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Realeconomiks

The rope on which our government walks is a very tight one. Censure them by all means, but have some pity too.

Realeconomiks
outlookindia.com
-0001-11-30T00:00:00+0553
TEN long years into reform, or what passes for it, and India is still more or less where it was in 1991. Indeed, some critics say that it is worse off now than before reform began. How accurate is this perception of standstill? How justified is the accusation of a slide? The shift towards the market has had several consequences. But, in terms of development per se, the three most important of these are:

  • An increase in the trend rate of GDP growth from around 5.5 per cent to around in the '80s to nearly 7 per cent in the '90s;


  • A slight worsening of income distribution, especially between the rural and urban areas; and


  • The onset of a process by which the poorest regions are getting left out of investment precisely because they are poor.


  • In consequence, an apprehension has grown that the process of market-based reforms, while accelerating growth, may also be worsening regional income disparities and creating unexpected strains and biases. The political response to the new economics has to be viewed in this context.

    Without seeming to justify anything, I think it's only fair to point out that in democracies—especially ones where 80 per cent of the population is poor—governments and political parties cannot fully endorse policies that exclude the poor from the consumption basket.

    This is not hard to understand. If you have inclusionist politics in which everyone above 18 votes, you cannot have exclusionist economics in which only the rich consume.

    The problem has been further compounded by globalisation, which involves labour-displacing technologies and, therefore, greater uncertainties about citizens' future incomes, against which they might plausibly seek insurance, either through the marketplace or through constitutionally-arranged income redistribution. In a system characterised by universal franchise, the importance of this cannot be overlooked.

    This raises the uncomfortable—and dangerous—question which the Indian middle class, one eye flashing with frustration and the other glinting with greed, is beginning to ask: is democracy incompatible with rapid and orderly economic progress?

    The East Asian and Chinese models certainly suggest so but now that we have opted for full democracy, warts and all, suffice it to say that just as markets take time to deepen and widen, democracy also takes time to mature. If the process is taking rather long here, it is only because of the complexities of our federal structure. Our democracy was always going to take time to mature.

    India was the first country in the world to accept universal franchise from the very start. Not even the US, whose democracy now seems to be as flawed as any, did this. That has complicated matters beyond anything that the world’s mature democracies can even begin to imagine.

    Unlike others, who made their economic choice first, we made our political one first. We now need to learn to live with its economic consequences. Our choice has entailed a cost, expressed by the need to exclude as few as possible from the consumption basket. Necessarily, this has meant a premium on equity over efficiency as defined by economics. Politics, therefore, has played a dominant role and economics is still as much a hostage to political whimsy as it was in 1991. That, indeed, is why only politically costless reforms have been carried out.

    The key political economy issue in the short term is the redistribution of income and the measures that are needed to ensure that the burden of redistribution is shared, at least apparently, in equal measure by all agents in the economy and sections of society.

    Two types of dangers are, therefore, ever present: the deadweight costs of the bureaucracy charged with administering the task of redistribution and the chance that, as incomes from investment are arbitrarily re-allocated, investment will be insufficient to lead to higher growth. This, certainly, has been the Indian experience.

    The problem is compounded by the fact that the ‘more’ democracy you have in a country with a very large number of poor people, the higher is the need for redistribution and, perversely therefore, the higher the incidence of both types of costs mentioned above. This, too, has been the Indian experience.

    Is there a way of reducing these costs? Only if society as a whole agrees to exclude a large number of people from the consumption basket. But such exclusion would increase poverty in the short term and, therefore, perversely, it would also increase the need for redistributive policies as well.

    The rope on which our governments walk is therefore a very, very tight one. By all means censure them, especially when they milk the system for the private gain of the members of the government.

    But have some pity on them as well.

    t.c.a. srinivasa-raghavan | Consulting editor, Business Standard

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