How Indian State reforms are stuck in the 1950s

Investing in India #3

We're thrilled to share the latest episode in our "Investing in India" series, where we go beyond economic statistics to explore what truly makes India tick.

In this episode, host Hansi speaks with Professor Kartik Muralidharan about his book "Accelerating India's Development" and his insights on India's state capacity.

Tune into the conversation here:

This Episode: The State Capacity Puzzle

Professor Kartik Muralidharan, who holds the Tata Chancellor's Endowed Chair in Economics at the University of California San Diego, brings over 20 years of research on India's public sector effectiveness to this conversation.

Why India Is Essential for Global Investors

When asked whether he would invest in India if he weren't Indian, Kartik responds with:

"India is both intrinsically and instrumentally important for global welfare. We are a sixth of humanity. India has more people than the entire western hemisphere put together. The sheer scale of what we have here means that you can't really be a serious investor in the world without engaging in India."

India's Unique Democratic Journey

One insight Kartik shares is about India's democratic history and its double-edged impact on development:

"India is this unique outlier in human history in that we are the only large country that had universal adult franchise democracy on day one of independence. It's a huge moral triumph... But the negative side or the challenges that come with that are the fact that because we are a low middle income country, our tax to GDP ratio is actually much lower... The Indian democracy has demanded welfare from the political class before the administrative capacity was built to deliver these programs well."

The Frugal Innovation Advantage

Kartik highlights what makes Indian innovation particularly valuable:

"Innovation in the U.S. and high income markets tends to focus on how you can push the frontier of, say, life expectancy, regardless of cost. But innovation in India is much more about frugal innovation - can I get 90 percent of the quality at 30 percent of the cost? And so there is so much innovation that happens in India that's going to be relevant not just for India, but for the world."

The Implementation Gap

The core challenge for India isn't a lack of good policies but their implementation. Kartik explains:

"Most policy makers in India will tell you that an old refrain about India is that the policies are usually very good, but the implementation is quite weak. Instinctively people have understood that one of the challenges in India is implementation. But I think we haven't really quite grappled with just how big an issue it is."

Beyond Left vs. Right: The Governance Solution

Rather than taking sides in the traditional growth versus development debate, Kartik offers another perspective:

"The efficiency of our spending is so poor, regardless of whether you're spending on the social sector or infrastructure, that you can deliver more of everything by paying more attention to the innards of the government. What is seen are the budgets. What is unseen is the insides of the government."

The Case for Optimism

Despite the challenges, Kartik remains hopeful about India's trajectory:

"There are enough structural positives that I think we will continue doing reasonably well. My grade for India is a solid B plus. The case for optimism is that we know what it takes, and we just have to apply our mind."

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This episode offers essential insights for anyone looking to understand the structural factors that will shape India's economic future. Whether you're an institutional investor, family office manager, or simply interested in India's development story, the entire conversation provides context beyond traditional financial analysis.

About Investing in India Series

Our series aims to provide investors with a nuanced understanding of India beyond financial reports. We speak not just with economists and market experts, but also with non-financial specialists to add narrative to the numbers.

Our previous episode featured data journalist Rukmini S, who discussed how understanding India's data collection methods is important for grasping the realities of the country.

Stay tuned for our upcoming episodes as we continue to explore India.