Transforming India: The Real Problem

TN Ninan, writing in Business Standard, put forth an analysis by Raghuram Rajan on the core issues which are at the heart of India’s challenges:

Delivering the third Business Standard lecture on Thursday night, Raghuram Rajan provided an interesting insight into the reason for high inflation in India. The professor of finance at Chicago, who is also an adviser to the Prime Minister, argued that productivity growth in Indian agriculture had been poor, so rural incomes were not growing fast enough. In its effort to deal with this, the government was pumping subsidies and income transfers into the countrywide, to put money in people’s pockets — which the recipients were spending. Since this expenditure was not matched by productivity growth, it was causing inflation.

…The bald truth is that half of India’s workforce toils in the fields to generate one-sixth of GDP….The way to even out the imbalance is to get people off the land, and into non-agricultural occupations….The answer to the problems of high inflation and slowing growth, and low farm incomes, would lie in addressing the basic reforms that India is still to attempt – like labour laws. Instead, we have a food security Bill that will create irrational incentives which end up threatening agriculture itself. Talk of committing hara-kiri.

Have you heard the Indian Prime Minister laying it out like this? Or for that matter anyone else in the government? Without an understanding of the real problems, the solutions we are going to come up with, as we have experienced in India with NREGA, will only make matters worse. The productive Middle India will continue, in the name of inclusive growth, to hand over money to rural India so that votebanks can be sustained, leading to what I think of as “perpetual planned poverty.”

Every sector in India has a right solution. But we aren’t even talking about it.

This is the trap we need to get out of.

Continued tomorrow.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.