Arvind Subramanian and Devesh Kapur on India’s Precocious Development Odyssey

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University.

Today my guests are Arvind Subramanian and Devesh Kapur. Arvind is a Senior Fellow at the Peterson Institute for International Economics and a former Chief Economic Advisor to the Government of India. Devesh is the Starr Foundation Professor of South Asian Studies and Director of the Asia Programs at the Johns Hopkins. They are co-authors of the recent book, A Sixth of Humanity: Independent India's Development Odyssey.

We talked about India’s redistributive democracy, why Indian states have taken such different development paths, India's socialism and consequent scarcity, manufacturing challenges, and much more.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Arvind. Hi, Devesh. It’s so nice to have you here.

DEVESH KAPUR: Thank you for having us.

ARVIND SUBRAMANIAN: Lovely to be here. Thank you.

A Sixth of Humanity

RAJAGOPALAN: It’s freezing outside, but we’re in the studio in Arlington, so this is a pleasure. We’re going to talk about your book, A Sixth Of Humanity: Independent India’s Development Odyssey. It’s a history of Indian political economy across the 75 years since independence. The big theme is how unique India is in terms of being a development state while also being a democracy, starting right from the get-go with universal adult franchise as a democratic republic and a federal republic. That leads to various sorts of problems, various sorts of uniqueness—precociousness, as you put it. Is that a good way to set up the overall book?

KAPUR: Clearly, one of the big themes of the book is the different types of ways that India’s development journey has been precocious. Precocious in the sense that something happened in an unusual sequence relative to the experiences around the world. One is politics, another is economic policy choices, and the third is the unusual way the structural transformation occurred etc. etc., which Arvind can talk about.

SUBRAMANIAN: In that sense, I would say that what you’ve probably begun with is one dimension of this—the political precociousness and democracy—because arguably some of the other stuff have and have not been affected by democracy, per se.

RAJAGOPALAN: The sense I got from the precociousness argument was everything else that you discuss in India’s development—whether it’s nation-building, state capacity, economic growth—everything seems to be affected by this initial choice of universal adult franchise. Is that not the appropriate way to read the book?

KAPUR: I think some things are, but not everything. Clearly the fact that you had different types of agriculture policies—there was no fertilizer subsidy for the first 25 years. It’s only after the mid-1970s that it comes up. Same with electricity subsidies. All these came much later, and those were policy choices. There was nothing about India being a precocious democracy that leads one to conclude that industrial licensing was inevitable.

SUBRAMANIAN: Just to build on that. Now, there are ways in which I think democracy had a big impact, even on the economic choices. First of all, we would say land reforms, for example. Basically, totalitarian, authoritarian states are successful at land reforms under certain contingent historical circumstances. In the Indian case, not just the fact of democracy, but the fact of a federal democracy in which the Congress was in the ascendancy for a long time, especially in the states, and they were beholden to the landed interests. That was clearly a case where I think democracy had an impact.

I would say that the economic choices—planning, public sector, industrialization, licensing, which we’ll come to in a second—they were less to do with democracy than just with the zeitgeist of the times. The Soviet Union was then the greatest success that we thought it was. Just to make it come alive here—some viewers may or may not know—I think in the ’50s, Khrushchev came to the UN. He took out his shoe, banged on the podium, and said, “We will bury you.” What he meant was not nuclear devastation. He meant that our model will actually outperform yours.

Europe embarked on the welfare state post-war, even the New Deal here. Since our gaze of the early elites was toward China, Russia, and the West, clearly the economic choices followed that. If they had looked eastward, maybe they may have viewed things differently, but that had very little to do with democracy. 

I think industrial licensing in particular is interesting because import substitution as a policy choice meant that you were going to favor domestic enterprise. We turned around and said, “No, we will stymie the domestic private sector through various means, including licensing.” Now, that had neither to do with the zeitgeist—because other countries did not do that—nor did it have anything to do with democracy as well. That was a slightly unique orthogonal choice. 

The last thing I would say is that it is the case that we argue that the fiscal state in India is one of the most vulnerable fiscal states, which was a surprise to us. There, we do say that something about how precocious democracy leads to every manner of interest being accommodated, both on the tax side and the expenditure side. I think democracy is both important but sometimes orthogonal to choices made.

The Effect of Education on State Development

KAPUR: If I can add, I think one other thing we found, much to our surprise, I think to some extent, not entirely, India’s failures in primary education were also because of—we know that India did very poorly in primary education. In fact, not until Sarva Shiksha Abhiyan was there a concerted effort. It was during the end date of the Vajpayee government. Basically, we know Myron Weiner’s great book, The Child and the State in India, this was elite choices and the upper castes were ascending and didn’t genuinely believe in educating the lower caste. Recent work also shows that, worldwide, primary education expands the most when there isn’t universal franchise. In a way, it is to expand for a variety of reasons. It’s partly to forestall the demands for franchise, partly for nation-building, a variety of reasons. It’s at least plausible from the evidence around the world that that too might have stymied.

RAJAGOPALAN: I think the reason why I read the democratic piece as so central is because, one, it’s the first part of the book. Everything else follows from that. My sense was, even though you get into the very specific socialist policies from 1950 to ’80 and then the one decade—’80s to ’90s—and then ’91 onwards, it seems like India’s socialism was not the cookie-cutter socialism of the Soviet Union nor China. A lot of it was determined by democratic pressures, whether it’s Nehruvian socialism not being as oppressive or Indira Gandhi’s socialism, which is very redistributive and almost placating different interest groups.

When it comes to state capacity and state-building, that seems to be a similar vein. India is asymmetric in its federalism. They needed to stitch together the union. President’s Rule and all those things are imposed depending on what’s going on at any point in time, but the universal adult franchise is really what holds the union together.

KAPUR: It’s that last point, I think, that is something that we highlight: That nation-building, historically, the quintessential experience of East Asia or West Europe was around a single language or religion. India was very distinctive in that it used democracy as its principal instrument of nation-building. That is why India managed to avoid extreme disorder. People think that India has a lot of violence. As you know, political scientists are obsessed with conflict and violence in India. We actually show the opposite—

RAJAGOPALAN: You’ve discussed this in your book with Amit Ahuja on the podcast.

KAPUR: —that India stands out with not how much, but how little mass violence it has, as opposed to street-level riots and so on. That, we argue, was the extraordinary contribution that early democracy did.

SUBRAMANIAN: Just on that, maybe your observation with the way you began, the more I think about it, maybe it is valid the way you started. Because just to complement what Devesh said on the political side, on the economic side, we show that India also avoided economic disorder as measured by hyperinflation and financial crisis. It’s surprising how low India’s never had bouts of hyperinflation. For a brief period, we had inflation after the thing. That sets India apart from—think of Latin America. Think of Turkey, Africa, even some East Asian countries. 

Sri Lanka recently had 70 percent inflation. The question is: Why was that the case? We argue in the book that it’s something about democracy— 

RAJAGOPALAN: —pressures.

SUBRAMANIAN: —because inflation is a tax on the poor. I always like to say that the job of a governor of the Reserve Bank in India on that is actually very easy because he or she just has to do what the society even wants in any case. In that sense, yes, democracy gave, and it took away. I think, in that sense, maybe there is a theme running through that.

KAPUR: The real monetary anchor in India is not some—

RAJAGOPALAN: It’s onion prices.

KAPUR: Democracy is the monetary anchor, not— 

SUBRAMANIAN: Since we’re having fun—we can have fun, right? 

RAJAGOPALAN: I only have fun.

SUBRAMANIAN: Since you’re Tamilian, you will understand. I was not a particularly politically [minded] person growing up, but I still remember my first political memory. I was sitting on Mount Road, which is the main thoroughfare in Chennai, ’67. This was the first time the DMK came to power. I remember the protests going through: “Kāmarājar eṉṉāccē, kaṭuku vilai eṉṉāccē?” 

RAJAGOPALAN: It’s in the book. The quote’s in the book. 

SUBRAMANIAN: “Veṅkaṭrāmaṉ eṉṉāccē, veṅkāyam vilai eṉṉāccē?”

RAJAGOPALAN: “What’s happening to the prices of mustard seeds and onions?” 

SUBRAMANIAN: We talk about the affordability crisis today here. That was true in ’67. It was a vote win—I know outcomes are complicated, but that did play a big role.

KAPUR: Also, the one serious bout of inflation post–first-oil shock, when it touches 35 percent-plus, that’s what leads to the beginnings of mass protests against Mrs. Gandhi. We know slowly that builds up, leading to the Emergency, all of that. That is inflation.

RAJAGOPALAN: At that time, there’s a twin crisis, right? There’s a scarcity economy and inflation running in parallel. Those two things should never go together.

SUBRAMANIAN: This is a point to emphasize. You mentioned earlier: How is Indian socialism different from socialism elsewhere? Certainly, it’s very different from import substitution elsewhere because the first 30 years are much better characterized as a scarcity economy than an industrialized or import-substituting economy as well.

Redistributive Democracy in India

RAJAGOPALAN: Now, maybe I’ll go section by section in the book. Before that, the sense I got from your setup is it’s not so much that India was unique and it democratized too early, because that’s one way to characterize it. In the very beginning of the book, you have this lovely chart, which talks about when universal adult franchise was introduced based on GDP per capita and the gap between original male franchise and universal franchise, the number of years that it took. India’s right at the bottom of both, and it’s completely unique.

One way to read that table is, “India democratized before it developed. Maybe it should have done it the other way around. Maybe it should have done it like South Korea or something else.” Another way to read it, by the time I got to the end of your book, is, “Actually, there are some great things that have come out of India being democratic. It’s literally stitched the nation together. It’s led to a lot of stability. It’s reduced disorder, both extreme violence, war, and conflict. Also, economic crises like hyperinflation or currency defaults.”

But the one thing that is persistent in Indian democracy is redistribution. Since we’re at George Mason University, James Buchanan said that there are different versions of the state. There’s the protective state, the productive state, the redistributive state, and the churning state—which is just cronyist—taking from one group and giving to another. That seems to be the big problem with the precocious democracy that you introduce right in the beginning. Everything else can be managed in some sense. Is that a good way to think about it?

KAPUR: In any democracy in principle—in an unequal society, the median voter’s preferences will be for redistribution. I think you’re right that redistribution per se is an impulse that has always been there. Even when the pre-occupation, rightfully so, given that for the first three-odd decades, parts of India, it was not about poverty. It was about destitution. It was about utterly degrading poverty. The attention given to poverty, in a sense, was also an aspect of redistribution. The impulses—in the book—were general sentiments; that was both essential and inevitable. The question was the instruments you used. That’s where the debates and reasonable people can disagree.

SUBRAMANIAN: Shruti, I would actually push back on the Buchanan thing. This is, I think, the sense in which Indian democracy has been very distinctive. When you think about democracy, the median voter, and redistribution, the sense is that it’s redistributing away from the rich and toward the poor. I think that’s actually not in practice how it happened. Pranab Bardhan has this great book on India saying there were three very strong vested interests: industrialists, bureaucrats, and big business. What we show—at least if you look at the fiscal state, for example—the beauty or the downside of Indian democracy is that any interest group that is loud enough and clamorous enough gets to suckle at the Indian state, both on the tax side and on the expenditure side.

That’s a very important point to make because many of the subsidies that we see today and have been for a long time—take the two big ones—the power subsidy and the fertilizer subsidy. We show in the book, and also in other work, that 60 to 70 percent of these subsidies, in the case of fertilizer, goes to the rich farmers. In the case of the households, it goes to rich households. This is not Buchanan-type redistribution, democracy-type—because there’s nothing about democracy or socialism that can really explain this. Because why are we giving 60 percent of the subsidy to 5 percent of—

RAJAGOPALAN: It is clientelism.

KAPUR: I would not say that because clientelism is when you’re trying to build relations with individual voters. It’s just the political clout of—just like big business has political clout, big farmers—just as the farmers’ protests that happened when they tried to introduce market reforms a few years ago, it was not the poor farmers in Bihar who were protesting. It was the biggest, richest farmers.

RAJAGOPALAN: No, what I mean by clientelism is in India, the form it takes is very much caste politics, linguistic politics. There are very specific groups that become interest groups and become entrenched, and it’s impossible not to redistribute toward them.

SUBRAMANIAN: Can I give one counterexample?

RAJAGOPALAN: Yes.

SUBRAMANIAN: Take the “middle class.”

RAJAGOPALAN: They’re the biggest beneficiaries.

SUBRAMANIAN: They are some of the biggest beneficiaries. There’s a chart on income tax exemptions that we see there. Per capita GDP grows slowly. Exemption limits are rising exponentially. This is true for landed interests, for example; they don’t get taxed. If you look at rich farmers and the subsidies they’re given—water subsidies, sewage subsidies. It’s more something about democracy and the clamorousness and having to accommodate almost every interest group, as it were. That’s, I think, the more distinctive part, rather than clientelism or particular interest groups because the beauty is that almost everyone can become an interest group in India. I think that’s what makes Indian democracy so distinctive in some ways.

KAPUR: I think, going back to your point about the redistributive part, we said that it was the instruments. I think one of the things we make in the book is that we don’t think of public goods as necessarily redistributive, but public goods actually, in practice, should be the most important initial tool of redistribution.

RAJAGOPALAN: They’re the most equitable.

KAPUR: Exactly.

RAJAGOPALAN: They’re not redistributive.

KAPUR: Instead, we show that India chose to build a welfare state without first laying a strong foundation of public goods. Of course, then the welfare state then essentially becomes a welfare state for the 10 percent in the formal sector. The 90 percent in the informal sector are broadly ignored. That impulse of doing for the poor, redistributing, if that impulse had manifested itself in building public goods, I think the development outcomes would have been much better.

SUBRAMANIAN: Just to summarize, we said this in our exchange with Pranab Bardhan—and I think it’s a nice contrast. You have focused on the redistribution. Pranab said, “Oh, it’s all about elites being very influential.”

RAJAGOPALAN: Yes, I’m saying we’re redistributing to the elites. I don’t think we’re redistributing to the poor.

SUBRAMANIAN: Oh, I see. There I would say that there’s lots of stuff we do.

RAJAGOPALAN: No, we do, but that’s post 1991. Once the fiscal coffers start coming in, we start extending the subsidies. We start giving more and more cash transfers. We include women. For a very long time, the state was really serving its own employees, who were all essentially the middle class. Look at our pension schemes.

SUBRAMANIAN: One way to summarize what’s so distinctive about it is that both elite and mass impulses got responded to by the state. I would say it’s not elites, but the Pranab Bardhan view, it’s not, “Oh, it’s all going to the poor.” It’s both. That’s what makes it so interesting and rich.

One democracy, multiple outcomes at the state level

RAJAGOPALAN: If I had to respond or think from the Pranab Bardhan lens, we don’t have a good explanation if we just look at democracy for how much variation there is within India. You point that out in the later part of the book. You actually go state by state and outline which states have done well. We have Tamil Nadu, Karnataka, and Kerala, all of which have performed as well as China for as long. Then we have states like West Bengal, which have actually regressed. Bihar has stagnated. There are parts of Bihar with Sierra Leone–level GDP per capita, despite not being a war-torn state.

What explains the variation, given that they all got universal adult franchise at the same time? These are all interior states. The states that I named are not the ones that have had President’s Rule or border conflicts and things like that. That can’t be the explanation. There’s something about what is going on in these big states that should explain what democracy alone or universal franchise alone can’t explain, right?

SUBRAMANIAN: A great question. One democracy, multiple outcomes at the state level.

KAPUR: It’s a nice natural experiment.

RAJAGOPALAN: It’s a great natural experiment. Unfortunately, natural experiments don’t have uniform outcomes. If your birth accident is that you were born in Bihar, then you’re in trouble.

SUBRAMANIAN: It’s multiple explanations, but let me just say one or two big commonalities. The spirit of the book is that Tolstoy is only half right. Both the successes and the failures, there are both patterns and exceptions. That’s what, again, makes India so rich. Just let me give you one commonality on the failure and maybe one commonality on the success.

Clearly, the southern states, especially Kerala and Tamil Nadu, benefited a lot from social reform movements early on, pre-independence. Even at independence, you will see human capital outcomes much better in Kerala. Actually, we show somewhere in the mid-’60s when India’s doing very badly, the allocations to primary education are much higher in the southern states, and they were not then the richest states.

RAJAGOPALAN: They were actually the poorer states and not industrialized.

SUBRAMANIAN: They were below the median. There is something about the social reform movements that happened in these places, which led to this bottom-up—in that sense, you could say it was a democracy where there was much more bottom-up pressure than in other parts. Devesh will talk about Bengal and the north in a second.

On the success, I think what’s interesting is that what is common to all the successful states, we show in the book, is that they’re all globalized—but globalized in different ways. This is the exemplar and the exception: Tamil Nadu, Maharashtra, Gujarat—based on manufacturing exports; Karnataka—of course, based on services in Bangalore; Haryana—a bit of both because it has both Gurgaon and the Maruti plant. The most unique model of all is Kerala—neither manufacturing, nor agriculture, nor services; it’s just globalized through labor flows. 

KAPUR: Just to add, the irony is that the big intellectual thing in Kerala is anti-globalization. The state that has most benefited from globalization— 

RAJAGOPALAN: That is true.

KAPUR: —is the most anti-globalization intellectually.

SUBRAMANIAN: Also, it’s a very interesting pattern of globalization because initially there was medium-skill labor outflow bringing back dollars.

KAPUR: Basically, low skill.

RAJAGOPALAN: Construction workers, nurses.

SUBRAMANIAN: It got on to nurses slowly. At the same time, especially in the last 20 years, Kerala has imported labor from the rest of the country.

RAJAGOPALAN: True. The low skill is now coming in from Bihar, Jharkhand, and Maharashtra.

SUBRAMANIAN: Yes. In that sense, there are explanations for the successes and failures. I’ll let Devesh talk about Bengal and the Hindi heartland.

KAPUR: One pattern is that coastal states have done better—

SUBRAMANIAN: Always with exceptions—and Odisha.

KAPUR: Till the ’80s, when India was closed, actually, the variance across states was quite modest. This variance has really increased post reforms. Post reforms is when [India] opens up to international trade, and all of that led to different outcomes. You could infer that might be a reason why the coastal states in general, not all—two states don’t follow this pattern. One is Haryana, an interior state, that does very well. That, we show, is partly an NCR effect—Delhi, the accidents of Maruti and the auto industry, the accident of Gurgaon.

SUBRAMANIAN: On which you’ve written as well, right?

KAPUR: Yes. There was nothing preordained, in a sense. The two coastal states on the east, Odisha and Bengal, were quite impoverished. Odisha was an extremely poor state. Odisha used to have starvation debts.

RAJAGOPALAN: In my lifetime, Odisha has seen famines.

KAPUR: Odisha actually has had stable government and has grown quite steadily. It’s absolutely not at all what it was. It’s also been politically stable.

RAJAGOPALAN: In manufacturing, which is unique, actually.

SUBRAMANIAN: Also, there is a Maoist conflict, which held it back for a long time.

KAPUR: The Maoist—nonetheless, that was more interior Odisha. I think the state that is the biggest puzzle to this is West Bengal, which was the most industrialized state in the ’50s. In our travels we had gone on for a book tour, in amazing places like Bangalore, the employees in hotels and students and faculty in universities are from Bengal.

For 100 years, from the late 19th century till the ’60s, people from all over India would come to Calcutta. Now, it’s the opposite. I think nothing tells you about the current and future prospects of a place where young people are exiting with their feet because they don’t see the prospects. Now, we go through why some of these things happened. Some might think the freight equalization policy was not just bad for Bengal, but for eastern India in general, because it took away the comparative advantage.

On the other hand, Bengal had lots of things going for it. The first ISI, Indian Statistical Institute, the first IIT, the first IIM. The Botanical Survey of India, the Zoological Survey—all of these came up. They were in Calcutta or in Bengal. I think there are two, three explanations. One, we know the violence that occurs after ’67, and the anti-capital, anti-business thing, and capital leaves. Once it leaves, it never comes back.

I think the other thing, which we don’t emphasize enough and we should have: For some reason, Bengal never developed a culture—or it had and lost it—of entrepreneurship.  

Bengal, in the beginning of the 20th century—we forget around 1950 the third-richest Indian was an industrialist from Bengal, Biren Mookerjee with Indian Iron and Steel Company. Bengal Chemical. These were all pioneer industrialists and industries. By the way, that is true not just in India, but outside India as well. There are lots of success stories of the Indian diaspora in business and entrepreneurship. Very few Bengali.

RAJAGOPALAN: If they’re Bengali, they are Calcutta Marwaris. They’re originally Marwaris who fled Bengal under communism.

KAPUR: Now, whether that was because of the Bhadralok culture that was so dominant and the intellectual elite never really came to terms with caste, and the fact that the intellectual elite were all upper caste—the Bhadralok—so what was valorized was other things. In fact, the irony is what was valorized was learning, Bengal, after 2000 when private higher education takes off, could have been said to have missed the manufacturing. It could have been a service-sector, higher-education magnet. In fact, the opposite. 

I think, in part, Bengal’s intellectual elite has to take some responsibility. I grew up in Calcutta. All the protest movements were about Cuba and Vietnam, but the fact that your own state was going through such bad times, that seemed to be not very relevant.

SUBRAMANIAN: I want to get back to your question about one democracy, many outcomes. The first thing to clarify is what Devesh said that this variance really starts in the 1980s. I think what’s important to note is not just that there was globalization, but essentially, policy, political, and fiscal decentralization happens progressively beginning in the late ’80s. 

Basically, the tall poppy syndrome of socialism—because states acquire agency in a real sense. That’s the dividing line. Therefore, each state determines its outcome more so than the common democracy does. The second thing I would say, related to your question about democracy, one thing that Devesh and I talk about is: What is it about West Bengal? Seven terms the government that presided over decline, or the party that presided over decline, was consistently re-elected. What does it say about democracy or about the notion that political stability is very good for growth? Again, that’s why this is very interesting.

KAPUR: The last 50 years, Bengal has had just three chief ministers, over half a century, which is so distinctive for India. In some ways, as Arvind said, that stability should have been a massive boost.

RAJAGOPALAN: We see that happen in Odisha later—for instance, under Naveen Patnaik, who’s the second-longest serving—after Sikkim and Tripura maybe or thereabouts—is the longest-serving chief minister. You see some serious economic growth, but you don’t see it with Nitish Kumar. Sikkim was rich to begin with. It’s not a comparable state. The long-serving nature doesn’t seem to be a good predictor in India for me.

SUBRAMANIAN: One thing we didn’t emphasize early on—for the benefit of the readers—one of the things we consciously do in this book is to adopt a comparative perspective, whether it’s comparing with China, or Korea, or other developing countries, so on. In the chapter on states, I think that, to me, some of the patterns that we see within India do recall some of the pathologies we see in the world. I think one of the slightly more novel insights that we offer on Punjab, for example, is also based on work that Devesh and I did elsewhere, is that we don’t think of Punjab as a rent-receiving state.

RAJAGOPALAN: Oh, it is.

SUBRAMANIAN: Massively rent—

RAJAGOPALAN: How else would we think of it?

SUBRAMANIAN: People will think that the conflict changed everything.

RAJAGOPALAN: Okay. Got it.

SUBRAMANIAN: It’s true that also played a role. The reason why we don’t think of it as rents is that we say, “Oh, farmers are subsidized.” But actually it’s a subsidy that comes from outside the state. If you were subsidizing from your own taxation, that’s a different kettle altogether, but if you get it from elsewhere—. Similarly, it’s a point that Devesh has made elsewhere that the pensions, for example, is also massive rents going to the state. Similarly, the other insight from outside is: There is a kind of internal aid curse as well within India.

RAJAGOPALAN: Definitely.

SUBRAMANIAN: I think to see India as this real crucible of so many different things going on is one of the interesting things about the Indian state.

KAPUR: Tamil Nadu and West Bengal have this interesting thing that since at least from the late ’70s, ’77 onwards, have always had political parties governing that are different from those governing at the center. The center has been basically largely Congress-led or BJP-led, and neither have been successful in either of those two states.

The Tamil Nadu political parties, even when they were in opposition and not part of the ruling coalition, managed some sort of modus vivendi with the center. The Bengal ones, whether it was the CPM or TMC, have been deeply antagonistic. This means that, in a sense, I think the Tamil Nadu political parties have been more pragmatic in knowing that they need the center. The center may not help you, but it can hurt you. That pragmatism seemed to be lacking in the case of West Bengal, where it all became about larger principles or X or Y for this. I think that also hurt Bengal relatively.

Tamil Nadu

RAJAGOPALAN: The story of Tamil Nadu, to me, the success is not that everyone did equally well. To me, the interesting thing is, legally speaking—in terms of state capacity and on so many other markers—they’re exactly like the rest of India. The labor law is almost the same as anywhere else. The industrial disputes are the same as anywhere else. 

But they’ve figured out some political configuration between the two parties that we won’t undo each other’s promises. Even though it’s not one single party rule for 30-plus years, they keep switching. Each party that comes never undoes either the corrupt promises or the fair promises of the previous lot. They seem to have a remarkable amount of political stability in a way that you don’t see even in Kerala and Karnataka, actually.

SUBRAMANIAN: One last point, I think, is a point that Devesh makes elsewhere is there were multiple sources of entrepreneurship in Tamil Nadu spatially. In West Bengal, it’s one city. Even if you look at industrialization in Tamil Nadu today, it’s pretty broad-based. That also helps structural transformation.

The Collapse of Punjab

KAPUR: That’s something you see also that Gujarat has—Surat, Baroda, Ahmedabad. Punjab had that; in the ’70s, industrialization was happening across—there wasn’t what we call a primate city the way West Bengal had, Calcutta was so dominant.

SUBRAMANIAN: Even Karnataka is mostly one city-based.

RAJAGOPALAN: That’s true.

KAPUR: Yes, Bangalore. I think that’s the tragedy of Punjab. It was poised to be the East Asian style. First, strong agriculture. Then, small industries were becoming bigger, spread out in Ludhiana, Jalandhar, and Patiala. Then, the ’80s just shortchanges everything.

SUBRAMANIAN: In fact, if you see the chart in our book, in some ways, the most dramatic line in the chart on the states is Punjab because it goes up and collapses like a meteor.

KAPUR: It’s inverted.

RAJAGOPALAN: Punjab also had a very interesting middle class because there were so many people serving in the army, the government, and so on. They had the agriculturists. The Green Revolution makes them much richer, more productive. There’s industry in places like Ludhiana. It’s a relatively homogeneous group: Hindus and Sikhs. On paper, Punjab has everything going for it. Then, it all goes upside down.

KAPUR: I think what we say in the book is that Punjab offers a salutary lesson for India in general. When you mix religion with politics—

SUBRAMANIAN: I was going to say that, exactly.

KAPUR: —it’s a cocktail that you want to be very, very careful with.

SUBRAMANIAN: In fact, Punjab, apart from whatever’s happening recently, is one of the, or maybe the, only state, where religion and politics are much more entwined than in any other state.

RAJAGOPALAN: It’s not religion as much as other caste and ethnic politics in the northeast. That would be the other example. They were never as big or as rich as Punjab. Punjab, being a border state, certainly doesn’t help on that front.

SUBRAMANIAN: Then all the rents coming in. Actually, the deepest fault line, arguably, in India runs in Punjab. 

RAJAGOPALAN: Even now.

SUBRAMANIAN: Just as we see exit of workers from West Bengal, we see similar exit of youth from Punjab.

RAJAGOPALAN: Actually, it’s so depressing. The last couple of trips I made to India, one, I went to Amritsar—about 18 months ago I was in Kochi. In both these places, when you’re just driving around between cities or taking a train between cities, the only billboards you see are ads for the SATs and IELTS tests and TOEFL and how to get out. 

In Kerala, it’s not the equivalent. It’s more about jobs and networks in the Gulf. It’s very depressing to see that. You don’t see that in Tamil Nadu. You don’t even see that in West Bengal.

KAPUR: That’s why the most illegal immigrants you see in Western countries from India are from Punjab and some from Gujarat. However, I think, for good or bad, those doors are closing. The humiliating way that Punjabis were returned in flights from the US, handcuffed, all of that, I think that dream that if you get out, everything will be great, that is now becoming more—

RAJAGOPALAN: You can’t take that for granted.

KAPUR: Yes.The question is: Will that change things cognitively? Because you first need that cognitive shift that you need to build here, rather than go somewhere else before things begin to happen.

SUBRAMANIAN: It’s also one of the weakest fiscal states in India.

RAJAGOPALAN: I know. Fiscally, it’s a total disaster and has been for a while. This is not just a neoliberal thing or a post-conflict thing. It’s been a mess. 

Shades of Socialism in India

RAJAGOPALAN: The first part of the book was about the democratic part. Then you get into socialism. Here, there are a few things that you point out. Normally, the distinction people use is Nehruvian socialism versus Indira Gandhi and her commanding heights and so on.

Instead, you look at 1950 to 1980 as one block of just gradually worsening policies and, in some sense, stagnation. Then, from 1980s to 1990s is a period of a little bit of opening, and then we have the reforms. When we are looking at 1950 to 1980, the way you set up the book is you have this table of the different kinds of mischaracterizations about the Indian economy, and you’re basically myth-busting in that chapter, in some sense. You say that that’s not really a time of import substitution. It’s more a time of scarcity economy because of License Permit Raj.

If I had to say it in my Econ 101 class, it would be something like: Protectionism and high tariffs are a tax on the foreign producer and the domestic consumer, whereas License Permit Raj is a tax on the domestic producer and the domestic consumer. Your argument is that it’s the latter which has the heavy hand. 

The question I have is I don’t see too many people arguing that the failure or the success of the time was import substitution. Everyone seems to agree that the problem with that time is License Permit Raj. To me, the two are highly entangled because it’s the autarkic nature in License Permit Raj, which leads to restriction of foreign capital, and you don’t have enough foreign exchange to actually buy the imports. There’s more and more protectionism because there’s a scarcity economy at home. The protectionism was never ostensibly driven to promote domestic champions. 

That’s why that chapter seemed a little bit odd to me. Not that I disagree on any of the facts or the data, but it’s more like the setup of how you explain that time.

SUBRAMANIAN: We try and bust two myths in that chapter. By the way, there is, I would say, almost the received wisdom in India today—or at least not everyone, but a lot of people express it—which is that period was not too bad in terms of the growth outcomes, especially if you compared it to where India was, how it had done previously. We bust that, A, by showing in a cross-country sense.

RAJAGOPALAN: Korea has taken off.

SUBRAMANIAN: Yes. Exactly. 

RAJAGOPALAN: Even China.

SUBRAMANIAN: We’ll come to China in a second. We were, I think we say something like it was in the 1950s, ’76, the poorest country. By 1980, it had deteriorated in the cross-section. Whenever you say, “India was unique,” then you have to, “Well, other countries also had their problems.” In a proper sense, it wasn’t. Of course, the comparison with China is especially important because this was a period in China, there was utter chaos, economic and political chaos. Despite that, they came out ahead. In 1961, ’62, China was actually behind India, productivity, production, all these things.

RAJAGOPALAN: They were having mass starvation and famine.

SUBRAMANIAN: Yes. Exactly. Mass starving. Then, of course, extreme political instability as well. The notion that somehow it wasn’t bad is, I think—

RAJAGOPALAN: And here, Arvind, economists always ask the question, compared to what?

SUBRAMANIAN: We’re giving you the comparison.

RAJAGOPALAN: Exactly. You’re giving us the comparison that compared to other East Asian countries—

SUBRAMANIAN: Not at all. No, the rest of the world.

RAJAGOPALAN: —or even poorer countries in the—

SUBRAMANIAN: Yes. Exactly.

RAJAGOPALAN: —rest of the world, India does much worse relative to what it could have. Compared to India of colonial times, especially between 1900 and 1950, India does better because it just stagnated so much under the latter part of the colonial times.

SUBRAMANIAN: That’s why you have to be careful about the comparison.

KAPUR: It’s not that India had unique handicaps.

SUBRAMANIAN: It had handicaps, but not unique necessarily. See, firstly, the way I would, in a classroom, explain scarcity is the following way. I think a simple way of saying it would be the following: You kept out foreign supply by taxing, by import substitution protectionism. You impacted domestic supply by taxing the domestic private sector. You also promoted the inefficient small-scale sector. Finally, you promoted the inefficient public sector. All four sources of supply, the inefficient were promoted and the efficient were taxed or kept out. That’s what leads to scarcity, and that’s the thing.

Now, this is something that I think someone else also made the same argument—it’s a very good point—which is to say that if you have licensing on foreign trade, licensing on domestic things is an analog. That’s not what other countries did. Other countries, when they said, “Import substitution,” they said it was all about the infant industry argument. It was about becoming competitive. We just didn’t do that. Now, the question is why did we do that? I think it’s a complicated question. I. G. Patel has an answer, basically saying that in the war period, all the scarcity and stuff also led to corruption. Also, the domestic private sector was also partly stigmatized, and so on.

India did something very different than the others did. Or a different way of putting it would be to say, we wanted to do import substitution, but only in favor of the domestic public sector, not the private sector. That’s how you have inefficient public sectors and then we have a whole chapter on the inefficiencies, the lack of accountability, and so on. It was import substitution in favor of domestic public sector. Maybe to reinforce that, you kept out competition from the private sector.

RAJAGOPALAN: I would actually go one step further. I don’t think it was just in favor of the public sector, because when they started doing it, the public sector wasn’t that developed. It was just coming up. I would actually say the License Permit Raj, in one sense, is the extension of the war controls. The war controls all started in the ’40s and we just doubled down on them. If there was controls on food, and silver, and cotton in the colonial period, now you just extend it to all other kinds of fabric or you extend it to all kinds of grain, and so on. That’s the way I read the control system.

The trouble was they started including the protectionism when we didn’t have a huge public sector, but we had this huge Bombay Club. They famously sat together and they all said, “Okay. We are the existing industry. We’re going to be grandfathered in.” Iron and steel is technically not part of the private sector, but if you existed before the republic of India and you already had an iron and steel company, of course, you’re included.

All these interesting exemptions given to the Bombay Club and large domestic industry that existed, they said, “Okay. It’s going to look terrible if we protect you. We’ll give you some licenses, and we’ll do something.” That’s really the way I interpreted it. I would love to have seen the protection more for the public sector, but they barely existed in 1947 to ’55.

KAPUR: I think I would slightly disagree with you in that, remember, the real beginnings of the serious control Raj—and we actually say at the end that if you think of the License Raj as a control mentality, that comes after the ’56 industrial policy. That’s when the serious beginnings of the public sector begin. The public sector firms don’t really come into being till ’64. The steel or heavy engineering, BHEL, et cetera. 

What is astonishing in the ’60s and ’70s is the incredible octopus-like minutiae of control. You need from this, you have to approve, and that approve—all of those things. They really come out very well in the first Administrative Reforms Commission that points out, because what you see happening with the control Raj and the public sector is something I think we often think of this as an entirely political thing, but the IAS plays, I think, a terrible role in this.  

Many of them are appointed as head of state-owned enterprises. They have no commercial experience. They’re not engineers. At that time, the IAS would not take in engineers. That control thing of that bureaucratic control, impulse is coming as much—it’s not just political. It is very much part of the IAS mentality of this control, which I would argue persists. It is a deeply entrenched thing that we are the nation’s guardians. Without us, all sorts of bad things would happen, therefore, we need to control everyone and everything.

RAJAGOPALAN: There, I wouldn’t disagree with you, but I still think the very high tariffs come in much before that. India becomes near-autarkic very, very early.

SUBRAMANIAN: Yes, yes. Of course.

KAPUR: The controls on the private sector, that expands, and the public sector performance then becomes much worse because of the nationalization of the Sick Industries. All that happens under Mrs. Gandhi.

RAJAGOPALAN: Yes, that comes later.

SUBRAMANIAN: No. See, the one slight surprise, at least for me—and yet, Devesh and I also maybe we have a little bit of difference on this. I’m not sure I’m right on this whole Nehru versus Indira Gandhi.

RAJAGOPALAN: I think of it as a continuation exactly like you. The policies are different, but I think of the ethos very much as a continuation. 

SUBRAMANIAN: Gradually gets worse.

RAJAGOPALAN: Yes. Gradually gets worse.

SUBRAMANIAN: No. See, the thing what I was surprised very much by was how much nationalization took place under Nehru. Air India was nationalized, insurance was nationalized, Imperial Bank was nationalized, and all the electricity companies which were in the private sector, they were— 

KAPUR: Electricity occurs later.

RAJAGOPALAN: It wasn’t glamorous industries. Bank nationalization is all at a different scale, so I understand your surprise.

SUBRAMANIAN: Yes. The other thing is that, if you look actually at the outcomes, in just the growth outcomes, in fact, between 1950 and let’s say you say, “Nehru good, Indira Gandhi bad,” you don’t see it in the outcomes. Around ’66, ’67, we’ve done as worse as we do subsequently as well. There is a continuity there.

RAJAGOPALAN: For me, this is really coming from like, say, Bhagwati and Desai’s book, the one that came out in 1970. Arun Shourie writes his dissertation around the same time on foreign exchange. 

KAPUR: That is earlier.

RAJAGOPALAN: That’s earlier? Bhagwati and Desai was floating around in ’69, ’70, and gets officially published—

SUBRAMANIAN: Yes, later.

RAJAGOPALAN: When I look at those two works together, to me, the protectionism, the import controls, high tariffs, the foreign exchange controls, and the domestic controls end up becoming this seamless, entangled thing because you can’t have one without the other. You have all these controls domestically. You have a foreign exchange problem. You’re near-autarkic. You can’t import because you don’t have enough foreign exchange.

Now, if you can’t import, your domestic industry needs to grow, but you aren’t giving enough licenses and expansion permits. If you allow the very few industries to expand, then now they’re going to make a killing, and we can’t let them profit under socialism. We got to not issue additional licenses or let them expand. Each one of these reinforces the other depending on which industry or sector you talk, one may have come before and one may have come later.

If I had to use a classic Soviet-style example, it would be like Mises’s dynamics of interventionism or something like that. You make one intervention, leads to the next, and leads to the next. That’s how I view that time. I don’t think of the import substitution as being necessarily separable, though eventually we did have a time when we completely dismantled at least the union-level License Permit Raj. We still had relatively high tariffs and they came down relatively slowly.

SUBRAMANIAN: Exactly. I was going to say just two things. On the Bombay Club that you said, that they went along with this, we actually cite Nehru saying—it’s actually the epigram there saying—“Lots of industrialists come to me and complain about all of this.”

RAJAGOPALAN: They’re not wrong.

SUBRAMANIAN: They’re not wrong. You could see straight away what they thought they were getting into was not what actually happened. What I was going to say, second point, is exactly that. You see that in the 1980s—this is what Dani Rodrik and I also did earlier—they keep the protection. By the way, the reason that happens is also because it’s politically incentive-compatible at that stage because it’s pro-competition reform that’s going to create disruption and opposition. In that sense, one can distinguish the two, as happened in the 1980s. It’s possible that before that it was all one seamless thing, and certainly there was elements of that as well.

RAJAGOPALAN: I don’t know if it’s seamless, but definitely entangled.

SUBRAMANIAN: The point that you made about the dynamic intervention, we do see that also in the subsidy thing. If you give one subsidy, you have to offset it therefore with another subsidy. That’s how we got the export subsidies coming into place. 

RAJAGOPALAN: About the fertilizer subsidy, actually, I have a paper on this exactly on Mises’s dynamics of interventionism and subsidies. They start with this idea of land reform. The original idea is that actually smaller land-holding sizes are more productive. Now this came from faulty surveys and it was based on bad research and bad measurement. Originally, the academic view very much was that smaller land-holding sizes actually leads to more yields because the farmer is more invested in—

KAPUR: —intensive agriculture.

RAJAGOPALAN: Exactly. Intensive.

SUBRAMANIAN: By the way, that’s also Studwell’s view on Asia, How Asia Works.

RAJAGOPALAN: Then they do that. The trouble is now with each generation, the holding size keeps getting smaller. It becomes more unproductive. Now, we’re not allowing exit from agriculture, so now you have to give subsidies. You give the first subsidy, which if you give better yield seeds, then you need more water, then it needs more—

KAPUR: Fertilizer.

RAJAGOPALAN: —fertilizer, it needs more electricity. And now we’ve never quite gotten out of it. You can literally see stage one, these are the subsidies given stage two. I think everything except the fuel subsidy is still there. Even the fuel subsidy has gone away because electricity has taken on part of the fuel subsidy basically. Instead of diesel generators, they are now using electric generators.

KAPUR: The subsidy was the one that went away and which was replaced by electricity was the kerosene.

RAJAGOPALAN: Kerosene. Exactly. Kerosene, diesel, that kind of fuel.

KAPUR: Partly I think the manner in which the fuel subsidy got eliminated was, that was a clever nudge-style thing that you incrementally increase it every two weeks by little, little, little, and they were helped that world prices went down, et cetera, et cetera. I think the dynamic which you’re seeing is exactly what is happening now with cash transfers. Today you saw the Tamil Nadu government, but slowly, slowly basically cash transfers are reaching close to 1 percent of GDP, and it’s all within the last 10 years.

RAJAGOPALAN: It’s all in addition to the other subsidies.

SUBRAMANIAN: Exactly.

RAJAGOPALAN: It’s not instead of.

KAPUR: The whole idea, in fact, Arvind and I, with Partha Mukhopadhyay, had written perhaps the first paper on cash transfers in 2008.

SUBRAMANIAN: 2007. Yes.

RAJAGOPALAN: You’ve changed your mind.

KAPUR: Yes.

RAJAGOPALAN: Have you changed your mind also?

SUBRAMANIAN: I’ve also changed my mind.

KAPUR: I changed my mind. Actually, in 2011, I changed my mind, meaning I said that unless it is a substitute, it should not be done.

RAJAGOPALAN: Just for the listeners, this was the first few writings on universal basic income and cash transfers in India. For both of you, the expectation was that this would be in lieu of all these other subsidies, which are actually price-distorting. That was the argument that you made. Now you realize that the political economy just simply doesn’t support that.

KAPUR: I think the one golden opportunity that they slipped away was when, in a little bit of a panic because Andhra had introduced, or maybe Telangana, this—

SUBRAMANIAN: Rythu Bandhu.

KAPUR: —cash transfer to farmers.

SUBRAMANIAN: Rythu Bandhu. Yes.

KAPUR: Then the central government went ahead. That was, of course, then all India. That was the time when they could have said, “You either get the fertilizer subsidy—”

RAJAGOPALAN: Or the cash.

KAPUR: “—or the cash transfer.” At least either or you make a choice, but not both. 

RAJAGOPALAN: Because they were all clamoring for the same votes.

SUBRAMANIAN: By the way, that was never on the cards. Nobody ever said fertilizer. Unfortunately, I wish it had been, but it was never.

RAJAGOPALAN: It was on the cards in the sense that’s how economists and academics anticipated or expected that to play out, that slowly we’ll phase out distortionary subsidies, and cap subsides.

SUBRAMANIAN: A little bit of a scoop.

KAPUR: Yes. Move from in-kind to cash.

SUBRAMANIAN: Let me give you a little bit of a—just because Devesh has mentioned it—minor scoop. Telangana implemented Rythu Bandhu, but then what happened January 2019, just before the election, the Congress Party introduced—

RAJAGOPALAN: This is the national election.

SUBRAMANIAN: Yes, 2019, the Congress party introduced NYAY. Remember that?

KAPUR: Yes.

SUBRAMANIAN: Rahul Gandhi thing? I got a call from Arun Jaitley saying, “Arvind, what should we do?” I don’t want to disclose the contents of that, but it was a combination of the Rythu Bandhu and the NYAY that made the government panic and that’s when they introduced PM-Kisan. 

Now, let me tell you, there are two reasons why I’ve changed my mind a bit on the cash transfer. One is what you and Devesh said, because remember when we wrote about it in the Economic Survey in 2016, where we said universal basic income, we actually listed all the subsidies that should be removed. These are middle-class subsidies.

RAJAGOPALAN: I calculated how much money you could give and how nondistortionary it would be, and all that stuff.

SUBRAMANIAN: The second reason is something that I hadn’t fully anticipated, and it’s an insight due to Tharman Shanmugaratnam, who’s the president of Singapore. He used to say, compare a cash transfer with an earned income tax credit. These are both means of giving money to the poor, earned income tax credit, but politically, you’ll win no votes for saying, “I’ve increased the earned income tax credit.” 

The very thing that makes a cash transfer popular is what lends it to abuse as well. It’s very easy if Devesh says 500 rupees, you will say,1000 rupees, which brings us to the other thing about the aspect which we talk about in the book, is that if you look at Indian democracy, in the first 30 years, the average gap between elections was like 4.7 years. In the last, whatever, five, 10 years—

RAJAGOPALAN: 18 months, 20 months?

SUBRAMANIAN: No, less. 14 months.

RAJAGOPALAN: 14 months. Wow.

SUBRAMANIAN: 14 months. Now, the number of occasions in which you can be populist has increased. The gap between them has become smaller, and so this abuse property of cash transfer gets exaggerated and heightened. That’s why we’ve seen the competitive populism of recent years.

KAPUR: If I could add, I think another reason why—more reasons, the fiscal costs, all of them—why does this increase last decade? It’s not just that one state starts. This is the point you very nicely put earlier, the inadvertent things that you think you start with, that the success in building a genuinely world-class digital public infrastructure means that now you have state capacity to implement this reasonably.  

RAJAGOPALAN: Yes. Inject it.

KAPUR: Now, that worked very well during COVID because India could transfer in ways few other countries could at scale. Now, as they say, once I have a hammer, I see a nail everywhere. Once I have the DPI and I can get it, I can get this. This morning at 6:00 a.m. or whatever, the Tamil Nadu government, it was in housewives’ bank accounts within whatever, five minutes, right?

RAJAGOPALAN: That’s the other constituency, actually women, who benefited hugely from the direct cash transfer, right?

KAPUR: I think what that means is that the foundational aspects of development, which is the classic public goods. Yields of Indian crops have not increased much. Especially when you compare to China, they’re still about a third to a half.  

RAJAGOPALAN: They were always bad to begin with, notwithstanding Green Revolution.

KAPUR: The agriculture extension systems of the public sector has collapsed. No investments. States actually investing in the crops growing on the state, in their agriculture, universities, et cetera, no. Instead, we’ll give that. We put money in schools. We know that the learning outcomes have been weak. All, what we call, hard, wicked problems that are absolutely essential.

Even now, the pitiful expenditure on, say, sewage that is dumped to create water treatment plants. Look at the incredible losses of human life and health because of air pollution, even where the elites live in Delhi. These are hard problems that require resources, state capacity, build up. That effort is hugely lagging compared to the rush to give cash out.

SUBRAMANIAN: I think there’s a more pernicious and deeper, I think, thing that is already there but looms ahead. You see—what you and Devesh said about the DPI—the political economy is something like this. That politicians want to be able to promise and deliver. Education, building, learning outcomes—between my saying, “I’m going to improve learning,” and it actually happening is like five years. There’s a second point, which is that politicians also want the clients to know that they were responsible. The attribution problem of political economy.

RAJAGOPALAN: Absolutely.

SUBRAMANIAN: Cash transfers accomplish that—

RAJAGOPALAN: Both of them.

SUBRAMANIAN: —beautifully. One, it’s effective. I say today, “Tomorrow it’s in your account,” thanks to DPI, what Devesh said. The second is, you can say, “This is due to me.” The combination of that, so then it has the potential to become a self-reinforcing political compact between the citizens and the state. Because of all the other things that Devesh said, right? It’s hard work, much more difficult to deliver. Both politicians and citizens say, “Yeh to hona nahi hai” [This will never happen]. Cash transfers are an easy way forward, and that’s what I think is slightly pernicious and dangerous about the current moment and cash transfers.

KAPUR: Because we cannot avoid the deep problems.

RAJAGOPALAN: We can’t. No, but there’s a third layer. You talk about it when you talk about the financial system. You focus much more on banking. We are in a bizarre sort of—I don’t even know if it’s cooperative federalism or competitive federalism—but it’s definitely federalism with no budget constraints. States are not responsible or rated for how large their deficits are, and how much debt they incur, and what kind of problems they impose. Basically, there are some states which are free-riding on the national currency. We have no way to discipline that. Municipal bonds are now coming in, but—

KAPUR: They’re so small.

RAJAGOPALAN: —state-level bonds, they are just rubbish.

KAPUR: There’s almost no way to discipline them. 

RAJAGOPALAN: There’s a market for them.

KAPUR: Because everyone believes there’s a sovereign guarantee, so you cannot use the bond market to discipline states.

RAJAGOPALAN: Exactly. The bond markets are also not giving you much information because the market’s also not very thick. You have an entire state banking system, which has no choice but to buy those bonds.

SUBRAMANIAN: I want to be a little bit careful here. I don’t disagree with what you’re saying about the states. It’s not as if the center is a knight in shining white armor.

RAJAGOPALAN: No, but they have better fiscal discipline than the states, I would think, in larger simple things.

SUBRAMANIAN: They’ve consistently flouted the FRBM after they instituted it.

RAJAGOPALAN: Yes.

Upside-Down State

SUBRAMANIAN: I think there’s not been one year where they’ve met FRBM target. Maybe there’s one. I’m missing it maybe. I think one has to be careful about that. I’ll just discuss this for one second. See, one of the puzzles we say in the fiscal chapter is, why is it that India, having had the highest deficits amongst all comparator countries, has not been punished by markets? We are double-digit for 35 years, center and state combined, and we haven’t really been punished. The point is that we have paid the cost in terms of—

RAJAGOPALAN: Internally.

SUBRAMANIAN: —the interest burden that has been used. It’s about 4 to 5 percentage points of GDP and—

RAJAGOPALAN: Only growing.

SUBRAMANIAN: —only growing. Defense expenditures, development expenditures—

RAJAGOPALAN: Everything is down.

SUBRAMANIAN: —have been squeezed out. At least, politically, I think the task should be how both can come together. There should be no finger pointing that only you are to blame, because after all, the center is giving all kinds of subsidies as well: the fertilizer subsidy, the MSP, et cetera, et cetera. I don’t disagree that the states also have to do, but I think it has to be done cooperatively. The broader point I was going to make was that states don’t feel the pressure because, as you said, whatever, the sovereign guarantee. But the country as a whole has also not felt the pressure from markets and so on, and that’s why we continue in this low-level equilibrium where, de facto, we’re bleeding.

RAJAGOPALAN: We’re bleeding internally. You can’t see it externally.

SUBRAMANIAN: Actually, we don’t see it in terms of crisis, but we do see it in terms of the huge development expenditures that are foregone.

KAPUR: We show in the chapter on order, that in the last decade, despite the much more muscular rhetoric, India’s defense expenditures, the share of GDP, has been the lowest in half a century.

RAJAGOPALAN: Even most of that expenditure is actually payroll.

SUBRAMANIAN: Yes. Exactly.

KAPUR: Exactly.

RAJAGOPALAN: It’s not real defense technology.

SUBRAMANIAN: Exactly. Good point.

KAPUR: That was also to win elections. One gave the one rank, one pension, sharply increased.

SUBRAMANIAN: Exactly.

KAPUR: You don’t win wars because your older people, retired people, can play golf well. That’s just a sad reality. The fact is, now, you can if you had all this thing that NATO now is rushing to cross 2 percent of GDP. India hasn’t. If you promise the one rank, one pension, and there are good reasons, fairness, all of that that should be done. Then, you have to go to at least 2.5 percent, but there is genuine crowding out now happening.

RAJAGOPALAN: Now, this is where both the book and this is some of your earlier work, I call it the upside-down state.

KAPUR: Ulta-Pulta  [upside down]

RAJAGOPALAN: Ulta-Pulta  India spends on everything except what it’s supposed to spend on. We’re not spending enough on defense and things like that.

KAPUR: Or R&D.

RAJAGOPALAN: Certainly not on police, and R&D, and courts, like all the Hobbesian state, as you call it in that table. We’re not spending enough or at least delivering on education and health. We’re spending on all these bizarre subsidies which only keep proliferating and also expanding in terms of expenditure. The tightest link that I find between democracy and how that has played out poorly for India is this part of it.

Now, there’s another way to think about it, which is maybe not that India became democratic too early or the democratic politics has caused this. It’s almost that India has too little democracy. We didn’t introduce the democracy at the local government level early enough. We didn’t have enough fiscal federalism early enough. Those are typically the governments that make the investments in public services, health, sewage, public sanitation, those sorts of things. Because we never quite had that, now the government has to, at the central or the state level, push a button and some midday meal scheme has to go somewhere in interior India. The way I think about that problem is: redistributive politics, because of democracy, but gone terribly wrong in a sense because of too little democracy, too much centralization. What would be your response to that?

KAPUR: There’s a graph you might recall in the fiscal federalism chapter. We generally think of all the debates on centralization is Delhi versus the states, basically tier one versus tier two. What we show is that among the three largest countries in the world, which is China, US, and India, China and the US, very different political systems, but very similar in that public employees are largely at the local—

RAJAGOPALAN: Local level.

KAPUR: —or federal, far fewer at the state. India is exactly the opposite. We argue from that the debate on centralization, and there’s a real important debate there between tier one and tier two, is obscuring the much greater centralization between tier two—

RAJAGOPALAN: Tier two and tier three.

KAPUR: —and tier three.

RAJAGOPALAN: Our tier two, just to interject, are as large as most countries, barring China. It is a relevant comparison.

KAPUR: This is something that Arvind has been more sensitive to—Bardhan and Mukherjee have written—there were real concerns that if you decentralized in the ’50s and ’60s to the village level, where the upper castes’, hegemony was there, the lower castes had very little voice, there would have been real capture. However, Indian politics has changed.

That upper caste hegemony, it’s not that it’s no longer there, but it’s much weaker in rural India than it used to be, so that there is a much greater scope for decentralization. This was, I think, one of Rajiv Gandhi’s singular contributions. It didn’t happen while he was alive, but we know he pushed it, and it happened after he died, the 73rd, 74th amendment. I think by all accounts, and we say in the book, the 73rd amendment, we don’t want to say it’s been great, but it’s made progress.

RAJAGOPALAN: Yes. Definitely.

KAPUR: The 74th, however, which is about urban—

RAJAGOPALAN: Urban. It’s been a disaster.

KAPUR: —that the states have just sabotaged. In fact, it’s interesting, we all think about elections and how the Election Commission is trying to tilt the playing field. The state elections, the commissions, they don’t even hold the elections, which are constitutionally held, and somehow it’s allowed to happen. They find 30 excuses to postpone it, you know, “Electoral roll is not ready,” this, that, and the other.

Unlike the 20th century, in the 21st century, India will be much more urban, growth will have to come from urban, that will be the one that will lift, there will have to be more migration, rural-urban. Arvind talks a lot about the competition among states, which can lead to positive outcomes, but you can imagine if you had competition among cities?

RAJAGOPALAN: Absolutely. That’s already happening, right?

SUBRAMANIAN: It’s already happening. Exactly.

KAPUR: It could happen much more if they had the agency and the autonomy—

RAJAGOPALAN: Absolutely.

KAPUR: —all of that. I think that part, the way the 74th amendment has effectively been sabotaged, and how to get around that, I think, is something that needs thought. 

SUBRAMANIAN: Yes, I agree with this. Again, just a cautionary note that just further decentralization is not a—

KAPUR: Panacea.

SUBRAMANIAN: —panacea for everything. I’ll give you one reason why. What Devesh says, I agree with, and what you’re saying also, I agree with. I don’t have the confidence that—supposing we said, “Third year, you will have control, say, to tax, generate revenue”—I don’t have the confidence that the third year will be able to do the taxation to generate the resources.

There’s an amazing report, one of the Taxation Committee reports in the ’60s or ’70s, where they say that some of these taxation should be centralized. I’m not saying this will actually happen, but I’m just saying it’s a cautionary note. Take the Chinese example. It’s very interesting. We have a chart in the book which shows revenues from land. China’s, in the last 25 years, is about 8 to 10 percentage points of GDP. We’re about 1 percent to 1.5 percent, maybe even less. The Chinese, third tier has got it by selling land. Now that they can’t sell, and they have to tax, they are not able to tax as well. In China, what Devesh mentioned, the third tier is a vehicle also for political advancement.

KAPUR: Because that’s where you started this.

SUBRAMANIAN: The Shanghai mayor. I think it has to be decentralization, but also something more which will make the third tier come alive. Because, remember, the heart of the problem, what Devesh said about the 74th thing—and this is, I would say, one of the tragedies of Indian development—that in the course of development, land values have exploded. Very little has been fiscalized. It’s all gone to the private sector or corruption or whatever. As long as that continues, the politics of the third tier is going to be so complicated.

KAPUR: In fact, to reverse it, because of the rents—

RAJAGOPALAN: It’s harder to reverse.

KAPUR: —it’s not been allowed.

RAJAGOPALAN: Yes. Exactly.

KAPUR: Because the state-level politicians know the money is—

SUBRAMANIAN: Absolutely.

KAPUR: —only because I can control urban, therefore they don’t want to let go.

RAJAGOPALAN: Here I have a couple of points. I completely agree with you. China is a little bit different. China is really decentralization. Here, I want to make a distinction between decentralization and federalism. To me, federalism means that each unit is its own power center, whereas decentralization just means someone else has handed you the authority which can be taken back at any point.

The thing with what we did with 73rd and 74th amendment is we decentralized in terms of taxation and expenditure, but we truly federalized in terms of creating a democratic layer. If you make it fiscally federal, I think we’ll have slightly different outcomes. The place where I really disagree with you is property taxes are one source of revenue, but there are other sources of revenue, most importantly, user fees. In India, the poor pay the highest user fees. They pay user fees for everything from clean water to using a restroom, to everything.

In a world where that’s already getting paid and it’s basically going to all sorts of middlemen and Baahubali or slum leaders, and things like that, you could very easily imagine a situation where that could go to the local ward or urban local body or the panchayat. There is an entire layer which we don’t seem to have tapped in. You could even think of rethinking the GST and saying 5 percent is going to be local GST and state and federal will take 2.5 percentage point less across the board. There are many ways of designing this in a way that there is fiscal capacity at the lowest level that the state politicians don’t need to oversee.

SUBRAMANIAN: I see the lack of user fees and not generating revenues through taxing as all of a piece. It’s the same thing. After all, take the electricity example, much bigger, much more salient. The rich don’t pay for the full cost of supply of power. Why do we think that if it doesn’t work at that level, it’s not surprising that it doesn’t work. I’m not sure that user fees somehow is a slightly different category that’s going to be very different. I think it’s all of a piece. This is the whole thing about Indian democracy, the clamor. Everyone gets a shot at suckling at the state, and they all get their thing.

KAPUR: I think we should recognize it’s not a central problem at all.

RAJAGOPALAN: It’s not simple but some states have done it, so it doesn’t seem that impossible.

KAPUR: No, but even then in states at the local level, the functionaries, they are not even aware of what they can do or not do. Local state capacity is extremely weak. See, because they are not allowed to hire on their own. They’re all state employees who can be transferred, not because of them, but because of state by and large. Starting with the larger cities, one needs to build up people who have experience, with state capacity. And as, you know, pari passu, you decentralize as capacity builds up. Now we are locked into this low-level equilibrium. You say, you don’t have the capacity, so we can’t give you the resources. Of course, if you don’t get the resources, how will you build the capacity?

RAJAGOPALAN: I would actually argue the opposite, that we should federalize the most of the places with the least capacity. It’s not like Bihar has great capacity at the state level either, right? They don’t have great state-level capacity to do factory inspections, to do cadastral surveys. They have nothing. You might as well just federalize it. What difference does it make?

SUBRAMANIAN: A different way of saying what Devesh just said was, even if I granted you that thing, there’s still a kind of chicken-and-egg problem. People will not pay unless you show that you can deliver. That’s why the cash transfers are so attractive, right? Then they can’t deliver until they have the resources and the agencies. You need to break the cycle somehow, and it’s not easy to do.

RAJAGOPALAN: People also said this about Indian democracy when we first introduced universal adult franchise.

KAPUR: Right. That they won’t be responsible.

RAJAGOPALAN: No, and they won’t even know how to vote. They can’t read, they can’t write. How will they even know who their political leader is or make demands? Somehow we have built capacity to vote, right?

SUBRAMANIAN: That, I think, is different. Also remember, all this user charge, all this that you say, it’s just when someone says, “Do this,” my question is, what is different now from the last 75 years that you can do it now?

RAJAGOPALAN: I’ll tell you one thing that is different, and I have seen this in two very different settings. My parents live in one of those big condo buildings in Noida, which got its own association. It’s got beautiful watered lawns inside. When I go to those meetings, it’s seriously democratic, in the sense that everyone has an issue. Everyone has a voice on how the money will be spent, on whether there is going to be a dog park or tennis courts, or a new golf cart to take the kids to the bus station, or whatever the issue is.

I have seen the same in outskirts of Gurugram slums. When we were working on the Gurugram paper, it’s the same thing. You go to one of these evening meetings in the slum, there are a couple of slum leaders. It is the exact same argument that we are paying money, but there’s still garbage immediately outside my home, and things like that.

The moment you tie the electoral voice, in some sense, with the monetary or the fiscal voice, you seem to get pretty good outcomes, which is what, in political science literature, or public finance literature, you would see about Switzerland or local governance in New Hampshire, or something like that. I don’t see why we can’t experiment with that at the lowest level. I think people are already doing it, because they’ve exited.

KAPUR: Look, I think we should acknowledge things are happening. I think there is a growing political recognition that this—and partly also India’s intellectual classes are obsessed with farmers. Everything is farmers, farmers. 

RAJAGOPALAN: None of them want to be farmers.

KAPUR: No, that, but somehow, why is it that construction workers are less deserving? 

SUBRAMANIAN: Or any other group?

KAPUR: Any other group than farmers. Somehow, anything that happens around farmers is the one thing that is completely distinctive, different. We point out in our book that Ambedkar, in 1918, said, the best way to rescue Indian farmers—

RAJAGOPALAN: Is to exit.

KAPUR: —is to get most of them out of it, because the plot sizes are just way too small. The more you give subsidies, the more you give, the more you lock them in, because that is at least something certain, relative to an uncertain urban. In some ways, all of this has fed into a low-level equilibrium. You realize that at some point, de facto, India is urbanizing, whether you want it or not. You’ll have to, I think.

SUBRAMANIAN: The only thing I would complement that by saying is that, you have to give them exit by providing jobs elsewhere, but we cannot neglect agricultural productivity. All this has to happen in the context of rising agricultural productivity.

RAJAGOPALAN: It’s the same thing Ambedkar said in that paper. We need large holding sizes, but his vision was, we want mechanization. He said, “I want lands full of tractors. I don’t want to see any landless peasants.”

KAPUR: The tractors are there now.

RAJAGOPALAN: They’re being driven by the wives, because the men have gone to the city to look for work.

KAPUR: I mean, the whole thing, people argue about food security, all of that. You need to get the same output. Not the highest, but just the world average, you need half the land.

Manufacturing

RAJAGOPALAN: Arvind, I wanted to ask you if you’ve changed your mind a little bit on this. This is really coming from a few years ago, your co-author Dani Rodrik wrote about how we have premature de-industrialization. Brazil was the big example, but of course, everyone is talking about it in India also. Raghu Rajan and Rohit Lamba have written their book. There are so many people pulling on that thread. Recently, your piece in The Economist talked about how you’re much more optimistic about manufacturing.

A couple of questions. One, are you more optimistic about manufacturing, irrespective of what’s happening in the global order? I am optimistic because I think some of the domestic reforms have started happening, and India is a large enough market, even if the world has lots of uncertainty in geopolitics. We haven’t had enough reforms still. As you point out in the book, we’re a country of midget factories. Nothing has scale.

SUBRAMANIAN: Midgets making widgets, yes.

RAJAGOPALAN: Yes, midgets making widgets. I love that phrase. Have you changed your mind on this?

SUBRAMANIAN: Exactly. Let me be careful here. I don’t know whether I’m seriously more optimistic. For me, an opening has been created for something that we were never able to do. Point number one. That opening is the China Plus One opportunity. Again, to fix this concretely, China does something like 40 percent to 50 percent of labor-intensive manufacturing. It’s going to resist it. It is resisting it through all kinds of policies, but hopefully, over time, that’ll come down. Point number two is that as long as we can go from our current 2 percent to 3 percent, to say 10 percent, 12 percent, that’s the opening that I think has opened up toward. That’s point number two.

RAJAGOPALAN: That’s big.

SUBRAMANIAN: That’s big. Exactly. Even with robotics, Devesh is right that many of these jobs are not going to be as labor-employing as before, but even with that, it’s going to be reasonable. Point number two. Point number three, it’s a variant of what you said about reforms having happened. The point is that some of the southern states have shown that they can, in fact, attract.

I think Foxconn coming to India is saying that—I’ll come to that in a second—we can do it. If we can do it in electronics, we can at least have a shot at doing it at this. Point number three. Point number four is that these are all activities that are female labor-intensive in employment. An average apparel factory, 80 percent of its thing is women. Same for nonleather footwear.

RAJAGOPALAN: Even Foxconn apparently, they think women do much better moving to the dormitory.

SUBRAMANIAN: I have been to the Foxconn factory dormitory in Chennai—20,000 for women.

RAJAGOPALAN: It’s incredible.

SUBRAMANIAN: There’s a factory coming up in Hosur by Tatas, it’s about 40,000 women. It’s possible. Therefore, what we should do now is give it the best shot to try and go from 3 percent to 12 percent, 15 percent. Last point I will say is that, look, these companies are coming to Tamil Nadu, Karnataka, Andhra Pradesh, obviously because governance is better there.

Within India, remember, going back to that striking observation in our book, one third of India has grown as rapidly as China for as long. How do the Hindi heartland states catch up with this? Which relates to my last point, which is that within India, if you think about it, labor costs are one third in Uttar Pradesh as they are in Tamil Nadu and Karnataka. Rightfully, and that’s where your point about reforms come in, if, say, in Uttar Pradesh or a Madhya Pradesh or Rajasthan can get the governance act together, then all of this manufacturing or a lot of it should go to the Hindi heartland states.

RAJAGOPALAN: Even all that manufacturing, they can have their own manufacturing. You can make apparel, you can make leather, you can make plastic toys and everything that Vietnam is doing.

SUBRAMANIAN: The only thing I disagree with is that the notion that India’s market is big enough to sustain manufacturing.

RAJAGOPALAN: Not sustain. I absolutely believe in export-led growth. I’m saying there are certain global cycles. I’m saying all this will work out for India, irrespective of what’s happening globally. We’re not making these investments because suddenly we have a trade deal with you.

SUBRAMANIAN: No. There, I slightly disagree. Cards on the table. See, when the US imposed 50 percent tariffs on India, I think not only was there a huge current cost in gems and jewelry, apparel, fisheries, very labor-intensive sectors, it was also how investors would view India as a future destination for future investment and things. It was dampening the China Plus One opportunity. The external environment matters a lot.

RAJAGOPALAN: Not to say it doesn’t matter, but I don’t see why that has to necessitate our reform.

SUBRAMANIAN: No.

RAJAGOPALAN: Our reforms need to happen, irrespective of what’s happening globally.

SUBRAMANIAN: 100 percent.

RAJAGOPALAN: That’s my point. There’s no substitute to export-led growth. I think on that, we don’t disagree at all.

KAPUR: Going back to our earlier thing on cash transfers and the opportunity costs of that, we know that manufacturing, an important, not the only, component of cost, is electricity. We show in the book, in India, manufacturing pays twice as much.

If you were now saying you want to be manufacturing any state, instead of these cash transfers and thinking long term, say, we will ensure that electricity prices are as much as our competitors pay. We know that labor, as Arvind was saying, has a strong gender component.

It does two things. Not only improves labor, but has female labor empowerment. If you want to do subsidies, instead of all of these subsidies, why not have subsidies for the dorms for women? That reduces the cost for the manufacturers. You say we know that women’s safety is one reason why we have lesser participation. This gives the safety. These are the more imaginative ways of thinking. When we think about industrial policy, it’s not just PLI or this. 

RAJAGOPALAN: You can get very targeted subsidies, which actually get things moving.

SUBRAMANIAN: Let me get on to my last pet peeve. We all agree that it’s an opening. There’s no guarantee. As you rightly said, we need to do all the reforms, electricity, whatever. This is for the nerds out there: All successful export-led strategies require a supportive exchange rate.

RAJAGOPALAN: We manage without that, actually, largely.

SUBRAMANIAN: In the last three years, we have followed a strong rupee policy.

KAPUR: Last two years. I mean, not the last six months.

SUBRAMANIAN: No, I would say very strongly after ’23 for about a year and a half and in the last six months, partially, because even in the last six months, we have intervened much more than we should have. It sounds geeky, but this is a macro instrument to support an exchange rate-led strategy.

RAJAGOPALAN: I have a question here. I think even in the book you talk about this. When India started liberalizing in 1991, it also moved away from the East Asian model in the sense that it didn’t give that kind of currency support to its exporters, and we managed to do it quite well, irrespective. I’m not disagreeing with what’s happened factually in India in the last few months. More that is it necessary really, or do we just need to stop taxing domestic manufacturing the way we do?

SUBRAMANIAN: The way I would put it, we tax manufacturing in many ways which have to go—electricity, labor, governance above all. When people talk about labor reforms or whatever, anything, what happens on paper is one thing. What investors care about is how it’s implemented on the ground. In the following sense, if there’s a dispute, is there a mechanism for resolving it in a way that’s satisfactory to all partners? That’s what Tamil Nadu has shown.

RAJAGOPALAN: Tamil Nadu has done a great job. They’ve allowed it to exit and they want to come back.

SUBRAMANIAN: This is a broader point in the book, which Devesh has also emphasized, that we don’t pay enough attention to actual implementation of these things. On the exchange rate, after liberalization, we followed an excellent exchange rate policy. We didn’t subsidize or follow aggressively mercantilist policy like China did. In the last few years, we’ve actually departed from that in favor of a strong rupee policy, intervening for reasons that are not related to maintaining low inflation.

RAJAGOPALAN: I’ll tell you a very uncharitable version of the reason for that policy. One of the senior Delhi bureaucrats told me that this is happening because all of our children are now going to college in the United States. 

SUBRAMANIAN: No, it’s not. It’s actually quite important what you say. This is again, when you talk about elite determination of policy, the exchange rate, some business groups borrow in dollars. They want a strong currency. The middle class sends its kids abroad, so they want a strong dollar as well.

RAJAGOPALAN: There’s a constituency that wants a strong dollar.

SUBRAMANIAN: Exactly.

KAPUR: Also, there is a view in certain parts of both on the right that a strong nation needs a strong currency.

RAJAGOPALAN: There’s a newspaper that’s also relentlessly covering it.

KAPUR: Oh, the rupee is declining.

RAJAGOPALAN: The rupee is declining.

Look how when we were there, the rupee was so strong under these—

SUBRAMANIAN: Even prominent economists tweet that.

KAPUR: Yes, exactly.

RAJAGOPALAN: We also have low inflation relative to those old times. Low onion prices, more stability in your consumer price. It’s a weird thing. Regular folks aren’t that obsessed with it in a way that the media and experts are.

KAPUR: It’s used as political brownie points that somehow if the rupee is declining, somehow it shows national weakness.

RAJAGOPALAN: Weakness, yes. There’s national strength and national weakness.

SUBRAMANIAN: My counter to that, when I speak to government officials who say the most nationalistic country is China, they maintain a mercantilist policy.

RAJAGOPALAN: One of the loveliest things about the book—and we run the 1991 Project, so if we don’t talk about it, then I think I will have to leave this building quietly—is you talk about how, both on the left and the right, there seems to be a huge misinterpretation of what really happened and what that meant.

It has given rise to both a much bigger welfare state, because finally the revenue started coming in without which it was impossible. It’s also given rise to the big aspiration, like all your economic growth, the double-digit growth in the boom years, all of that came from export-led growth in some sense. Both the left and the right somehow seem to both understate their own cases and also overstate their own case—

SUBRAMANIAN: 100 percent.

RAJAGOPALAN: —but it hasn’t led to huge structural transformation. That’s the headline of those separate chapters.

SUBRAMANIAN: I would say two things on that. One is that not only did we get the welfare state, also the rectification of the neglect on public infrastructure, health, and education, that also happens after 1991 for various reasons. In that sense, the neoliberal state was the caring state, was the much more public good–providing state, and all of these things. Yes, it also led to higher inequality, but it also led to the fastest poverty reduction in Indian history, and the aspirational stuff is very important.

RAJAGOPALAN: People wanting to go to school because they can see all these engineers get jobs, and even BA literature get jobs at call centers and things like that. It’s a huge difference of young people actually wanting to study was something my generation saw for the first time.

KAPUR: Of course, I think it is the case—and it’s not unique to India; we’re seeing this worldwide—that one of the single biggest challenges now and going forward will be good jobs. That, as we’re seeing, is true in the US, it’s true worldwide, which is precisely why doing more on manufacturing,you got to do everything, not just X or just Y.

RAJAGOPALAN: It’s existential for India now, right?

KAPUR: You have to do.

SUBRAMANIAN: Just on the neoliberal state, remember, the education outcomes improve not just because of more resources; it’s because the demand for education went up, and parents started sending their kids to private schools where public schools were no longer available, right? 

Let me tell you the tragedy in terms of your ’91 moment. It’s something that’s one of the themes of our globalization chapter. Why is it that the period that delivered the most because of openness, we went back on that, in two ways. 2017, ’18, the government started started reversing the gradual opening.

RAJAGOPALAN: Now, I think they’re again turning back on that.

SUBRAMANIAN: Again, due to external pressure.

RAJAGOPALAN: Also, your quality control orders and all that you’ve written about are thankfully going.

SUBRAMANIAN: A lot of it good, but the Congress Party, in its manifesto, it never mentions—you say failure is an orphan. The tragedy is that India’s success has become an orphan. That’s the paradox of this.

KAPUR: The fact the Congress Party did not allow the man who ushered in the reforms, that when he died, his body was not allowed in the Congress office, just shows that the man, that their own party, that launched such as India’s success—

RAJAGOPALAN: They have no political opportunism, which is the standard.

SUBRAMANIAN: Yes, exactly.

RAJAGOPALAN: They’re disappointing us even as politicians.

SUBRAMANIAN: That’s why, in my Economist piece, the reason I see this as an opening is the China Plus One, but also, we are going to open up, under pressure this time around, in a way that we’ve never done. Can you imagine manufacturing tariffs in India close to 0 percent? Admittedly, not to everyone else. Not everyone, but still.

RAJAGOPALAN: It’s a big step.

SUBRAMANIAN: Yes, it’s a big step.

KAPUR: There is an opportunity, but all opportunities, you have to willfully seize them.

RAJAGOPALAN:  One important distinction is, in those years, the attitude, at least in New Delhi, very much was, “We need to grow the size of the pie, so let’s do reforms so that we can open up the fiscal space or we can open up employment or any other opportunity or get more foreign exchange.”

Let’s just take electricity as an example that you’ve written a lot about. I don’t see the government going crazy and saying, “Okay, we can’t solve the political economy problem of subsidizing electricity for farmers and things like that. Why don’t we just go nuclear?” I don’t mean that just as a pun. Why don’t we just go all in, remove the constraint that we have on coal or oil-based electricity, and really do that?

KAPUR: I think, to some extent, that is happening. That, I think, is the central government.

SUBRAMANIAN: Central government.

KAPUR: For instance, see, electricity is a state subject. All the things of the DISCOMs, their finances, all of that, and so many attempts have been made, and the centre can only do so much. On the supply side, there is a big focus on renewals. Now, solar, you have a gargantuan supply side. The transmissions you have to build, the distribution, all of that, I think, in the sense, it’s not looking as bad as it used to. The main thing is that unless you cut down cross-subsidies, it’s very hard for manufacturing to get competitive prices. And manufacturers often are not allowed to have their own captive solar, which they can wheel from anyone, because you have to go through the state electricity board transmission. If things like wheeling, et cetera, allowing competition, there is a possibility.

SUBRAMANIAN: Coincidentally, maybe, is that I have a piece coming out today with a co-author, Navneeraj Sharma, in Project Syndicate. Remember, this episode with the US has shown us again how energy dependent we are. Our energy imports, as a share of total energy consumption, is like 35 percent. It has risen over time.

RAJAGOPALAN: Now we want data centers which are getting more electricity. We’re giving them tax holidays. This is just going to get worse.

SUBRAMANIAN: I think here the central government is moving in the right direction. 

RAJAGOPALAN: States have to get their ducks in a row. No, this was a great read. I really enjoyed reading it. It has 100 pages of references. I feel like it’ll become my one-stop shop for all the research that I need on every topic. I encourage everyone to read it. My only quibble, like I mentioned, is the title. I expect this book to be read maybe 100 years from now, and at that time, I don’t know if it’ll be a sixth of humanity.

KAPUR: No, it still will be.

RAJAGOPALAN: That depends on how all the other countries do, right?

KAPUR: Also, we looked at—

RAJAGOPALAN: Every demographic.

KAPUR: —the best UN projections.

RAJAGOPALAN: A sixth of humanity is going to be pretty stable?

SUBRAMANIAN: The reason being that China’s will decline, but Africa’s will go up.

RAJAGOPALAN: No, but ours may also decline much faster, right?

KAPUR: No. Ours, between 1950 and 2025, India added a billion people. Between 2025 and 2100, the next 75 years, India will add a net zero people. It will stabilize and begin to fall, meaning from the peak.

RAJAGOPALAN: Yes, in 2065, we stand for that.

KAPUR: I mean, no one knows the future, but the demographics, it doesn’t change that rapidly, the projections.

RAJAGOPALAN: We read Adam Smith now, 250 years later.

SUBRAMANIAN: I thought your complaint was going to be, the reason it’s not a good title is because all of humanity should read this book.

RAJAGOPALAN: Okay. Well, I hope our students read this book. I’m so disillusioned with anyone reading anything now. Thank you so much for this. It was such a pleasure.

SUBRAMANIAN: Thanks for having us. Thank you so much.

KAPUR: Thank you.