One of the most interesting features about India’s growth is the way it has been achieved under a democratic framework. There is a view that democracy impedes economic growth and India would eliminate poverty faster if we are willing to sacrifice freedom and democracy.

I quite disagree with this perspective. I believe that democracy is a ‘growth fundamental’, that we have come where we have come because of democracy, and not despite it. I found one insightful way of thinking about this in a 1988 paper^[7] by Dani Rodrik, which offered an interesting framework for understanding resilience of output growth, when faced with external shocks.

∆ growth =
- external shocks x      latent social conflict
                                Institutions of conflict management

This ‘equation’ seeks to explain the impact on GDP growth of a given external shock. This is linked to three explanations:

Going by his definition, India has substantial ‘latent social conflict’, given the ethnic and religious diversity present in the country. Yet, we know that the output loss associated with shocks in India was small. How did this happen?

By Rodrik’s argument, this suggests the high quality of the institutions of conflict management in the country. This is achieved through political institutions, and the functioning of democracy. As is well known, India is the world’s largest democracy. Freedom of speech, regular elections, and an independent judiciary have characterised India’s 57-year post-independence experience.

While India started out with very strong majorities for a single party (the Congress) in Parliament, over the decades, the political system has learnt how to obtain consensus through coalition governments. For example, in recent years, bipartisan support was essential for every piece of legislation. Milestones in economic legislation, such as the Electricity Act, the Foreclosure law, or the Fiscal Responsibility and Budget Management Act, would not have been possible without bipartisan support.

In many countries, the introduction of market-oriented reforms has been highly unpopular with the larger populace. This appears to have not been a constraint in India. One litmus test of this problem is found in the labour market. One revealing statistic about this is the number of strikes and the man days lost through strikes in 1992 and 2002. Major changes in economic policy have been actually accompanied by a sharp diminution in the incidence of unrest on the part of organised labour.

How was such a consensus in favour of market-oriented reforms forged? In the early period, market-oriented reforms may have appeared relatively novel and required consensus building to support embarking on relatively unknown territory. These innovations in policy were better accepted in India, as compared with the experience of many other countries, since they were crafted through the processes of a participatory democracy. In recent years, the consensus in favour of market-oriented reforms has been cemented by the results which better economic policy has delivered. One of the reasons for this has been the better sequencing of reforms which enabled ‘early harvest’ of the benefits.

The most important area of progress is that of poverty reduction. A shocking fact, embedded in Indian history, is the stagnation of the headcount of the poor at 320 million for the two-decade period from 1973 to 1993. From 1993 to 1999, in a short six-year period alone, the headcount of the poor dropped by 60 million. Taking into account various factors, it can be said that 100 million people have been brought out of poverty by the growth process of the last decade. This is an astonishing achievement, and it has had a positive impact on the political acceptance of economic reforms.^[8]

As mentioned before, per capita GDP now shows three doublings in an adult life, as compared with one doubling in an adult life that used to be observed earlier. These changes have been accompanied by a reduction in the volatility of GDP growth, which has helped alleviate fears about the vagaries of the free market. All these changes have been manifestly visible in the political system and public discourse, and have helped cement the consensus in favour of economic reforms.

While democratic institutions are very valuable things to have, this is not to say that it is easy for a country to learn how to operate democratic institutions. Many countries have lost high GDP growth rates for a decade or more, in learning to make the transition from dictatorship to democracy. By now, India appears to have absorbed the costs of learning to operate vibrant democratic institutions.