The capacity of politics to get in the way of economic growth has dominated most of the economic history of most of the world, says John Kay.

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The Indian stock market shrugged off the deepening chaos in neighbouring Pakistan to reach yet new highs. There are many signs of a bubble: in Mumbai business news is stock market news and people who know little of business or markets boast of the gains they have made and those yet to come. Yet bubbles can continue until everyone who might be induced into the market has been: there are still many foreign investors who have not discovered India and a vast population of Indians who have not yet discovered financial speculation.

So the market may have some way to run, but sooner or later such bubbles burst and that will be the moment for questions about the nature and sustainability of Indian economic growth. Has it really moved permanently beyond the disappointing economic record of the four decades that followed independence?

The particularities of Indian development reflect particularities of Indian society. India is a democracy – by a hair’s breadth. Its putative dictator, Indira Gandhi, called a free election in the mistaken belief that she would win it. The aftermath strengthened the endangered democracy. India, which inherited its only national language from its colonial past, is the largest English-speaking country after the US. India has spent more than other poor countries on advanced education relative to elementary education. As a result, there are many well-trained graduates but low levels of general literacy, especially among women. The combination of these factors has important economic implications.

The most common path of economic development, pioneered by the UK and reproduced today in China, draws unskilled labour from agriculture into basic industry. This process raises wages and productivity in agriculture as well as in industry. The new industrial sector creates entrepreneurs who reinvest profits in diversifying their business and in doing so develop the sophistication of their output and their employees’ capabilities. Although serious inequalities and hardships are experienced, the long run results leave almost everyone better off.

India’s recent trajectory looks different. The sectors that receive particular western attention – such as information technology and financial and other business services – do not attract peasants from the land; they make more effective use of India’s graduates. There are spillover effects – because these sectors and the people who work in them need other services – but they are less direct. As industrialisation proceeds, an increasing proportion of the output is for domestic consumption. But there is, or certainly should be, a limit to the capacity of an economy to consume its own business services.

This does not imply that India’s path of development may not work. But it is distinctive and, because necessarily export dependent, may not be as robust to developments in the world economy; and it means that, to a greater extent than in China, development will proceed in the cities and leave the countryside where the mass of the population and the persistence of poverty are found relatively untouched. That divergence has political implications.

The shape of Indian democracy bore the marks of the remarkable men who led the country to independence. The continuation of Indian democracy eventually led to the emergence of politicians more representative – less intellectually distinguished, more populist, more self-interested. If it is possible to be optimistic about the future of Indian democracy, it is hard to be equally optimistic about the quality of leadership that democracy will produce. The choice is between dynasties based on preferment and patronage and parties rooted in communal differences. Corruption is entrenched and magnifying tensions between economic and religious groups is an easy route to power.

It is attractive to believe that economic growth in India is inevitable given the potential of its vibrant society and the achievements of individual Indians. But the magnitude of the relative economic failure of both India and China across the 19th and 20th centuries demonstrates that nothing is inevitable. The capacity of politics to get in the way of economic growth has dominated most of the economic history of most of the world.



John Kay