Our No-Confidence Motion

What might get India caught in the Middle Income Trap is a cultural deficit with many dimensions

What sucks India into the Middle Income Trap

At current trends, it will take China more than 10 years just to reach one-quarter of US income per capita, Indonesia nearly 70 years, and India 75 years. So says the World Bank’s latest World Development Report (WDR).

Since 1970, the mean income per capita of middle-income countries has never risen above 1/10th that of the US, says the report. That, in essence, is the Middle-Income Trap. Middle-income country growth has been slowing.

Poor countries grow by adding to the stock of capital in their economies —that is, by investing. After having reached a threshold level of development, they have to progress to what WDR calls a ‘2i strategy’, adding infusion of technology derived from abroad to the first i of investment. Then, after acquiring some more economic complexity, they have to start innovating, that is, adopt a 3i strategy.

They have to carry out remarkable improvements in governance, improve efficiency and productivity. Governance is the key to enabling creative destruction. Capture of state institutions by incumbents would have to be avoided, companies must be exposed to competition from abroad and from new entrants to keep them efficient. Capital must be efficiently allocated and re-allocated. Civic liberties and individual freedoms tend to aid the process of creative destruction.

All this is nice to hear. These formulaic prescriptions might even apply to some small developing countries. But when it comes to large, complex economies like India and China, the WDR strategy seems rather simplistic.

Right after Independence, India embarked on a development strategy that qualified to be described, in WDR lin go, as 3i. India repressed farm prices, gave enormous protection to industry, raising the price of industrial output. This turned the terms of trade against agriculture. Farmers had to part with more of their produce to buy industrial goods than they ought to have. This helped capital accumulation in industry.

Banks mopped up the public’s savings, and handed them over to term lending institutions by subscribing to their bonds, declared eligible to meet the banks’ mandate to keep a certain proportion of their assets in government bonds. (This was called statutory liquidity ratio, or SLR.) The term-lending institutions gave long-term debt capital to industry, to invest.

GoI itself invested massively in infrastructure, public enterprises, the temples of modern India. Simultaneo usly, it sought foreign technology in state-owned enterprises, defence production, in nuclear power generation, in machine tools, in dairying. At the same time, the government funded research in atomic energy, space technology, railway technology, assorted weapons systems. It set up the IITs and IIMs to produce research and technocratic talent.

India followed all the strategies recommended by WDR, not in sequence, but simultaneously. And within India —its 1.4 bn-strong population — we have the equivalents of poor nations, middle-income nations and the rich world.

India produces and exports talent, has the capacity to re-absorb returning talent — for R&D and for management. It has a functional capital market to allocate capital, a growing venture capital industry, openness to private equity and portfolio capital from around the world. It has more than 100 unicorns, the third-largest herd in the world, behind only the US and China. It has over 1,600 global capability centres that do serious research for Fortune 500 companies.

Still, many Indians are poor, and bereft of the human agency to move out of poverty. What ails India? India has a multidimensional cultural deficit that constrains growth. Overcoming that is the real challenge.

At one level, after nearly two centuries of British rule, and being subjected to English studies as the instrumentality to civilise the ‘natives’ —much as the British subjected their own young to Greek and Latin to civilise the brutes — elite Indians stood deprived of cultural confidence.

They spoke the language of the ‘master race’, but were not authentically English. They knew little of their own classics, held Indian languages to be ‘dialects’ and ‘vernaculars’, and were indifferent to their literary output. Even if they had an originalidea, they dared not recognise it as one, unless the White man attested it as such.

At another level, communal politics made Indian elites disown their shared tradition with Central Asia, its achievements in astronomy, architecture and public administration, and abandon, in the process, India’s soft power that enveloped much of West, Central and Southeast Asia.

Even more injurious has been the failure, thanks to the caste system and its segmented view of right and wrong, to evolve a shared public morality. Quality, respect for contracts and governance — whether in running companies or imparting learning to someone else’s children — suffer, as a result.

India’s route to success lies in removing this cultural deficit. Not in rousing speeches from the ramparts of the Red Fort, or simplistic formulae from World Bank.