Good evening everyone. I am grateful to the SKOCH Foundation, Mr. Kochhar, Dr. Dev, for honoring me. This award—it's actually more than the recognition for the work—it's encouragement to keep doing good work. There is a lot that needs to be done in terms of understanding and advising on what needs to be done going forward. The title given to me was “The Intersections of Democracy, Federalism and Development.” So for the next 12–15 minutes I would like to express my views on those topics.

The first observation that I must make is that the objective we have set for ourselves is a very, very challenging one. This is not to say that we won't be able to meet it, but it is important to remember that there is no country in the world which has achieved what we are trying to do. And let me set that context clearly. Most developed countries today went from being lower or middle income to upper income over a period of 150 to 200 years. What we are trying to do is achieve the same in about 50 to 60 years, which means that we need to grow at three times the pace at which those economies grew.

As you know, driving a car at 20 km an hour is a lot easier than driving a car at 80 km an hour. There are so many more risks that you need to take. You need to prepare much better, we need to forecast much better. What is also very important is that as we go through our current phase of development, there is a surplus of labor and a shortage of capital. What this results in is significant rise in inequality. Most countries that have gone from lower middle income to upper middle income or rich in the last 50 years were autocracies or dictatorships. So like South Korea, Taiwan, Spain—they were not democracies. They did not have universal franchise. In fact, even historically, as the US or the UK or Japan went through this phase of growth, they did not have universal franchise.

So what we are trying to achieve is absolutely unprecedented. It has never been done in history. What is also important today, and what makes it especially challenging, is that the pace of demographic transition is much faster than the pace of economic transition. So the drop in fertility rates is much faster than what used to happen in the past. And it is way faster than the catch-up on the economic side. Which means that we cannot just wait—that six and a half, seven percent real growth we can keep compounding for. Okay, so if we can't grow at 8–9%, we can keep growing at 6.5–7% for 20 more years and we'll be able to get there. That's not how it works because the moment the median age starts to cross 40 years, the growth in the economy starts to decelerate and therefore we have at most about 20 to 25 years to become rich before we become old. And that should set the expectations on the risks that we need to take, the policy risk that we need to take, and the urgency with which we need to act.

What needs to be done can be understood through a simple but comprehensive framework of the factors of production. So as we know, there are four factors of production that drive economic activity and growth: land, labor, capital and entrepreneurship. The Center has a predominant role to play when it comes to capital. So it's not just the cost of capital, but also I think the distribution, the availability of capital and I think the Center has done—especially over the last 10 years. I mean, among the various achievements that Mr. Kocher’s book highlights, I would add to the fact that the relentless focus on fiscal discipline and making sure that a taxpayer's money is spent wisely has resulted in cost of capital on both the debt and the equity side which is the lowest since Independence.

So if you're an entrepreneur today, AAA 10-year bond yields 7%. The 10-year bond yield at about 6.5% and falling is the lowest in a non-crisis period since Independence. At the same time, when you see price-to-equity levels in the equity market, price-to-earnings level in the equity market being at 22–23x, that means that if you are raising capital in the equity market, it is actually the cheapest that you could think of. The $40 billion+ that comes through systematic investment plans (SIPs) is a massive pool of risk capital which actually can be deployed for meaningful investment activity.

So if you are an entrepreneur today, not only do you have the cheapest equity and debt capital, you also have low corporate tax rates. So if you earn profits, you can retain a much larger part of it than you could earlier. In addition, you have many different forms of capital. So you have angel investing clubs that exist in almost every town now. There are many pre-Series A, Series A venture capital firms going all the way to buyout funds. So if there are companies that need exits of $400–$500 million, all of those are now starting to develop in India and the financial ecosystem is becoming very rich and diverse.

This is not to say that we've solved all problems. We still need to develop our bond markets. The bond markets are still—effectively, we have to prove to the bond market that you don't need the money before you get it. So you need to deepen the bond market. We also need to solve the hard problems of distributing capital in very small chunks. So one of the ways to reduce the inevitable rise in inequality is to make sure that we find ways of giving small-ticket loans, small-ticket equity to smaller entrepreneurs.

So one of the reasons that inequality ends up becoming inevitable or has been inevitable in some of these economies is that it is much easier to give capital in large ticket sizes than to give in small ticket sizes. Using digital public infrastructure, and as the speakers in the previous panel also mentioned repeatedly, the Jan Dhan Yojana is not just about allowing the people to save in bank accounts—it's also about making sure that financial transactions, creating what is called the India Stack, and creating the transactional data which can then be used by lenders. So frameworks like OCEN (Open Credit Enablement Network), ONDC—these are all things which are still work in progress. There's a long distance to travel, but we need to solve these problems if we have to keep growing without a political backlash from the growing inequality.

But that's on the capital side. We have covered a long distance. I think the hardest has been for a democratic government to show fiscal discipline even in the face of political pressure, and I think the government—especially the commitment of the Prime Minister, Mr. Modi—has resulted in this reduction in the cost of capital.

The remaining three—and this is where I get to the issue of federalism—the remaining three factors of production, which are land, labor and entrepreneurship, are mostly in the realm of the state governments. You can see that again—for people who are obsessed with Delhi—it is much easier, especially if you are a foreign journalist, if you are Financial Times, The Economist, Wall Street Journal, it is much easier to characterize the whole country through what's happening in the central government and in Delhi. But what is also happening—and this is again something that the SKOCH Foundation has taken the leadership on—is the grassroots changes that are starting to happen as the process of reforms is now starting to shift to the state level.

This is something that the Center has been advocating, has been trying to push, realizing very well that if it comes to, say, land reform, passing a central law is going to be very difficult, but doing it at a state level is much more practical and feasible. And so we are starting to see—even in the last six months—what we have seen is that, for example, the Rajasthan government in July allowed women to work night shifts. We have seen the Tamil Nadu government whitelisting a large number of industries so that they don't have to apply for Pollution Control Board approvals. We have also seen the Odisha government set up a massive textile park. I don't know if you're aware, but the Japanese apparel major Uniqlo is setting up a very large textile park in Cuttack. It is so large that even in India's own textile hub of Tirupur, there are entrepreneurs which are, in order to take advantage of the whole supply chain being set up in Qatar, actually buying land and setting up factories there. So there's a remarkable pace of activity which is now visible in some of the states.

So states like Tamil Nadu, Odisha, Uttar Pradesh—I think they are starting to change things very rapidly in order to attract new investment. States like Chhattisgarh are trying hard, though of course their infrastructure is not as well set as that of Tamil Nadu. When I was chairing this panel at Semicon India—so I'm also involved with the India Semiconductor Mission—I was moderating this panel with the partners of Indian firms. So as you know, in semiconductors, all Indian firms have needed to have partners because we don't have the technology. So we needed to get foreign partners. So this panel was with partners of Tata Electronics and CG Power and Kaynes Technology and so on and so forth.

What was stunning was the feedback from the partners—the positive feedback that they're getting. So, for example, the partner for Renesas–CG Power was effusive in its praise for the support they've got from the Gujarat government. They were absolutely impressed that from groundbreaking to the first output was only 14 months. In fact, now I can count—I mean I'm running out of fingers to count on—the number of factories that I've heard that from the time that the factory was planned to the first output was between 9 to 15 months. So when Tesla does it in China in 9 months it is celebrated the world over. But I think you should appreciate that in India there are many states and there are many factories where these things are starting to happen.

So there is quite a bit of activity. I think the federal structure of the country makes sure that there is diversity. And so you can start to see that some of the states are doing way better. So, for example, Odisha and Jharkhand had the same per capita GSDP in the year 2000 and today Odisha has a 2x per capita GSDP. They are both mineral-rich states. It's just the quality of administration, the quality of reforms that are happening and the way things are changing—I'm quite sure that this gap is going to widen. While Jharkhand is where I grew up, I would very much want it to grow faster. But it shows how state-level reform can actually transform a state.

As Bihar, which is my ancestral state, heads to the elections, I'm quite alarmed that development and job creation and industrialization doesn't even seem to be part of the agenda. So this tells you that for a state to progress, democratic pressures need to build. So it is the pressure from the bottom, it is the challenge.

For example, if you take the issue of urbanization, the states where the percentage of urban population is starting to rise are the states that are also starting to take a lead in urban reform. So one of the biggest challenges for India, one of the biggest sources of demand for India in the next 15 to 20 years is going to be the creation of housing stock. An average Indian today lives in about 130 sq ft of housing constructed space. An average Chinese in a tier-three town has 550 sq ft of constructed space. An average American has 700 sq ft of constructed space and it is still growing at 1% a year.

So as we think about where the end demand will come from—as much as, you know, I would like to emphasize that we focus on export competitiveness—we have to remember that that is only useful from the perspective of productivity. When it comes to end demand, it is mostly domestic end demand that must drive our manufacturing and the creation of housing stock. The creation of urban infrastructure is going to be an absolutely critical part of doing that.

So when you see reform process—if those of you have been to Bombay/Mumbai recently and have seen the remarkable changes in infrastructure—the oohs and the ahs that you get, that you can travel from Nariman Point to the entrance of BKC in 20 minutes—this needs to be replicated to 1,000 towns and cities. When you see the recent restructuring of the urban administration of Bangalore, these are all reflections of the fact that as the urban share of population starts to find a voice, the state governments are starting to respond.

And this is how democracy works. Unless there are these pressures, you can keep advising from the top. Development cannot be pushed down the throats of people. It has to emerge. So the role of advisors like myself or the leaders in the audience would be to accelerate that process—make sure that the importance of relaxing supply constraints in the real estate market, in urban administration—that process accelerates so that we can grow faster and move to the process of Viksit Bharat.

So far the fund allocation to various local governments in India is less than 5%. Whereas in China, 53% of fiscal resources flow directly to the city governments; in India that number is less than 5%. Even when you think about the Urban Challenge Fund that was launched in the budget this year—which I think is a remarkable innovation, I think it's a very important scheme—however, the allocations to that need to be 10x higher. It cannot just be ₹1 lakh crore over 5 years. I think it needs to be ₹10 lakh crore over 5 years. And that is when the process of acceleration and growth can happen.

So we have successfully gone from looking at everything from a prism of Delhi, the lens of Delhi, to going to the state capitals. I think it's very important that we take that lens and push it down to the district level. Honorable Prime Minister also in the last five, six years has been saying that we need to have district-level growth plans. Remember that most Indian states are larger than countries. For example, the state of UP has as many people as Indonesia; it has the same number of districts as Indonesia has provinces. So one district of UP is as big as a province of Indonesia. You have so much analysis on federalism in Indonesia, but you have absolutely no analysis on how district-level plans need to be created.

So what is remarkable and encouraging is that the current UP government and their advisors are starting to come up with district-level plans. And I think this needs to happen at a national level.

So I'll conclude by saying that data at the underlying level shows that growth post-pandemic has surprised positively. It is much better than feared. The global shocks and the widespread anger that we have seen, I think, have created a much better setup for trying. Because the acceptability of transformational disruptive reforms is now much better than it used to be. And I just hope that our policymakers and our political leadership take advantage of this acceptability of transformational reform and drive or accelerate our growth towards Viksit Bharat.

With that, I thank you for being patient on this.

Participants at the Social Contract of Business & Governance