Indias Precocious Development Odyssey Arvind Subramanian And Devesh Kapur

TITLE: Arvind Subramanian and Devesh Kapur on India’s Precocious Development Odyssey CHANNEL: Mercatus Center DATE: 2026-04-09 ---TRANSCRIPT--- Hi Arvin. Hi Dish. It’s so nice to have you here.

Thank you for having us. Yeah, lovely to be here. Thank you. Yeah, it’s freezing outside but we’re in the studio in Arlington. So this is a pleasure and we’re going to talk about your book uh sixth of humanity independent India’s development odyssey. It’s a history of Indian political economy across the 75 years since independence and the big theme is how unique India is in terms of being a development state while also being a democracy. uh starting right from the get-go with universal adult franchise as a democratic republic and a federal republic and that leads to various sorts of problems various sorts of uh uh you know uh sort of uniqueness precociousness as as you put it. Uh but is that a good way to set up the book? I I mean I mean clearly one of the big themes of the book is the different types of ways that India’s development journey has been precocious. Precocious in the sense that something that is unusual sequence relative to the experiences around the world. Yeah. One is politics, the other is economic policy choices. The other is the third is the unusual way the structural transformation occurred etc etc which Harvin can talk. Yeah. So so in that sense u I would say that u uh what you’ve probably begun with uh is is one dimension of this the political precautiousness and democracy because arguably some of the other stuff have and have not been affected by democracy per se. So that’s just so the sense I got from the precautiousness argument was everything else that you discuss in India’s development whether it’s nation building state capacity economic growth everything seems to be affected by this initial choice of universal adult franchise is that not the appropriate way to read the book I think some things are but not everything okay I mean clearly uh the fact that you’ve at the different types of agriculture policies. There was no fertilizer subsidy for the first 25 years. It’s only you know after 19 the mid 1970s after that it brings up same with electricity subsidies. All these come much later and those were policy choices. There was nothing about India being a precautious democracy that leads one to conclude that industrial licensing was inevitable. Yeah. So so so just to build on that. Yeah. Um now there are ways in which I think democracy had a big impact right uh even on the economic choices. I think first of all we would say land reforms for example basically totalitarian authoritarian states are successful at land reforms and under certain contingent historical circumstances. uh in the Indian case not just the fact of democracy but the fact of a federal democracy in which the congress was in the ascendancy for a long time especially in the states and they were beholden to the landed interests. Uh so that was clearly a case where I think democracy had a had an impact. Uh I I I would say that you know the whole e the economic choices happened you know planning public sector um industrialization licensing we’ll come to in a second I mean they were less to do with democracy than just with the zeitgeist of the times right I mean the Soviet Union was then the the greatest success that uh we thought it was I mean just to make make it come alive here I don’t know whether uh you know some viewers or may not may or may not know. I think in the 50s Khrushchov came to the uh UN. He took out his shoe, banged on the podium and said, “We will bury you.” And what he meant was not nuclear devastation. He meant that our model will actually uh outperform yours. Um Europe embarked on the welfare state postwar even the new deal here. A and so since our gaze of the early elites was China, Russia, the west, so clearly you know the choices economic choices followed that. I mean if they had looked eastward maybe they may have uh you know uh uh viewed things differently but that was that had very little to do with democracy. And I think u licensing in particular is actually uh uh interesting industrial licensing is because you know u import substitution as a policy choice meant that you were going to favor domestic enterprise right but we turned around and said no we will styy the domestic private sector through various means including licensing. Now that had neither to do with the zeitgeist because other countries did not do that nor did it have anything to do with democracy as well. So that was slightly kind of a unique orthogonal choice. The last thing I would say is that it is the case that we argue that the fiscal state in India it’s one of the most vulnerable fiscal states in in which was a surprise to us there. We do say that you know something about precautious democracy leads to every manner of interest uh being accommodated both on the tax side and the expenditure side. So so so I think democracy is both important but sometimes orthogonal to choices. I think one other thing we found much to a surprise uh I think to some extent not entirely India’s failures in primary education were also because of so we know that India did very poorly in primary education and in fact not until survishik shabyan was there a concerted effort it was when the when when the ND you know pay government but basically we know you know my viner’s great book on the child and the state in India that this was you know elite choices and uh you know partly the upper class were ascendant and didn’t genuinely believe in in educating the lower class but recent work also shows that worldwide primary education expands the most under when there isn’t universal franchise and in in a way it is to expand partly for a variety of reasons. partly is to forestall the demands for franchise you know so uh partly for nation building you know a variety of reasons so so it’s it’s it’s at least plausible uh from the evidence around the world that that too might have stymied so I think the reason why I read the democratic piece is so central I mean one it’s the first part of the book so it kind of you know everything else follows from that but my sense was even though you get into the very specific ific socialist policies from 1950 to 80 and then you know the one decade 80s to ’90s and then 91 onwards it seems like India’s socialism was not the cookie cutter socialism of the Soviet Union nor China and a lot of it was determined by democratic pressures right whether it’s Nuvian socialism not being as oppressive or Indra Gandhi socialism which is very redistributive and sort of almost placating different interest groups right uh when it comes to state capacity and state building that seems to be a similar vein. Uh India is asymmetric in its federalism. You know, they needed to stitch together the union president’s rule and all those things are sort of imposed depending on what’s going on at what point in time. Uh but the democratic uh the universal adult franchise is really what holds the union together. And and it’s that last point I think that I think is something that we highlight that nation building historically the quintessential experience of East Asia or West Europe was around a single language or religion. India was very distinctive in that it used democracy as its principal instrument of of of you know nation building. Yeah. So that is why uh India managed to avoid extreme disorder in the way you know people think that India has a has a lot of violence. You know as you know uh you know political scientists are obsessed with conflict and violence in India. We actually show the opposite that you’ve discussed this with in your book with Amituja on the podcast that India stands out with how not how much but how little mass violence as opposed to you know you know street level riots and so on and that we argue is that that was the extraordinary contribution that early the democracy did. Just on on that course um you know maybe your your observation you know with the way you began is maybe actually the more I think about it maybe it is uh uh valid the way you started because just to complement what Dish said on the political side you know on the economic side we showed that India also avoided economic disorder uh as measured by you know hyperinflation and financial crisis uh it’s it’s surprising urprising how uh low India’s we’ve never had bouts of hyperinflation for a brief period we had inflation after the thing and and uh and that sets India apart from you know you think of Latin America uh uh think of you know Turkey Africa some of even some of the East Asian countries uh you know Sri Lanka recently had 40 70% inflation u so the question is why was that the case and I do think uh we argue in the book that’s something about democracy because you know uh inflation is a tax on the poor and and uh I I I always like to say that the job of a governor of the reserve bank in India on that is actually very easy because you know he or she just has to do what the society even wants in any case. So I think so in that sense yeah democracy did have so so it gave and it took away and I think in that sense maybe there is a theme running through that. So you know just to say we say that the real monetary anchor in India is not some you know You know, it’s it’s it’s the democracy is the monetary not, you know, since we’re having fun, right? We can have fun. Yeah, we are having I only have fun. Yeah. See, I I I I want and since you’re tamilian, uh you will understand. I was not a particularly politically kind of person growing up. But I still remember my first political memory. I was sitting on Mount Road in uh in Chennai, which is the main thoroughare in Chennai. 67 uh uh this was when uh uh uh the first time the DMK came to power and the I remember the protests going through Kamaraj that’s in the book Nache Wai Nache that is you know what’s happening you know we talk about what’s happened to the price of mustard seeds and onions onions and we talk about the affordability crisis today here uh that was true in six and it was a vote win I know very comp outcomes are complicated but that did play a big role and that also the hyperinflation or the one serious bount of inflation post first oil shock when it touches 35% plus that’s what leads to the beginnings of mass protests and you know against Mrs. Gandhi and we know slowly that builds up leading to the emergency all of that and that is inflation. Yeah. Yeah. And at that time there’s a twin crisis right there’s a scarcity economy and inflation running parallelly where and those two things are should never go together. I I think that this is a point I think to emphasize you mentioned earlier how is Indian socialism different from you know socialism elsewhere a and I think certainly it’s very different from import substitution elsewhere because the first 30 years are much better characterized as a scarcity economy than an industrial uh industrializ or import substituting economy as well. Yeah. So now let’s maybe I’ll go section by section in the book but before that the sense I got from your setup is it’s not so much that India was unique and it democratized too early because that’s one way to characterize it right in the very beginning of the book you have this lovely chart which talks about when universal adult franchise was uh uh introduced based on GDP per capita and also and and the gap between original male franchise and universal franchise right the number of years that it took and India’s right at the bottom of both and it’s completely unique. So one way to read that table is oh India democratized before it developed. Maybe it should have done it the other way around. Maybe it should have done like South Korea or something else. Another way to read it by the time I got to the end of your book is actually there are some great things that have come out of India being democratic. It’s literally stitched the nation together. It’s led to a lot of stability. It’s reduced disorder. Uh you know both you know inc extreme violence and and sort of war and conflict and also economic crisis like hyperinflation or currency defaults. But the one thing that is persistent in Indian democracy is redistribution. Right? So I mean since we’re at George Mason University, uh James Buchanan said that there are different versions of the state. There’s the protective state, the productive state and the redistributive state and the churning state which is just you know sort of cronyist taking from one group and giving to another. And it seems like that seems to be the big problem with the precautious democracy that you introduce right in the beginning. everything else can be managed in some sense. Is that a good way to think about it? No. So I mean in any democracy in principle in a in a unequal society the median voters preferences will be for re redistribution right uh so uh I think redistribution per se you’re right that that is an impulse that is always been there and you know even when the preoccup patient and rightfully so given that uh for the first three odd decades uh you know parts of India it was not about poverty it was about destitution it was about utterly degrading poverty so the attention given to poverty right in a sense was was also an aspect of redistribution right uh so the impulses were in the book are general sort of sentimentals that was uh both essential and inevitable the question was the instruments you used right that’s where the debates and reasonable people can disagree so no I I would actually push back on this uh uh uh you know the Buchanan thing and this is I think the sense in which uh India Indian democracy has been very distinctive When you think about democracy, the median voter and redistribution, the sense is that it’s uh redistributing away from the rich and towards the poor. A and I think that’s actually not uh uh not not in practice. In practice that was not how it happened and that’s why you know when uh you know pradan has this great book on India saying there were three very uh strong vested interests you know industrialist bureaucrats and and uh uh big business right um what we show at least if you look at the fiscal state for example I think the kind of beauty or the downside of Indian democracy is that any interest group that is loud enough and clamorous enough uh gets to suckle at the you know Indian state uh both on the tax side on the expenditure side and it’s very important uh this is a very important point to make because um many of the uh subsidies that we see today and they’ve been for a long time take the two big ones the power subsidy and the fertilizer subsidy I mean we show in the book and then also in other work that 60 to 70% of these subsidies in the case of fertilizer goes to the rich farmers in the case of the households goes to rich households. So, so this is not you know Buchanan type redistribution democracy type because there’s nothing about democracy or socialism that can really explain this you know because why are we giving 60% of the subsidy to 5% of clientalism. Yeah. So it’s you know I don’t I would not say it’s that that is because clientalism is you’re trying to build relations with individual voters. It’s just the political clout of just like big business has political clout you know big farmers just as the farmers protest that happened when they tried to introduce market reforms a few years ago it was not the poor farmers in Bihar who were protesting it was the biggest richest farmers no what I mean by clientalism is in India the form it takes is very much cast politics linguistic politics there are very specific groups that become interest groups and become entrenched and it’s impossible not to redistribute towards them or redistribute but but can I give you one counter example here take the middle class quote unquote middle class right they’re the biggest beneficiaries yeah I mean they are some of the biggest beneficiaries there’s a chart on income tax exemptions that we see there right uh you know uh per capita GDP grows you know slowly exemption limits are rising you know exponentially so and this is true for landed interests for example they don’t get taxed right and if You look at um rich farmers. Rich farmers and you look at the subsidies are given, water subsidies, sewage subsidies, you know. So it’s more something about democracy and the clamorousness and having to accommodate almost every interest group as it were. That’s I think the more distinctive part rather than clientalism or you know a particular interest groups because the beauty is that almost everyone can become an interest group in India. And I think that’s what makes Indian democracy so you know uh so I think distinctive in some ways but but I think going back to your point about the redistributive part and uh you know we said that it was the instruments that I think one of the things we make in the book is that we don’t think of public goods as necessarily redistributive but public goods actually in practice is should be the most important initial tool of re the most equitable. Exactly. They’re not redistributive. Uh but instead we show that India chose to build a welfare state without first laying a strong foundation of public goods. So of course the welfare state then essentially becomes a welfare state for the 10% in the formal sector. the 90% in the informal sector are broadly ignored. Now I think so that impulse of doing for the poor redistributing if that impulse had manifested itself in building public goods I think the development outcomes would have been much better or just just to summarize you know uh we said this uh in in our exchange with Pranab Bdan um uh because remember and this I think a nice contrast uh you you have focused on the redistribution. Uh Praob said, “Oh, it’s all about elite elites uh being very influential.” Yeah, I’m saying we’re redistributing to the elites. I don’t think we’re redistributing to the I see. Yeah. No, no, but but there I would say that, you know, there’s lots of stuff we do on post 1991 once you know the fiscal coffers start coming in, we start extending the subsidies, we start giving more and more cash transfers, we include women. But for a very long time the state was really serving its own employees who were all essentially the middle class. I mean look at our pension schemes. Yeah. Government is see or let me just just one way to summarize why what’s so distinct about that is that both elite and mass impulses got responded to by the state and that’s how I would say it’s it’s not you know it’s not elites the prana burden view it’s not you know oh it’s all going to the poor it’s both and that’s what makes it so interesting and rich. So okay so if I had to think about this the way you know if I had to respond or think from the pranaban lens we don’t have a good explanation if we just look at democracy for how much variation there is within India so you point that out in the later part of the book you actually go state by state and which states have done well so we have tamunat karnataka kerala which have performed as well as China for as long and then you know we have states like west Bengal which have actually regressed Bihar stagnated uh and Bihar has like you know there are parts of Bihar with like Sierra Leon level GDP per capita despite not being a you know war torn state. So what explains the variation given that they all got universal adult franchise at the same time? These are all interior states. They are not, you know, the states that I named are not the ones that have had presidents rule or, you know, border conflicts and things like that. So that can’t be the explanation. So there’s something about what is going on in these big states that should explain uh what democracy alone or universal franchise alone can’t explain. Right. So, so u a great question. Uh uh you know, one democracy, multiple outcomes at the state level. It’s a it’s a nice natural experiment. Yeah, it’s a great natural experiment. Unfortunately, natural experiments don’t have uniform outcomes. So, if your birth accident is that you were born in Bihar, then you’re in trouble. Yeah. So, I I it’s it’s we multiple explanations, but let me just say one or two uh big commonalities. So, so the spirit of the book is that Toltoy is is only is only half right. You know, both the successes and the failures are both there are both patterns and exceptions. That’s what again makes India so rich, right? So, so just let me give you one commonality on the failure and maybe one commonality on on the success. Um I mean clearly the southern states especially Kerala and and Bihar uh Kerala and Tamad benefited a lot from social reform movements early on. So pre-independence pre pre-independence right so even at independence you will see human capital outcomes uh much better in in Kerala and actually we show uh somewhere uh in the mid60s right when things are doing India is doing very badly the allocations to primary education uh are much higher in the southern states and they were not then the richest states they were then they were actually the poorer states and industrialized below the median whatever they were so so so there is something about the social reform movements that happened uh in these places which led to this bottoms up. So in so in that sense you could say it was a democracy where there was much more bottoms up pressure than than in other parts and dish will talk about Bengal in the north in in a second. Uh on the success I think what’s interesting is that what is common to all the successful states we show in the book is that they’re all globalized and but globalized in different ways. again. So this is the this is this you know the exemplar and the exception right uh Tamnad Maharashtra Gujarat based on manufacturing exports um um Karnataka of course based on services and Bangalore Hana bit of both because it has both uh Gura and it had you know Marauti plant and so on and of course the most unique uh model is model of Alerla neither manufacturing nor agriculture services but it’s just globalized through labor flows right and also interestingly uh you know And just to add the irony is that the big intellectual thing in Kerala is anti- globalization. The state that has most benefited from globalization is the most anti- globalization intellectually. Yeah. And also also it’s a very interesting pattern of uh globalization because you know there’s been initially there was you know mediumskill labor outflow right to bringing back dollars basically low skill low construction workers nurses but then got on to nurses slowly slowly up right and but at the same time especially in the last 20 years high skill you know Kerala’s imported labor from the rest of the country that’s true the low skill is now coming in from Bihar and Jhan and everywhere So, so it’s so you know so in that sense um uh it it is the there are you know the explanations for the successes and failures but of course I’ll let Dish talk about Bengal and and the Hindi heartland. So one I mean pattern is that coastal states have done better uh and you know there’s a general thing that in if as you and remember but but but always with exceptions yeah and and Odisha and Odisha Odisha. Yeah. Yeah. Uh so till the 80s when India was closed actually the variance across states was quite modest. Yeah. Right. This variance has really increased post reforms and post reforms is when of course opening up to international trade. All of that led to different outcomes and the and so you could sort of infer that that might be a way reason why the coastal states in general not all uh now two states that are not that don’t follow this pattern. One is Hariana interior state that does very well and that we show is partly an NCR effect Delhi you know it gets on the accidents of of Maruti and the auto industry the accident of of Gonga on which you’ve written as well right yeah you know and and and there was nothing pre-ordained in a sense right uh the two coastal states on the east right uh Orisa and Bengal now Orisa was an extremely poor state I mean Orisa remember used to have starvation deaths still famines still I mean in my lifetime Oura has seen famines but Orisa actually has had stable government and has grown actually quite steadily and it’s absolutely not at all what it was and it’s been you know it’s also been politically stable manufacturing which is unique actually mist conflicted which held it back for a long time ah the mouse but but nonetheless that was sort of more interior Horesa uh you know so it still has I think I think the state that is of course the biggest puzzle to this is West Bengal right uh which was the most industrialized state in the ’ 50s uh in our travels we had gone for a book tour uh it was amazing in places like Bangalore you know the hotels the employees you go to universities the students faculty they’re from Bengal for 100 years from the late 19th century till the 60s people from all over India would come to Kolkata now it’s the opposite and I think nothing tells you about the current and future prospects of a place where young people are exiting with their feet right because they don’t see the prospects now you know we go through why some of these things happen some I think the freight equalizing ation policy was not just bad for Bengal but for the eastern India in general because it took away the comparative advantage. But on the other hand, Bengal had a lots of things going for it. You know the first ISI, Indian statistical institute, the first IIT, the first IM, the you know the botanical survey of India, you know the zoological survey, all of these came up. They were in Kolkata or or in Bengal. uh I think two three explanations one we know the violence that occurs in after 67 and the anti- capital anti- business thing and capital leaves and once it leaves it never comes back I think the other thing which we don’t emphasize enough and you know we should have a little for some reason Bengal never developed a culture or it had and lost it a culture of entrepreneurship. Bengal the in the beginning of the 20th century you know we we forget around 1950 the third richest Indian was an industrialist from Bengal bir mukherji Indian iron steel company all of that uh Bengal chemical these were all pioneer industrialist industries all of that by the way that is true not just in India but outside India as well there are lots of success stories of the Indian diaspora in in business and entrepreneurship very few Bengali. Yeah. And if they’re Bengali they are like Kolkata Marvaris you know they’re originally Barbaris who fled Bengal under communism. So that that now whether that was because of the bodhallo culture that was so dominant and Bengal never the intellectual elite never really came to terms with cast and the fact that the intellectual elite were all upper cast you know and so what was veerized was other things uh but not in fact the irony is that what was veorized things like learning Bengal after 2000 when private higher education takes off could have been said you know you miss the manufacturing it could have been a service sector higher education magnet yeah it in fact the opposite young Bengalies you know so I think they I think in part Bengal’s intellectual elite has to take some responsibility I mean I grew up in Kolkata and all the protest movements were about Cuba and Vietnam but the fact that your own state was going through such bad times that seemed to be not very relevant. Yeah. So, so I want to add just and related back to to your question about one democracy many many outcomes right. Um so the first thing to clarify is that you know Dish said you know this variance really starts in the 1980s. I I think what’s important to note is not just that there was globalization and things but essentially uh you know policy political and fiscal decentralization happens progressively beginning in the late60s. So in a sense you late from ’ 80s late ’ 80s. Exactly. A and and basically the you know the tall poppy syndrome of socialism uh gets because states acquire agency you know in a real sense and and that’s what that’s that’s the dividing line and then therefore you know each state determines its outcome more so than the common democracy becomes this the second thing I would say relate to your question of democracy one thing that uh you know dish and I talk about is that uh what is it about West Bengal all seven terms the the the government that precided over decline or the party that precided over decline was consistently reelected. What does it say about democracy or about the notion that political stability is very good for growth? I mean kind of again that’s why it’s very interesting. Can I just add last 50 years Bengal has had just three chief ministers right over half a century which is so distinctive for India and in some ways as Alvin said that stability should have been a massive boost and we see that happen in Odisha later right so for instance who’s I think the second longest serving after Sikkim after Sikkim and Tripura maybe or thereabouts uh is the longest serving chief minister and you see some serious economic growth but you don’t see it with Nitish Kumar right Sikkim was rich to begin with and is not a very good you know it’s not a comparable state so the the longserving nature I don’t know doesn’t seem to be a good predictor in India for me yeah one last one last so see we one thing we maybe didn’t emphasize early on maybe we should just uh for benefit of readers is that one of the things we consciously do in this book is to adopt a comparative perspective right whether it’s comparing I think it’s China or Korea or you know other countries um other developing countries so on and in the chapter on uh states I think that at least uh to me some of the patterns that we see within India do recall some of the pathologies we see in the world for I mean I think one of the slightly more novel insights that we offer on Punjab for example is also based on work that uh um uh Dish and I did elsewhere is that we think we we don’t think of Punjab as a a rent receiving state. Oh, it is. Yeah. Massive. How else would we think of it? No. I think people will think that the the people will think that the conflict changed everything. Ah, okay. Yeah. Got it. Uh and it’s true that also played a role. But we don’t see the reason why we don’t think of it as rents is that we say, “Oh, farmers are subsidized.” But actually it’s a subsidy that comes from outside the state to to similarly very rich farmers. Yeah. Yeah. And it comes so so the rent but if you are subsidizing from your own taxation that’s a different kettle altogether but if you get it from elsewhere and similarly uh it’s a point that dish has made elsewhere that you know the defense uh uh the the pensions for example is also massive rents going to the state. So, so and similarly the other thing which other insight from outside is there is a kind of internal aid curse as well within India. Definitely and you know so so I think to see India as this you know real uh you know crucible of so many different things going on is is one of the you know you know uh interesting things about something to add you know which is you know the Tamil Nad in West Bengal this interesting thing that basically since the uh last at least from the late ‘7s 77 onwards the have always had political parties governing that are different from the those governing at at the center. The center has been basically largely Congressled or BJPled and neither have been successful in either of those two states. But the Tamil Nad political parties even when they were in opposition not part of the ruling coalition managed some sort of modus vendi with the c center. Yeah. The Bengal ones whether it was the CPM or TMC have been deeply sort of handogonistic which means that you know in a sense I think the Tamil Nad political parties have been more pragmatic knowing that you need the center may not help you but it can hurt you. Yeah. that pragmatism seemed to be lacking in the case of West Bengal where it all became about larger principles or X or Y you know for this and I think that also hurt Bengal relative the story of Tamunad to me the success is not that everyone did equally well to me the interesting thing is you know legally speaking in terms of state capacity on so many other markers they’re exactly like the rest of India I mean the labor law is almost the same as anywhere else the industrial disputes is the same as anywhere else. But they figured out some political configuration between the two parties that we won’t undo each other’s promises. So even though it’s not one single party rule for 30 plus years, they keep switching. Each party that comes never undoes the either the corrupt promises or the fair promises of the previous law. So they seem to have a remarkable amount of political stability uh in a way that you don’t see even in Kerala and Karnataka. Actually one one last point I think is a point that you know um also Dish makes uh elsewhere is that see the the because there were multiple sources of entrepreneurship in Tamil Nad specially there were multiple uh you know uh uh where’s in where’s Bengal it’s one city and you know whatever and so even if you look at industrialization in Tamilad today it’s pretty broad yeah it’s pretty broad-based and that also helps you know structural transformation That’s something you see also that Gujarat has right because Sulat, Bodha, Ahmedabad uh Punjab had that. Yeah. Right. that was in the ’ 70s industrialization was happening across you know there wasn’t a what we call a primate city right uh the way say west Bengal had kolkata was so dominant even karnataka is one mostly one city yeah that’s true bangalore and and and so I think that’s the tragedy of punjab that uh that industrialization it was poised to be the sort of east Asian style first strong agriculture Then you know small industries that were becoming bigger spread out in Ludjana and Jalalander and Patiala and etc etc and then of course the 80s just short changes everything and it never really in fact if you see the chart in our book you know in some ways the most dramatic line in the chart on the states is Punjab because it goes up and collapses like and Punjab also had a very interesting middle class right because there were so many people serving in the army and the government and so on. So they have the agriculturist, the green revolution makes them much richer, more productive. There’s industry in places like Ludhana and then everything uh un and it’s it’s a relatively homogeneous group, right? Hindus and Sikh. So that’s the other like everything on paper Punjab has going for it and then it it all goes upside down. I I think what we say in the book is that Punjab offers a salutary lesson for India in general. When you mix religion with politics, I was going to say that. Exactly. Yeah. It’s a cocktail that you want to be very very careful. Yeah. Yeah. In fact, Punjab is is the is the maybe the apart from whatever has happened recently is one of the or maybe the only state where religion and politics are much more uh entwined than in any other state. Yeah. And I mean so it’s not religion as much as other like kind of cast and ethnic politics in the northeast. That would be the other example. But they were never as big or as rich as Punjab. Uh and Punjab being a border state you know certainly doesn’t help on on that margin. And then all the rents coming in and you know it’s kind of like actually uh the deepest fault line arguably in India uh runs in in Punjab. Yeah. Even because ju just as we see exit of uh workers from West Bengal, we see similar exit from youth from Punjab. Yeah. Actually, it’s so depressing. The last couple of trips I made to India. one I went to Amritsur you know about 18 months ago I was in Kochi and in both these places when you’re just driving around between cities or like taking a train between cities the only billboards you see are ads for the SATs and how to get out and how to get out and in um you know Kerala it’s not the equivalent it’s more about jobs and you know networks in in the Gulf but it’s very depressing to see that You don’t see that in Tamat. You don’t see that in Westing. That’s why you see the the most illegals uh immigrants in western countries from India are have been from Punjab and some from Gujarat. uh but however I think for good or bad those doors are closing and the question is and you know the humiliating way that Punjabis will return flights from the US you know handcuffed all of that so I think that sort of dream that if you get out everything will be great that is now uh becoming you can’t take that for granted for you yeah so the question is, you know, will that sort of change things cognitively because you first need that cognitive shift that you need to build here rather than a go somewhere else before things begin to happen. It’s also one of the weakest fiscal states. Yeah, I know. It’s a fiscally it’s a total disaster and has been for a while, right? This is not just a neoliberal thing or a postconlict thing. It’s been a mess. So, okay. So we the first part of the book was you know about the the democratic part the then you get into socialism and here there are a few things that you point out. So one you characterize the socialism from you know normally the distinction people use is Nuvian socialism versus like Indra Gandhi and her commanding heights and so on. Instead you look at 1950 to 1980 as sort of you know one block of just gradually worsening policies and you know in some sense stagnation and then from 1980s to 1990s is a period of a little bit of opening and then you know we have the reforms. So when we’re looking at 1950 to 1980, the way you set up the book is you had this table of you know the different kinds of mischaracterizations about the Indian economy and you’re basically myth busting in that chapter in some sense and you say that that’s not really a time of import substitution. It’s more a time of scarcity economy because of license permitage. So I mean if I had to say it like in my econ 101 class it would be something like protectionism and high tariffs are attacks on the foreign producer and the domestic consumer whereas license permitage is attacks on the domestic producer and the domestic consumer right and your argument is that it’s the latter which has the heavy hand. So the question I have is I don’t see too many people arguing that it was you know the failure or the success of that time was import substitution like everyone seems to agree that the problem with that time is license permitage. So what is and to me the two are highly entangled right because it’s the autoarchic nature and license permit which leads to restriction of foreign capital and you don’t have enough you know foreign exchange to actually buy the imports there’s more and more protectionism because there’s a scarcity economy at home. So the protectionism was never ostensibly driven uh to promote domestic champions. That’s why I I mean that’s why that that chapter seemed a little bit odd to me. Not not that I disagree on any of the facts or you know the data but it’s more like the setup of how you explain that time. Okay. So, so let me uh say uh actually we try and bust kind of pummits in that chapter, right? One is by the way there is a I would say almost the received wisdom in India today or or at least not everyone but a lot of people express it which is that they were that was not that period was not too bad in terms of the growth outcomes especially if you compared it to where India was you know how it had done previously right and we we bust that a by showing in a crosscountry sense you know Korea has taken off yeah exactly and and relative to We were China we come to China a second we were I think we say something like it was the whatever in 195076 poorest country by 1980 or 90 it was it had deteriorated in the cross-section so whenever you say India was unique then you have to well other countries also had their problems so in a proper sense it wasn’t and of course the comparison with China is especially important because this was a period in China there was utter chaos economic and political chaos and despite that cha they came out ahead you know by in 1961-62 China was actually behind uh uh India productivity production uh all these things I mean they were having mass starvation and famines exact mass starvation and then of course extreme political instability as well so so that’s so the notion that somehow it wasn’t bad is is I think uh now the you know here Arvin like economists always ask the question compared to what and we’re giving you the comparison exactly so you’re giving us the comparison that compared to other East Asian countries and everyone else or even poor countries and rest of the world, India does much worse than rel relative to what it could have. But compared to India of colonial times, especially between 1900 and 1950, India does better because just stagnated so much under you know the latter countries also. So that’s why you have to be careful about it’s not that India had unique handicaps. It had handicap but not unique necessarily. See the second thing comes to your thing about uh uh uh the see the firstly the way I would in a classroom explain scarcity is the following way simp I think a simpler way of saying it would be the following you kept out foreign supply yeah by taxing whatever by import substitution protectionism you impacted domestic supply by taxing the domestic private sector you also promoted the inefficient smallcale sector So and finally you promoted the the inefficient public sector. Yeah. So all four sources of supply the inefficient were promoted and the efficient were taxed or kept out. So that’s what uh leads to scarcity and that’s the thing. Now you you’re uh and this is uh something that I think someone else also made the same and it’s a very good point which is to say that uh you think of you know if you have licensing on foreign trade licensing on domestic thing is kind of an analog right but that’s not how what other countries did. Yeah. Other countries when they said import substitution they said you know remember it was all about the infant industry argument. uh it was about you know be becoming competitive and we just didn’t do that. Now the question is why did we do that? I think it’s a complicated question. IG Patel has an answer basically saying that you know in the war war period all the scarcity and and stuff also led to corruption. So also the domestic private sector was also partly stigmatized and so on. But I I I think India did something very different from what the others did because the aim at that point was and and so or a different way of putting it would be to say we wanted to do import substitution but only in favor of the domestic public sector not the private sector and that’s how you know you have inefficient public sectors and then we have a whole chapter on you know the inefficiencies the lack of accountability and so on. So it was import substitution in favor of domestic public sector. Uh but uh you know uh uh a and maybe to reinforce that you kept out competition from the private sector. I would actually go one step further. I don’t think it was just in favor of the public sector because when they started doing it the public sector wasn’t that developed. It was just coming up. I would actually say a lot of the early protection. So you know the the the license permitage in one sense is the extension of the war controls. Right. So the war controls all started in the 40s and we just doubled down on them and you know if there was you know controls on food and silver and cotton you know in the in the colonial period now you just extend it to all other kinds of fabric or you know you extend it to all kinds of grain and so on. So that’s the way I read the control system. The trouble was they started including the protectionism when they when we didn’t have a huge public sector but we had this huge Bombay club and they famously sat together and they all said okay we are the existing industry we’re going to be grandfathered in right so iron and steel is technically not part of the private sector but if you existed before the republic of India and you already had an iron and steel company of course you’re included right so there are all these interesting exemptions given to the Bombay club and large domestic industry that exists did they said okay it’s going to look terrible if you protect you we’ll give you some licenses and we’ll do something but that’s really the way I interpreted it I would love to have seen the protection more for the public sector but they barely existed in 1947 to 55 no but I think I would slightly disagree with you in that for much remember the real beginnings of a serious control raj and we actually say at the end towards the that if you think of the license raj as a mentality that is deeply which is a control mentality that comes after the 56 industrial policy that’s when the big serious beginnings of the public sector begin and the public sector firms don’t really come into being till the 64 you the steel all heavy engineering BHL etc. What is astonishing in the 60s and 70s is the incredible octopus like mini share of control. I mean you know you you need from this you have to approve and that approve all of those things and they really come out very well in the first administrative reforms commission that points out because what you see happening with the control raj and the public sector is something I think we often think of this as a entirely political thing but the I plays I think a terrible role in this Most many of them are appointed as head of stateowned enterprises. They have no commercial experience. They’re not engineers. At that time the IS would not take in engineers. And that control thing of that bureaucratic control is coming impulse is coming as much. It’s not just a political, it is very much part of the I mentality of this control which I would argue persists. Yeah, it it is a deeply entrenched thing that you know we are the nation’s guardians. Without us, you know, all sorts of bad things could happen. Therefore, we need to control everyone and everything. No there I wouldn’t disagree with you but I still think the very high tariffs come in much before that right India becomes near otteric very very early but but the controls on the private sector that expands and and the public sector performance then becomes much worse because of the a nationalization of the sick industries all that happens under Mrs. Yeah, that comes later. No, see the the one slight surprise at least for me was that you know and yeah Dish and I also maybe have a little bit of difference on this and I I’m not sure I’m right on this this whole you know Neu versus Indra Gandhi which everyone makes a you know whatever no I think of it as a continuation exactly like you so I don’t think of I mean the policies are different but I think of the ethos very much as but gradually gets worse gradually gets worse but See the things what I was surprised very much by was how much nationaliz national nationalization took place under NU. Yeah. Air India was nationalized, insurance was nationalized, imperial bank was nationalized and we don’t all the electricity companies which were in the private sector they were can I tell you the electricity occurs later but it wasn’t glamorous industry you know bank nationalization is all at a different scale. So I I I understand your surprise. Yeah. Yeah. A and the other thing is that if you look at actually at uh the outcomes uh you know in just the growth outcomes in fact between 1950 and let’s say you say NU good Indra Gandhi bad you don’t see it in the outcomes it’s you know around 66 67 we’ve done as worse as we do subsequently as well so so that that kind of you know uh so there is a a continuity there so you know for me so this is really coming from like say you know Bhagwati and Desa’s his book you know the one that came out in 6974 74 uh and then we have you know Arun Shri writes his dissertation around the same time on foreign exchange those that is that is earlier that’s earlier uh I thought there was you know Bhagwati and uh Desai was floating around in 6970 and gets officially published when it gets published right exactly so when I look at those two works together to me the protectionism the import controls, high tariffs, the foreign exchange controls and the domestic controls end up becoming this seamless entangled thing because you can’t have one without the other. So, right, I mean you have all these controls domestically. I mean, you have a foreign exchange problem. You’re near Otaric. Uh you can’t import because you don’t have enough foreign exchange. Now, if you can’t import, your domestic industry needs to grow but you aren’t giving enough licenses and expansion permits. So if you allow the very few industries to expand then now they’re going to make a killing and we can’t let them profit under socialism. So we got to not issue additional licenses or let them expand. So each one of these kind of reinforces the other depending on which industry or sector you talk you know one may have come before and one may have come later. So I very much think of their um you know I mean if I had to like use like a very u like a classic Soviet style example it would be like Mises’s you know dynamics of interventionism or something like that like you know you make one intervention leads to the next and leads to the next. So that’s how I view that time. I don’t think of the import substitution as being necessarily separable though eventually we did have a time when we completely you know dismantle at least the union level license permitrage and we still had relatively high tariffs and they came down relatively slowly. Exactly. So I I was going to say just two things right on the um on the Bombay club that you said you know that they went along with this but actually we actually cite uh uh Neu saying it’s actually the epig there saying lots of industrialists come to me and complain about all of this and they’re not wrong and they’re not wrong. So, so, so you know, you could see straight away the, you know, what they thought they were getting into was not what actually happened. And, and, and what I was going to say second point is exactly that that you see that in the 1980s is work that Danny Rodrik and I also did uh earlier that you you know they they keep the protection and and then they uh it’s also by the way the reason uh that happens is possible because it’s kind of politically incentive compatible at that stage, right? because it’s pro competition reform that’s going to create disruption and opposition and and so so so in that sense one can distinguish the two as happened in the 1980s but but it’s possible that before that it was all one seamless thing and certainly there was you know elements of I don’t know about seamless but definitely entangled you and we see that you know the point that you made about the dynamic intervention we do see that also in the subsidy thing right you have to give if you give one subsidy you have to offset it therefore with another subsidy That’s how we got the export subsidies coming into place because we realized that uh you know and so we got the fertilizer subsidy actually I should send you I have the I have a paper on this exactly on Mises’s dynamics of interventionism and subsidies. So they start with this idea of land reform. The original idea is that actually smaller landholding sizes are more productive. Now this came from faulty surveys and it was based on bad research and bad measurement. But originally the the view the academic view very much was that smaller landholding sizes actually leads to more yields because the farmer is more invested in you know very intensive. Exactly. Intensive by the way that’s also Stwell’s view on Asia how Asia works. Yeah. So then they do that. The trouble is now with each generation the holding size keeps getting smaller. It becomes more unproductive. Now we’re not allowing exit from agriculture. So now you have to give subsidies. So you give the first subsidy which you know if you give better yield seeds then you need more water then it needs more fertilizer it needs more electricity and now we’ve never quite gotten out of it and you can literally like see stage one these are the subsidies given stage two I think everything except the fuel subsidy is still there and even the fuel subsidy has gone away because electricity has you know kind of taken on part of the fuel subsidy basically right instead of diesel generators they are now using electric gener Yeah. The the subsidy was as the one that went away and which was replaced by electricity was kerosene. Kerosene. Exactly. Right. Kerosene, diesel, that kind of fuel. Partly I think the manner in which the fuel subsidy got eliminated was that that was a clever sort of nudge style thing, right? That you incrementally increase it every 2 weeks by a little little and there were helped that that world prices went down etc etc. And I think the dynamic which you’re seeing is exactly what is happening now with cash transfers right today you saw the Tamil Nad government and but slowly slowly I mean basically cash transfers are reaching close to 1% of GDP and it’s all within the last and it’s all in addition to the other subsidies it’s not in it’s not the whole idea in fact Arvin and I with part uh uh uh mukupad they had written perhaps the first paper on cash transfer This was in 2008 and but you’ve changed your mind. Yeah, I changed my mind. I also changed my mind. Yeah, I changed my mind actually in 2011 I I changed my mind meaning I said that unless it is a substitute it should not be done. Yeah, just for the listeners, this was you know the first few writings on universal basic income and cash transfers in India and for both of you the the expectation was that this would be in lie of all these other subsidies which are actually price distorting right that was the argument that you made and now you realize that the political economy just simply doesn’t support them and I think the one golden opportunity had that this slipped away was when the uh in a little bit of a panic because Andra had introduced or maybe telling Ghana this cash transfer to farmers. So then the central government went ahead and that was of course then all India. That was the time when they could have said you either get the fertilizer subsidy or the cash transfer at least either or you make a choice but not both. But instead by the way and then every state realized because they were all clamoring for the same votes right by the way that that was never on the cards. Nobody ever said fertilizers you know unfortunately I wish it had been but so just so it was on the cards in the sense that’s how economists and academics anticipated or expected that to play out that slowly we’ll phase out distortion subsidies and go to cash subsid from inind to cash so let let me give you a little bit of just because dish has mentioned it uh minor scoop uh so so telingara implemented right to bandu right but then what happened Jan January 2019 19 just before the election uh the Congress party introduced this is the national election yeah national 2019 the Congress party introduced ni you remember that remember that whole kind of thing I got a call from Arunjiti saying Arvin what should we do I don’t want to disclose the contents of that but it was a combination of the rabbandu and the nai that made the government panic and that’s when they introduced PMAN now let let me tell There are two reasons why I’ve changed my mind a bit on the on the cash transfer, right? One is what you and Dish said because remember when we wrote about it in the U survey in 2016 where you said universal basic we actually listed all the subsidies that should be removed you know and these are middle class we calculated how much money you could give and how nondistor it would be and all that stuff but the second uh reason is something that I hadn’t fully uh anticipated and it’s an insight due to TMA Shanogaratnam who’s the you know Singapore He used to say uh you know compare a cash transfer with an earned income tax credit. Okay, these are both means of you know giving people money to the poor. Yeah. Right. Earned income tax credit. But politically you’ll win no votes for saying I’ve given I’ve increased the earned income tax credit. Uh which you will. So the very thing that makes a cash transfer popular is what lends it to abuse as well. you know it’s very easy if you know D says 500 rupees you will say 100,000 rupees and and which brings us to the other thing about uh the aspect which we talk about in the book is that if you look at India Indian democracy in the first 30 years the average gap between elections was like 4.7 years okay in the last you know whatever 5 10 years like 18 months 20 months 14 months 14 months wow 14 months. So now the number of occasions in which you can be populist has increased. the the gap between them has become smaller and so this abused property of cash transfer gets exaggerated and heightened and that’s why we’ve seen the competitive populism of recent but if I could add I think another reason why you know then more reasons you know the fiscal cost all of but I think one why does this increase last decade it’s not just that one state starts is and this is the point you very nicely put earlier You know the inadvertent things that you think you start with that the success in building a genuinely worldclass digital public infrastructure means that now you have state capacity to implement this right now that worked very well during co right because India could transfer in ways few other countries at scale now once as They say once I have a hammer, I see a nail everywhere. Once I have the DPI and I can get it, I can get this. So this morning when at 6:00 a.m. or whatever the Tamil Nad government, it was in the in housewives bank accounts within Yeah. whatever five minutes, right? And that’s the other constituency actually women who’ve benefited hugely from the direct cash transfer. But but I think what that means is that the that the foundational aspects of development which is the classic public goods. So yields of Indian crops have not increased much. I mean especially when you compare to China they’re still about a third to a half and they were always bad to begin with notwithstanding green revolution. But the agriculture extension systems of the public sector has collapsed. Yeah. No investments. States actually investing in the crops growing on the state in their agriculture, universities, etc. Nove put in money in schools. We know that the learning outcomes have been weak. And yet so all the what we call hard wicked problems that are absolutely essential even now the pitiful expenditure on say sewage that is dumped to create water treatment plants. Look at the incredible losses of human life and health because of air pollution in even where the elites live in in Delhi. that these are hard problems that require resources, state capacity, buildup. That effort is hugely lagging compared to the rush to cash down. There’s kind of a more punishious and deeper uh I think looms that is already there but looms ahead. You see what you and Dish said uh and about the uh DPI. See the the the the the political economy is something like this, right? That politicians want to be able to promise and deliver, right? Yeah. Education building learning outcomes between my saying I’m going to improve learning and actually happening is like 5 years. Yeah, but there’s a second point is that politicians also want the clients to know that they were responsible. The attribution problem of political economy. Absolutely. Cash transfers accomplishes that both of them beautifully you know one it’s effective. You know I say today tomorrow it’s in your account thanks to DPI what they said. The second is you can say this is due to me. Yeah. A and the combination of that therefore so then it has the potential to become a self-reinforcing political compact between the citizens and the state you know because of all the other things that they said right it’s going to it’s hard work much more difficult to deliver so both politicians and citizens say you know cash transfers are an easy way forward and that’s what I think is slightly pernitious and dangerous about the the current moment and cash transfers because you cannot avoid the deep We can’t. No, but there’s a third layer and you talk about it when you talk about the financial system. I mean, you focus much more on banking, but we are in a bizarre sort of I don’t even know if it’s cooperative federalism or competitive federalism, but it’s definitely federalism with no budget constraints, right? States are not responsible or rated for how large their deficits are and how much debt they incur and what kind of problems they impose. I mean they basically there are some states which are free riding on the national currency and we have no way to discipline that municipal bonds are now coming in but state level bonds are pretty there’s almost no and there’s a market for them right there’s a there’s a because everyone believes there’s a sovereign guarantee so there’s no so you cannot use the bond markets like to discipline exactly and the bond markets are also not giving you much information because that market’s also not very thick you have a an entire state banking system which has no choice but to buy those bonds. But but I I want to be a little bit careful here. See, I think we have to be I don’t disagree with what you’re saying about the states, right? I think but it’s not as if this the center is a night in white shining white armor. But they have better fiscal discipline than the states. I would think in larger like larger consistently flouted the FRBM after it they instituted it. I mean I think there’s not been one year where they’ve met the FRBM target. Maybe there’s one I’m not I’m missing it maybe. So, so I think one has to be careful about right that I think because I this leads to the just discuss this for one second right. See one of the puzzles we say in the in the fiscal chapter is why is it that India having had the highest deficits amongst all comparator countries has not been punished by markets right there’s a bit yeah I mean we are double digit for 35 years you know center and state combined right and we haven’t really been punished but the point is that we have paid the cost in terms of the interest the interest burden that has been produced and you know it’s about four to five percentage points of GDP uh and uh you know defense only growing and only growing defense expenditures development expenditures have been squeezed out so I think the the at least politically I think the task should be how both can come together there should be no fingerpointing that you know only you ought to be because after all the center is giving all kinds of subsidies as well uh the fertilizer subsidy the MSP etc. etc. So I I think that I don’t disagree that the states also have to do but I think it has to be done cooperatively but then so so the broader point I was going to make was that states don’t feel the pressure because as you said whatever the the you know the sovereign guarantee but the center the country as a whole has also not felt the pressure from markets and so on uh and that’s why we continue in this low-level equilibrium where de facto we’re bleeding uh but but we’re bleeding internally you can’t see it externally. We don’t see in terms of a crisis but we do see it in terms of the huge development expenditure and we show in the in the in the chapter on on order that in the last decade despite the much more muscular rhetoric India’s defense expenditures a share of GDP has been the lowest in half a century and even most of that expenditure is actually payroll it’s not real defense technology Also to win elections one gave the one rank one pension right sharply increased. So you’re you know you don’t win wars because your older people retired people are can play golf well. Yeah right. That’s just a sad reality. But uh the fact is now you can if you had a you know you know all this thing that NATO now is rushing to cross 2% of GDP. Well, India hasn’t you know if you if you promise the one rank one pension and there good reasons fairness all of that that should be done but then you know you have to go to at least 2 and a half% but there is genuine crowding out now happening so basic okay so now this is where both the book and this is some of your earlier work uh you know on how I call it the upside down state right so India the Indian states ulta huh ulta Right. So India spends on everything except what it’s supposed to spend on. So we’re not spending enough on defense and things like that. Certainly not on police and R&D and courts like you know all the the the hobbsian state as you call it in that table. We’re not spending enough or at least delivering on education and health and we’re spending on all these bizarro subsidies which only keep proliferating and also expanding in the in in terms of expenditure. So the tightest link that I find between democracy and how that has played out poorly for India is this part of it. Now there’s another way to think about it right which is maybe not that India became democratic too early or you know the democratic politics has caused this. It’s almost that India has too little democracy, right? We didn’t introduce the democracy at the local government level early enough. We didn’t have enough fiscal federalism early enough. Those are typically the governments that make the investments in, you know, public services, health, sewage, public sanitation, those sorts of things. And because we never quite had that, now the government has to, you know, at the central or the state level push a button and some media meal scheme has to go somewhere in interior India. So the way I think about that problem is redistributive politics because of democracy but gone terribly wrong in a sense because of too little democracy, too much centralization. What would be your response to that? So you know there’s a graph you might recall it’s in the fiscal federalism chapter. uh we generally think of when all the debates on centralization is Delhi versus the states basically tier one versus tier 2. What we show is that among the three largest countries in the world which is China, US and India. India, China and the US complete very different political systems but very similar. Yeah, in that public employees are largely at the local or federal, far fewer at the state. India is exactly the opposite. Yeah. And we argue from that that the that the debate on centralization and there’s a real important debate there between tier one and tier 2 is obscuring the much greater centralization between tier two and tier three. and our tier 2 just to interject are as large as most countries China right so I mean it is a relevant comparison now I think and this is something that that Arvin has been more sensitive to this that especially and you know uh uh uh uh Bardan and Mukerji have written and there were real concerns that if you decentralized in the 50s and 60s to the village level where the upper class hey hegemony was there the lower class had very little voice there would have been real the capture right however Indian politics has changed you know that upper cast he hedgemony it’s not that it’s no longer there but it’s much weaker at in rural India and and you know uh than it used to be so that there is a much greater uh scope for decentral now we did and this was I think one of Rajiv Gandhi’s singular contributions it didn’t happen while he is alive. But we know he pushed it and it happened after he died. The 73rd 74th amendment. I think by all accounts and we say in the book the 73rd amendment it’s not we don’t want to say it’s been great but it’s made progress. Definitely the 74th however which is about urban urban that the states have just sabotaged. In fact, it’s interesting. We all think about elections and how the election commission is trying to, you know, tilt the playing field. The state election, the commissions, they don’t even hold the elections which are constitutionally held. And, you know, somehow it’s allowed to happen. They find 30 excuses to postpone it. You know, electoral role is not ready, this that and the other. And so the unlike the 20th century in the 21st century India will be much more urban. Yeah. Growth will have to come from urban that will be the one that will lift. There will have to be more migration, rural, urban and if you are not giving urban areas and so the real competition you know uh Herbin talks a lot about the competition you know amongst states which can be lead to positive but you can imagine if you had competition among cities absolutely that’s already happening right but but it could happen much more if they had the agency and the autonomy all of that and I think that part, the way the 74th amendment has effectively been sabotaged and you know how to get around that I think is uh something that needs Yeah. Uh you see I agree with this but I think you know again just a cautionary note that you know just you know further decentralization you know is not a panacea for everything. I I’ll give you I’ll give you one one reason why I have uh what D says I agree with you know and what you’re saying also agree with thing but I I don’t have the confidence that supposing we said you know uh uh third year you know you will have control say to tax uh and generate revenue and then thing I don’t have the confidence that the third year will be able to you know do the taxation to generate the resources because in some ways you know and there’s an amazing uh report uh one of the taxation committee reports uh in the ’ 60s or ‘7s where they say that you know uh some of these taxations should be centralized because the closer you are to people I’m not saying this will actually happen but I’m just saying it’s a cautionary note because take the Chinese example as it’s very interesting so we have a chart in the book which shows revenues from land right China’s in the last days about like 25 like 8 to 10 percentage points of GDP we’re about 1 to one and a half maybe even less but the Chinese third year has got it by selling land not by now that they can’t sell and they have to tax they’re not they are not able to tax as well in China what Dish mentioned the third tier has is a vehicle also for political advancement Yes, right because that’s where you start and you know many of the cities have been the you know Shanghai mayor whatever right so I think it has to be decentralization but also something more which will make you know third the third tier come alive because remember the heart of the problem what D said about the 74th thing is and this is one of the I would say one of the tragedies of Indian development that in the course of development land values have exploded. Very little has been fiscalized. It’s all gone to the private sector or corruption or whatever. And as long as that continues, as long as that continues, um you know, uh the politics of the third tier is going to be so complicated. In fact, to reverse it because of the rents, it’s harder to reverse. It’s not been allowed. Okay. Yeah. because the state level politicians know the money issues only because I can control urban therefore they don’t want to let go. So here I have couple of points. So I mean I completely agree with you that you know China is a little bit different. China is really decentralization. And here I want to make a distinction between decentralization and federalism because to me federalism means that each unit is its own power center whereas decentralization just means someone else has handed you the authority which can be taken back at any point. The the thing with what we did with 73rd and 74th amendment is we des we decentralized you know in terms of taxation and expenditure but we truly federalized in terms of creating a democratic layer. So if you make it fiscally federal, I think we’ll have slightly different outcomes. But the place where I really disagree with you is property taxes are one source of revenue, but there are other sources of revenue, most importantly user fees, right? And in India, the poor pay the highest user fees. So they pay user fees for everything from, you know, clean water to using a restroom to everything. And in a world where that’s already getting paid and it’s basically going to all sorts of middlemen and bahubali or you know like slum leaders and things like that you could very easily imagine a a situation where that could go to the local ward or you know urban local body or the panchiat. So there is an entire layer uh which we don’t seem to have tapped in. You could even think of rethinking the GST and saying 5% is going to be local GST and you know state and federal will take 2.5 percentage point less across the board like there are many ways of designing this in a way that there is fiscal capacity at the lowest level that the state politicians don’t need to can I can I see the lack of user fees and and not generating revenues through tax as all of a piece. It’s the same thing you know h because after all take the take the electricity example much bigger much more salient I mean the the rich don’t pay for the full cost of supply of power why do we think that if it doesn’t work at that level you know I I it’s not surprising that it doesn’t work so I I’m not sure that you know user fees somehow is a slightly different category that’s going to be very different I think it’s all of a piece this is this is the whole thing about Indian democracy, the clamor, everyone gets a shot, you know, uh at at suckling at the state and they all get their thing. I think I think we should recognize it’s not a simple problem at all, you know, so simple, but some states have done it. So it doesn’t seem that impossible. No, but even then in in states at the local level the functionaries they are not even aware of what they can do or not do. local state capacity is extremely weak. See, because they are not allowed to hire on their own. They all state employees who can be transferred not because of them but because of state by and large. So you know starting with the larger cities one needs to build up people with with who have experience with state capacity and as you know parasu you decentralize as capacity builds up but now we are locked into this low-level equity so we can’t give you the resources but of course if you don’t get the resources how will you build I would actually argue the opposite that we should federalize the most of the place with the least capacity Because it’s not like Bihar has great capacity at the state level either, right? So they don’t have great state level capacity to do factory inspections, you know, to do cadastral service. They have nothing. So you might as well just federalize it. Like what difference does it make? A different way of saying what Dish just said was even if I granted you that thing, there’s still a kind of chicken and egg problem. People will not pay unless you show that you know you can deliver. That’s why the cash transfers are so attractive, right? A and then but then they can’t deliver until they have the resources and the agencies. So you need to break this cycle somehow and it’s not easy to do. But you know people also said this about Indian democracy when we first introduced universal adult franchise right that they won’t be responsible no and they won’t even know how to vote they can’t read they can’t write like how will they even know who their political leader is or make demands some capacity to vote right but that I think is different but also remember all this user charge all this that you say it’s just you know when someone says do this my question is what is different now from the last 75 years that you can do it So I’ll tell you one thing that is different and I have seen this in two very different settings. So you know my parents live in one of those big condo buildings in Noa which is got its own association and you know it’s got like beautiful watered lawns inside. When I go to those meetings it’s like seriously democratic in the sense that everyone has an issue. Everyone has a voice on how the money will be spent on whether there is going to be you know a dog park or tennis courts or a new golf cart to take the kids to the bus station or whatever the the issue is. Uh I have seen the same in you know outskirts of Gurango uh slums uh when we were working on the Gurango paper. It’s the same thing. You go to one of these evening meetings in the slum there are a couple of slum leaders. It is the exact same argument that we are paying money but there’s still garbage outside my you know immediately outside my home and things like that. So the moment you tie the electoral voice in some sense with the monetary or the fiscal voice uh you seem to get pretty good outcomes which is what you know in political science literature or public finance literature you would see about Switzerland or local governance you know in New Hampshire or something like that. So I don’t see why we can’t experiment with that at the lowest level. I think people are already doing it because they’ve exited. Yeah. No but I think look I think we should acknowledge things are happening. Yeah. Uh you know I think there is a growing political recognition that this and you know partly also India’s intellectual classes are obsessed with farmers. Everything is farmers farmers somehow the you know and we say and some of them want to be farmers. No, no, that but somehow why is it that construction workers are less deserving of any other group or or any other you know you know group than farmers and but somehow anything that happens around farmers is the one thing that is like you know completely distinctive different as opposed to saying look uh you know and you know we point out in our book that you Ambedkar in 1918 said the best way to rescue Indian farmers is to is to get most of them out of it because the plot sizes are just way too small. The more you give subsidies, the more you give, the more you lock them in because that is at least something certain relative to an uncertain urban. So in some ways we’ve we’ve all of this has fed into a low-level equilibrium and you know you realize that at some point de facto India is urbanizing whether you you want it or not. So you’ll have to I think the only thing I would complement that by saying is that you know you have to get them exit by providing jobs elsewhere but we cannot neglect agricultural productivity. All this has to happen in the context of rising agriculture production. It’s the same thing Amitkar said in that paper, right? We need large holding sizes. But his vision was we want mechanization, right? He said, I want lands full of tractors. I don’t want to see any landless. The tractors are there now. But but the thing is that I mean they’ve been driven by the wives because the men have gone to the situation. I mean the whole thing you know people argue about food security all of that. I mean you need in to get the same output if you had just not the highest but just the world average. You need half the land. Yeah. Uh so Arvin I wanted to ask you if you’ve changed your mind a little bit on this. So you know this is really coming from a few years ago your co-author Danny Rodri wrote about how we have premature de-industrialization. Brazil was the big example but of course you know everyone is talking about it in India also and you know uh Ragu Rajan and Rohit Lamba have written their book and you know I mean this has so many people pulling on that thread and recently your piece uh in the economist talked about how you’re much more optimistic about manufacturing so couple of questions one are you more optimistic about manufacturing irrespective of what’s happening in the global order I am optimistic because I think some of the domestic reforms have started happening and India is a large enough market even if the world has lots of uncertainty in geopolitics but we haven’t had enough reforms still right we are like as you point out in the book we’re a country of factories like nothing has scaled midgets making widgets yeah midgets making widgets I love that phrase so so have you sort of changed your mind on this so exactly so so let me be careful here I don’t know whether I’m seriously more optimistic stick for me an opening has been created for something that we were never able to do. Point number one. Okay. And that opening is the China plus one opportunity. Right. Uh and again to fix this concretely, China does something like 40 to 50% of labor inensive manufacturing. Yeah. Right. It you know it’s going to resist it. it is resisting it through all kinds of policies but hopefully over time that will come down and point number two is that as long as we can go from our current two to three to say 10 12% that’s the opening that I think has opened up towards that’s point number two right point that’s big that’s big exactly that’s not even with robotics you know dish is right that many of these jobs are not going to be as intensive as labor employing as before but even with that it’s going to you know reasonable point number two. Point number three, it’s a variant of what you said about reforms having happened. The point is that some of the southern states have shown that they can in fact attract I think Foxcon coming to India is like say it’s saying that and remember these are all very uh uh you know employ I’ll come to that in a second that we can do it if you can do it in uh electronics we can at least have a shot at doing it at this point number three point number four is that these are all activities that are female labor intensive and employment you An average apparel factory 80% of its thing is is women. Same for non-leather footwear. Now even Foxcon apparently you know they they think women do much better moving to the do I have been to the Foxcon factory do in Tam Chennai 20,000 for women right incredible and and there’s a factory coming up in Hosul by Tatas it’s about 40,000 women right so third is so we we we can’t I mean it’s possible so therefore uh you know what we should do now is uh give it the best shot to try can go from 3% to 12 15%. Uh through and and last point I will say is that look these companies are coming to Tamarad, Karnataka, Andhra Pradesh, right? Obviously because governance is better there right but within India remember going back to that observation striking thing in our book onethird of India has grown as rapidly as China for as long. So how do the Hindi heartland states catch up with this? So which relates to my last point which is that within India uh if you think about it labor costs are one-third in Uttar Pradesh as they are in Tamil Nad and Karnataka. So rightfully and that’s where your point about reforms come in. If say an Uttar Pradesh or or a Madhya Pradesh or a Rajasthan can get the governance act together then all of this manufacturing or a lot of it should go to the Hindi art that manufacturing they can have their own manufacturing right you can make apparel you can make leather you can make plastic you know toys and everything that Vietnam is doing but the only thing I disagree with is that the notion that India’s market is big enough to uh to sustain manufacturing sustain I I I absolutely believe in exportled growth but I’m saying You know there are certain global cycles. I’m saying all this will work out for India irrespective of what’s happening globally like we not making these investments because suddenly we have a trade deal with you or No no no no there I slightly disagree. See I I was and cards on the table. See when the US imposed 50% tariffs on India I think not only was there a huge current cost in you know in gems and jewelry apparel fisheries very labor intensive sectors it was also how investors would view India as a future destination for future investment and things right and it was dampening the China plus one opportunity so so so theter internal environment matters a lot. I mean, so not to say it doesn’t matter, but I don’t see why that has to necessitate our reforms. Our reforms need to happen irrespective of what’s happening. So that’s my point. But there’s no substitute to export growth. I think on that we don’t disagree at all. I think you know going back to our earlier thing on cash transfers, right? And the opportunity costs of that, right? We know that manufacturing an important not the only component of cost is electricity. Yeah, we show in the book in India manufacturing pays twice as much. If you were now saying you want to be manufacturing any state instead of these cash transfers and thinking long-term say we will ensure that electricity prices are as much anyone else our competitors pay. We know that labor as saying you is is has a strong gender component. So it does two things not only includes labor but has is labor female labor empowerment. So if you want to do subsidies instead of all of these subsidies why not have subsidies for the doms for for like women right that reduces the cost for the manufacturers and you say it we know that women’s safety is one reason why we have lesser participation. this gives the safety. These are the more imaginative ways of thinking when we think about industrial policies, not just PLI or this. These are ways very targeted subsidies which actually get things moving. Let me get on to my pet last pet peeve, right? We all agree that you know this is it’s an opening. There’s no guarantee and as you rightly said we need to do all the reforms you know electricity whatever. One reform that and this is for the nerds out there, right? All successful export-led strategies require a supportive exchange rate. Yeah. And we managed without that actually right largely in the last 3 years uh we have followed a strong rupee policy last two years I mean I mean not not the last six months. No, no, no. I I would I would see very strongly between after 23 for about a year and a half and in the last 6 months partially because we’ve been intervening very dish even in the last 6 months we’ve intervened much more than we should have. So, so this is something you know it sounds like you know geeky but if you want to sustain one of the elements also because remember this is a macro instrument to support a competitive ex to compare an exchange rate. question here. I think even in the book you talk about this when India started liberalizing in 1991, it also moved away from the East Asian model in the sense that it didn’t give that kind of currency support to its exporters and we managed to do it quite well irrespective. So is it so I I’m not disagreeing with what’s happened factually in India in the last few months more that is it necessary really or do we just need to stop taxing domestic manufacturing the way we do? The way I I would put see we do we tax manifesting in many ways which have to go electricity labor whatever governance above all see when people talk about labor reforms or whatever anything what happens on paper is one thing what investors care about is how it’s implemented on the ground I in the following sense if there’s a dispute is there a mechanism for resolving it in a way that’s satisfactory to all partners and that’s what Tamil is Tamad has done it allowed it to exit and they want to come back. Yeah. So, so these and and this is a broader point in the book which dish has also emphasized that you know we don’t pay enough attention to actual implementation of these things and this is where on the exchange rate a simple thing after liberalization we followed an excellent exchange rate policy we didn’t uh uh you know subsidize or follow a uh you know aggressive mercantalist policy like China did but in the last few years we’ve actually departed from that in favor of a strong rupee policy intervening for reasons that are not related to maintaining low inflation. Yeah. And and and it’s so so I’ll tell you a very uncharitable version of what uh the reason for that policy. One of the senior Delhi bureaucrats told me that this is happening because all of our children are now going to college in the United States and that’s why we have No, it’s not. So it’s not it’s not a it’s it’s it’s actually quite important what you say. This is again when you talk about elite determination of policy, the exchange rate, some business groups borrow in dollars. They want a strong currency. The middle class sends its kids to things. They want a strong dollar as well. So there’s a constituency that wants a strong dollar. Exactly. But also there is a view in certain parts of uh the both on the right that a strong nation needs a strong currency. There is and the newspapers are also relentlessly covering. Oh, the rupee is declining. You know, look how when we were there, the rupee was so strong under these. So, even prominent economists tweet that by low inflation relative to those old times and people are low onion prices, more stability in your consumer price. And so, it’s a weird thing like regular folks aren’t that obsessed with it in a way that the media and experts are because it’s seen it’s used as political uh you know, brownie. Yeah. the downey points that somehow uh if the rupee is declining somehow it’s a it shows national weakness weakness yeah there’s national strength and national and and so my counter to the when I speak to government officials say the most nationalistic country is China they they maintain a you know mercantalist policy so you know on the the one of the loveliest things about the book and you know we run the 1991 project so if we don’t talk about it then I think I I will have to leave this building quietly uh is you talk about how both on the left and the right there seems to be a huge misinterpretation of what really happened and what that meant and it has given rise to both a much bigger welfare state because finally the revenue started coming in without which it was impossible. Uh but it’s also given rise to like the big aspiration right like all your economic growth the double-digit growth in the boom years all of that came from export-led growth in some sense so both the left and the right somehow seem to both understate their own cases and also overstate their own cases but it hasn’t led to huge structural transformation so that’s kind of the the headline of of you know those separate chapters I would say two things on that right one is that you know Not only did we get the welfare state you know also the rectification of the neglect on public inf infrastructure health and education that also happens after 911 you know for various reasons. So, so in in that sense you know took the neoliberal state was the caring state was the much more public good providing state and all of these things which yes it also led to higher inequality but it also led to the fastest poverty reduction in Indian history and I I think therefore uh and the aspirational stuff uh is very important no people wanting to go to school because they can see all these engineers get jobs and you know even BA literature get jobs at call centers and things like that right like it’s a it’s a huge difference of of young people actually wanting to study was was something my generation saw for the first time. Although of course I think uh it is the case and it’s not uh unique to India. We seeing this worldwide that that sort of one of the single biggest challenges now and going forward will be good jobs that but that as we’re saying is true in the US it’s true worldwide we are at that and which is exa which is precisely why I mean doing more on manufacturing got to do everything not just x or just y it’s existential for so you have to do so so so just on on the neoliberal states. Remember the the the health the education outcomes improved not just because of more resources. It’s because the demand for education went up and parents started sending their school to private schools where public schools were no longer available. Right? So, but let me tell you the the the kind of tragedy of uh in terms of your 91 moment, right? And it’s something that’s one of the themes of our globalization chapter. Why is it that the period that delivered the most because of openness we start we went back on that two ways 2017 18 the government started reversing protectionism started reversing the gradual opening which now I think they’re again due to external pressure which is why I’m and also your quality control orders and all that you’ve written about are thankfully going a lot of it good but the Congress party in its manifesto it never mentions it has you know you say failure is an orphan the tragedy is that India’s success has become an orphan and that’s the paradox of this I mean the fact the Congress party did not allow the man who ushered in the reforms that when he died his body was not allowed in the congress office just shows that the man who that their own party who that launched such a this India’s success they have no political opportunism which is the standard Exactly. They’re disappointing us even as politicians. Exact. So, so, so that’s why, you know, when my in my economist piece, the reason I see this as an opening is, you know, the China plus one, but also we are going to open up in a way that we’ve, you know, under pressure this time around in a way that we’ve never done. I mean, can you imagine manufacturing tariffs in India close to 0% and admittedly not to everyone else? No, but still. Not to everyone, but you know, but still, but it’s a big step. Yeah, it’s a big step. Yeah. And I and I think so there is an opportunity but we have to and but all opportunities you you have to willfully seize them. One important distinction is in those years the attitude at least in New Delhi very much was we need to grow the size of the pie. So let’s do reforms so that you know we can open up the fiscal space or we can open up employment or any other opportunity or get more foreign exchange. Let’s just take electricity as an example that you’ve written a lot about. I don’t see the government going crazy and saying okay we can’t solve the political economy problem of you know subsidizing uh electricity for farmers and things like that. Why don’t we just go nuclear and I don’t mean that just as a pun right like why don’t we just go allin remove the constraint that we have on coal or oil based electricity I think to some extent yeah I think that I think the central you know for instance see electricity is a classic it’s a state subject right so all the things of the discoms their finances all of that and you know so many attempts have been made and the center can only do so much. But on the supply side, there is a big on on renewals. I mean now solar I mean you have gargantuan you know supply side but you know the transmissions you have to build the distribution all of that I think in the sense it’s not looking as bad as it used to. The main thing is that unless you cut down cross subsidies, it’s very hard for manufacturing to get competitive prices. Unless you and manufacturers often are not allowed to have their own captive solar which they can wield from anyone because you have to go through the state electricity board transmission. If if things like wheeling etc allowing you know competition there is a possibilities there. Um coincidentally maybe is that uh uh I have piece coming out today with a co-author Navira Sharma on in project syndicate on India’s uh you know see because remember this episode with the US and things and I was surprised has shown us again how energy dependent we are our energy imports are you know what our energy imports as a share of total energy consumption is like 35%. And it has risen over time and now we want data centers which are going to take more electricity. We’re giving them tax holidays. So this is just going to get worse. I think here the central government is moving in the right direction. And now states have to solve get their ducks in a row. Yeah. No, this was a great read. I really enjoyed reading it. It’s it’s almost like I mean it has like 100 pages of references. So I feel like it’ll become my one-stop shop for all the all the research that I need on every topic. So I encourage everyone to read it. My only quibble like I mentioned is the title because I expect this book to be read maybe 100 years from now and at that time I don’t know if it’ll be a sixth of a humanity it still will be I but that depends on all how all the other countries so we looked at at the best UN projections uh the sixth of humanity is going to be pretty stable so the reason being the reason being that China’s will decline go up so just ask me also decline much faster, right? No, no. So, ours in between 1950 and and 2025, India added a billion people. Yeah. Between 2025 and 2065 and 2,100, the next 75 years, India will add a net zero people. Yeah. So, it will stabilize and begin to fall meaning from the peak. Yeah. in 2065. Yeah, we start but but I mean no one knows the future but to the extent that right now but the demographics it doesn’t change that rapidly the the the read Adam Smith’s now 250 years later so you want about I thought your complaint was going to be uh the reason it’s not a good title is because all of humanity should read this book. Ah, okay. Well, I would just ex hope our students read this book is where I I’m so disillusioned with anyone reading anything now. But thank you so much for doing this. This is such a pleasure. Thank you so much.