Recently, there have been discussions on developing a vision for India’s economy in 2047. Most of these attempts have been made to present the size of the domestic economy and its relative position in the global economy, with less emphasis on means and methods. To change the growth trajectory of our economy and propel it to a higher trajectory. While these empirical exercises have an important role in creating some long-term goals, they rely heavily on assumptions and may miss some non-tangible intricacies that affect long-term development. Since economic growth is a cumulative result, many factors contribute to shaping its size and character. An important component is the role of institutions, the discussion of which has been limited while predicting India’s future development.
Long lasting economic growth depends on the ability and stability of the institutions controlling economic activity. There is ample empirical evidence on this. The most cited example is the role played by resilient institutions in Southeast Asian economies as they continually transition into economies capable of high growth. Cross-country evidence suggests that the potential to drive large leaps in economic performance is dependent on the creation of the necessary institutional frameworks, which together provide the preconditions for rapid growth over the long term.
What are institutions?: Nobel laureate Douglas North provides perhaps the most comprehensive definition. He defined them as: “Institutions are the rules of the game in a society, or, more formally, the humanly drawn constraints that shape human interaction.” Institutions are established to reduce the barriers arising from incomplete and disparate information. Barriers that institutions have to overcome are described as transaction costs. The answer distinguished two types of constraints: formal and informal. Together, these constraints comprise what he called the “laws of the game.” Viewed from this perspective, institutions essentially control how the economy functions and shape long-term outcomes. The link between strong institutions and economic performance is through their ability to increase economic activity, decrease friction and barriers, and facilitate the extraction of economic performance. In their book Why Nations Fail, Daron Acemoglu and James Robinson argue that institutions are the most important determinant of economic performance and that economies that have nearly identical endowments may have different economic trajectories as a result of differently developed institutions. Analysis of the development of many emerging economies has highlighted their importance in escaping the poverty trap and preventing political instability.
Institutions do not function as discrete entities but as dynamic forces that are constantly shaping and being shaped by the environment in which they operate. Strong political institutions can go a long way in facilitating better economic performance, while well-functioning economic institutions have larger social implications. This synergy of institutions should be carefully understood and implemented in institutional design. Long-run economic performance depends on creating institutional capacity as a result of efficient institutional design. In this context the state has a very important role to play in designing the institutions. The role of the state stems not only from its democratic legitimacy, but also as a social contract between a country and its citizens.
However, institutions do have a degree of ‘path dependence’ and therefore extreme care must be taken to create new institutions and improve upon existing ones. Path dependency implies that institutions have a high degree of inertia to change and adapt and once an institution is embedded in the system, its trajectory is difficult to change. Hence the institutional design must ensure that they have the right ingredients, which will go a long way in extracting economic benefits in the long run. A level of reflexivity is also needed in terms of their ability to change strong institutional designs and adapt to exogenous shocks, given how the economy must often grapple with uncertainties. This is where the sustainability of institutions becomes important.
A vision for India in 2047 should revolve around key elements of the institution’s design. While examples from the development of other successful economies can be included, we must make sure to assimilate the unique aspects of the Indian economy. Any such vision must also incorporate the federal realities of the economy, and therefore seek to achieve synergy between the Center and the states. Our challenges are twofold. Firstly, there is a need to create new institutions to address the issues of an economy undergoing rapid structural change. Second, there is a challenge to reform and strengthen the existing institutions to reduce their path dependence, as they have to adapt to the changing environment. First there is a need for clarity on India’s long-term vision and the precise objectives to be achieved. For example, expansion of the size of the economy and increase in per capita income. Tackling the second challenge requires a continuous cumulative actions approach, in which information flows to various stakeholders. This requires consultation and engagement with the participating agents, who need to be reassured about the changes taking place in the institution concerned. Addressing the issues of resource mobilization and sharing are examples of areas that require constant engagement with all stakeholders. The role of the state becomes crucial in addressing both the above challenges as it has to play the dual role of a facilitator and an overall governing agency.
To envision India in 2047, the task ahead is to build and enhance the institutional capacity that can create the necessary environment to achieve high growth in the long run. For this, recognition of the fact that economic growth in the long run is driven by how well the institutions needed to facilitate economic activity—social, political and economic—come together as an important starting point. as mandatory.
M. Suresh Babu and Mausam Kumar are, respectively, advisors to the Prime Minister’s Economic Advisory Council and Professor of Economics at IIT Madras; and researcher in the Economic Advisory Council to the Prime Minister.
These are the personal views of the authors.
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