How India can fashion its growth path: T.V. Somanathan

Former senior economist at the World Bank, T. V. Somanathan is helping shape India’s policy as joint secretary at the Prime Minister’s Office. He tells Fortune India about how the country can maintain its world-beating economic growth. These are his personal views. Edited excerpts:

How does India’s economy fare in comparison to China and the rest of the world?
The current combination of favourable demography, prudent macro-economic policy, and on-going reforms, if sustained, will keep India near the top in terms of growth rates. India’s large population means that [especially in purchasing power terms] it now has a significant share of global gross domestic product [GDP], despite a relatively low per capita income. So long as India grows faster than average, its share of global GDP—and therefore its significance to the global economy—will keep increasing. However, the slow growth of global trade does make it more difficult for India to emulate the export-led growth model of many successful Asian economies.

Like China, India has a huge domestic market, and therefore the potential to sustain a massive industrial base. However, India’s democratic system means it cannot [and I would argue should not] pursue a centrally planned and coordinated approach to investment—an approach which can produce rapid transformation in areas like railways, roads and ports. On the other hand, India’s less centralised approach can help it avoid problems like the creation of massive overcapacity [in sectors ranging from housing to steel] which currently affect China. India’s strength in the export of services and in areas like financial regulation means that it can fashion for itself a different path to growth.

Do you think the Indian economy will be 'coupled' with the U.S. over the next decade?
The U.S. is a significant trade partner, so its economy will influence India. Apart from the overall volume of trade, the U.S. is a significant importer of Indian services and the fortunes of the IT sector in particular—which is a large employer—will be closely linked to developments there. The U.S. is also a major source of investment. The share of U.S. investments in India is larger than official statistics indicate because some of them may be routed through third countries for tax reasons.

But more broadly, India’s domestic market is likely to grow faster than exports. In the long run, I would also foresee domestic investment playing a larger role than foreign capital. Therefore, I do not foresee the ‘coupling’ with the U.S. in years to come; I would expect it to stay at present levels or decline slightly.

What lessons do you draw from Brexit?
The key lesson for me, as an economist, is that the best laid plans can come to nought if we lose sight of the concerns of ordinary people and work toward some long-term imaginary utopia. For example, issues of identity are a real concern for ordinary people; they cannot be ignored or brushed aside in the name of economic rationality and higher GDP. In other words, politics is important and cannot be wished away. A lesson I draw for India is that projects for tighter economic integration of the Indian Union—which large industry in particular is usually in favour of— also need to keep in mind the need for states to have a good degree of autonomy, not because it is good economics [it may or may not be] but because it is a necessity for a strong polity.

How can Indian agriculture be reformed? Can it be made sustainable?
The key improvements needed in agriculture can be divided into production and marketing. On the production side, the main challenges relate to efficiency in input use, adoption of better seeds and technology. On the marketing side, the key issues are reducing wastage and post-harvest losses [through better storage and an improved supply chain], as well as increasing the share of the final consumer price which goes to the farmer, by removing middlemen. Many of these challenges can be met. Indeed, there are instances in some parts of India where each of these challenges have been successfully met on a small scale. The task is to scale up these successes and replicate them across the country.

How important is access to banking?
Lack of credit is a prime reason that people remain poor. Take the case of a poor family which faces a medical emergency. Credit can be the difference between life and death. Even if the family manages to get credit from a money lender or pawn shop, the cost can be exorbitant. Access to banking is a means to credit. Access to credit is access to opportunity.

Secondly, access to banking is access to the modern economy. It enables the poor to receive payments from remote locations. Families of migrant workers, for instance, end up paying high costs to intermediaries to receive money. Poor families, which receive benefits from the government, often get less than their due because of local corruption in disbursement. When every person has a bank account, he or she can receive payments directly, saving costs and cutting out middlemen. The government can pass on benefits directly to the poor, bypassing layers of bureaucracy. Prices can be left to market forces and subsidies paid to the deserving through their accounts.