India as the Next Frontier of the Global Economy: An interview with Anupam Manur

You may listen to this interview from HERE. 

Anupam Manur is an Assistant Professor at the Takshashila Institution. His research interests lie at the intersection of economics, technology, and public policy. He is currently working on platform economics, India’s ongoing jobs crisis, international trade, and economic policy. He edits and manages the Indian Public Policy Review (IPPR), a peer-reviewed, open-access, online and bi-monthly journal of public policy. He has published several editorials in leading Indian publications. He has also edited three books published by the Takshashila Institution Press. He is the co-author of a new book published in January 2024 titled We, the Citizens: Strengthening the Indian Republic.

Anupam teaches different variants of economics in all of Takshashila’s public policy programmes and is responsible for designing the curriculum for the educational programmes.

Q1. Please introduce yourself and tell us about your current interests.

I am Anupam Manur and I am an Economics Professor. I am passionate about two things – making economics interesting and widely accessible to people and in economic freedom. Most of my writing stems from the overlap of these two ideas. I find myself interested in understanding the economics of platforms and finding the least distortive ways of regulating them, advocating for more liberal trade policies and finding policy solutions to stimulate job creation in India. Most often though, I am commenting upon government policies that impinge upon individual liberty, especially in the economic realm, which happens a bit too often for my liking.

Q2. India has become one of the most exciting global economic stories. What do you think has changed that has raised India’s profile or is this more about an ongoing economic transformation that has only just received media/investor attention, especially in light of US-China geopolitics and weak Chinese growth/stock market performance?

Nothing happens overnight in India and the same applies to its economic transformation. Since the liberalization of its economy in 1991, it has been on an upward trajectory, with each additional wave of liberalization giving additional returns. The growth story gets a boost during favourable global conditions. During the great liquidity in the 2000s due to the Fed’s easy money policy, India was a benefactor of foreign funds and grew at an incredible ~9%+ growth rate for a few years. Today, given China is slowing down and there exists both a trade war and geopolitical tension between the US and China, the world is looking at alternatives and India happens to be one among them.

Despite unfavourable global headwinds like the slowing global economy and the Russian war in Ukraine, the Indian economy staged a sharp recovery after the pandemic registering growth of 9.1% in 2021-22 and 7.2% in the next year. According to the RBI, it is expected to grow at 7% this year.

India perhaps gets more attention than the others due to its comparable size and its democratic form of government. This is not to diminish the excitement about India. There is a lot to be excited about the Indian economy and where it is headed. Macroeconomically, India’s debt is under control even after the expansionary fiscal policy following the pandemic, the rupee is stable, the merchandise trade deficit is compensated by the services export and financial inflows, there is a healthy forex balance, and inflation steadied rather quickly after the pandemic.

Simultaneously, one can always lament about the unfulfilled potential. As Ruchir Sharma, formerly of Morgan Stanley, put it: “India disappoints both the optimists and the pessimists”.

Q3. Beyond the hype, where do you see the real opportunities for foreign parties, both in terms of sectors and states? What is the ambition by Indian policy makers and should this factor into the calculations of foreign firms and investors? Where are the weaknesses that might not be well understood by those rushing to gain exposure to the latest hot market?

The rhetoric at the national level is an important indicator of the priorities of the Union Government. There is a clearly stated goal of making India into a $5 trillion economy by 2027. Further, transforming India into a developed economy by 2047 is one of the stated goals of the current government and part of its election campaigning (Viksit Bharat). To achieve this goal, India’s per capita income must witness a 5-fold increase, which requires the average growth rate to be increased to about 9% from the current 6-7%.

This is not going to be easy without significant structural transformations in the economy. There has to be a dramatic increase in productivity in the agricultural and allied sectors. The vast labour pool has to be skilled, manufacturing has to provide the base for job creation and there has to be a sustained increase in public and private investment.

Behind the hype, one important point to consider: though India has the highest population in the world, this does not necessarily translate into a large market, as many incoming foreign firms have learnt. The rich are few and far between, the middle class have limited disposable income, and while there have been many who have risen above the poverty line, it is not adequate to be a potential customer for foreign firms. In absolute numbers, the size of the potential market is still big enough to be interesting, but the optimism warrants caution. Though slightly dated, this piece by The Economist elaborates on this issue.

Q4. How well integrated is India as a national economy? Can you do business seamlessly across the country? The government has invested significantly in infrastructure but what is the reality in terms of logistics development and where does more work need to be done?

I’ve remarked in the past that while India has done fairly well as a political union of states since Independence, there is a lot to be desired in the economic realm. An individual in the European Union can reside in any country, buy property, own businesses, and conduct any form of economic activity in any other member country of the EU. In India, there are restrictions on buying land, movement of goods, jobs and residence, and there is even friction in driving a car bought in another state.

However, the introduction of GST (Goods and Services Tax), a unified tax structure across the country, removed many of the additional tax burden at the regional level. Infrastructure development in the past 10 years have been at an incredibly fast pace (~300% growth), which has reduced trucking times and logistics cost. The newly passed National Logistics Policy aims to reduce logistics cost from about 14% of GDP to less than 10%.

Q5. In your view, is the Indian economy primarily a domestic story? Apart from some tech names, we don’t see many Indian companies going overseas and the focus appears to be more India driven. Is this the sensible path forward with such a large opportunity set domestically or do you think this is a missed opportunity? Is India really that big a market and how should we view the middle class as representative of this market opportunity?

Outside of a few companies, such as Tata Motors, Infosys and TCS, very few Indian companies have made a mark globally or have been truly competitive in global markets. For convenience, one can attribute this to the fact that the Indian domestic market remains large and complex and thus, that retains most of the entrepreneurial energy. However, this is only a part of the story.

The other reason why Indian companies do not seek riches in foreign markets is the lack of investment in R&D and innovation. India ranks rather low on all innovation parameters (patents, journal papers, etc) and Indian companies spend very little on R&D. The policy landscape also does not particularly encourage R&D spending.

Another hypothesis, which I find to be a particularly good explanation, is that Indian companies are often stuck in a low-level equilibrium. Government policies are more pro-business than pro-market and this has consequences. Many big Indian companies find it far easier to influence government policies to create a situation where they have market power, can create entry barriers and enjoy protection from foreign players than to genuinely innovate and go yonder.

Market access, generally a detriment to cross-border trade, is not a very big factor in this situation. Indian companies have had access to most markets that we want to have a presence in – the US, Europe, Middle-East, Japan and South-East Asian economies are broadly open to Indian companies for both investment and trade. Only access to the Chinese market is limited.

Q6. China became an economic and trade powerhouse partly by opening up to foreign companies/capital, investing in infrastructure, adopting best practices, embracing its role as a low-cost manufacturing hub and then moving up the value chain. The government studied and learned from other models and adapted them to China’s own situation. This was a successful strategy, so do you see India moving in this direction? Is the Modi government (or the opposition) likely to reduce import restrictions and embrace regulatory loosening? Would this even be welcomed by tycoons and business elites if their priority is on growing domestic businesses free of foreign competition?

India has witnessed alternative waves of liberalization and protectionism. Since 1991, while the broad direction has always been towards liberalizing the economy with the average effective tariff rate reducing from as high as 46% in 1991 to around 13% in 2023, there have been a few policy interventions that have gone against this trend. The period between 2014 to 2017 had many liberalizing reforms in trade and reduction in tariffs. However, given the domestic economic situation (economic slowdown post demonetization and introduction of GST) and the trade war between US and China, India gradually increased its tariffs on certain items. The policy rhetoric had also changed during the pandemic to “Make in India”, Self Sufficiency, Vocal for Local, etc which marked a decisive turn toward protectionism.

The steadily increasing trend towards protectionism is seen by the fact that the simple average tariff has increased from 8.9% in 2010-11 to 11.1% in 2020-21. The proportion of tariff lines above 15% has increased from 11.9% in 2010-11 to 25.4% in 2020-21.

However, in 2023-24, there seems to be a slightly more open stance towards trade. Some of the excise duty on electronic items has been reduced. There is increasing interest in India becoming an important contributor to global value chains. Foxconn and Apple setting up manufacturing centres in India seems like a landmark moment – the Indian government has cleared some regulatory bottlenecks and eased imports to make this happen. This could serve as a precedent for other companies to set up in India with China+1 strategy.

Q7. How have views on capitalism and the role of markets evolved in recent years? In China, there is a delicate dance around trying to reconcile the market economy with Marxist Leninist and Maoist thought. Does India have its own challenges adapting market economics to its own political, cultural and historical legacy? Is economic freedom a concept that is taking root in society and what do you think that means?

This question requires quite a complex and nuanced answer. India was all too glad to leave behind the socialist economy in 1991 and to date, the liberalization of the economy in 1991 is largely celebrated. However, economic freedom is not given the same level of importance as some of the other freedoms – political or expression – and the government often tramples upon the economic freedom of the citizens with impunity. Control over production, distribution and sales through licenses, and permits remains strong.

Government interference in markets remains stubbornly popular – a price cap or a ban – often gets approval from the public. In various parts of the country, there are price controls on education, medicines, coronary stents and medical devices, movie tickets, air fares, taxi fares, agricultural produce and the classic rent control and minimum wages.

The other trend of note is the growing sense of economic nationalism in India. Despite sometimes having very similar outcomes and results, the socialism of the 70s is replaced with soft economic nationalism or Atmanirbharta in the 2020s. This refers to a set of policies that are aimed at encouraging or boosting domestic production through subsidies and state support and discriminatory policies against foreign sellers and service producers. It also contains the belief that markets are subordinate to the State and should serve the interest of the State.

This has taken shape through the “Make in India” initiative, the ideology of Atmanirbharta (loosely translated to self-sufficiency or self-reliance), the Production Linked Initiative, increased harmful interventions in trade, and many other subtle forms of positively discriminating Indian companies over foreign ones. The Prime Minister had launched a campaign urging Indians to be “vocal for local”, which is a classic manifestation of an inward-looking policy stance. The rules on e-commerce are also a good example – the Department of Industrial Policy and Promotion laid out rules disallowing the inventory model of e-commerce (vertical integration) by modifying FDI rules. This meant that Amazon and Walmart could not be vertically integrated, but Reliance and Tata could.

Q8. What is the role of the State in the Indian economy, and do you see government intervention as part of the solution or part of the problem? Can the government truly pick “winners” or does the risk of a heavy-handed approach outweigh the benefits? Is the private sector versus public sector divide something that will change over time, or can we expect both to thrive and play beneficial roles in society?

The government in India is both too big and too small. On many essential services, which the government should be rightfully providing, like police, fire and the court system, the government is under-staffed and has low capacity. Simultaneously, the government is involved in a range of activities that it has no business in – like producing soaps, running hotels and having a monopoly over the country’s railway network. The paradox of the Indian State is that it is very big in its ambition, but very small in its capacity to enforce the rules it makes.

The same idea carries over to the role of government in markets. Instead of using the limited state capacity and resources on fostering markets – such as having a robust contracts enforcement mechanism, access to justice, property rights, and so on – the government gets involved in price determination, protectionism and subsidizing their preferred goods and services.

Industrial policy is on the rise in the rest of the world and India is not left behind. India’s current industrial policy is geared towards picking sectors in which India can have a global advantage (a fundamentally flawed approach), providing subsidies linked to production quotas, and protecting these industries with trade barriers. This creates multiple distortions in the market and relies heavily on the government’s ability to pick winners.

Q9. Taking a specific example, what are your thoughts about the national rail network? What do you see as the challenges and the possible solutions to improving and upgrading the network? Can China serve as a model considering how rapidly it has built out its own nation-wide high speed rail?

Yes, we should be looking at the way China upgraded its rail network. The railways sector in India is stagnant or has even moved backwards. Only about 20% freight is moved through the rail network in 2022, as against 60% in 1980s. The average speed of a goods train is stuck at a woefully low 25 kmph for many years, which needs to drastically improve for it to become a viable option. Punctuality of the trains must improve along with process improvements for collection and distribution of freight. The railways cargo handling capacity has to exponentially increase, which requires a doubling of its fleet of wagons.

Moving freight through the rail network is also relatively quite expensive due to the cross-subsidization of passenger rail. To bring in efficiency, private players must be bought into the rail network. This government can and will bring about marginal changes to the existing infrastructure, but a step change requires private capital and knowledge.

Q10. One of the common concerns of foreign investors/businesses looking at India is around enforcement of contracts, protection of property rights, judicial remedies, and other legal enforcement issues. For example, there were a lot of expectations around The Insolvency and Bankruptcy Code introduced in 2015 but these efforts seem to have stalled. Do you see progress in these areas, and what can we expect in the next few years?

The Insolvency and Bankruptcy Code was a game changer and a landmark legislation. It is therefore very disappointing to see it lose ground and run into implementation problems. The two important problems plaguing the system are the enormous delays in resolution and the huge haircuts the lenders have to take. Recovery rates have fallen from 43% to 32% between March 2019 and September 2023, and there has been an increase in the average resolution time from 324 to 653 days versus the stipulated 330 days.

According to CRISIL, this is due to two reasons: “First, limited judicial bench strength and delays in identification and acknowledgement of default. Second, significant delay in the pre-IBC admission stage (650 days in fiscal 2022 increased from about 450 days in fiscal 2019) has suppressed recovery rates”.

This is symptomatic of the wider problems plaguing the Indian judiciary. There are 80,000 cases pending in the Supreme Court and roughly 50 million cases pending in all courts in India. This results in inordinate delays in judgement. Arbitration is also slow and expensive in India. In the earlier reports of Ease of Doing Business, India used to score very low on the Contract Enforcement scale (keeping aside the problem with the report and its methodology for the moment).

Q11. Much discussion is made about India’s young population and the promise of a demographic dividend. Is the education system doing enough to prepare young people for the available job opportunities? There is both significant unemployment in India as well as many vacancies for skilled positions. What is the key to addressing these dual realities?

With regard to education in India, the problem of quantity seems to be largely solved. Gross enrolment ratio (number of kids signing up for school) at the primary and upper primary level is above 95%. This does drop for higher education. However, the bigger problem is that of the quality of education. The Annual Survey of Education Reports (ASER) notes that nearly 50% of kids in 5^th grade cannot read or understand a 1^st grade textbook. Thus, while India has a demographic advantage, an overwhelming proportion of the working-age population does not have the education and skills required to participate productively in organized manufacturing and service sectors. This explains the dual problem of high unemployment and high vacancies.

There are quality concerns even at the higher levels of education, such as engineering. While many graduates are well equipped to do routine work, companies wanting to do high-end precision work and cutting-edge research and innovation will find it difficult to hire skilled employees. The Indian software industry as well requires a massive skill upgrade to be able to retain the comparative advantage.

The government has and will continue to pump in money to education at all levels and has specifically chosen to focus on skilling, reskilling, and upskilling. But, there is a need for more dramatic reforms – allow for profit-making entities in lower education, refocus government energy in subsiding private education instead of running schools themselves (which have not delivered on learning outcomes) and get the government out of curriculum setting and supervision in higher education.

Q12. India has built world-class technology companies and is an important international player in IT services and software development. The government is also keen to promote the electronics industry and integrate India into the global value chain. Is this a feasible strategy and what will it require from a policy and regulatory perspective? It will likely also require closer integration and collaboration with China, which adds an interesting geopolitical angle. More generally, the future of technology and the digital economy will have a major data component. To this end, does the government have a view or policy direction around data collection, use and privacy?

The Indian government wants to make a strategic bet on the electronics industry and wants India to be a bigger player in the global value chains. To achieve this, the government has gone about crafting an “industrial policy for the information age”. This is broadly in trend with many other countries having an industrial policy (like the Chips Act in the US).

The strategy involves 2 prongs – subsidizing domestic industry and protecting domestic industry. The subsidy happens through the PLI (Production Linked Incentive) scheme, which has delivered less than expected results. For instance, in the mobile phones space, companies have used the PLI scheme for merely assembly and not manufacturing.

There is a fundamental contradiction in aims and objectives of the new industrial policy. The desire to be part of the global value chain necessitates opening of the economy and allowing for free imports. A country cannot adopt a protectionist stance and hope to be integrated into global value chains. Thus, a big problem with the PLI scheme is that many companies end up taking subsidies from the government and use it to pay the high import duties on components. Being part of the global value chain will require having an open trade policy even with China for import of components.

On to data, the government has a relative new data protection law in place. The good news there is that it has moved away from its earlier strict stance on data localization to a more relaxed position, which is good for potential investors. The new privacy laws for personal data protection are broadly seen to be simple, enforceable and enhances privacy. While this applies to companies, the law is very lax on personal data protection from the government.

Q13. Please share any favorite books, blogs, podcasts or other resources that readers could use to improve their understanding of India and the Indian economy.  

1. The Seen and the Unseen – Podcast by Amit Varma

2. All Things Policy – Daily podcast by the Takshashila Institution

3. Anticipating the Unintended – Weekly newsletter by Pranay Kotasthane

4. Ideas of India – podcast by Shruti Rajagopalan

5. The Third Way and Privacy 3.0 – Books by Rahul Matthan

6. When the Chips are Down – book by Pranay Kotasthane on the geopolitics of semi-conductors and India’s way forward.

7. Urbanomics – Blog/Newsletter by Gulzar Natarajan

8. Mostly Economics – Blog by Amol Agrawal

9. In Service of the Republic – Book by Vijay Kelkar and Ajay Shah (Ajay Shah’s blog Leap Blog is also a great resource)

10. Indian Public Policy Review – A peer-reviewed journal on Indian Public Policy

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