Black hole of the state

The core of India’s economic challenge is managing inflationary expectations. Everything from the savings rate to investor confidence depends on giving some signal about what kind of world to expect in terms of inflation. Fiscal tightening might signal a resolve to manage those expectations. But the state has done nothing to lessen the uncertainties over inflation. If anything,the budget suggests even more inflationary pressures. The government lost credibility because for three years it was being mendacious about inflation diagnostics. Was it labour cost push? Was it energy prices? Was it government expenditure growth not being linked to productivity increases? Without a diagnostic that is clearly addressed in the budget,there is no credible roadmap to managing inflation,and this will create choppy seas.

The second black hole of the state is regulatory certainty. The biggest regression over UPA 2 was that it continued to multiply regulators,while at the same time moving away from principled regulation. It got into trouble in sector after sector because it could not stick to regulatory frameworks with credibility; even in PPPs,it was amenable to arbitrary discretion. This also created openings where other institutions like courts could compound uncertainties. So here is a non-rhetorical question. Do we have any reason to have more confidence that the regulatory capacity of the state is going to improve? The answer is probably,no.

The third black hole of the state is that it still does not seem to understand the importance of a framework for justifying its decisions in terms of public reason. The issue is not tax rates. A good case could have been made for taxing the super-rich. But it should have been made with courage of conviction and on principled grounds. Instead,what we got was something like,“We are in trouble,so let us do this for a year and then we will roll back.” This will hardly cement the state’s reputation as a credible taxer.

The fourth black hole comes out most clearly in the economic survey. This is that every single item required for future growth is premised on a radically different kind of state. The survey tries to do a fair-minded assessment of the deep dynamics of growth and the more contingent drivers. The survey is wonderful at emphasising the need for job growth. It then offers a good comparative analysis of issues we have to face: labour laws,the ease of doing business,formalisation,education and skilling and so forth. The survey often draws comparisons with East Asia,but then tellingly leaves out the most important question: do we have similar state capacity? In fact,in the short to medium run,state capacity may actually decline. Take the items in turn.

The government has finally woken up to the fact that without a manufacturing base of some kind,we will be doomed. So here is the nasty question. Can you think of one example where a country has managed to create a strong manufacturing base without an industrial policy of some kind? But here we cannot even leverage defence spending to boost domestic manufacturing,let alone create the kinds of winners East Asia did. The state does not even trust itself to do contracting. The survey talks a lot about the “missing middle” in India’s firm size,though it underestimates the degree to which this seems like a global phenomenon. It talks a lot about the way in which the informal sector is a drag on Indian productivity. The function of informality is more debatable. But it is hard to argue that making the transition from informality to formality will require vastly deepened state capacity. But the East Asian examples also suggest that the formalisation happened under the aegis of what Atul Kohli called state-directed development,not simply private sector expansion.

The survey talks about skilling and human capital requirements. But it is hard to imagine a single case where a system of robust public education and more intelligent public outlays was not the bedrock of human capital enhancement. The survey points out,not for the first time,that we have arcane labour laws. It would have been nice,though,if it had provided some explanation of why there is so much variation in manufacturing prowess,where states like Haryana,Tamil Nadu and Gujarat still manage to clock impressive numbers. It also does not dwell adequately on the fact that the bargaining power of labour has been declining,as evidenced in the share of profits to wages,or the ratio of lockouts to strikes. But the crucial point is that it is hard to wish labour issues away. Indeed,the real issue now is that the gap between organised formal workers and informal workers in the organised sector will lead to greater militancy amongst workers. Can the state redefine its relationship to labour,as it did in East Asia?

Again,not for the first time we come to that grand idea,“the ease of doing business”,where India ranks close to the bottom. But here is the nasty question. If after two decades of reform,there is not an iota of progress in this area,except perhaps for the very big guys,is there any reason to suppose that anything is going to change on this front? This is a tough one to crack because the cumulatively hostile environment for business is a product of innumerable small decisions,each of which has a bureaucratic logic of its own.

In short,no matter which direction you look in,you hit the brick wall of the kind of state we have. It is being said that the economic survey is optimistic in its growth projections. But its diagnosis of what we need to do raises serious and dispiriting questions. These days,it is considered unpatriotic to talk India’s prospects down. But it is foolish to think that India can grow without tackling the infirmities of its state. A fiscal deficit number will give a small assurance that we are not bankrupting ourselves to high heaven. India has enormous energy and inventiveness. But unless you see signs that we are reinventing the state all promises will prove illusory. Unfortunately,we have replaced the art of state-building with the science of number-crunching.

The writer is president,Centre for Policy Research,Delhi

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