Although the world has just discovered it, India's economic success is far from new...The notable thing about India's rise is not that it is new, but that its path has been unique. Rather than adopting the classic Asian strategy -- exporting labor-intensive, low-priced manufactured goods to the West -- India has relied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. As a result, inequality has increased much less in India than in other developing nations...
In the 1980s, the government's attitude toward the private sector began to change, thanks in part to the underappreciated efforts of Prime Minister Rajiv Gandhi. Modest liberal reforms -- especially lowering marginal tax rates and tariffs and giving some leeway to manufacturers -- spurred an increase in growth to 5.6 percent...India's current government is led by a dream team of reformers -- most notably Prime Minister Singh, a chief architect of the liberalization of 1991. Singh's left-wing-associated National Congress Party was swept into power two years ago even though the incumbent BJP (Bharatiya Janata Party) had presided over an era of unprecedented growth. The left boasted that the election was a revolt of the poor against the rich. In reality, however, it was an anti-incumbent backlash -- specifically, a vote against the previous government's poor record in providing basic services. What matters to the rickshaw driver is that the police officer does not extort a sixth of his daily earnings. The farmer wants a clear title to his land without having to bribe the village headman, and his wife wants the doctor to be there when she takes her sick child to the health center. These are the areas where government touches most people's lives, and the sobering lesson from India's 2004 elections is that high growth and smart macroeconomic reforms are not enough in a democracy.
Still, the left saw the Congress victory as an opportunity. Unfortunately, it stands rigidly against reform and for the status quo, supporting labor laws that benefit 10 percent of workers at the expense of the other 90 percent and endorsing the same protectionist policies that the extreme right also backs -- policies that harm consumers and favor producers. Thus, Singh and his reformist allies often seem to be sitting, frustrated, on the sidelines. For example, the new government has pushed through Parliament the National Rural Employment Guarantee Act, which many fear will simply become the biggest "loot for work" program in India's history.Although some of the original backers of the bill may have had good intentions, most legislators saw it as an opportunity for corruption. India's experience with job-creation schemes is that their benefits usually do not reach the poor; and they rarely create permanent assets even when they are supposed to: the shoddy new road inevitably gets washed away in the next monsoon. There is also the worry that the additional 1 percent of GDP borrowed from the banks to finance this program will crowd out private investment, push up interest rates, lower the economy's growth rate, and, saddest of all, actually reduce genuine employment.
Singh knows that India's economic success has not been equally shared. Cities have done better than villages. Some states have done better than others. The economy has not created jobs commensurate with its rate of growth. Only a small fraction of Indians are employed in the modern, unionized sector. Thirty-six million are reportedly unemployed. But Singh also knows that one of the primary reasons for these failures is rigid labor laws -- which he wants to reform, if only the left would let him...India's greatness lies in its self-reliant and resilient people. They are able to pull themselves up and survive, even flourish, when the state fails to deliver. When teachers and doctors do not show up at government primary schools and health centers, Indians just open up cheap private schools and clinics in the slums and get on with it. Indian entrepreneurs claim that they are hardier because they have had to fight not only their competitors but also state inspectors. In short, India's society has triumphed over the state.But in the long run, the state cannot merely withdraw. Markets do not work in a vacuum. They need a network of regulations and institutions; they need umpires to settle disputes. These institutions do not just spring up; they take time to develop. The Indian state's greatest achievements lie in the noneconomic sphere...The stubborn persistence of democracy is itself one of the Indian state's proudest achievements...To be sure, it is an infuriating democracy, plagued by poor governance and fragile institutions that have failed to deliver basic public goods. But India's economic success has been all the more remarkable for its issuing from such a democracy.