Indian Prime Minister, Dr. Manmohan Singh addressing at the presentation ceremony of the Outstanding Parliamentarian Awards for the years 2007, 2008 and 2009, in New Delhi on August 18, 2010. Dr. Arvind Subramanian says the Indian state is foundering, partly because Indian politics has become increasingly criminalized, and corruption is rampant.

On Tuesday, Finfacts reported that India should start matching China's GDP growth of around 8.5-9.5%, over the next two years, barring another global financial crisis, according to Asian economists at US investment bank Morgan Stanley. More importantly, they say that, by 2013-15, India will start outpacing China's GDP growth.  However, economist Arvind Subramanian, an Indian national, who works at the Peterson Institute for International Economics, in Washington DC, has highlighted the paradox of India's growth. 

Arvind Subramanian wrote this week that last Sunday, India celebrated 63 years of independence. He said many hail it as an economic powerhouse but also point to the lopsidedness of its growth. Despite being home to some of the world’s leading technology companies, poverty is still widespread, physical and social infrastructure still woefully inadequate, employment opportunities still limited, and access to basic and higher education still insufficient.

Subramanian said nearly 40% of the population is still illiterate, and 25% is below the poverty line. India ranks 133rd (out of 183 countries) on the World Bank’s ease of doing business index - - 169th on starting a business and 182nd on enforcing contracts - - way behind several countries in sub-Saharan Africa and Latin America. As Edward Luce, currently Financial Times Washington bureau chief, observed in his In Spite of the Gods: The Rise of Modern India, “India finds itself higher on the ladder than one would expect it to be. It is just that most of its people are still sitting at the bottom.”

The economist asked why, then, has India grown so rapidly? He said economic growth depends on policies toward the private sector and supporting public institutions. Policies have improved especially since 1991 but hardly enough to justify the spectacular growth rates of over 8% per year. Some institutions have done well, particularly those that hold elections, ensure financial stability, and regulate telecommunications and financial services. But these exceptions apart, the Indian state is foundering, partly because Indian politics has become increasingly criminalized, and corruption is rampant. India’s (lack of) preparedness for the Commonwealth Games, which New Delhi is to host in October, illustrates the gravity of the crisis in India’s governance.

Arvind Subramanian said given the deterioration of the state, it is puzzling why India’s economic growth is so high. Many would point to the educated elite and a dynamic information technology (IT) sector as explanations. While these have helped jumpstart growth, their effects are too small and benefits too narrow to sustain growth in a large economy like India’s.

The economist said the real driver of India’s economic growth is growth itself: Growth that policymakers kick-started in 1991 is begetting more growth. "As I argue in my op-ed in the Financial Times, this process works through three channels: First, growth for three decades since the 1990s has made entrepreneurship and money making respectable in India. As political scientist Devesh Kapur notes, India has become a nation of 'hustlers' constantly looking for new economic opportunities, and ways to get around tedious regulations, which keeps growth on an upward path. Second, the private sector is increasingly responding to rising demand for public goods, which the state has been failing to supply adequately. The government’s failure to provide good quality education, for example, is turning out to be an opportunity for private companies, such as the flagship IT company Infosys. Whether they are private schools in rural areas or training and vocational centers in cities, almost all the incremental demand is now being met by the private sector. Third, India’s states have become increasingly competitive. If one state rejects a project, another is ready to take it," Subramanian said and he cited as a prime example Tata Group’s relocation of its Nano project to the state of Gujarat from West Bengal.

While this three-way dynamic continues to generate growth, the decrepit Indian state is thwarting wider economic change, thus preventing India from scaling the heights China has, the economist concludes.

Finfacts report, Aug 18, 2010: India to outpace China's growth by 2013-15; By 2020 India will have the largest annual number of new graduates globally