Indian Development Homepage

by Garry Jacobs*
Published in FISC 2020: India’s Long Term Fiscal Outlook
Public Expenditure Roundtable, June 2004

Projecting the future is always hazardous, especially when it comes to human affairs. The behavior of galaxies and star systems may be fairly predictable over long periods of time, but thus far social behavior has defied the tools of science. When it comes to projecting the performance and achievements of rapidly changing societies of the size and complexity of India, the task is that much more daunting. Among the human sciences, demography arguably comes closest to attaining predictive power, and even here its projections are only rough approximations with wide margins of error. The demographic studies underlying the Planning Commission’s Vision 2020 report are only able to predict the size of India’s population 20 years hence within a range of 100 million people. How much greater must be the inexactitude and uncertainty in our estimation of national finances 20 years from now? With this limitation in mind, I will confine my observations to some broad statements regarding the financing of India’s long-term development needs.

Sir Winston Churchill once observed that analysis by first principles is anathema to the British intellect. A complete understanding of how and why Britain developed a global political and economic empire requires a consideration of first principles that lay outside the traditional boundaries of economics. Britain is a country that receives on average 140 inches of rainfall, an amount far in excess of that which is desirable for growing most food crops but which is ideal for the production of fodder grasses. The abundance of cheap fodder coupled with a cool climate served as an ideal basis for sheep farming. The production of wool far in excess of what could be consumed domestically compelled merchants to develop overseas markets for the surplus. The quest for those markets was one significant driving force for England’s colonial expansion. A similar analysis from first principles that takes into account the waves of foreign invasion from Roman times until the 10th Century can help us understand why England became the birthplace of modern democracy in Europe.

Many years before Churchill remarked on the British propensity for practical thought, Sri Aurobindo wrote that understanding from first principles is one of native strengths of the Indian intellect. That propensity qualifies India to generate a valid framework for a true science of human development based on an understanding of the first principles of individual and collective human behavior. Though this task far exceeds in breadth and complexity the issues raised for discussion at this seminar, I am sure you will agree that without a deeper appreciation of the first principles and processes governing the evolution of the Indian society and economy, no significant contribution can be made to addressing the narrower issue of realizing in fact the objectives set forth in India’s Vision 2020 documents. Therefore, I would like to focus my presentation on a discussion of first principles that have a direct bearing on this narrower issue.

To begin with, I would like to raise a question. Over the past few decades we have seen an enormous multiplication in India’s financial resources. Total deposits in India’s commercial banks have risen from less than Rs 5000 crores to upwards of Rs 1,200,000 crores since 1969, an astonishing 280-fold growth in three decades. Gold reserves held by private citizens have grown commensurately and may roughly equal total investment in Indian stock markets. In addition, India’s foreign exchange reserves have risen dramatically from $1 billion to $110 billion during the past 13 years. These facts naturally raise the question, “Where did all this money come from?” I do not intend to answer this question in detail, but rather to suggest that a full and adequate answer to this question requires resort to the very same first principles upon which any valid projection of India’s future financial performance will depend. Unless we can satisfactorily explain to ourselves the origin and process by which this enormous growth in wealth has been achieved, we are unlikely to succeed in our endeavour to project India’s future capacity for wealth creation.

Let us then explore some of the fundamental principles on which an understanding of India’s future development achievements and their financial implications needs to be based. Starting from first principles requires that we begin by considering what money is and how it is created. Such an inquiry leads ultimately to the conclusion that there is no finite limit to the capacity of society to create financial resources. We know that early forms of money such as the Egyptian grain warehouse receipt were created as symbolic representatives of material goods. This has given rise to the widely held impression that money is a scarce material resource like land or oil or gold. In fact, money is a purely human invention, a symbol, a creation of the human mind, and therefore subject to no such inherent physical limitations. Former Union Finance Minister C. Subramaniam illustrated this truth when he asked me nearly ten years ago, “After all, what is the value of a Rs 100 currency note? It says on the note that the Reserve Bank promises to pay the bearer one hundred rupees. So what happens if you present this currency note to RBI? You can come away with ten ten rupee notes or 100 one rupee notes! That’s about all. The note has no inherent material value. It is only a symbol.” C.S.’s comment only begs the question, “A symbol of what?”

Until recently many economists might have been satisfied with a traditional response to this question, such as money is a symbol of the productive capacity of the society as represented by its land, natural resources, factories and infrastructure. Certainly this definition contains a truth, but it is only a partial truth. For as recent development trends make evident, material resources and material production represent a declining proportion of economic wealth-generating activity. The explosive growth of India’s software industry from $12 million in 1984 to over $12 billion today, a 1000-fold multiplication, is only a dramatic illustration of a general rule. Economic services which arose originally as a necessary means for the storage, distribution and delivery of material products such as foodgrain have long since become the dominant sector of modern economies. Production of material goods and services may be one factor that results in the creation of money, but it is not the only one, nor is it any longer even the most important.

I refer to this well-known segmentation of economic activities only to emphasize the point that the creation of money is not subject to physical limits. An analogy to agriculture may further clarify the point. The average farmer in Tamil Nadu produces eight to ten tons of tomato from an acre of land. The average farmer in California produces around 40 tons of tomato from the same area. An Israeli farmer applying intensive methods of cultivation may produce 240 tons or more. A Dutch scientist growing tomatoes hydroponically in a greenhouse may produce the equivalent of 1000 tons or more without in fact using any soil as the basis. The progressive increase in productivity arises from a progressive increase in the knowledge or technology intensity of the activity. This leads us to the obvious conclusion that knowledge is an enormously powerful resource for increasing productivity, which means for creating money.

Taking the argument further, we can subdivide the broad category of services into several parts. First, we have the traditional physical services such as transportation that relate directly to the handling and movement of physical goods and are to a large extent dependent on the strength of the physical infrastructure. In 1984 while preparing the first draft of the Seventh Five Year Plan, an investment of Rs 15,000 crores was proposed to expand and modernize the country’s telecommunication infrastructure. Finally, it was decided that no more than Rs 5000 crores could be made available for this sector. It appeared as though India was destined to fall further and further behind the rest of the world in modernizing its telecom infrastructure. Herein originated the move to corporatize the telecom sector and open it up for private investment. Now, just 20 years later, consider how far growth of the telecom sector has exceeded the wildest imagination of the planners. Few today mourn the country’s backwardness in this sector or point out the danger of falling further behind. How did it happen? Spurred by privatisation and new technologies, the country is rapidly bridging the huge gap in telecommunications that has separated it from most countries of the world. No one could imagine or foresee this development 20 years, any more than we can imagine or foresee the development opportunities that will emerge over the next two decades.

The service sector also includes human services such as education, health care, community services and governance that arise directly from interactions between people and are far more dependent on the quality of human resources than they are on the underlying material resource, infrastructure or production base. The recent rise in Business Process Outsourcing is a case in point. The emergence of human services as the dominant sector of modern economy led the leading American thinker, Harlan Cleveland, to postulate long ago that it is possible to create any number of job opportunities and, consequently, any amount of wealth, by brainwork.

Everyone will agree that India has the brains, but many may doubt whether it is capable of creating the educational infrastructure sufficient to educate them? The Planning Commission’s Vision 2020 document calls for a substantial increase in expenditure on education, to an extent that may appear unachievable based on the competing demands for limited resources. Imagine the difficulty that planners would have faced in 1980 in conceiving of how India could possibly finance the expansion of technical education to support a 1000-fold growth of the software industry. No one could have imagined then that Tamil Nadu’s 13 engineering colleges would multiply to 256, nor that thousands of private computerized training institutes would proliferate in the 1990s to service every corner of the country. How much greater must be our imagination and resourcefulness in conceiving the multiple ways in which social needs can and will be met two decades from now.

Beyond this, we have also the field of activities in which money itself becomes the resource for producing more money. Financial services that relate to the handling, movement, investment and saving of money, as in the case of banking, insurance and stock markets, are among the fastest growing industries in the world. It is so difficult for people to understand how an intangible symbol can by itself generate more real wealth that we are prone to dismiss the multiplication of money by money as false, immoral or an evil instrument of the devil. The difficulty arises primarily from our inadequate understanding of what money is and how it is created.

The further we progress from the original notion of money and wealth creation as a material thing resulting from a physical activity, the more we become aware that the potentials for increasing the generation of money and wealth in society are indeed limitless. How else can we understand, as UNDP once observed, how the world has created more wealth in the past 50 years than in the previous 500?
The generation of wealth and money become more intelligible when we realize that multiplication and self-multiplication are natural processes in society, expressive of the human capacity for creation, and they are by no means confined to the field of money. When Gutenberg produced the first hundred printed editions of the Bible in 1446, it must have seemed the result of magic or devil worship to the Christian monks who laboured for years to copy out a single volume by hand. So too, when agricultural production far out-stripped the calculations of Malthus, enabling world population to multiply 12 times in 200 years. The multiplication of computers, cells phones, patents, scientific knowledge, fashions, foods and countless other material and non-material things are only further expressions of this common process. Multiplication is a fundamental characteristic of human activity.

A stage comes when the process of multiplication is no longer dependent or limited by external stimuli and it becomes self-regenerating. The exponential growth of websites is a recent example of this process of self-multiplication. The same process is now occurring with respect to the self-multiplication of money. Understanding this process will enable society in future to create as much money as it requires as it now possesses the capacity to produce so many TVs, computers, cell phones and automobiles. This principle is illustrated by the fact that the accumulation of foreign exchange reserves raises the country’s international credit rating and attracts greater foreign investment into the country. This understanding is the right basis for India’s future planning.

Having distinguished money from its material origins and having widened the boundaries for its potential generation, we have still not fathomed the real secret of money. One of the most baffling characteristics of money is its ability to appear or disappear at the apparent whim and fancy of public opinion. Rumours of an impending trade breakthrough or possible military conflict can send stock markets soaring or plummeting at a moment’s notice. For those who have invested in marketable securities, these sudden ups and downs, whether euphoric or despondent, can result in huge gains or losses.

However perplexing and apparently unjust it may seem to many, real wealth is created and destroyed by such transactions. This is so because they are only extreme expressions of a general truth that underlies all economic activity, all wealth creation. That truth is that the real basis of money and wealth is trust and confidence. Take away that trust for any reason, economic activity shrinks and the value of money declines. Enhance that trust by any means, economy expands and money rises in value. The Chairman of Unilever expressed this truth during a recent visit to India when he predicted that the growth rate of the Indian economy can reach 10% per annum in the coming decade. How did he justify this favourable projection? He did not refer to the country’s growing capabilities in software. He made no reference to government policies for liberation and denationalisation. He spoke nothing about expanding global demand for what India produces. His simple explanation for this conviction is that the country has gained self-confidence. Enhancing self-confidence stimulates productivity and creates money. It prompts entrepreneurs to launch new ventures, investors to invest, bankers to lend, consumers to buy, youth to seek higher qualifications, government to become more expansive and responsive to the needs of business.

During the 1960s when India was heavily dependent on foreign food aid to overcome perennial food shortages and when two successive drought years confronted the country with the dire threat of famine, as the newly appointed Food Minister, C. Subramaniam had the vision and courage to declare the government’s intention to achieve food self-sufficiency within five years. Despite scepticism from nearly all quarters, he launched the Green Revolution, raised foodgrain production by 50% in five years, and was able to abolish dependence on foreign food aid within the stipulated target period. How was such a remarkable achievement possible in so short a period, when C.S. himself had said it would take two years just to locate all the meteorological stations in the country? It was possible because he recognized the fundamental truth that development is not a programme executed by government, but rather a process carried out by the entire population, and he conceived of a strategy to unleash some of the latent potential of Indian farmers to tackle the problem. A similar realization is needed today in order to fashion a realistic and effective strategy for realizing the goals of the Vision 2020 report.

In recent decades India has significantly enhanced its infrastructure, expanded access to education, liberalized policies, and done many other things. But most significantly of all, the country and its people have become more conscious of their own potentials. Indians have come to believe in themselves.

More than everything else, a change in belief has been the determinant of India’s progress in the past and more than anything else it will determine the course and rate of its future progress. Paraphrasing the ancient words of the Gita, the country is discovering that it can become whatever it has faith that it can become. Unless we are able to factor in these fundamental intangibles into our equations about growth and public expenditure, our projections will be without foundation.

The Reserve Bank prints the money, but it is the aspirations of people that create money and wealth. Fifty years ago while working for the United Nations in East Asia, Harlan Cleveland observed that a sudden soaring of human aspirations was rippling through the region and he perceived that this rising tide of human will was a powerful stimulus to economic growth and living standards in Taiwan, South Korea and Japan. It was he who first coined the term ‘revolution of rising expectations’ to describe the fact that rising social aspirations were the driving force for rapid economic advancement. His great insight is a universal truth of social development. It is rising expectations that compel people to work harder and longer, provide their children more and better education, acquire the conveniences of modern technology, demand improved public facilities, insist on clean government, upgrade their living standards and seek greater enjoyment. The real market for economic growth, especially in a country the size of India, is not the import requirements of other countries. It is the rising economic aspirations of India’s own population. Rising expectations spurs greater production, productivity, innovation, creativity, entrepreneurship, i.e. greater all around development and wealth creation.

I have been arguing that social attitudes such as trust, confidence, and aspiration are fundamental determinants of economic performance and social development. It is attitude that determines whether the nation’s most talented youth seek secure jobs in government or industry or have the courage and self-confidence to become entrepreneurs who create jobs and wealth for other people. It is attitude that determines whether a family buys gold with its surplus income or invests the money in a family enterprise or public company, or deposits the money in a bank so that it can be lent for productive purposes to other people. It is attitude that has encouraged NRIs to return home in greater numbers to start enterprises here and to channel back more and more of their funds for investment within India.

Fourteen years ago I was engaged as a business consultant by a Rs 40 crore manufacturing company in Rajasthan. The owners described the company as a dying business in a dying industry with absolutely no future and proclaimed their intention to close the factory the moment it ran into losses, which they believed to be imminent. After studying the company, I informed the owners that the business had the potential of raising its net income from Rs 2 crores to 12 crores, if only they would change their attitude. They accepted my advice and achieved more than the Rs 12 crores target within a few years. So great is the talent and resourcefulness of Indians, once they acquire an attitude conducive to maximum accomplishment.

It is ludicrous for a country of India’s great intelligence and rich human resources to look beyond its borders for the solution to its problems or the source of its future accomplishments. The key to India’s future does not lie in foreign aid or foreign investment or even in the penetration of foreign markets. The real key lies in tapping the unlimited resourcefulness of Indian culture, a culture steeped in the highest values of human accomplishment which are spiritual. A rediscovery and adaptation of India’s spiritual heritage to contemporary ways of life is enough to usher in widespread prosperity throughout the country within the next two decades. Application of spiritual values in life is prosperity.

* Garry Jacobs is an American business and economic consultant who has worked for 30 years as Assistant Secretary of the Mother’s Service Society, a social science research institute based in Pondicherry.