From Paternalistic to Enabling

• Author: Raghuram Rajan
• Position: Economic Counsellor and Director of the IMF's Research Department

India needs to adopt a style of government that unleashes the people's entrepreneurial zeal

The recent volatility in the Indian stock market seems to mirror a worldwide reassessment of emerging markets, rather than reflect specific concerns about India's future growth. There is an underlying strength to the Indian economy that will likely continue. Nevertheless, it is a good time to reflect on what might constrain India's future growth. While much attention has been focused on the need for government action here or there, what is less commented on is the nature and purpose of government. In my view, it will be increasingly important for India to exchange its paternalistic, directive government, which seeks to remedy every wrong through a subsidy, a quota, or a scheme, for one that creates an enabling environment for the people and unleashes their entrepreneurial zeal. This will require a change in the mindset of the people, a change that is happening but will have to accelerate.

Why do I argue in this way? Does a poor country not need a directive government to redress past wrongs and inequities? Indeed, India's government has always tried to direct the path of economic growth. Invariably, the path realized has been different from the one intended, with mixed consequences. Even today, the government is being pressed to push the economy in this direction or that to achieve this outcome or that. But increasingly, such direction will come into conflict with the outcomes dictated by the market. Something will have to give, and if it is the market, it will come at the expense of economic growth, as India has discovered time and again. Instead, a focus on creating an enabling environment that provides access for all to education, health care, finance, and, yes, a minimum safety net-indeed, a focus on spreading opportunity rather than mandating outcomes-will be a better way to achieve both growth and social justice.

Why do I think the change in mindset is overdue? Because of past government policies that had unintended consequences, India, unlike the typical developing country, has world-class capabilities in information technology (IT), pharmaceuticals, and finance, as well as increasingly in skill-intensive manufacturing. Its young population, and the growing share of the population in the labor force, will surely prove an asset in the years to come. But its growth and success stories of the past 25 years mask two areas of serious concern.

Too few jobs

First, India is not creating enough jobs. The conventional wisdom is that the path to creating jobs is through East Asian-style, labor-intensive growth. The conventional wisdom is a recipe for direction-to identify the priority sectors, protect them from competition, and throw resources at them, for example, so that they can upgrade technology.

But could the path lie elsewhere? For instance, it may be easier for India to build on its strengths and develop a strong and well-paid export sector in finance, business processes, IT, and other skill-intensive industries than to foster export-oriented labor-intensive manufacturing. Domestic demand-led growth, including through providing services to these well-paid employees-that is, jobs in restaurants, hotels, tourism, construction, and...