was about five years. Now, with the national, state, panchayat and municipal elections, it is 1.2 years. It further increases the demand for money and scope for corruption. I’m not saying that elections are the only reason for corruption, but it is an important factor. Third, as time horizons become smaller, the incentives to focus on what is visible and can be done in short time periods increase. These include instantaneous cash transfers and even communal violence, which we know is a tool for polarising the electorate.On cultural nationalism | What we forget about this government is that their cultural nationalism and political nationalism came with economic nationalism. This was part of their core ideology, which manifested after 2017-18The way our democracy has evolved, there are some structural infirmities. You have to strike a balance. Having national and state elections simultaneously may result in the same party coming to power and has its risks. The same applies to state and local elections. However, the correlation between national and local elections is much weaker. So, why not have national and local elections concurrently and state elections separately? Those are the sort of compromises a healthy democracy must make. Devesh Kapur, Professor of South Asian Studies at Johns Hopkins University.Subramanian: Let me give you two examples in the economic sphere, where democracy did take a toll. One reason why agricultural productivity did well in East Asia was because they undertook serious land reforms. In India, we tried to be a little anti-zamindari but basically it ran up against the vested interests of the Congress party. If we had more equal land holdings, it could have also been easier to break down feudal power structures.The second big cost is what we term the ‘Kamadhenu fiscal state’. After the ’90s, India was among the sixth or seventh fastest growing countries of the world. Growth means you get more taxes and generally more stability. But in that period, India had the highest fiscal deficit among all the major comparator countries. It is true that after 1991 we haven’t had macro crises, but we’ve been in a very vulnerable fiscal state and we’ve paid a price for that in terms of interest expenditure rising and crowding out all development and even defence expenditures. Why did we become vulnerable? The argument we have is that precocious democracy means that every manner of vested interests has a claim on the government — ‘give me this, give me that’. If you look at the tax system, the rich farmers and property-owners are left out. Similarly, on the expenditure side, look at the amount of subsidies given by all levels of government. We call this the ‘Kamadhenu fiscal state’ that is indiscriminately accommodating vested interests.Story continues below this adP Vaidyanathan Iyer: Could this government, given its huge strength in Parliament for the last three terms, have used its political clout better? Also, how has its so-called cultural project impacted the economy and other areas of governance?Kapur: One of the boldest steps the government took in its first term, unfortunately one of the most misguided ones as well, was demonetisation. They thought they had good intentions, but had not thought through enough about its massive disruptions. That, and the failed farm laws, led to risk aversion. Furthermore, if you have a weak Opposition, complacency sets in more.One of the areas where we see fiscal weakness of the Indian states manifest, especially when you compare it to China, is just how little we spend on R&D. Any large country that does not invest in human capital, innovation and R&D is going to face challenges. The way to develop that human capital is through higher education. To be fair, the failures in higher education go back to Independence. But then see what the CPM did to universities in West Bengal. Around the world, there are Bengali academics. The best ones are everywhere, except in Bengal.With regards to the cultural project, the risk that India faces is from packing public universities with people who are vetted for ideology, not academic competence. As a friend said, first-rate people hire first-rate people, second-rate people hire third-rate people. Once you get mediocrity entrenched in higher education, it’s very hard to turn it around. In the last 25 years, we created four new colleges a day. But higher education is about software, not only hardware. Without good faculty, what is the education that we are giving?Story continues below this adIt’s always easy to blame the Indian state for a wide variety of pathologies. But many of these are pathologies of the Indian society, whether it is gender, caste or religious bigotry. Why do young people spend years in college doing completely useless degrees, where they’re not going to be skilled? It’s about status. We are a very status hierarchical society. These pathologies also feed into some of these challenges.Subramanian: In the first term, the Modi government enacted the GST, bankruptcy code, inflation targeting regime, and embarked on new welfarism, which included providing clean cooking fuel, toilets and bank accounts for free, which no otherprime minister did. Two things are important to understand why subsequent reform didn’t happen. One is the cultural agenda, which displaced everything else. But what we forget about this government is that their cultural nationalism and political nationalism came with economic nationalism. This was part of their core ideology, which manifested after 2017-18, when this government turned completely protectionist. What’s sad about India is that we don’t even learn from our success. The most successful growth episodes have been when we’ve been more open to trade. The second thing is that this government is very good at implementation of projects and programmes. That’s why the new welfarism and public infrastructure also took off. But policy requires rule of law and not to weaponise the state to go after people or favour some groups. This government has not grasped that this is what drives private investment.Siddharth Upasani: Professor Kapur, in a 2020 paper, one of the reasons you had cited for India’s subpar performance is the government becoming more centralised and poor staffing at local government level.Kapur: In China and the US, most government employees are at the federal or local level. India is the exact opposite. Most government employees are at the state level. Whenever we think of centralisation, it’s always Delhi versus the states. There is much more extreme centralisation betweenStory continues below this adTier-II and Tier-III. Remember, most states in India are larger than most countries and there is incredible centralisation within states. But they don’t want to talk about that. Everyone wants to talk about centralisation at a level above, not below, them. The 74th Amendment has been basically sabotaged by all states for a very simple reason — money is to be made in urban India, even though the votes are in rural India, I will not let go of control in the cities and all the money that is to be made to win elections.Siddharth Upasani: Dr Subramanian, you introduced the UBI (Universal Basic Income) concept in your 2016-17 Economic Survey. How do you look at cash transfers today?Subramanian: Everyone must have a basic income. There are many burdens that come with poverty and, as Amartya Sen said, ‘You can realise your capability if you’re free of these burdens’. But in the survey, we also identified all the subsidies to the rich and middle class, which we said should be replaced when you implement UBI. Here, UBI has come on top of the subsidies. Maybe there’s a bit of naivete in not recognising that withdrawing entitlements are going to be difficult and it (UBI) is going to be additive. Cash transfers are politically very appealing. But it is that very fact of its political appeal that lends itself to abuse, escalation and makes it a subject of competitive populism.Kaushik Das Gupta: You spoke about the lack of meaningful impact higher education has made to the economy. What about deficits at the school level?Story continues below this adKapur: There’s no question that the foundations of education have to begin with primary school. We know from the ASER reports that one battle has been won, which is school enrollment. But they also show weak learning outcomes. Also, economic growth itself has changed society’s attitudes on the demand for education. Even if the government school system is not working, the demand for private education and tuition has grown. We continue to think about education through hardware terms. Yes, school buildings, toilets and facilities matter. But do teachers come to school and what do they do when they come? We are now doing this electoral roll revision (SIR). Who do we use? We draw our teachers out. Teachers should be doing this when children are on vacation, not in the school year. We never prioritise the rights of the child and our public teachers are used for a wide variety (of other tasks). There is a fundamental failure in putting the child at the paramount of our public policy.Soumyarendra Barik: Given India’s young demography and manufacturing having not taken place, where do you see this huge labour going from here?Subramanian: Firstly, just because it happened in other countries, we’ve thought of demographic dividend as an entitlement. It was true in East Asia but it was about converting a potential opportunity into a real dividend, which required a lot of hard work — good economic policy and so on. Unless we do that, it (demographic advantage) will be kind of squandered. Job opportunities are now being created through internal migration and some external migration. The Southern states have grown rapidly. It attracts labour from other parts of India and goes back as remittances. One of our findings is that one-third of India has grown as rapidly as China. What that says is that two-thirds of India, the Hindi heartland, doesn’t have to ask how can we be like China. It only has to say, how can it be like Tamil Nadu. Low-skill manufacturing should be going to Uttar Pradesh and Bihar, which have one-third or a quarter of the wage rates.Kapur: In the last 75 years, India added a billion people. In the next 75 years, it will add zero. The number of school-going age children peaked by 2015. So you don’t need to keep building more schools. It offers an opportunity to shift from quantity to quality.Story continues below this adSubramanian: Just as we should get rid of the obsession with government jobs, we should also not fall into the trap of thinking that IT services and high-skill services are the future of India.Ritika Chopra: How important is it for people in the government to voice their opinion and ask tough questions? Could you have spoken out against demonetisation?Subramanian: There aren’t remotely enough critical voices in India as there should be. But we’re finding this around the world. If you look at the US today, it’s like a medieval court and all these courtiers and sycophants enthralling the leader. If a strong man is willing to ruthlessly wield power with a modicum of democratic and electoral validation, the institutions and the checks and balances can crumble quite easily. Regarding demonetisation, I did consider resignation, but then came to the judgment that what I could do within the government, in terms of GST, banking or Economic Survey, would be more valuable. So, I don’t regret not resigning then.