The not-so holy trinity

Ever since independence, India has been fortunate in having a string of top economists to advise the government in the process of planning and economic policy formulation — among them are well-known names like Professor Mahalanobis, Pitambar Pant, Professor Lakdawala, Professor Sukhamoy Chakravarty, Dr I G Patel, Professor Raj Krishna, Dr Manmohan Singh and several others.

On the political side, we can rightfully take pride in our vibrant and functioning democracy. India was ruled by a single party with repeated mandates from the people for nearly 50 years after independence with some brief interruptions. During this period, there were a number of short-lived governments with varying mandates, but which nevertheless did their best to serve the country under difficult circumstances. Now, we have a multi-party coalition government, with vast differences in ideology and political beliefs among its constituents, which has been in power for six years.

In respect of governance, the administrative structure of India, with the so-called ‘‘steel-frame’’ of a permanent bureaucracy, has been the envy of the post-colonial developing world. Even after allowing for a considerable rusting and weakening of the frame, the governance structure at the Centre, states, districts and panchayats still remains largely intact.

Thus, we have had a fine combination of good economists, an operational governance structure, and a functioning democracy — all working together. Yet, the results on the ground in terms of social or economic development over the long period since independence — leaving aside the most recent period — were rather disappointing. For the first fifty years after independence, India lurched from one crisis to another. We also had low growth, low literacy, and an abundance of poverty. The vision outlined in 1956, at the beginning of the Second Plan, of a poverty-free India with full employment in 25 years, i.e. by 1981, still eludes us.

The question which puzzles me is why this combination of economics, politics and civil service did not lead to the kind of results that the people of our country could have legitimately expected. This is what I propose to discuss with you today.

My feeling is that, while on the surface, the three elements were working together, in a more fundamental sense the reality was vastly different. Despite appearances to the contrary, there was in fact a substantial gap between what was considered to be economically sound and what was found to be politically feasible. Economic strategy seldom reflected our political or social realities or, if you will, real political considerations. Similarly, the administrative implications of policies, launched with great conviction, were seldom considered or, when considered, these implications did not affect the actual evolution of economic policies or programmes on the ground.

To illustrate the point, let me begin by referring to the Mahalanobis-Nehru development strategy, which dominated our post-independence economic policies for close to 40 years. Several of these policies have undergone a drastic change after 1991. However, it is striking that despite many problems and tribulations, the basic framework of economic policies introduced soon after independence remained intact for as long as four decades and more.

The basic elements of the post-independence economic strategy are too well known to need repetition. The Indian nationalist movement during the colonial period, you will recall, had given very high priority to making India economically independent — in addition to political independence — through aggressive import substitution and reduction in India’s dependence on foreign trade and foreign investment. Also, based on the Soviet experience, it was believed that economic independence and high domestic savings could be achieved only if the ‘‘commanding heights’’ of the economy were in the hands of the public sector. It was assumed that if the means of production were owned by the State, all the value-added in production will flow to the people. Further, if consumption was discouraged, public savings would automatically increase. These savings could then be used for further investment and growth, and India could soon catch up with the developed world.

This was a most heart-warming economic vision, supported by leading economists of the day and widely respected academic models of savings, investment and growth. Unfortunately, it paid scant regard to the political and administrative implications of the favoured strategy. The political assumption was that the representatives of the people, freely elected to power, will selflessly promote the greatest good of the greatest number. In public enterprises, in the absence of private capitalists, labour and management were expected to work together in harmony without political interference, in line with national priorities as laid down by the planners. Another important assumption was that India was one, and as was the case during the struggle for political independence, all Indian citizens will work selflessly without sectional interests to achieve the country’s economic objectives.

The reality has proved to be vastly different. The political decision-making on economic issues in our country, as indeed in most democracies, is often driven by special interests rather than the common interests of the general public. These special interests are also more diverse in India than in other more developed and mature economies. Thus, there are special regional interests, not only among states, but also within states, depending on the electoral strength of the party in power in different parts of the state. Economic policy-making at the political level is further affected by occupational divide (eg farm vs non-farm), the size of enterprise (eg large vs small), caste, religion, political affiliations of trade unions, or asset class of power-wielders, and a host of other divisive factors. As a result, most of the economic benefits of specific government decisions are likely to flow to a special interest group or, in Mancur Olson’s famous phrase, to ‘‘distributional coalitions’’. These coalitions are always more interested in influencing the distribution of wealth and income in their favour, rather than in the generation of additional output which has to be shared with the rest of society.

Also, the delivery of government benefits to special groups has given rise to a whole process of bargaining and conflict resolution among various interests. As a result, a large number of middlemen have emerged across the political spectrum. Further, as elections have become more expensive and more frequent with uncertain time period during which funds can be collected in different states, there is a greater tolerance of political corruption as an unavoidable feature of the electoral process.

Thus, contrary to what was envisaged by the founding fathers of our republic, and contrary to the vision of our planners, the political-economic balance, in actual practice, has turned out to be self-centric, narrow, and wasteful. An interesting question is: how did the stranglehold of special interests last so long? Where were the majority of the people who did not gain sufficiently from the economic bargaining process? The answer is not difficult to find. The simple fact is that the so-called majority is fractured into a large number of sub-groups of individuals who are divided among themselves by several factors (such as caste, religion, location or occupation), while special interests are united in protecting their share of the economic output. This is really why the so-called ‘‘haves’’ are so much more powerful than the ‘‘have-nots’’ in our society. It is, for example, the trade union of employed persons (or, the ‘‘haves’’) which is likely to go on strike when their economic interests are threatened, rather than the vast majority of the unemployed (or, the ‘‘have-nots’’) across the country.

At this point, I must make it clear that what I have said so far about the power of special interests in determining political economy outcomes is not an argument in favour of unfettered free markets, or the need for an economy without government regulations and laws. The issue here is not ‘‘markets vs government’’. It is that the political priorities are distinct from priorities laid down by economists and experts. Thus, the problem with the Indian economy is not that its market is less or more free, but that its freedom is in the wrong domains. It is common knowledge that in most parts of India, government permissions, regulatory approvals, or licenses can be purchased at a price. In these domains, the problem is that of excessive marketisation. On the other hand, in other areas where the market ought to be more free (for example, the labour market or international trade), India is strapped in bureaucratic red tape.

Two more caveats are necessary in considering the power of dominant coalitions in determining economic policy outcomes in our country. The point is not that these coalitions always emerge as winners in determining the direction of public policy, or that all politicians pander only to special interests. There are honourable exceptions, and there certainly are leaders who give primacy to the general public interests. But they are likely to be exceptions rather than the rule. They are also likely to face considerable hurdles in successfully pursuing economic policies that adversely affect the special interests of the organised groups. Similarly, there are situations (such as war, a natural catastrophe, or religious conflict) when a unity of purpose emerges among all sections of the people to promote the common good.

Another important assumption in the choice of post-independence development strategy was that public sector enterprises would generate public savings, which could be used for higher and higher levels of investment. However, instead of generating savings, the public sector soon became a drain on public savings. Despite commanding the ‘‘commanding heights’’, public sector savings are now negative by as much as 4 per cent of GDP. These negative savings have led to fast accumulation of internal public debt and lower investment than would have been the case otherwise. In the annals of development history, it is hard to find another example of a perfectly sensible idea — the need for higher public investment for greater public good — leading to exactly the opposite result, ie higher public consumption with diminishing returns for the public!

To be concluded.

The writer is a former RBI Governor and present Rajya Sabha member. This is the text of his speech at the IIM-A convocation on April 3.

PART II