Governance & politics

Neither the Nehru-era approach nor the Chinese model is right for India. It needs to create room for the private sector

Good governance requires good politics, something we are seriously short of now. Today, our political process is rife with hate speeches that divide communities, groups using violence to do precisely this, acrimonious relationships between political parties and sharp Centre-state differences. The measures the government is taking to address the problem of containing COVID-19 could help to bring the country together without distinction of caste,   religion or region. But the evidence suggests that when the crisis is over, we will be back to square one in the snakes and ladders of politics.

Our politics is becoming dysfunctional in the sense that it is failing to achieve its principal purpose — the clear articulation of interests and a process of dialogue and decision-making that mediates between conflicts of interest and resolves them into a broadly accepted consensus. In a country like ours, which is very diverse, a political process that tries to privilege one community, one language or one region is profoundly dysfunctional.

 The contrast with China, a one-party dictatorship, may make this a little clearer. China has some minority issues with the Uighurs and the Tibetans. But 92 per cent of the Chinese population belongs to one ethnic group, the Han, who share a common language and culture.

Our country is profoundly different. It is diverse in terms of ethnic origin, language, religion and culture, and as of today much of the articulation of interest is by regional or caste-based parties. This makes Centre-state relations more complex because not just economic, but also cultural interests need to be harmonised. Unlike China, we are a democracy and the modulation of interests has to take place in public rather than in closed party conclaves. The way things are amongst our political parties this dysfunctional character of our politics is not going to disappear anytime soon, though the recent upsurge in spontaneous mass protests against divisive politics gives some grounds for hope.

Given this pessimistic perspective, India cannot follow the Nehru-era approach of an entrepreneurial State or the Chinese model of state-driven economic development. It will have to rely on a process of governance that limits the discretionary powers of the government and reduces its draft on private savings, leaving room for more vigorous private sector growth. 

Illustration: Ajay Mohanty

The most immediate problem of governance is the management of populism. Given the highly competitive nature of electoral politics, central and state governments will focus more and more public spending on the delivery of immediate benefits to voters at highly subsidised rates. Good governance requires that there should be a transparent process to distinguish between good and bad freebies. The first requirement is that the benefit delivery must be based on a planned process that identifies all the requirements in terms of resources and implementation mechanisms. Announcing bold targets for electoral gain and then trying to work out how it is to be done will lead to waste. The second requirement is a more careful analysis of alternative delivery mechanisms, perhaps on the lines popularised by the Nobel Prize winners Abhijit Banerjee and Esther Duflo. But the most important requirement is the strict enforcement of the rules about budgetary deficits. In fact, the time may have come for a ceiling on the borrowing requirements of the public sector, which at the moment absorbs virtually all private financial savings.

Subjecting populism to fiscal discipline is but a first step. Much of this populism has been financed by the sale of public assets and resource rights. We need a firewall between budgetary spending and the assets owned by the government in the form of land, revenue earning infrastructure, resource rights and commercial public enterprises. The proceeds from selling these assets should not be available directly for budgetary spending and should be used to stimulate private enterprise, which may make better use of these assets, and to reduce public debt.

The implicit assumption in this approach that the private sector will do a better job of delivering development then the public sector depends a lot on major changes in the interface between the government and the private sector and in the strengthening of competition within the private sector. This will require institutional reforms that are not electorally attractive and may be ignored by governments with a short-term electoral outlook. Yet without that our development prospects cannot be rescued from the political turmoil that is ahead of us. Perhaps an organisation like the Niti Aayog should take the lead in spelling out this agenda of institutional reform.

The reform is needed at both ends —the government and the corporate sector. The agenda at the government end is three-fold:

* Convert public sector commercial enterprises, particularly the financial institutions, into autonomous entities free of political interference and subject to the judgements of the capital market.

* Make allocations of government controlled land and other natural resources through a transparent process like an auction, for instance.

* Strengthen the laws that govern competition and regulation of natural monopolies and prohibit political involvement in individual cases.  

The corporate sector in India still reflects the organisational inheritance of the old managing agency  system. Business houses grow by horizontal diversification rather than by vertical integration of globalisation. Even a new post managing agency player has diversified from petrochemicals to telecommunications, retail trade and mass media. In this structure, corporate strategy reflects a group interest rather than the interest of the specific firm. Fortunately, such conglomerates are now being challenged by independent companies operating on a large scale in areas such as banking, information technology, pharmaceuticals, biotechnology, e-commerce and automobiles — all of them incidentally areas which have done well in the post-liberalisation era. That is what we need and the big question is how that can happen.

A part of the answer lies in strengthening company law provisions on cross holdings and other commercial arrangements between companies within the conglomerates. Another part of the answer lies in making hostile takeovers easier so that incumbent managements at company level recognise their responsibility to the shareholders rather than to the group promoters. But the biggest impact can come from large institutional shareholders who can enforce a degree of accountability on corporate management. Companies may continue to be run by promoted managers. That is not the problem. The real need is to liberate companies from the group interests of conglomerates.

Moving away from an entrepreneurial state does not mean that the government has no developmental role. In fact, it has to concentrate much more on the efficient provision of public services in education, health, pollution management and urban development. If someone who was a left-of-centre economist now argues against the state being a player in the market economy, it is because the government has lost the ability to take a long-term view, and short-term electoral considerations dominate its direct market activities.

(nitin-desai@hotmail.com)