The Economist Debates: Is Indian Growth in Jeopardy?

As India’s economy slows, is Indian growth losing its way? CGD senior fellow Arvind Subramanian thinks so. This week Arvind faces off against Shashi Tharoor, a member of the Indian parliament, in a debate on the Indian economy hosted by The Economist. Their opening remarks were posted today, and you can read them here (free registration required).Arvind is pessimistic about India’s prospects. He worries that an weakening state and deteriorating politics undermine the economy.

“The Indian state is increasingly unable to provide a range of basic services: health, education, physical security, rule of law, water and sanitation. The writ of the Indian state, for example, covers only about 80% of India, with the tribal belt essentially contested by Maoist insurgents. The private sector can substitute for some of these deficiencies but never completely. – In the long run, growth is determined by effective state capacity: that is India's weakness compared with China.”

Flawed democracy extracts a heavy toll.  Arvind has argued that infrastructure is undermined by populist policies and corruption – dramatically demonstrated by this summer’s power outages. The weak state and deteriorating politics leave economic problems unaddressed. India faces rising inflation, but no demand for inflation controls.  Overextended balance sheets and firms that are too big to fail constrict the private sector, and despite a decade of high growth, India faces as much public debt as many advanced economies.  India’s skills-based growth model is also in jeopardy.  Universities may not able to meet demand for skilled workers, and India has yet to tap into its abundant unskilled labor. Arvind hopes state policy can have a positive influence national policy and steer India back on course, but in the “race between rot and regeneration in underlying institutions – it is far from obvious that regeneration is winning.”Tharoor disagrees, arguing that those who take disappointing GDP growth “to herald the demise of the Indian miracle are” mistaken.

“China and India remain the fastest growing economies in the post-recession world, and of these, India is far less vulnerable to export shocks. Historically, domestic growth, savings and investment have been the stable drivers of Indian growth. What was once derisively called ‘the Hindu rate of growth’ of GDP—about 3%—remains the unfailing contribution of the domestic sector to the Indian growth story.”

With plans for $1 trillion in infrastructure investments over the next five years, India offers expanding opportunities for the private sector.  Tharoor concedes that India faces grave challenges, including inflation, but argues that inflation is driven by the expanding middle class, and that weakening demand for Indian exports can be supplemented with new domestic customers.But the debate has just begun.  Subramanain and Tharoor each have two more chances to persuade readers.  Guest experts will also weigh in.  President of the Centre for Policy Outreach and CGD non-resident fellow Pratap Bahnu Meta, will be among the commentators joining the conversation.The best part? You decide the winner.  I hope you’ll take a few minutes this week to weigh both sides, and cast your vote.