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Why India failed to become an economic giant

November 29! 2013 12:20 "#$

Investment in human capital is likely to fail to translate into effective growth if incentives for entrepreneurs are missing, says Arvind Panagariya.

"t has been asserted that "ndia neglected education! especially at the elementary level!
investing too little in it in the early post-"ndependence decades. "t is additionally claimed that the low investment in education was the reason "ndia grew

slowly during those decades. %re these critics right& 'ne way to highlight the difficulty of achieving high per capita e(penditures on education during the early decades is to as) what it would have ta)en to achieve the current level of per capita e(penditures on education. "n 200*-09! the latest year for which such an estimate is readily available +see graph in slide 2,! e(penditure on education by all departments in the central and state governments amounted to 3.* per cent of gross domestic product +-./,. %ssuming the same proportionate e(penditure in 2012-13 and recognising that per capita income that year was 0.* times that in 1900-01! it would have ta)en a whopping 22 per cent +0.* times 3.*, of -./ in the latter year to reach the current per capita e(penditure on education.

$he situation did not get significantly better three decades later. #low growth meant that
per capita income in 19*0-*1 rose to only 1.0 times that in 1900-01. $his meant that per capita income in 2012-13 remained 3.* times that in 19*0-*1. $herefore! achieving the 2012-13 level of per capita e(penditure on education in even 19*0-*1 would have re1uired spending 12.2 per cent of -./ on education! a virtual impossibility. $he actual e(penditure on education in "ndia in 19*0-*1 was three per cent of -./. $his is perhaps on the low side when compared with other countries! but not dramatically so. %s an e(ample! government e(penditure on education in #outh 3orea was 4ust 2.2 per

cent of -./ in 1950! although it rose to 2.0 per cent in 19*6.

"n view of the low initial per capita income and slow growth! "ndia could have spent! at
best! marginally more on education in per capita terms than it actually did in the first three decades. $hose arguing otherwise must point out the cuts in other e(penditures that were politically feasible as well as economically defensible. "ndeed! given the high fiscal deficits and competing demands for public e(penditure! even today! our best bet for raising education e(penditure remains rapid growth. 7ising per capita incomes yield a double dividend when we consider the total e(penditure on education. 'n the one hand! they bring the government larger per capita revenues! and on the other they bring higher incomes to households to increase private e(penditure on education.

8ven by official count! 30 per cent of children in the first to fifth grades were in private schools across rural and urban "ndia in 2010. 9ithout these private e(penditures! which show a rapidly rising trend! "ndia would not be anywhere near achieving the goal of

universal elementary education today. $urning to the second claim by the critics! while education certainly plays an enabling role in faster growth! it is far from sufficient. $wo dramatic e(amples illustrating the point are :uba and the #oviet ;nion. <oth had achieved near-universal literacy by the early 1960s! but failed to e(hibit high growth because the policy framewor) they chose was counterproductive. #o anti-growth was the policy framewor) in the #oviet ;nion that! from 1950 onwards! it e(perienced low and declining growth rates despite a high and rising investment-to--./ ratio alongside high levels of education.

:loser to home! 3erala has had a long history of high literacy rates! but states such as
=aryana and -u4arat have dominated it in terms of growth. -rowth e(periences of #outh 3orea! $aiwan and #ingapore in the 1960s and 1950s are commonly cited as e(amples of high education levels leading to faster growth. $rue! these countries had relatively high literacy levels during their miracle-level growth. <ut the credit for stimulating and sustaining fast growth goes principally to their switch to outward-oriented policies and good economic management domestically. >or e(ample! the literacy rate in #outh 3orea stood at 22 per cent in 1920. "n 1929! the country passed the basic education law and launched a massive programme of literacy for citi?ens of all ages.

<y 1966! literacy levels had risen to *2.0 per cent for males and more than *0 per cent
for females. @et the average growth rate in the immediate post-3orean 9ar period! 1902 to 1962! was a modest 2.2 per cent A not dramatically higher than the 3.5 per cent achieved by "ndia. -rowth in #outh 3orea accelerated beginning in 1963. =owever! the trigger was not a massive e(pansion of education but! instead! a series of policy changes that made the e(ports of labour-intensive manufactures highly attractive. $wo final clarifications are in order. >irst! my intention is by no means to downplay the importance of education. 8ducation is a value in itself and it also contributes to growth. 9ithout civil engineers we cannot build roads and bridges! and without computer scientists we cannot become a software powerhouse. 8conomists have long considered investment in physical as well as human capital as an important element in sustained rapid growth.

$he argument " have made is that! as with :uba and the #oviet ;nion! investment in human capital is li)ely to fail to translate into effective growth if incentives for entrepreneurs are missing.

#econd! the failure of "ndia has been not so much in mobilising e(penditures in education as in using those e(penditures effectively and efficiently. $he e(penditures on education in #outh 3orea in the 1900s and 1960s were 1uite modest. @et these countries were able to e(pand literacy rapidly. #adly! our civil society groups! 4ournalists and politicians insist on more and more public e(penditures and public delivery of education but not on superior educational outcomes. "ronically! however! nearly all of them rush to private schools when it comes to educating their own children and grandchildren. 8ven the 7ight to 8ducation %ct that they have pushed through a spineless :abinet and /arliament only see)s to ma(imise input without demanding even minimal educational achievements. The writer is a professor at Columbia niversity. #ource: