There is another way

Strong, decisive rule is not the only way to effectiveness. Our experience since 1991 shows diffused economic and political power can deliver the goods even better

R Jagannathan’s thought-provoking article in these pages (‘Democracy, autocracy, or both?’, Business Standard, April 3, 2024) has raised some very important issues. He is surely right in saying that countries as a whole are difficult to compare, as no country is like another across all elements. But he then goes on to directly assert that autocracies are more effective at getting things done: “A country that wants quick, radical change will tend to be less democratic because big change needs more concentration of power.”

There is another way. As many have pointed out (see Martin Wolf’s piece last week in the Financial Times), there is no correlation between autocracy and performance. For every Lee Kuan Yew (who brilliantly developed modern Singapore) there are multiple Maos, Stalins, Pol Pots, and Chavezes who were walking, talking disasters for their countries. Democracies may often stumble, but the option of voting incompetence out can drive improved performance like nothing else.

It depends, too, on what change one is driving. Large infrastructure projects can benefit from top-down drive. But our single largest economic challenge is employment; we need to create millions of good-quality jobs each year. In our private-sector-driven economy, many things must line up. Since 1991, broadly sensible economic policy across governments has kept growth reasonably strong. But that isn’t enough to annually add millions of good-quality jobs. The state must remove obstacles to employing more labour (our long-pending labour reforms) and ensure market access through free-trade agreements for labour-intensive goods like garments and footwear. But even that isn’t enough. The key missing element is a mindset among Indian entrepreneurs that labour-intensive manufacturing is good business. What else explains why a large garment plant in India employs 3,000 to 5,000 people, but one across the border in Bangladesh employs 30,000 to 50,000. Changing mindsets involves persuading, modelling, encouraging, incentivising, and doing so consistently over many years; it cannot be ordered to happen. As dozens of entrepreneurs move in the right direction, hundreds and then thousands more will follow them. How do we make that happen?

Let us learn from our own experience since 1991. The key element was the retreat of the state. We scrapped rules restricting what industry could be started, where it could be started, how much could be produced, what price it could be sold at, what could be imported, for how much it could be imported, what technology could be licensed from whom and by whom, and how much could be paid for it. All this, decided by bureaucrats with no domain knowledge, held India back for 30 years. It is the removal of these controls that has seen India be one of the world’s 10 best-performing economies for 30 years, with every projection saying we will continue to be so for the next 30 too.

The removal of controls unleashed Indian entrepreneurship. Over the years I’ve done a simple exercise of comparing the Business India list of India’s top 100 firms. What is striking is how the 10 years to 1991 saw a largely similar list. Ten years after 1991, new entrants made up half the list. Whole new sectors such as pharmaceuticals, information technology services, hotels and branded fast-moving consumer goods products came in, while commodity producers retreated. Since around 2000, the churn has reduced, and some older commodity groups have even returned to prominence. The entry of new entrepreneurs slowed down in the 2000s, which has persisted to this day. The Indian market seemed to become less welcoming to entrepreneurship at precisely the time it was growing fastest. Why?

Anne Krueger’s classic paper, “Political Economy of the Rent-seeking Society”, argues that government restrictions on economic activity give rise to rents. These restrictions can include limits on entry, protection, or licences to operate. People then compete to capture those rents using legal or illegal means. Was there a fall in rent-seeking from 1991 to the early 2000s, and a return since? Rent-seeking thrives on political connections; this favours incumbents and deters new entrants. The last page of Vijay Kelkar and Ajay Shah’s book, In Service of the Republic, says: “The private sector is fearful of the arbitrary power wielded by officials, and does not speak up. There is no voice, but there is an exit in the form of reduced investment.” One form of this “reduced investment” is reduced entrepreneurship.

The retreat of centralised control of the economy went with a revival in the independence of other institutions. The Election Commission, the Supreme Court, the Enforcement Directorate, and others, were all less beholden to the minority or coalition governments of the day in their actions. Whether this came from weakness or wisdom isn’t important; the effect on independence was the same.

There remains ample opportunity for the state to retreat further, and so set us on course to becoming a developed nation. The reforms after 1991 were all largely at the level of the Union government; there is so much scope for state governments to do less, and then do that less better. And even within the Union government, reforms were concentrated in the finance, commerce and industry ministries; education, science and technology, home, agriculture, and the rest offer great scope for further reforms that limit their role to a few things done better.

Ultimately a government must be judged not on whether it is strong or weak, but on its performance. How have we performed in economic well-being, both for the overall economy and the income of the median Indian; in civil and individual rights for all citizens; in equality of opportunity through access to education and health infrastructure; in the rule of law being applied freely and fairly across states and citizens.

Mr Jagannathan ends by saying: “Is it any wonder many voters seem to prefer strong leaders, even if it means less democracy, so that their everyday problems get solved.” He cites the Austrian-British philosopher Karl Popper for his paradoxes of democracy, freedom and tolerance. Much of Popper’s book is an attack on those who would offer us grand theories in the name of history, to reclaim some lost (and usually never existing) glory. His is an argument not for concentration of power, but decentralisation, and for checks and balances as things get done. Economic and political power must be diffuse. Like 

Mr Jagannathan, I will cite Popper too, from the same book, The Open Society and its Enemies: “If in this book harsh words are spoken about some of the greatest among the intellectual leaders of mankind, my motive is not, I hope, to belittle them. It springs rather from my conviction that, if our civilisation is to survive, we must break with the habit of deference to great men.” I share Popper’s motive — and conviction.

The writer is co-chairman, Forbes Marshall; past president, CII; and chairman of Centre for Technology Innovation and Economic Research and Ananta Aspen Centre. His book, The Struggle and the Promise has been published by HarperCollins. ndforbes@forbesmarshall.com