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Rathin Roy: Tax Sops, Investments Won’t Erase Growth Fault Lines

Social factors play a big role in preventing development of states, says Rathin Roy, economist and former member of the Prime Minister’s Economic Advisory Council. Critical of the penchant to manufacture for the rich, he calls for a political conversation around the need to address unmet demands for affordable access to basic necessities like healthcare, education, housing and textiles. Edited excerpts: 

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Comment on the correlation between regional wealth generation and policymaking in India.

The traditional story is that coastal areas benefitted from economic liberalisation due to ease of exports. This is emphatically not true for India; exports have not been a driver of growth or prosperity post 1991. The one exception was IT exports which has undoubtedly driven growth in Karnataka, Tamil Nadu and Telangana. 

But the main story is structural. Post 1991, India’s growth was marked by an increase in the share of services in GDP as well as an increase in the share of profits (at the expense of wages). Maharashtra, Gujarat and, to some extent, Tamil Nadu benefitted from these structural changes as the capitalist class and the financial sector were located in these regions, especially in the western states. In addition, the expansion of luxury industries like automobiles and FMCG led to a manufacturing boom which Tamil Nadu and Maharashtra, and Gujarat to a lesser extent, were able to take advantage of.  

The south Indian states have also seen a marked improvement in human development and have reduced extreme poverty to very low levels. This has given them a superior human capital base. A history of social movements against caste discrimination and bigotry and of women’s empowerment has also meant a more egalitarian and engaged—though not perfect—workforce, a better socio-institutional environment and better governance and maintenance of law and order through social coalition as opposed to bulldozers. These things are very attractive to investors.  

In the post-GST regime, should the Centre be responsibile for regional industrial development, or is it still upon states to attract investments on their own?

Tax concessions have neither been necessary nor sufficient for development. The less developed states have been inhibited by other social and institutional factors in securing development. The productivity of investment in human capital has been far lower than in the west and the south. In addition, repressive social relations and thuggish and exploitative state practices in the north and the east, as well as the recent rise in bigotry in the Hindi belt, are huge impediments to progress. When the rule of law is maintained through bulldozers and encounters, and social unrest is caused by vigilantes looking for beef transporters and love jihad, there is a clear and present trade-off with prosperity and transformation. Political ideology matters and this has been the major deficit in the poor states. Tax concessions cannot compensate for this deficit. And it is not about the character of the individuals—the very same individuals thrive and prosper in places like Mumbai, Chennai and Bengaluru when freed from the social, institutional and bigotry shackles, just as Indians living abroad miraculously follow traffic rules in advanced societies but persist with chaos on Indian roads.  

How can the Centre tweak big-ticket investments in favour of the lesser developed states? Is it advisable to bring lesser developed states on the map of such investments?

The key to improving prosperity in the north Indian states is not high-ticket investments. It is producing the things that people wish to consume there at affordable prices. Two examples: shirts that ordinary people all over India (and since the north and the east have far more ordinary people than the prosperous parts, they provide a huge market) wear are largely imported from Bangladesh and Vietnam. But high-end shirts are made in India. Why are we not able to make shirts for ordinary people when we can for rich people? Ditto with housing. We can make posh flats for rich people but are incapable of making Rs 10 lakh to Rs 15 lakh ticket size houses for ordinary people, who are not poor, without subsidy. Ditto for good quality education and quality healthcare.  

If the unmet demand for affordable things that the ordinary person wants can be supplied at affordable prices, the economies where ordinary people live (the north and east of India) will transform. Unfortunately, India caters only to the demand of the rich who are happy in that economic bubble and only care about ordinary people as providers of low-end personal services. The things I mention here have to be produced in the geographies where ordinary people live and do not require extraordinary skills to do it. 

What we therefore need is not high-ticket investments but a national enquiry and political conversation on why it is that India can produce health, education, housing and textiles for rich people but not for ordinary people.  

How will economic growth in lesser-developed states impact the economies of southern and western states? 

As I tell my Tamilian and Keralite friends, the availability of cheap unskilled north Indian labour is a mixed blessing for them. Tamil Nadu and Kerala should by now have been moving into high productivity lines of activity which are far more technology- and capital-intensive than the informal sector activities that still form a very high proportion of the total economy, even in these low-poverty, high human development, well-governed states. It is like an addiction. The availability of cheap labour discourages the formalisation of work practices and the creation of a high wage, high demand, high technology economy which ultimately is what a developed economy is. Think of construction. By now, construction in Tamil Nadu and Kerala should have been at least as modern and productive as in other Asian G20 emerging economies. But, while better than north India, it is still light years away from the best-in-class standards.  

Should we also start discussing concentration of economic activity within intra-state regions?

Intra state inequalities are due to a number of factors but if the barriers that I have outlined to the growth of prosperity in the north and the east are tackled, then the very ubiquity of these barriers would mean than once they are not there, we can expect a far more symmetric and inclusive rise in prosperity in the vast majority of India than we have seen across our contemporary history so far.