The Democratic Pace of Reforms

ON 15 AUGUST 1947, when India became independent, in a celebrated and oft-quoted passage in his address to the nation, Jawaharlal Nehru said:

Long years ago, we made a tryst with destiny and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.

On the 74th anniversary of Independence, 15 August 2020, there [was] certainly much to rejoice in what India has been able to achieve in the past. In view of India’s poverty and diversity at the time of Independence in 1947, not many political observers believed that the Indian democracy would survive for long. It is gratifying to note that India’s democratic system has not only survived but is universally regarded as a role model for a peaceful transfer of power from one government to another after periodic elections.

The Indian economy, which for quite some time—in the 1950s, 1960s, and 1970s—was in doldrums, also recovered and has shown rapid and steady growth since the beginning of the ’80s. Experts all over the world believe that the economy’s potential for even faster growth in the future is quite strong. A view is gaining ground that India will become one of the dominant economies of the world by the mid-21st century. With a faster rise in per capita income, the curse of widespread poverty is also expected to be substantially reduced.

There is no doubt that India’s future economy is currently on a new growth path. Part of the reason for the resurgence of confidence in India’s future is the process of economic reforms initiated in 1991. However, there is another important reason why there has been such a dramatic shift in India’s economic outlook. The basic reason, which is sometimes overlooked, is that the sources of comparative advantage of nations are vastly different today than they were even 20 years ago. There are very few developing countries that are as well placed as India to take advantage of the phenomenal changes that have occurred in production technologies, international trade, capital movement, and the deployment of skilled manpower. As a result, India today has the knowledge and skills to produce and process a wide variety of products and services at competitive costs.

One of the most remarkable political developments since Independence was the passage of the 73rd Amendment to the Indian Constitution in 1993. As is well known, this amendment created a new tier of local government which, within a relatively short time—by the year 2003—led to the constitution of as many as 235,000 new village governing institutions or gram panchayats, staffed by over 2 million elected representatives. This is probably the largest number of persons elected to serve as people’s representatives in any democracy in the world. Further, as a remarkable experiment in affirmative action, the 73rd Amendment mandated that close to half of the elected positions be reserved for traditionally disadvantaged population groups (lower-caste groups and women).

Over the long term, India now has tremendous opportunities to completely alleviate poverty and to become one of the strongest democratic global powers. To achieve this goal and meet the challenges that lie ahead, India also needs to initiate some political reforms which may take some time to implement after the discussion and adoption of necessary legislative measures by the Parliament and state assemblies. Currently, India is fortunate to have a government in power, which, after 25 years of relatively short-term governments of non-performing coalitions of multiple parties since 1989, has a majority of its own. India now has the ability to initiate reforms in the political and administrative system which can deliver public services to the people with least diversion, delay, or multi-tier corruption in the allocation of public resources.

In the past six years, the government has initiated several key reforms, some of which have been introduced through new laws. These also had the support of parties in opposition in the Parliament. New laws included those relating to the auctions of coal and mineral mines, the Aadhaar Act, IBC, GST, and introduction of new farm bills with approval of Parliament. The government has also liberalized foreign direct investment (FDI) policies and raised the FDI cap on insurance to 49 per cent. In order to reduce the large percentage of NPAs in the banking sector, an ordinance was also issued to help banks resolve some of the bad loans, especially in cases where coordination among multiple lenders was required to curb credits to defaulting large corporate borrowers. In addition to the positive changes in law, some measures have also been taken to expand the policies for rural development and housing for the poor, and accelerate the direct delivery of various services, including subsidies through the use of technology, such as DBT. To simplify the administrative process for the delivery of public services, the number of central social sector schemes has also been pruned from 1,500 to 300, and CSS has been reduced.

IN CONSIDERING FUTURE policy options, it is necessary to distinguish between ‘ends’ and ‘means’. Thus, political freedom, alleviation of poverty, universal literacy, equal economic opportunities, and so on are objectives or ‘ends’. While these objectives are non-negotiable, the specific policies or ‘means’ that are adopted to achieve them are matters of choice. For example, in a fast-growing economy like India, there can be no disagreement about the need to generate more jobs or provide adequate job security for workers. However, whether the best instrument for achieving this objective is through the public sector is a legitimate subject for reasoned debate. Similarly, there can be no two views on the desirability of higher growth with a better distribution of income in a developing country. But there can be a legitimate difference of views on the correct degree of the trade-off between the two objectives in the short run, or the right mix of policies to achieve the agreed objectives.

For a better future, it is important to have a consensus on primary development objectives over the next few years and then have a debate on the means of achieving them. There are several important objectives such as capital markets, competition, global integration, and foreign investment which need to be reviewed in respect of their impact on growth and poverty alleviation. Similarly, if there is preference regarding public enterprises and delivery of services to the poor and government servants, then their impact on the agreed objectives of generating more jobs and poverty alleviation have to be examined.

In light of the past experience on the slow pace of economic reforms in India, in some quarters there is a feeling that the basic economic reforms are feasible only in a crisis, through a majority party government at the Centre and states. This view is not valid for two reasons. First, a slower pace of reforms, based on consensus, is vastly preferable. It is also likely to be more durable in a democracy. Second, a severe economic or domestic crisis is highly damaging to the economy and the people. The Latin American economies, for example, which experienced severe crises from time to time, suffered a substantial and abrupt drop in their national income and employment. The adverse effects of these developments lasted for several years. The poor were the worst affected. While crisis-driven reforms may have rescued the economy in the short run, the long-term effects on growth and welfare were largely negative (compared to the counterfactual hypothesis of slow and steady reforms without a crisis).

THE COST-BENEFIT of economic policies in developing countries is likely to depend on the domestic and external conditions facing a particular country. The right choice of policies is, therefore, ultimately a matter of judgement of those responsible for taking the necessary decisions in the country. It also needs to be recognized that the validity of the chosen policy mix has to be judged in the light of actual results on the ground and not in terms of any predetermined optimal model of growth or capital accumulation. If the chosen policies do not yield the expected results, it is desirable to modify or reverse them as early as possible rather than persist with them.

The real world is complex and the interrelationship between countries and the global economy is also changing, particularly during periods when there are significant developments in technology (for example, the IT revolution), or political alignments (for example, the formation of the European Economic Community or the demise of the Soviet Union).The mix of policies that are required to adjust to the changing situation cannot fit neatly into any fixed paradigm. Today’s global economic and geopolitical environment is vastly different from that of the earlier decades following India’s Independence. It also has to be recognized that in all societies, different sections of people have different interests and there is nothing wrong in having such interests. In modern economies, workers have their legitimate interests in job security and higher wages, just as entrepreneurs and companies have their interests in maximizing profits and market shares.

Consumers have interests in adequate supply of goods and services at low prices, just as retailers and traders have interests in strong demand and higher margins. Similarly, farmers have interests in higher food prices, and governments have interests in ensuring food security at reasonable prices.

The real issue from a policy point of view is not that there are such special interests, but how these interests are reconciled with the public interest. If the pursuit of special interests leads to the adoption of policies that minimize the public welfare or which lead to higher incomes for a particular section of the people at the expense of the economy in general, then those policies are clearly wrong and deserve to be abandoned. The need to reconcile the pursuit of legitimate private interests with the interests of the society or the people in general is the primary rationale for setting up supervisory or regulatory bodies, such as a central bank or a stock market regulator, in most economies.

An important priority in the choice of appropriate strategies and policies in a democracy is that these decisions must be based on a reasonable consensus (not necessarily unanimity) across the political spectrum. In making the right choices, it is also necessary to make a distinction between objectives (ends) and instruments (means) that need to be pursued in order to meet the agreed objectives. The merits of specific policies must be determined and debated in terms of their impact in achieving the desired economic goals rather than preconceived ideological positions. Similarly, the appropriateness of a policy needs to be judged in relation to the actual results on the ground rather than in terms of any optimal theoretical model or a standard package of reforms. If the chosen policies turn out to be wrong, they must be modified or abandoned as early as possible, even if they can be justified on grounds of preconceived notions of what is the right thing for a developing country to do. India’s policies must be tested in the light of what they achieve for India. Finally, it has to be recognized that different sections of the people have legitimate economic interests which they should be free to pursue as per the law of the land. However, if there is a conflict between private or sectional interests and the wider public interest, then the latter must prevail.

As it happens, colonial and feudal traditions are still reflected in the perquisites and various other public adornments available to government ministers. It is desirable to make these offices less attractive in terms of public display of power, ostentation, and personal staff surrounding them. There is no reason why a minister in office cannot continue to function exactly as he or she was doing prior to becoming a minister (that is, as an MP or MLA) with some additional secretarial assistance. It would be desirable if the gap in terms of ostentation between being ‘in’ or ‘out’ is also reduced. Hopefully, such a levelling of status may reduce the unseemly scramble for ministerial berths by legislators.

THE CONCERN ABOUT the need to improve government finances has figured in budget discussions in the Parliament and outside over several decades (that is, after the first oil crisis in 1973, when stringent expenditure control measures had to be introduced to release resources for oil imports). Numerous committees and commissions, including finance commissions, have made appropriate recommendations to improve budgetary receipts and reduce expenditure. Governments, both at the Centre and states, have also taken several steps to improve the fiscal situation. An important initiative taken by the government is the adoption of the Fiscal Responsibility and Budget Management (FRBM) Act. Under the Act, annual and lower ceilings have to be announced by the government with respect to both fiscal and revenue deficits, until the desired targets are reached. From the long-run point of view, this is a commendable and welcome step.

It is, however, likely that the positive effects of the fiscal responsibility legislation, in improving the government’s ability to undertake higher expenditure in vital public areas, will take some time. This is because the government’s access to market borrowings and its revenue expenditure need to be substantially reduced in order to meet the lower annual targets of fiscal and revenue deficits. Part of the gap may be covered by revenue buoyancy due to tax reforms. However, the government’s overall expenditure would have to grow at a much lower rate than before.

There is no easy way out of this dilemma in view of the excesses of the past. The only possible way out for the government, in the next few years, is to sell its idle or loss-making assets and reduce its unproductive organizational expenditure. In view of the political compulsions, the choice is difficult. But this is the only choice. The government would do well to evolve a consensus on this score, as early as possible, by fully protecting the interests of government employees and other parastatal organizations. The government should give an assurance that while all its employees would have the option to avail themselves of a generous voluntary retirement scheme, they could also continue as employees of the government if they wish, and draw their full salaries and other benefits. Those who opt for the second alternative would be treated as employees ‘on leave awaiting fresh postings’. Even if full salaries are paid, the cash position of the government would still improve substantially because of receipts from asset sales and elimination of non-salary office expenditure. In several government enterprises, annual cash losses are, in any case, substantially higher than salaries.

Substantial savings and the reduction of corruption and the harassment faced by the public are possible by reducing the large number of government organizations and ‘attached’ offices which no longer serve any useful purpose. It is unnecessary to individually list such organizations, but even a cursory look at the list of Central or state government offices in the local telephone directory would provide sufficient evidence of the non-functionality of the vast superstructure of a large number of attached offices of government. These were set up years ago for promotional information or productivity improvement work, but have now become moribund. Large savings are possible by reducing the size of this superstructure without adversely affecting the interests of the staff or those of the public.

(This is an edited excerpt from India Reckoning: Politics, Economy, Governance and Beyond by Bimal Jalan)

democracyeconomic reformsFDIGDP growthGSTPoverty alleviationReserve Bank of India