In his book India after Gandhi, Ramachandra Guha had asked us to reflect on the profoundly important question: Why did India survive as a nation after Independence? It was an unlikely outcome. A large, poor country, with disparate religions, languages, food and culture, coming together against imperial domination, not much else. The other parts of the empire — Afghanistan, Pakistan, Bangladesh, Nepal and Myanmar — much smaller, more cohesive in terms of religion and race, with much less spatial spread, have fared much worse and are seen as struggling states. I argue that the reasons that have helped India survive as a functioning state make it a hard place to do business.
So why did India survive? The strong initial leadership of Jawaharlal Nehru and Sardar Patel helped strengthen the five institutions that built India. First, for almost its entire independent history, India managed repeated peaceful transitions of power. Voting rates have been admirable and the electorate’s awareness of its ability to kick underperformers out, high. Unfortunately, poor delivery on development promises by successive governments created cynicism and an almost transactional mindset in voters. People sought and accepted short-term inducements from candidates because they did not trust their long-term promises.
Similarly, primordial linkages with a candidate held a strong appeal as it provided hope of continued access to the MP after election. Second, the federal structure allowed India’s plurality expression and power. Over time, chief ministers came to enjoy real autonomy and mostly stronger mandates than the Centre. Third, the judiciary has been independent and has had the power to challenge the government. Just consider the recent coal block cancellations. However, the increasingly activist judiciary is slow, and the lower judiciary has a deteriorating reputation, which has often drawn allegations of misuse. Fourth, the media, often considered irresponsible, is independent.
The great proliferation of television channels has required sensationalism to attract viewers. The media puts serious pressure on the government, judiciary, bureaucracy and business alike. But given the slowness of the courts, sensational journalism has few checks. The media is often prosecutor, judge and jury. Finally, at Independence, Nehru wisely allowed the bureaucracy to sideline the army from the centre of power. Patel used this bureaucracy from the start to support a fledgling state. One unfortunate byproduct was that bureaucrats were put at the centre of a heavily controlled economy. Further, regulatory and judicial activism has, in the recent past, called bureaucratic action into question and landed bureaucrats in courts, greatly increasing their risk-aversion and paralysing decision-making.
A poor country, a weak state machinery and an active electorate is an easy prey for anti-business sentiment and populism. Populism has led to sops to every important constituency — farmers, labour, and the poor. Rajiv Lall of the IDFC has argued that India makes higher social payments at its level of income than almost any other country. India has a low tax base, high subsidies and political parties that require massive funding for fighting elections without any real mechanism to obtain it.
The state’s autonomy to pursue bold reforms or create predictable policy, and the resources to build long-term infrastructure, is challenged. Policymaking is further inhibited due to the federal structure, especially when many state governments are led by chief ministers from strong regional parties and who can stymie the Centre’s initiatives. Independent courts have questioned government policies and an independent press has made the costs of transgressions high. The bureaucracy is risk-averse and enjoys its powers. The democratic system compromises political parties and puts them at considerable risk, as it requires them to raise funds illicitly to fight elections. Thus, the reasons that helped India survive make it a tough place to do business in.
What has changed with Narendra Modi? First, he has a majority mandate, and it is his mandate. Second, after many decades, an election has been fought on a development agenda. He has offered hope to India’s young, not sops, and created anger against past failures. He likes to go directly to his electorate and the idea behind the Jan Dhan Yojana is to shut out the massive leakage in providing subsidies. The voter will get the same subsidy directly and more conveniently, and cutting out the middlemen will reduce the total subsidy bill.
He is trying to create Centre-state alignment and obtain a Rajya Sabha majority by focusing on winning state elections, as evidenced by Haryana, Jharkhand and Maharashtra. To moderate the influence of the media on his autonomy, he is using social media and communicating directly with the electorate on the back of being an outstanding orator. The bureaucracy has been put on notice and is expected to take decisions but has also been promised protection from harassment. His autonomy has allowed him, at least currently, to keep a tight eye on the discretionary actions of his ministerial colleagues. Finally, though his relations with the judiciary appear somewhat frosty, he is trying to reduce litigation by getting government departments not to go to courts and also has a team trying to simplify old laws.
But there is a need for patience. Though he has had luck with falling commodity prices, especially oil, the US recovery suggests a rise in US interest rates and sluggish growth in Europe and Japan will dampen the global economy. In India, the PPP model is not working and infrastructure projects are stuck. Troubled public sector banks can’t help and even normal credit offtake is slow. Lower tax revenues create a challenge in meeting the fiscal deficit target, as well as making the required infrastructure investments. Progress on the GST is encouraging but incomplete, and the lack of a Rajya Sabha majority stalls key reform bills.
The task ahead is difficult and will take time. Those waiting at the 100-metre mark will be disappointed, but Modi is a marathon runner with a plan. The overarching economic vision is motivating, there is clarity on the key imperatives, a great openness to new ideas and ministers are action-oriented. While there is no magic wand, there are strong grounds for optimism.