Only a fool learns from his own mistakes, the wise learn from the mistakes of others”. As our neighbours Pakistan and Sri Lanka spiral into economic and political crises, and common people there suffer, India must take the opportunity to learn from their mistakes, because we too have committed several of the same errors in the past, and continue to repeat them in the present.
The most crucial mistake that India must watch out for concerns not economics, but our social contract. We must learn to be wary of populist schemes that promise free lunches and convenient fixes. The immediate events that precipitated Sri Lanka’s crisis were policies of President Gotabaya Rajapaksa, who frequently chose easy options that don’t work in most economies — slashing taxes without a vision for boosting growth, printing money, restricting imports and ducking reforms.
But the roots of the Sri Lankan crisis lie in the country’s socialist history and in successive governments prioritising populist, debt-fuelled welfare spending over structural reform and good governance. Pakistan’s fiscal profligacy and unsustainable debt-fuelled spending are also well known. On most metrics, India isn’t that far away from Sri Lanka or Pakistan. Sri Lanka’s twin deficits — the fiscal and the current account deficit are cited by many as a primary cause of the crisis. On both fronts, India is not very different. Sri Lanka’s debt as percentage of its GDP has hovered above 70 per cent since 2016 and India and Pakistan crossed this threshold in 2018. In 2019, Sri Lanka was at 86.8 per cent, Pakistan at 85.3 per cent. India was at 87.8 per cent in 2021. In terms of current account deficit, Sri Lanka’s ratio to GDP has ranged from 2 per cent to 3 per cent between 2017 and 19 and India and Pakistan from 1 per cent to 2 per cent.
Also read: For a ‘civilisational’ India, important to understand a ‘garrison’ Pakistan, ‘fragile’ Lanka
How do we manage these metrics?
Both the quantity and quality of government spending must be improved.
On quantity, the FRBM Act has failed to improve fiscal responsibility and so must be strengthened to become a constitutional amendment like Germany’s ‘debt brake’ if it is to work better. Another route recommended by our top public finance experts is that debt must also be limited on the demand side. Instead of being able to require financial institutions to buy its debt, the government must find buyers under open market conditions, as all advanced economies do.
On the quality of expenditure side, the government must be restricted to the essential investments that benefit every citizen and which only the government can provide — provision of national defence, policing, courts, public health, basic social and economic infrastructure. For most other things, like laptops, mangalsutras and other freebies, the experience of every successful country has shown us, we must enable markets to operate. This builds the productivity and wealth of nations over time, and is at the root of all progress. Countries that do not follow this broad paradigm have suffered. The USSR does not exist anymore; Venezuela is in deep trouble in spite of being oil rich; China used to be poorer than India until they started promoting markets in 1979 and our own adoption of socialism led us to the 1991 crisis.
Also read: China’s threat won’t wait for India to get better technology. Army must use more brainpower
Reduce dependency
The next lesson India can draw from Sri Lanka is of not being overly dependent on any one sector for growth. Sri Lanka depended on tourism for 24 per cent of its total exports in 2019. The pandemic shock dropped it into crisis. IT and ITES made up ~20 per cent of our total exports in 2019. The biggest merchandise sector, petroleum, is only 7.8 per cent. Any demand shock in IT could be debilitating for our economy. So, while we should continue to champion IT/ITES exports since it has been our main engine of growth, we must also start facilitating exports in other sectors where we have comparative advantage.
Our biggest comparative advantage is abundant labour and our biggest challenge is to find good jobs for this abundant labour. Only exports in labour-intensive industries can convert our advantage into opportunity. Sectors like apparel, footwear, toys, furniture and electronics contribute over a $ one trillion and nearly a hundred million jobs to China’s economy, all for relatively low-skilled labour.
As China’s labour pool has started reducing, it is becoming uncompetitive in labour-intensive industries. However, the advantage, in place of India, is going to countries like Bangladesh and Vietnam. For example, in the apparel sector, China used to export goods worth $186.6 billion at its peak in 2014, while India’s export value stood at $17.7 billion. Bangladesh and Vietnam exported goods worth $24.6 billion and $20.2 billion, respectively.
In 2019, China’s exports had dropped to $151.8 billion while Vietnam and Bangladesh climbed to $33.1 billion and $30.9 billion. India’s exports decreased to $17.2 billion in the same year. This is a competition we are losing because of our past self-goals — an overly restrictive business environment that makes it impossible for labour-intensive manufacturing to survive. We cannot be incrementalists here or we risk losing this opportunity. Our prime minister and chief ministers must cooperate to create large zones where labour-intensive exports face a radically more friendly business environment, competitive with the best in the world. True economic and national security will come only when we boost our productivity and growth to the maximum possible extent.
Overall, India must focus on prudent economic and fiscal management, ensuring that the country’s social and governing fabric is rid of populist promises that do not focus on creating a strong base of governance. We must also play to our strengths and drive competitiveness in labour-intensive exports alongside the services sector to help us truly take care of our people and step onto the world stage as a secure and atmanirbhar society.
Rahul Ahluwalia is Director, Central Square Foundation and Foundation for Economic Development. Views are personal.
(Edited by Anurag Chaubey)