“India Does Not Need to Learn Capitalism from the West,” Says Lord Desai

At the second annual India Investment Conference in Mumbai earlier this month, Lord Meghnad Desai, emeritus professor of economics at the London School of Economics and Political Science, delivered an eloquent presentation on “The Rediscovered India and the Road Ahead,” based on his recent book, The Rediscovery of India.

Lord Desai, who addressed conference delegates on Friday, 13 January, drew a parallel between the superstition surrounding that date and the uncertainty that characterizes the current politics and economics of India. In a wide-ranging discussion, he touched on many subjects, including pensions, inflation, fiscal policy, capitalism, and some of the economic policy decisions that lie ahead for the world’s most populous democracy.

Lord Desai contended that at the root of the global credit crisis is a total absence of any political party that stands for genuine fiscal discipline. Noting that “the crisis in Europe is largely a pension fund crisis,” he asserted that India must draw a clear lesson: that committing unsustainable pension benefits is economically dangerous. “If India does not reform its pension scheme,” he told conference delegates, “then in 20 years [the country] will face a horrendous crisis like Europe is currently confronted with.”

Unfortunately, though, India’s political system does not seem prepared to address the country’s fiscal deficits, Lord Desai said, noting in particular that no political party has begun to talk about the efficiency of government spending. In addition, he stated, the current government is not ready to admit that its free services are neither effective nor sustainable in the long term. (Education, Lord Desai noted, is particularly inefficient in India.) If the government continues to budget liberally, Lord Desai observed, then India’s fiscal deficit will increase.

When it comes to growth, the core issue for India is not that its gross domestic product (GDP) growth will fall below 8%, but rather that economic growth will not move above the 9–11% range. And if growth does not revive in the 2012–2013 time frame, Lord Desai argued, deficits are sure to climb.

So what lessons can India draw from the West? Not many, according to Lord Desai. In fact, he contended that, “India does not need to learn capitalism from the West.” He observed that in terms of GDP levels, “the U.S. and Europe can’t reach their precrisis levels of 2007 until 2015 — and it is a capitalism in crisis.”

Still, he acknowledged that “capitalism always goes to crisis,” and “crisis is a cure as it curates the excesses of capitalism.” The market is perfect because it has cycles, he added. Nonetheless, Europe represents an old, geriatric form of capitalism, he stated, whereas Asian capitalism has thrived because of hard work and reinvestment, virtues that have largely been forgotten in the West. Looking ahead, India’s growth potential lies in Asia, and it will change global capitalism. “India has capability second to none to compete in the world,” Lord Desai told delegates.

Even so, policy paralysis is creating uncertainty and reforms haven’t been forthcoming. But that didn’t stop Lord Desai from making a few suggestions. He said that microfinance could be a tool to bridge the rural-urban separation. In addition, a sound approach to more inclusive growth, he contended, would aim to facilitate the employment of the rural work force throughout the year, whereas current policy subsidizes rural people but keeps them poor. Another way to reduce the income gap, he added, would be through an ambitious manufacturing strategy aimed at getting workers to productive areas of the economy. Lord Desai closed his remarks by arguing that India should model other Asian countries that have developed ambitious manufacturing strategies that, in turn, have successfully raised the incomes of rural workers and reduced the number of poor people.