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Demystifying India's Economic Transformation

September 6, 2018 in Economics

By Deepak Lal

Deepak Lal

The Billionaire Raj, a new book on India’s
economic transformation by James Crabtree – who was, until
recently, the Mumbai bureau chief for the Financial Times
- is a curate’s egg.

First for the good part.

One of the puzzles of the 1990s moves from planned economies to
market-based economies in China, Russia and India was that the
liberalisation of the numerous economic controls that had damaged
their growth and promoted rent seeking led to even more rabid rent
seeking without damaging growth.

Crabtree describes this new form of cronyism vividly, but he
does not explain why, unlike the old version, it has been
accompanied by high growth rates.

In 2011, just as the previous decade’s growth surge was
coming to an end, I wrote a paper in which I distinguished between
‘monopoly rents’, ‘economic rents’ and
‘composite rents’.

The main economic difference between them is that whereas
‘monopoly rents’ — such as those generated by
licenses and controls — are equivalent to distortionary
taxes-cum-subsidies affecting the marginal decisions of consumers
and producers, which damage economic efficiency, the other types of
rent (like the ‘economic rents’ from land) are like
lump-sum taxes which have only distributive effects without
damaging economic efficiency and therefore growth.

Nevertheless, by the 2010s India’s economic growth started
to decline. This could not have been due to the scams generating
economic or composite rents from land, natural resources like coal
and the spread of mobile technology like 2G. Crabtree’s
contribution, without recognising the above analysis, is to show
that these scams were associated with the financing of these
investments by unsustainable debt.

In “The House of Debt”, the best chapter in the
book, Crabtree shows how the banks nationalised by Indira Gandhi in
the early 1960s became the main instruments financing the
investments generating economic and composite rents.

Many of these turned sour — particularly when it came to
financing infrastructure projects — because they were
private-public partnerships (PPP) whose risks were misaligned.
Private investors bore the initial risks of getting the requisite
licenses. After 2010, with the populist turn in the second
Congress-led coalition, a new “permit raj” based on
environmentalism emerged. The result was stalled investment
projects that added to the non-performing assets of the banks

Most of the loans that soured were rolled over. But there was
limited knowledge of the extent of these NPAs until the new
governor of the central bank Raghuram Rajan got a private agency to
dig into the data and found that the public sector banks had a debt
crisis as bad as China’s. On his initiative, a new bankruptcy
law has been instituted and his successor Urjit Patel is now using
it vigorously to clean up …read more

Source: OP-EDS

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