Political-Economy and Governance Issues in the Indian Economic Reform Process
I am grateful to ASARC for the invitation to deliver the 2003
Narayanan Oration and am happy to be here at The Australian National University. I do not know
ex-President Narayanan personally but we have a good common friend (K N Raj) from whom I had
often heard glowing accounts about Dr Narayanan. Exactly 20 years back I gave the Radhakrishnan Lecture at Oxford University, and I now have great pleasure in getting this opportunity to
honour another distinguished south Indian ex-President.
My subject today is political economy and governance issues in Indian
economic reform. Political economy is concerned with distribution of economic and political
power, and inequality in this distribution poses important questions in a democracy. In 1949, as
the Indian Constitution was getting ready and the debates in the Constituent Assembly were being
wound up, B.R Ambedkar, a founding father of the Indian Constitution, said in a speech in that
Assembly:
More than 50 years later in India we still live this life of
contradictions, although there have been many changes, some of which would even have taken
Ambedkar by surprise.
I will start with some historical and social factors which provide the
context for Indian democracy and have shaped its complex unfolding in the last five decades, and
then relate these to the various disjunctures between economics and politics that have developed
in the on-going economic reform process in the last decade or so.
The historical origins of democracy in India are sharply different from
those in much of the west, and these differences are reflected in the current functioning of
democracy in India, making it difficult to match the Indian case to the canonical cases in the
usual theories of democracy. At least five of these differences are:
- While in Europe democratic rights were won over continuous battles against
aristocratic privileges and arbitrary powers of absolute monarchs, in India these battles were
fought by a coalition of groups in an otherwise fractured society against the colonial
masters. Even though part of the freedom struggle was associated with on-going social
movements to win land rights for peasants against the landed oligarchy, the dominant theme was
to fight colonialism. And in this fight, particularly under the leadership of Gandhi,
disparate groups were forged together to fight a common external enemy, and this required
strenuous methods of consensus-building and conflict management (rather than resolution)
through co-opting dissent and selective buyouts. Long before Independence the Congress Party
operated on consensual rather than majoritarian principles. The various methods of group
bargaining and subsidies and ‘reservations’ for different social end economic categories that
are common practice in India today can be traced to this earlier history.
- Unlike in western Europe democracy came to India before any substantial industrial
transformation of a predominantly rural economy, and before literacy was widespread. This
seriously influenced the modes of political organization and mobilization, the nature of
political discourse, and the excessive economic demands on the state. Democratic (and
redistributive) aspirations of newly mobilized groups outstripped the surplus-generating
capacity of the economy, demand overloads sometimes even short-circuiting the surplus
generation process itself,
- In western history the power of the state was gradually hemmed in by civil society
dense with interest-based associations. In India groups are based more on ethnic and other
identities (caste, religion, language, etc.), although the exigencies of electoral politics
have somewhat reshaped the boundaries of (and ways of aggregating) these identity groups. This
has meant a much larger emphasis on group rights than on individual rights. A perceived slight of a particular group (in, say, the speech or behaviour of a
political leader from another group) usually causes much more of a public uproar than crass
violations of individual civil rights even when many people across different groups are to
suffer from the latter. The issues that catch public imagination are the group demands for
preferential treatment (like reservation of public-sector jobs) and protection against
ill-treatment. This is not surprising in a country where the self-assertion of hitherto
subordinate groups in a hierarchical society takes primarily the form of a quest for group
dignity and protected group-niches in public jobs.
- In western history expansion of democracy gradually limited the power of the state. In
India, on the other hand, democratic expansion has often meant an increase in the power of the
state. The subordinate groups often appeal to the state for protection and relief. With the
decline of hierarchical authority in the villages and with the moral and political environment
of age-old deference to community norms changing, the state has moved into the institutional
vacuum thus left in the social space. For example, shortly after Independence popular demands
of land reform legislation (for the abolition of revenue intermediaries, for rent control and
security of tenure), however tardy and shallow it may have been in implementation, brought in
the state to the remotest corners of village society. With the advantage of numbers in
electoral politics as hitherto backward groups get to capture state power, they are not too
keen to weaken it or to give up the loaves and fishes of office and the elaborate network of
patronage and subsidies that comes with it. This serves as a major political block to the (largely elite-driven) attempts at
economic liberalization of recent years, as we will discuss later.
- For a large federal democracy India, by constitutional design, differs from the
classical case of US federalism in some essential features. Not merely is the federal
government in India more powerful vis-a-vis the states in many respects (including the power
to dismiss state governments in extreme cases and to reconstitute new states out of an
existing state in response to movements for regional autonomy), but it has also more
obligation, through mandated fiscal transfers (via the Finance Commission and the Planning
Commission), to help out poor regions. In classical federalism the emphasis is on restraining
the federal government through checks and balances, in India it is more on regional
redistribution and political integration. Stepan (1999) has made a useful distinction between
‘coming-together federalism’ like the US, where previously sovereign polities gave up a part
of their sovereignty for efficiency gains from resource pooling and a common market, and
‘holding-together federalism’ as in multinational democracies like India or Belgium or Spain,
where compensating transfers keep the contending nationalities together and where economic
integration of regional markets is a distant goal, yet incompletely unachieved even in more
than 50 years of federalism.
Given these social and historical differences in the evolution of
democracy in India its impact on inequality and poverty has been rather complex. In the history
of western democracies extension of franchise has been associated with welfare measures for the
poor. In the more recent data for a large number of countries cross-country regressions have
found a positive association between democracy and some human development indicators (relevant largely for the poor) or incomes of the lowest quintile of income distribution. What has been the performance over time of the Indian democracy in terms of economic
inequality and poverty? If we examine inequality in terms of the Gini coefficient there has not
been much change overall. According to household consumer expenditure data collected by the
National Sample Survey, during 1983 to 2000 for example, rural inequality in consumption
decreased a bit whereas urban inequality increased somewhat. Poverty has fallen significantly,
though. In 1983 46 per cent of the population was below the Planning Commission poverty line
whereas in 1999–2000 this figure was about 29 per cent. Despite this fall, India remains the
largest single-country contributor to the pool of the world’s extremely poor, illiterate people.
Anti-poverty programs constitute a substantial part of the budgets of federal and state
governments, but it is widely noted that a large part of them do not reach the real poor. The
poverty figures are based on NSS consumption data and not data on income. Some fragmentary data
on income suggest that the Gini coefficient for income distribution remains quite high, around
0.41 (and the Gini coefficient for asset distribution substantially higher). Some people contend
that in the last decade or so the top 1 per cent of the population has become much richer, and
their income or consumption is not captured in the usual survey data.
On the other hand, democracy has clearly brought about a kind of social
revolution in India. It has spread out to the remote reaches of this far-flung country in
ever-widening circles of political awareness and self-assertion of hitherto subordinate groups.
These groups actually have increased faith in the efficacy of the political system and they
vigorously participate in larger numbers in the electoral process. In the National Election Study carried out by the Centre for the Study of Developing Societies, the percentage of
respondents who answered positively to the question, ‘do you think your vote has effect on how
things are run in this country?’, went up between 1971 and 1996 from 48.4 per cent to 58.7 per
cent for the total population, from 45.7 per cent to 57.6 per cent for ‘backward caste’ groups
(designated as OBC in India), from 42.2 per cent to 60.3 per cent for the lowest castes
(designated as scheduled castes), and 49.9 per cent to 60.3 per cent for Muslims (only later
data can show if this figure has now changed for Muslims in view of the recent happenings in
parts of the country).
Yet, this faith in the efficacy of the political system is very
inadequately translated into concrete results on economic progress for the median member of the
poor disadvantaged groups. Let us explore this particular disjuncture between economics and
politics in India a bit further. The politicians are seldom penalised by the Indian electorate
for endemic poverty; poverty is widely regarded among common people as a complex phenomenon with
multiple causes, and they ascribe only limited responsibility to the government in this matter.
In any case the measures of government performance are rather noisy, particularly in a world of
illiteracy and low levels of civic organization and formal communication on public issues. As we
have indicated before, a perceived slight in the speech of a political leader felt by a
particular ethnic group will usually cause much more of an uproar than if the same leader’s
policy neglect keeps thousands of children severely malnourished in the same ethnic group. The same issue of group dignity comes up in the case of reservation of public sector
jobs for backward groups which, as we have said before, fervently catches the public imagination
of such groups, even though, objectively the overwhelming majority of the people in these groups
have little chance of ever landing those jobs, as they and their children drop out of school in
large numbers by the fifth grade. Even when these public job quotas mainly help the tiny elite
in backward groups, as a symbol and a possible, though distant, object of aspiration for their
children, they ostensibly serve a valuable function in attempts at group upliftment.
Particularly in north India there seems to be a preoccupation with symbolic
victories among the emerging lower-caste political groups; as Hasan (2000) points out, with
reference to BSP, a politically successful party of the oppressed in UP, these groups seem less
concerned about changing the economic-structural constraints under which most people in their
community live and toil. Perhaps this is just a matter of time. These social and political
changes have come to north India rather late; in south India, where such changes have taken
place several decades back, it may not be a coincidence that there has been a lot more effective
performance in the matter of public expenditures on pro-poor projects like health, education,
housing and drinking water. This reflects the fact that in south India there has been a long
history of social movement against exclusion of lower castes from the public sphere, against
their educational deprivation, etc. in a way more sustained and broad-based than in north India.
One may also note that the upper caste opposition to social transformation is somewhat stronger
in north India, as demographically upper castes constitute in general a somewhat larger
percentage of the population than has been the case in most parts of south India. So new
political victories of lower castes in north India get celebrated in the form of defiant symbols
of social redemption and recognition aimed at solidifying their as yet tentative victories,
rather than in committed attempts at changing the economic structure of deprivation.
From this major disjuncture between politics and economics in India let me
now move on to the various kinds of disjuncture that have appeared in the Indian scene between
the policy of economic reform and the on-going political and administrative processes.
Economists often ignore these, and are surprised when things do not proceed in the way they
want. In the last two decades, particularly since the early nineties, India has launched a
widely-heralded process of economic reform with a view to unleashing the entrepreneurial forces
from the shackles of the nightmarish controls and regulations that have hobbled the economy for
years. Yet many commentators have noted our ways of lumbering, proceeding two steps forward, one
step backward. We need to have a better understanding of why reform is so halting and hesitant,
why there is no substantial and durable political constituency for reform (outside the small
confines of India’s metropolitan elite), why even the few supporters of reform underplay it at
election time. In the rest of this lecture I shall point to ten different kinds of disjuncture
that may be linked to this phenomenon.
- Any process of sustained economic reform and investment requires a framework of
long-term policy to which the government can credibly commit itself. But the political process
in India seems to be moving in the opposite direction. While becoming more democratic and
inclusive in terms of incorporating newer and hitherto subordinate groups, it is eroding away
most of the structures of institutional insulation of long-run economic management decisions
against the wheeling and dealing of day-to-day politics. There are very few assurances that
commitments made by a government (or a leader) will be kept by successive ones, or even by
itself under pressure. A political party that introduces some reforms is quick to oppose them
when it is no longer in power.
- With the extensive deregulation of the last two decades it was expected that
corruption that is associated with the system of permits and licenses will decrease. There are
no hard estimates, but by most anecdotal accounts corruption has, if anything, gone up in
recent years. Although there may have been some decline in smuggling, black market in foreign
exchange, or real estate. Some of the newer social groups coming to power are quite nonchalant
in suggesting that all these years upper classes and castes have looted the system, now it is
their turn. This has implications for the milking of the remaining obstructive regulations,
particularly at the level of state governments (for example in matters of water and
electricity connections to factories or enterprises, and in land acquisition and
registration). As elections become more and more expensive the demands on business from the
politician‑regulator are unlikely to relent.
- Much more than economic reform the major economic issue that captures public
imagination, as we have noted before, is that of job reservation for an increasing number of
‘backward’ groups, which is accepted by all political parties. In the last decade of market
reform more and more of the public sector job market has been carved up into protected niches.
Cynics may even argue that the retreat of the state, implied by economic reform, is now more
acceptable to the upper classes and castes, as the latter are losing their control over state
power in the face of the emerging hordes of hitherto subordinate groups, and they are opting
for greener pastures in the private sector and abroad. As these hitherto subordinate groups
capture state power they are not likely to easily give up the lucrative benefits of office and
the elaborate network of patronage distribution that goes with it. This is more acutely the
case at the state government level where these groups are more secure in power.
- There have been few substantive reforms in the agricultural sector, and the
non-agricultural informal sector has been hurt by the credit crunch. Yet these two sectors
constitute 93 per cent of the total labor force. No wonder they are not enthused by the
reforms carried out so far. In fact even organised farm lobbies (with few exceptions) have not
been very active in demanding reforms of agricultural controls like those on storage and
distribution and on domestic and foreign trade. They may be worried that the dismantling of
the existing structure of food, fertilizer, water and electricity subsidies in exchange of
receiving, say, international agricultural prices may be too complex and politically risky a
deal. In any case the high administered procurement prices for grains have now eroded India’s
earlier (largely unexploited) competitive advantage in world grain markets.
- Political power is shifting more to regional governments and regional parties, which
makes national coordination on macro policy more difficult. For example, fiscal consolidation
in general and a substantial reduction in the budget subsidies in particular are difficult
when the national government depends on the support of powerful regional parties that
assiduously nurse their parochial interest lobbies with a liberal use of subsidies (implicit
or explicit). As the logic of economic reform and increased competition leads to increased
regional inequality, it is not clear how the Indian federal system will resolve the tension
between the demands of the better-off states for more competition and those of other states
(which a politically weaker Centre can ill afford to ignore politically) for redistributive
transfers. Can, for example, a coalition government at the Centre, dependent for its survival
on the large number of MPs from weak states (like Bihar or UP), ignore their redistributive
demands to compensate them for losing out in the inter-state competition for private
investment? It is also the case that a large number of entry taxes on goods imposed by
governments even in otherwise leading states in economic reform (for example, Maharashtra,
Tamil Nadu) are making the goal of reformers to unify an integrated all-India market that much
more distant.
- While the political power of regional governments is increasing, at the same time
their fiscal dependence on the Centre is also increasing. (Between the middle 1950s to middle
1990s, the fraction of states’ current expenditures financed by their own revenue sources
declined from around 70 per cent to around 55 per cent). A significant part of the central
transfers is discretionary (examples are the numerous central sector and centrally sponsored
schemes); these and discretionary subsidized loans are often used by the Centre more for
political influence in selected areas than for the cause of fiscal or financial reform or of
poverty removal.
- Reform would have been more popular if it was oriented to aspects of human development
(education, health, child nutrition, drinking water, women’s welfare and autonomy, etc.).
Reformers usually are preoccupied with problems of the foreign trade regime, fiscal deficits,
and the constraints on industrial investments in the factory sector, and they believe that
once these are handled right, trickle-down will take care of the issues that concern the
masses. In particular, the reformers have paid little attention to the crucial problems of
governance in matters of achieving human development, which will be inexorably there even if
trade, fiscal and industrial policy reforms were successful. Ravallion and Datt (2002) show
from an analysis of household survey data across 15 states over 1960 to 1994 that non-farm
growth is less effective in reducing poverty in states with poorer initial conditions in terms
of rural development, human resources and land distribution. For example, nearly two-thirds of
the difference between the elasticity of headcount poverty index to non-farm output for Bihar
and Kerala is attributable to the latter’s substantially higher initial literacy rate. If the
administrative mechanism of delivery of public services in the area of human development
remains seriously deficient, as it is today in most states, chances of constructing a minimum
social safety net are low, and without such a safety net any large-scale program of economic
reform will remain politically unsustainable, not surprisingly in a country where the lives of
the overwhelming majority of the people are characterized by a brutal lack of economic
security.
Of course, decentralization of governance which the 73rd and the 74th
constitutional amendments in the early 1990s ushered in most of the country (around the same
time as serious economic reforms were also launched) has raised hopes for better delivery of
public services, sensitive to local needs. In some sense this is quite a landmark in
administrative reforms. But so far the progress in this respect has been disappointing in most
states, both in terms of actual devolution of authority and funds, and the outcome variables of
services actually delivered. Let me just quote from one general evaluation, by Pal (2001): ‘With
some exceptions in Kerala, Madhya Pradesh, Tripura and West Bengal, nothing worthwhile has been
devolved to the panchayats. The bureaucracy at all tiers of panchayats is holding the balance.’
Note also that in Kerala and West Bengal decentralization with regular panchayat elections
started long before the constitutional amendments. In many states not just the bureaucracy
(which often has overlapping functions with the panchayats) has been reluctant to let go, the
local MLAs, in order to protect their patronage turf, have hijacked the local electoral and
administrative process (even in otherwise better-run states like Tamil Nadu). In Andhra Pradesh,
a state supposedly at the forefront of economic reform, the Chief Minister is reportedly using
information technology to further centralise (and personalise) the administrative process. Even
in the relatively successful case of West Bengal the major role of panchayats has been in
identifying beneficiaries of government programmes and the management and implementation of
local infrastructure projects like roads and irrigation, funded by tied grants from the Central
or state government. There is no serious involvement of the panchayat in the management or
control of basic public services like primary education, public health and sanitation or in
raising local resources. Of course, prior land reforms in Kerala and West Bengal have made the
panchayats somewhat less prone to capture by the village landed oligarchy as compared to parts
of north India.
- Another potential link between economic reform and decentralization largely
un-utilized in India relates to small-scale, particularly rural, industrialization. (In fact,
rural non-farm employment grew at a much slower rate in the nineties than in the eighties).
The Chinese success in the phenomenal growth in rural industries is often ascribed to
decentralization, by which the Central and provincial governments gave ‘positive’ incentives
to the local government-run village and township enterprises (by allowing them residual
claimancy to the money they make) and ‘negative’ incentives to keep them on their toes (in the
form of refusing to bail them out if they lose money in the intense competition with other
such enterprises). In India decentralization is usually visualised only in terms of delivery
of welfare services, not in terms of fostering local business development, and yet if this
link could be established, economic reform would have been much more popular, as local
informal-sector industries touch the lives of many more people than the corporate sector. A
program of economic reform that involves curbing the petty tyranny and corruption of the small
industry inspectors (who currently act as serious barriers to potential entry), encouraging
micro-finance and marketing channels, and providing the ‘positive’ and ‘negative’ incentives
of Chinese-style decentralization, has the potential of opening the floodgates of small-scale
entrepreneurship in India. Examples of successful cooperative business development with the
leadership of the local government, though rare in India, are not entirely absent. Take the
case of the Manjeri municipality in the relatively backward district of Malappuram in north
Kerala, with not much of a pre-existing industrial culture. In this area the municipal
authorities, in collaboration with some NGOs and bankers, have succeeded in converting it into
a booming hosiery manufacturing centre, after developing the necessary skills at the local
level and the finance. This and other award-winning panchayats in Kerala dispel the common
presupposition that civic bodies in the villages and small towns of India do not have the
capability to take the leadership in developing and facilitating skill-based small-scale and
medium-scale industries.
- It is anomalous to expect reform to be carried out by an administrative setup that for
many years has functioned as an inert, arbitrary, heavy-handed, often corrupt, uncoordinated,
monolith. Economic reform is about competition and incentives, and a governmental machinery
that does not itself allow them in its own internal organization is an unconvincing proponent
or carrier of that message. Yet very few economists discuss the incentive and organizational
issues of administrative reform as an integral part of the economic reform package. We have an
administrative structure dominated by bureaucrats chosen on the basis of a generalist
examination (rank in that early entry examination largely determines the career path of an
officer no matter how well or ill suited s/he is in the various jobs s/he is scuttled around,
each for a brief sojourn), and promotions are largely seniority-based not merit or
performance-based. There are no well-enforced norms and rules of work discipline, very few
punishments for ineptitude or malfeasance, and there are strong disincentives to take bold,
risky decisions. Whether one likes it or not, the government will remain quite important in
our economy for many years to come, and it is difficult to discuss the implementation of
economic reform without the necessary changes in public administration including incentive
reforms, accompanied by changes in information systems, organizational structure, budgeting
and accounting systems, task assignments, and staffing policies. In these matters there is a
lot to learn from the (successes and failures of) innovative administrative reform experiments
that have been carried out in many developing countries in the last decade or so.
- Finally, in large parts of the country the judiciary (particular at the lower end) is
almost completely clogged by the enormous backlog of cases and the legal system is largely
paralysed by delay and corruption. Even more important, the institutional independence of the
police and criminal justice system is regularly undermined by politicians of whichever is the
ruling party. As result, the rule of law, which is as much the foundation stone of a regime of
market reforms as of political democracy, is often sadly missing. (The N.N. Vohra Committee
Report of a few years back, now shelved, clearly spelled out the nexus between politicians,
bureaucrats, the mafia, and even some members of the judiciary.) This politicisation of police
and the administrative system is also the institutional background of the state-abetted
carnage in Gujarat last year. This shameful chapter of recent Indian history took place in a
state which is supposed to be a leader in economic reforms, indicating an alarming disjuncture
between politics and economics in India today.
But much more than hostility of certain religious groups is involved here;
what is basically at stake is a political failure of the Indian state. In large parts of India
sectarian interests are fishing in the troubled waters mainly caused by a failed state, when the
state cannot deliver the essential services (health, education, a minimum safety net and the
rule of law). When public schools, for example, do not deliver education to the poor, they
sometimes are compelled to send their children to the schools run by Hindu fanatics or madrasas
run by Muslim fanatics. Market reformers, instead of trying to organize the retreat of the
state, should devote a large part of their energies to the cause of reform of the state
machinery, to administrative and judicial reform to make the state more accountable to the
common people, and to prevent the hijacking of the police and the criminal justice system by the
politician-criminal nexus.
In this lecture I have started with a delineation of the different social
and historical context of Indian democracy, compared to the West, how it adds complexity to its
relation with problems of inequality and poverty. In this discussion I have underlined the
various kinds of disjunctures that have appeared, and unless these are addressed not much reform
or reduction of poverty and inequality will be sustainable, in spite of the many strides of
undoubted social and economic progress the country has taken over the last five decades.
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India, Oxford University Press, with an expanded edition in 1998, New Delhi.
Z. Hasan (2000), ‘Representation and Redistribution: The New Lower Caste
Politics of North India’, in F.R. Frankel et al. (eds),
Transforming India: Social and Political Dynamics of Democracy, Oxford
University Press, New Delhi.
M. Lundberg and L. Squire (1999), ‘Growth and Inequality: Extracting the
Lessons for Policymakers’, Working Paper, World Bank, Washington D.C.
A. Mani and S.W. Mukand (2000), ‘Democracy and the Politics of
Visibility’, Working Paper, Vanderbilt University.
M. Pal (2001), ‘Documenting the Panchayat Raj’, Economic and
Political Weekly, 8 September.
A. Przeworski, M. Alvarez, J.A. Cheibub, and F. Limongi (2000),
Democracy and Development: Political Institutions and Material Well-being in the
World, 1950–1990, Cambridge University Press, Cambridge.
M. Ravallion and G, Datt (2002), ‘Why Has Economic Growth been More
Pro‑poor in some States of India than Others?’, Journal of Development Economics,
August.
Y. Yadav (2000), ‘Understanding the Second Democratic Upsurge: Trends of
Bahujan Participation in Electoral Politics in the 1990s’, in F. Frankel, et
al. (2000), Transforming India: Social and Political Dynamics of
Democracy, Oxford University Press, New Delhi.