The Rise of India: Overcoming Caste Society and Permit-License-Quota Raj, Implementing Some Economic Freedom

Abstract

Two or three centuries ago most of mankind was still very poor. When the West outgrew mass poverty, India was a British colony and suffered from stagnation. When East Asian economies exploited the advantages of backwardness and benefited from export-led growth, India remained inward-looking and poor. The ‘Hindu rate of growth’ preserved mass poverty. Since the reforms of the early 1990s India has exploited the advantages of backwardness and some global markets. In this article, the roots of India's failure to grow rapidly before the end of the twentieth century are analyzed. Stagnation is blamed on restrictions of economic freedom, whereas growth is explained by the expansion of economic freedom. Before the mid-twentieth century, the caste system and the legacy of sultanism curtailed economic freedom and contributed to economic stagnation. Thereafter, democratic socialism distorted incentives and generated ‘permit-license-quota raj’ or a rent-seeking society. When some obstacles to growth were dismantled, vigorous growth followed. Although expanding economic freedom remains limited. India's growth potential is not yet fully exploited. Indian infrastructure and human capital formation remain inadequate, regulations intrusive, and the budget in deficit. The rule of law looks better on paper than from the ground. Compared to China Indian public policy still has a lot of room for improvements. ‘Maoists’ or Naxalites threaten political stability and economic freedom. Geopolitics may explain India's late, slow and incomplete reforms. The rise of Asia, in particular of China and India, generates geopolitical challenges of its own. Conceivably, the global expansion of economic freedom permits not only the rise of Asia, but the peaceful management of the coming power transition between Asia and the West.