The India Model

Gurcharan Das

From Foreign Affairs, July/August 2006

Summary:  After being shackled by the government for decades, India's economy has become one of the world's strongest. The country's unique development model -- relying on domestic consumption and high-tech services -- has brought a quarter century of record growth despite an incompetent and heavy-handed state. But for that growth to continue, the state must start modernizing along with Indian society.

GURCHARAN DAS is former CEO of Procter & Gamble India and the author of India Unbound: The Social and Economic Revolution From Independence to the Global Information Age.

The government's most damaging failure is in public education. Consider one particularly telling statistic: according to a recent study by Harvard University's Michael Kremer, one out of four teachers in India's government elementary schools is absent and one out of two present is not teaching at any given time. Even as the famed Indian Institutes of Technology have acquired a global reputation, less than half of the children in fourth-level classes in Mumbai can do first-level math. It has gotten so bad that even poor Indians have begun to pull their kids out of government schools and enroll them in private schools, which charge $1 to $3 a month in fees and which are spreading rapidly in slums and villages across India. (Private schools in India range from expensive boarding schools for the elite to low-end teaching shops in markets.) Although teachers' salaries are on average considerably lower in private schools, their students perform much better. A recent national study led by Pratham, an Indian nongovernmental organization, found that even in small villages, 16 percent of children are now in private primary schools. These kids scored 10 percent higher on verbal and math exams than their peers in public schools.

India's educational establishment, horrified by the exodus out of the public educational system, lambastes private schools and wants to close them down. NIIT Technologies, a private company with 4,000 "learning centers," has trained four million students and helped fuel India's information technology revolution in the 1990s, but it has not been accredited by the government. Ironically, legislators finally acknowledged the state's failure to deliver education a few months ago when they pushed through Parliament a law making it mandatory for private schools to reserve spots for students from low castes. As with so many aspects of India's success story, Indians are finding solutions to their problems without waiting for the government.

The same dismal story is being repeated in health and water services, which are also de facto privatized. The share of private spending on health care in India is double that in the United States. Private wells account for nearly all new irrigation capacity in the country. In a city like New Delhi, private citizens cope with an irregular water supply by privately contributing more than half the total cost of the city's water supply. At government health centers, meanwhile, 40 percent of doctors and a third of nurses are absent at any given time. According to a study by Jishnu Das and Jeffrey Hammer, of the World Bank, there is a 50 percent chance that a doctor at such a center will recommend a positively harmful therapy.

How does one explain the discrepancy between the government's supposed commitment to universal elementary education, health care, and sanitation and the fact that more and more people are embracing private solutions? One answer is that the Indian bureaucratic and political establishments are caught in a time warp, clinging to the belief that the state and the civil service must be relied on to meet people's needs. What they did not anticipate is that politicians in India's democracy would "capture" the bureaucracy and use the system to create jobs and revenue for friends and supporters. The Indian state no longer generates public goods. Instead, it creates private benefits for those who control it. Consequently, the Indian state has become so "riddled with perverse incentives ... that accountability is almost impossible," as the political scientist Pratap Bhanu Mehta reported. In a recent study of India's public services, the activist and author Samuel Paul concluded that "the quality of governance is appalling."

There are many sensible steps that can be taken to improve governance. Focusing on outcomes rather than internal procedures would help, as would delegating responsibility to service providers. But what is more important is for the Indian establishment to jettison its faith in, as the political scientist James Scott puts it, "bureaucratic high modernism" and recognize that the government's job is to govern rather than to run everything. Government may have to finance primary services such as health care and education, but the providers of those services must be accountable to the citizen as though to a customer (instead of to bosses in the bureaucratic hierarchy).

None of the solutions being debated in India will bring accountability without this change in mindset. Fortunately, the people of India have already made the mental leap. The middle class withdrew from the state system long ago. Now, even the poor are depending more and more on private services. The government merely needs to catch up.

REFORM SCHOOL

India's current government is led by a dream team of reformers -- most notably Prime Minister Singh, a chief architect of the liberalization of 1991. Singh's left-wing-associated National Congress Party was swept into power two years ago even though the incumbent BJP (Bharatiya Janata Party) had presided over an era of unprecedented growth. The left boasted that the election was a revolt of the poor against the rich. In reality, however, it was an anti-incumbent backlash -- specifically, a vote against the previous government's poor record in providing basic services. What matters to the rickshaw driver is that the police officer does not extort a sixth of his daily earnings. The farmer wants a clear title to his land without having to bribe the village headman, and his wife wants the doctor to be there when she takes her sick child to the health center. These are the areas where government touches most people's lives, and the sobering lesson from India's 2004 elections is that high growth and smart macroeconomic reforms are not enough in a democracy.

Still, the left saw the Congress victory as an opportunity. Unfortunately, it stands rigidly against reform and for the status quo, supporting labor laws that benefit 10 percent of workers at the expense of the other 90 percent and endorsing the same protectionist policies that the extreme right also backs -- policies that harm consumers and favor producers. Thus, Singh and his reformist allies often seem to be sitting, frustrated, on the sidelines. For example, the new government has pushed through Parliament the National Rural Employment Guarantee Act, which many fear will simply become the biggest "loot for work" program in India's history. Although some of the original backers of the bill may have had good intentions, most legislators saw it as an opportunity for corruption. India's experience with job-creation schemes is that their benefits usually do not reach the poor; and they rarely create permanent assets even when they are supposed to: the shoddy new road inevitably gets washed away in the next monsoon. There is also the worry that the additional 1 percent of GDP borrowed from the banks to finance this program will crowd out private investment, push up interest rates, lower the economy's growth rate, and, saddest of all, actually reduce genuine employment.

Singh knows that India's economic success has not been equally shared. Cities have done better than villages. Some states have done better than others. The economy has not created jobs commensurate with its rate of growth. Only a small fraction of Indians are employed in the modern, unionized sector. Thirty-six million are reportedly unemployed. But Singh also knows that one of the primary reasons for these failures is rigid labor laws -- which he wants to reform, if only the left would let him.