Can India's colonial-era state power an AI-driven economy?

Technological change, led by AI, is perhaps the biggest disruption since advent of the steam engine. What is different between Industrial Revolution 1.0 and 4.0 is the speed of change. Can the Indian state, whose structure predates Independence, guide it to prosperity in such a dynamic world?

The Indian state, conceived by the British colonial regime, was never built for dynamism. It was built to perform the dour task of controlling a subcontinent. It was never a state engineered to deliver development. It was purposed to administer. After Independence, the people who manned it changed, but the structure did not.

Perhaps it was deliberate. In 1947, India's unity could not be taken for granted. Of course, there was Partition. But there was also the matter of integrating 560-odd princely states and several French- and Portuguese-administered areas into a cohesive union. A centrally-planned economy was a complement to the political need for a high degree of centralisation.


In 1991, the failure of that model to deliver prosperity led to economic liberalisation. We got decontrol, but the state did not retreat. It moved to regulation.

The state apparatus was jolted into action by Prime Minister Narendra Modi in 2014. He succeeded where others before him had failed in two critical areas:

Welfare delivery With the use of technology and direct benefit transfer, India's poor got their full share of entitlements for the first time.

Infrastructure building For long, poor infrastructure had been the Achilles' heel of India's economy. Modi's government, over the last 12 yrs, has ensured that India has more top-class roads, ports, railway services and airports.

But the next stage in India's journey, in the current global environment, requires two things that the state apparatus in its inherited form may not be able to do:

Risk-taking by itself.

Unleashing the full capability of risk-takers, namely, entrepreneurs.

Industrial policy, which is a midway between free markets and a planned economy, has made a comeback around the world. Essentially, it requires governments to pick winners among industries and firms by giving chosen ones big financial support. This involves big risks.

But even Western governments, which had for long rejected industrial policy, are using it in sectors like critical minerals, AI and associated industries like semiconductors and defence manufacturing. Traditionally, the Indian state has been comfortable giving unconditional protection, but not outcome-based promotion. The PLI scheme is an exception, and the success of the electronics sector is worthy of applause.

But, in its quantum and design, it's not enough to compete with the world in cutting-edge areas. Can any Indian central or state government commit huge financial resources to specific private sector firms by putting performance clauses preferably linked to penetrating international markets? That's the only way industrial policy works. It would take considerable risk-taking appetite to go down this path because there are bound to be failures along with successes.

On unleashing entrepreneurship, the probability is higher especially if the system follows the minimum government instincts of Modi. Only the private sector and India's entrepreneurs have the creativity, nimbleness and risk-taking capacity to compete in such a dynamic environment. However, a US-style entrepreneurial culture is unlikely to be easily facilitated by a state that has control and regulation at its core.

Admittedly, it's hard to change the DNA of an old institution. But, at this time, some modification will help India leapfrog into the big league.

The writer is chief economist, Vedanta