THE INDIAN GROWTH STORY
In India, the savings and investments rate remains very high. In 2010, gross domestic capital formation and savings as a percentage of GDP at current market price were 36.5 and 33.7 percent. But this was not always like this in the past. In 1960, India´s gross domestic savings rate and gross domestic capital formation were only 11.2 and 14 percent of GDP. It started to increase after the process of liberalization started in the early part of 1990´s. By 2000-2001, the savings and the capital formation rate had reached 23.7 and 24.3 percent. This upward trend continued and reached its peak in 2007-2008 when the figures stood at 36.9 and 38.4 percent respectively. As of 2009-2010, both rates are slightly lower but still remarkable.
How can we explain this impressive change in the savings and investments behavior of the people? Of course, there are many explanations ranging all the way from culture to sociology and religion. In fact, it is quite possible that if India can maintain the growth momentum for the next 10 years, the Bhagawad Gita and the karma yoga doctrine will be studied by management gurus around the world as the real reason for the expansion of entrepreneurship in the sub-continent. History shows that it is normally the culture of the economically successful nations that gets attention and appreciation.
From a historical perspective, however, it is not necessary that the availability of surplus leads to an increase in the productive capability of a nation. In ancient times, the Egyptians used their surplus over consumption not for creating productive assets but for making sure that the Pharoahs live well after death. And so we had fabulous monuments in the form of Pyramids that are providing returns at present, (rather late, I suppose) in the form of income from tourism. Apart from religious and similar other monuments that often project the ego of the rulers, the ruling elite in the past indulged in luxury consumption as a way of enjoying the surplus extracted from the working population. Nepal during the Rana rule was no exception to this historical trend.
The fact remains that the political elite in Nepal has so far failed to look after the economic interest of the people. Our development narrative based as it is on a foreign aid dependent mentality is losing its emotional links with the people.
The logic that economic growth and the well-being of the people must receive the attention of the state is a relatively new concept. The gradual transition of feudalism to mercantilism and capitalism in the Western world reflected a new interaction among three main elements , namely (a) changing view of the relationship between the state and the people (b) rapid advances in technology, transport and trade and (c) the opportunity of wealth creation outside land based on (a) and (b). The complex fusion of all these three elements created the basis for increases in savings, financial intermediation and investments to generate new wealth and income. The important point is that in a society that puts economic growth as one of its most important objectives, savings will increase if there is an incentive to invest for higher income in the future.
In most developing countries in the 20th century, the logic was that it is the state that has to play a major role in resource mobilization and its use so as to control the "commanding heights" of the economy both for rapid economic growth as well as a distribution system that is viewed by the people as just and fair. The model found its fullest expression in India but it was virtually discarded in the early 1990´s because it failed to achieve the desired results. The growth rate of the Indian economy could not attain a breakthrough against the famous "Hindu rate of growth" or 4 percent. It led to a rapid expansion of a rent seeking bureaucratic cum political class for whom rhetoric rather than results became the norm. Similarly, population below the poverty line was as high as 55 percent even after almost 25 years of planned development under the overpowering leadership of the state.
Since 1991, Indian economic policies have undergone a sea change, bordering on a paradigm shift. However, the role of the government remains important as ever. The traditional focus of the government in investments in infrastructure and the social sector has remained more or less as in the past. The new focus is on policies to promote debureaucratization, transparency, competition and a whole new structure of incentives that encourage the people to increase both savings and investments. The results are dramatic. In 1960, the investment as a percentage of GDP was below 15 percent; in 2010 it was 33.7 percent.
The percent of people living below the poverty line had come down to 22 percent by 2004/05. Even more dramatic is the changing role of the government and the private sector. In 1980/81, public sector investment was around 8 percent and the private sector accounted for about 12 percent. However, in 2007/2008, total gross investment was 36.3 percent with the share of the public and the private sector at 7.4 and 26.3 percent respectively. Thirty years ago, the government considered itself as the main driver of economic growth; now it is the private sector that is in the driver’s seat, with the government trying to influence through policies the direction of the economy and the structure of investments so that growth is rapid as well as inclusive.
The Chinese experience is also in the same direction. After the Deng takeover of economic policy planning based on the famous concept that the color of the cat is irrelevant as long as it catches mice, investments rose rapidly along with a new focus on private initiative. For example, in 1990, Chinese investment and savings as percent of GDP was 23 and 24 percent respectively; it continued to rise rapidly over the years As of 2009, gross domestic savings and investments are an astounding 51.2 and 47.7 percent of GDP.
The Indian experience points out that even the poorest countries in the world can increase their savings and investments if the government can come up with an incentive structure that rewards risk taking and the possibility of future growth in wealth and income. It is remarkable that profit after taxes in India recorded a growth of 47 percent per annum in the four-year period ending in 2006/07. Naturally, a rise in profit of this magnitude reduces the interest burden of business enterprises and makes funds available for further investments.
THE FAILURE OF POLITICS
There is no one specific path or one unique fit for all solution to economic growth applicable to all nations as shown by the case of both China and India. However, the essential point is that unless the governance system assures security of savings and promotes an incentive structure that projects the possibility of attractive returns, current consumption will remain high. Perhaps, this explains why most of remittances income in Nepal is spent on consumption giving the impression that Nepalis are naturally inclined to a low level of savings. But before we come to this conclusion, we must also ask if our political and economic policy makers are serious about designing a policy framework that reduces political risk and transaction cost of doing business while promoting competition, transparency and entrepreneurship in the nation.
So far the record is poor. Our attachment to radical political rhetoric remains strong as ever but when it comes to actual policy making in the economic arena, political parties have proved to be nothing more than rent seekers that do not care even if it destroys initiative and entrepreneurship in the nation. The recent decision of Surya Nepal, probably the most important garment exporter in the nation, to close down its factory because of harassment encouraged by the political parties is a case in point. What is distressing is the fact that the government shows no concern even when thousands of jobs are being lost. Naturally, in this kind of an uncertain atmosphere, investors even when they see potential opportunities for profit shy away and think of exporting their capital to other regions where the political risks are lower.
In the meantime, we remain smug and satisfied with the data on poverty reduction reflecting not growth in productivity but a massive export of unskilled labor to the Middle East in foreign employment hoping that it can go on forever while we continue in our petty games of "political consensus" and "rotating power sharing models". The fact remains that the political elite in Nepal has so far failed to look after the economic interest of the people. Our development narrative based as it is on a foreign aid dependent mentality is losing its emotional links with the people. Naturally, it has failed to enthuse the masses and is proving to be a hindrance in promoting a climate of self-confidence, innovation, risk taking and entrepreneurship in the nation. No wonder we save so little!
The writer is the co-chairman of the National Janasakti Party
prakash_dr@hotmail.com
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