Policy Seminar with David Mulford

The common list of India’s shortcomings is real — bureaucracy, difficulty of getting things done, corruption, difficult rules such as joint venture regulations that favor Indian companies. But this is changing, and growth is the ending of this change.

 

Starting in 2003, India jumped to 5% growth, and its growth has been 5-10% ever since. The Modi government came in after a bit of a slowdown in growth, showing how important growth has become to India. Coming in with the first majority parliament since 1984 allowed Modi to pursue some dramatic reforms that pave the way for more growth.

 

Mobile phones have diffused through the whole country. India leapfrogged the whole landline era. With cheap mobile phones costing as little as $10, this has had a dramatic effect throughout the country.

 

Linked to mobile phones, there has been a revolution in banking and payments. There has been a push to open small bank accounts throughout the country, linked to electronic transfers, and a biometric id system. For example, think of an urban worker sending money home. Previously this was costly, inconvenient, and a lot of the money “leaked” along the way. Secure low-cost electronic funds transfer is a life-changer here. Similarly, many of the government subsidies are now done via secure transfer. Estimates of “leakage” in the previous system were as high as 35%. This 35% has allowed the government to save substantial money without running the political dangers of reducing subsidies. Eighty percent of the country is now banked. The remaining 20% remains an opportunity for the future, but the achievement has been transformative.

 

Now growth is back up to 6.5% with 7% forecast for next year. 

 

Financial reform is also bearing fruit. HTC bank opened 1400 rural branches in the last 12 month, and is now making money on agricultural and educational loans. These are larger than microfinance loans, and much less expensive than traditional money lenders. Government banks (62%) remain a problem, as they have a lot of non-performing loans and are otherwise inefficient. But private banks like HTC are stepping in to fill the gap. The introduction of a unified GST is a major reform. It has been bumpy, but trucks no longer stop for hours or days at each state border crossing. All in all these major structural changes pave the way for substantial further growth.

 

John Taylor asked about the currency reform, in which the government forced everyone to turn in 100-rupee notes. David replied that yes, it has been seen as a monetary misstep, and led to a lot of people hiring others to change their money, and bank tellers also making some money on the side. But its’ main message was a shot across the bow to the cash, corruption economy, and let them know the government is serious and can do it again.

 

Richard Sousa asked whether rising inequality would bring back a drift towards socialism. David responded that this certainly is a standard part of how people in India think about things. You can’t use the word “privatize,” and despite their growth from liberalization, there is a general mentality that the government must control things. He also gave the example of joint venture rules, which allowed the Indian partner to block any expansion of the American partner, even if the former was bankrupt. The liberalization of this kind of rule is only partial.