There is much lamentation in India about the lack of governance in general, and about poor economic governance in particular. It is important to place things in context as we try to evaluate how we have fared in this regard.1
Economic governance cannot be disassociated from political governance. In his 1989 essay, Francis Fukuyama argued that while there might be many competing forms of social and political organisation, none could claim to be superior or more durable than the idea of a liberal democracy. He went further to make the case that liberal democracy works better with, and is bolstered by, free markets. Since then the global economy has suffered the Asian financial crises of 1997 and the so-called global financial crisis of 2008. This has reignited the debate about the role of markets, their efficacy, and their contribution to growing inequality. In parallel, the world has seen the spectacular economic success of the Chinese model of state capitalism. Was Fukuyama not premature in declaring the "End of History"?
Turning to India, let us first ask the question: are we a successful democracy? Whether it is life expectancy, health, nutrition, poverty or any other metric, India has not delivered as effectively as China. Does this mean that Indian democracy has failed? If China, without a free political system, can deliver substantially greater economic prosperity than India, does this mean that democracy has not been good for India? This line of reasoning may be logical, but it is troublesome. Our notion of what is good for our society must surely be anchored in some moral and philosophical value system, one in which we as Indians attach value to freedom of choice. In fact, the importance of being able to choose who governs us cannot be measured. The success or failure of governance in India cannot and must not be gauged only in terms of our economic performance. Such an evaluation must also take into account what else we have achieved.
What is the record of political governance in India? At the time we became a republic, the probability that most ascribed to India surviving as a democracy was close to zero. Recent empirical research using data on emerging democracies suggests that the wealthier the country at the time of "democratisation", the likelier it is to survive as a democracy. India has proven to be quite the exception. We had the lowest per capita income of any democracy at the time we embarked on our political journey. That we remain a vibrant democracy with the largest electorate in the world today is a remarkable achievement.
It is incontestable that Indian democracy has become more representative over time. Scheduled castes, scheduled tribes and other backward castes comprise some 65 to 70 per cent of the population. The influence and participation of these historically disadvantaged communities in decision-making today is dramatically greater than before we got universal suffrage. For a society that has been burdened for centuries by the insufferable rigidities of the caste system, this would count as a significant success.
From a sociological perspective, social equality and dignity are equally, if not more, important than economic equality. We may not have been as successful as many would wish in delivering economic equality, but we have surely made material progress in delivering greater respect and recognition for the socially oppressed, even though we still have much further to go in this regard.
Thus, our political system may appear dysfunctional and corroded by corruption, but it has actually delivered quite robustly on political governance in the sense that it has greatly enhanced the representation of, participation by, and dignity for, disadvantaged segments of our society.2
Now let us come to the question of economic governance. Although we started our post-Independence political journey wholeheartedly embracing liberal democracy, we did not start our economic journey with the same enthusiasm for markets. On the economic front, we started with the so-called "mixed economy" model. During the first 45 years after Independence, we created a most elaborate system for managing and administering the economy, one that relied very much on state intervention. Over the years, our bureaucracy and judiciary became conditioned to that way of functioning. As a result since we started the economic reform process in 1991, we have not been very successful in changing the paradigm of state engagement with the private sector from how it was in the era of "command and control" to what it should be in the era of deregulated markets.
Twenty years after "liberalisation" the extent of state participation in the economy remains stubbornly large. For example, the share of public sector undertakings (PSUs) in the combined sales revenues of all listed companies actually rose from 41 per cent in 2003 to 43 per cent in 2013. In infrastructure, the entire electricity supply chain, with the exception of generation, remains dominated by government companies. In agriculture, the pricing of sugar, the procurement and exports of food grains, the marketing of agricultural commodities, are all still subject to pervasive state controls. The state continues to play an invasive role in land markets and PSU institutions still account for more than three-quarters financial sector assets. This widespread government participation in economic activity has been used to pursue the state's political agenda in a manner that has distorted markets and undermined economic governance. Directed lending to agriculture from PSU banks, free electricity through state electricity boards, subsidised petroleum products through the oil distribution companies are but some examples.
Being in a half-way house where the state is reluctant to give up economic space and the private sector is eager and anxious for more space has made effective business regulation difficult. An effective regulator must be independent and autonomous. But in an economy where the state itself competes with the private sector, how does one ensure that the regulator is independent? Our country is replete with examples of sectors where we have an inherent conflict with the government competing with the private sector while also playing regulator. With a few notable exceptions, regulators such as the state electricity regulators, are typically retired civil servants that act largely to protect the political interests of the governments that appoint them.
As elsewhere, economic policy in India is hugely influenced by special interest groups. But in part, because of the widespread footprint of government in economic activity, lobbying has deteriorated into "crony capitalism". While our politics has become more fiercely contested over time, increasing fragmentation of political power has made the Centre-state dynamic harder to harness in service of economic reforms of national importance, and pressures of coalition politics have contributed to greater populism in economic policy-making.
That economic decision-making in our country is heavily politicised may not be good from an economist's perspective of delivering optimum economic outcomes. But this is in a sense the price we pay for democracy, the value of which cannot be measured in economic terms. The bottom line is that we cannot improve our economic governance by wishing away its underlying political drivers. To improve the quality of our economic management our bureaucracy particularly, but also our judiciary and other institutions, must evolve to higher levels of sophistication, competence and autonomy such that they facilitate, regulate and adjudicate economic activity, rather than supervise it or participate in it.
The writer is executive chairman, IDFC
1 This essay derives from my contribution to the lecture series celebrating the 30th Anniversary of CUTS.
2 See Ashutosh Varshney's "Battles Half Won", 2013 for more on this line of reasoning
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