Thirty years after The Political Economy of Development in India was published, its author explores what has changed and what has not changed in India today.
This is a slightly edited version of the opening keynote lecture at a conference organised by All Souls College, Oxford to mark the 30th anniversary of the publication of The Political Economy of Development in India, that was originally presented as the Radhakrishnan Lecture at that college in 1983.
Over the 30 years since The Political Economy of Development in India was published I have noticed a remarkable asymmetry in its reception among mainstream economists and others. The book has received nothing but benign neglect from the former group. I am pretty sure most of my colleagues in the major Economics Departments in the United States (US) have never heard of this book, even though many of them may be aware of my more technical articles in journals. Looking back I have sometimes thought that maybe it would have attracted more attention of economists if I had published in the book the background theoretical notes I had for a couple of its main messages.
One such message was about the difficulty of organising collective action towards long-term public investment in infrastructure, a key ingredient of economic growth, in a country where even the elite is fragmented and finds it difficult to get its act together in doing something that would have benefited most of its members. With this failure of collective action, the public surplus is often frittered away in short-term subsidies and handouts. Since writing the 1984 book I have elsewhere (Bardhan 2005) elaborated on my theoretical ideas on the adverse effect of social heterogeneity and inequality on collective action not just on matters of macroeconomic growth but also in the microeconomic issues of management of local commons.
The other message, enunciated in the last chapter of the book, for which I had some unpublished theoretical notes, was how the same elite fragmentation that acts as a constraint on economic growth can work as a safeguard for the resilience of democracy in India, where the divided groups may agree on the procedures of democracy as a means of keeping one another within some bounds of moderation in their transactional negotiations.1
Collective Action Issue
This article first discusses the collective action issue for long-term growth that I had identified more than three decades back and which remains acute even today in India. It then moves onto a discussion of a few of the structural issues not considered in the 1984 book that have become prominent in recent years.
The economic growth fundamentals for India are now potentially quite strong (stronger than it seemed in 1984):
• Domestic saving and investment rates are relatively high for a poor country.
• After the opening of the Indian economy the alacrity with which a part of the hitherto protected Indian business adapted to the demands of global competition and thrived suggests a remarkable adaptability.
• Vigorous entrepreneurial spirit in all corners of the economy, rejuvenated by the infusion of business entries from hitherto subordinate castes and regional capitalists.
• The majority of the population is quite young, with the potential of a large and productive young workforce.
• With better transport and communication (particularly with the remarkably fast spread of mobile phones), connectivity is increasing in a way that is likely to speed up enhancement of productivity.
But there are major structural and institutional problems blocking the full realisation of these strong growth fundamentals:
(a) The physical infrastructure (roads, electricity, ports, railways, etc) is weak. Public budgets laden with heavy subsidies, salaries and debt servicing have very little left for infrastructure investment, leading to increasing frequency of public-private partnerships on infrastructure. But these have often been saddled with problems of mismanagement, very high debt–equity ratios, opportunistic renegotiation, non-transparent regulations and corruption. In addition, caught in the crossfire between corporate lobbies on the one hand and social activists and judiciary on the other, official land and environmental clearances for infrastructure projects have become extremely slow, non-transparent or erratic (lurching from one side to the other) in recent years.
(b) Secondary education is a minimum qualification for many good non-farm jobs, and yet the children from poor families overwhelmingly drop out before entering or completing secondary schools, on account of economic and, particularly in the case of girls, also social compulsions.
(c) The average quality of school and college education is not sufficient for employable skills for many, even for some manual, jobs. The provisions for vocational training and skill formation along with connections with potential employers, particularly for rural youth, are extremely deficient. In a so-called “labour-surplus” country there is now a serious shortage of employable labour in factories and other enterprises.
(d) Despite all the economic growth of recent years, a major social and organisational failure, almost at a disastrous level, over many decades has been in matters of public health and sanitation, where India lags behind even some African countries.2 Poor public health and sanitation continue to keep the Indian disease burden high and the productivity of workers low.
(e) Environmental degradation has been a major drag on net economic growth. It has been reported in the 2014 United Nations Development Programme’s (UNDP) Human Development Report that the annual depletion in natural resources (depreciation of “natural” capital) in India as proportion of national income (conventionally measured) is nearing 5% per year (not very different from the growth rate in national income in recent years), compared to 3.6% for Brazil and 0.1% for Costa Rica.3 It has been assessed by the World Health Organization that of the 20 most air-polluted cities in the world, 13 are in India. (Indoor and outdoor) air pollution kills an estimated 1.6 million people every year.
Governance Ineffectiveness
All of the above—infrastructure, education, public health and sanitation, environment—involve the governance effectiveness issue with respect to delivery of key public goods and services, which is rather low in India, and, of course, varies a great deal between different states in India (Mundle et al 2012).
Governance ineffectiveness is often regarded as a lack of state capacity, that many point to as India’s major failing. While it is true that the bureaucracy is often inept or corrupt or simply truant, it is equally important to keep in mind that state capacity is sometimes weak not necessarily because of a dearth of capable people but because of a systemic impasse.Extraordinary state capacity may be observed in some episodic matters, for example, in organising the complex logistics of the world’s largest elections, the world’s second largest census, and some of the world’s largest religious festivals. But extraordinarily poor state capacity is displayed in, for example, some regular essential activities like cost-effective pricing and distribution of electricity—the key input for the economy. There exist regular under-recovery of costs, erratic supply and anemic investment in electricity, caused not so much by an inherent lack of administrative capacity, but more by factors relating to complicity in a sinister political nexus, populist pressures and outright theft. Similarly, much of the police and bureaucracy are highly politicised and often deliberately incapacitated. Corruption in India is often more dysfunctional, than say in the more politically centralised countries of East Asia, primarily because it is fragmented, with no encompassing centralising entity, internalising the distortions (“negative externalities”) of each act of corruption.4
The apparent lack of state capacity may be more a symptom of the underlying difficulty of organising collective action (or collectively working out a “social pact”) in India, a problem exacerbated by its large heterogeneous population, fragmented polity and extreme social and economic inequality. In such a context, commitments on the part of the state are often not credible, and anticipating that different interest and identity groups settle for short-run patronage and subsidies.
This brings me back to the main theme of difficulty of collective action empasised in the 1984 book.
Since 1984 the population has increased considerably both in size and the diversity of now-assertive groups. The polity is more fragmented (even in the most recent, unusually aggregative and presidential, national election signs of high political fragmentation remain—36 political parties with at least one seat in Parliament; the vote share of regional parties still remaining almost half, etc). While social inequality may be on a slow decline, economic inequality has almost certainly increased. Thus, by and large, the consequent problems for collective action may have become more severe, in spite of centralisation of power under the new regime.
Four Structural Issues
Let me now move to the second part of this article, by pointing briefly to at least four types of structural issues, not considered in the 1984 book, where there are significant unresolved tensions that the Indian political economy will have to grapple with in the coming years.
(a) There is a brewing “legitimisation crisis” of capitalism in India for many sections of the people on account of (1) rising inequality of wealth, (2) the flourishing of “crony” capitalism (exemplified by the so-called Gujarat model of development), (3) the displacements and dispossession of common people from their land and degradation of their environment, and (4) deterioration in the supply of basic public services (water, safety, etc) in the burgeoning cities and towns, while the rich arrange for private access to these services.
In reaction, quite often politicians try to placate the citizen with short-run populist measures. But the legitimisation issue has also induced over the last couple of decades, vigorous social movements and pressures for the recognition of various kinds of citizen rights and accountability institutions. (The Left, or whatever is left of the Left in party politics, has so far given mostly rhetorical support to these movements, without putting its organisational muscle into them.)
These movements, however, have occasionally ended up stalling industrial progress—in collaboration with judicial activism they have made mining, infrastructural and environment clearances sometimes very difficult, slowing industrial growth.
The debates all around have become polarised on this matter, and political decisions seem to lurch from one end to the other—under the United Progressive Alliance (UPA) in the early years the rights movement flourished, but in the last two years or so, under UPA as well as the National Democratic Alliance (NDA) governments, the pendulum has swung again in favour of corporate lobbies.
Since the social movements have not yet taken the form of mass political organisations, it has been relatively easy for business-friendly governments to bypass or dilute earlier welfarist legislative actions in actual implementation. To negotiate some kind of political balance in this tug of war between competing interests will be complex and time-consuming, and the Indian polity will go on vacillating on these issues. And following usual political practice, parties in opposition will agitate against policies they themselves supported while in power.
The mainly elite-led but thriving non-governmental organisations and other voluntary organisations act often as strident single-interest lobbies, making compromise difficult. In this respect they are poor substitutes for large multifarious political parties. But with the decay of inner-party democracy in all the parties, political parties no longer act as a forum for deliberation and transactional negotiations between contending interest groups within the party on controversial policy issues, where there are always trade-offs which could be negotiated.
(b) More than citizen rights and welfare, the young people who are the majority of “aspirational” India seem to be demanding jobs. Over the next decade or so this can be a major source of political turmoil, particularly because over many decades job growth in India has been very sluggish. Every month there are about a million new entries into the non-farm labour force, but outside the construction sector, the growth elasticity of job creation so far has been extremely low. Most recent economic success stories in India have been in relatively skill-intensive or capital-intensive industries (software, pharmaceuticals, vehicles, auto parts, etc).
There are several constraints on large-scale labour-intensive industrialisation in India—infrastructure, skill formation, credit, regulatory environment, contract enforcement problems, red tape and inspector raj, etc. We do not yet have good statistical decomposition exercises on the net impact of these various factors on job creation or lack of it.
The business press and some liberal economists habitually put much of the blame on trade unions, but they overlook the fact that trade unions (particularly of unskilled workers) are now substantially weaker than before, partly on account of forces of technology, and increased capital mobility both across countries and across states in India. Even in the organised sector, more than one-third of workers are now “contract labourers” without security or benefits, sometimes working side by side with regular workers.
(c) Even when jobs are created, there is a major regional discrepancy between job demand and supply, which may turn the so-called demographic dividend from large numbers of young people into a ticking time bomb in parts of the country. For demographic reasons these young people are more in the large populous states of North India (where poor governance and infrastructural deficiency limit job growth as well as delivery of welfare services). But jobs, when created, are more in states in west and south India. Interstate migration can be a partial relief but, given the staggering numbers, it cannot be a solution if one wants to avoid large costs of dislocation and nativist unrest.
The current government and the Fourteenth Finance Commission seem to be encouraging more devolution of finance and responsibility to the states. With large initial differences in state capacity and infrastructural deficit, this is likely to accentuate regional inequality and discontent. With capital being much more mobile across states than unskilled labour, many states are likely to compete in giving concessions to capital while indulging in populist measures for the poor.
(d) Tension between rentier and entrepreneurial capitalism: There are three major sources of rent: (1) Traded natural resource intensive goods (like minerals). In the last decade the mining mafia had its way, but with global recession and slowing down of the Chinese economy this source of rental income is a bit weaker now. (2) Non-traded natural resource-intensive goods and services (like land and real estate). (3) Political rent in other activities (following from collusion between politicians/bureaucrats and connected sets of favoured businessmen). Even after liberalisation, capital crucially depends on various kinds of regulatory discretion of officials as well as loans from public banks—large corporate defaulters on the latter have recently been described by the Reserve Bank of India Governor as “freeloaders.”
There is hardly any major state or political party in India which has not been corrupted by land and real estate interests. As the economy grows and land prices in a densely populated country gallop, this is unlikely to diminish in importance. (There is some evidence that land price rise in India in recent years has been one of the highest in the world Chakraborty 2013.)
Political Rents
On political rent there are, of course, built-in checks in economic competition (if scale economies are not large barriers to entry), particularly from abroad, and the political competition of democracy. Though the domestic non-traded part is large, the Indian economy is now sufficiently globally integrated for the economic check to be quite significant in many sectors. There is, however, not much evidence that the dominance of incumbent firms has declined in the Indian industrial sector even after economic liberalisation (Alfaro and Chari (2013). On political competition, the barriers to political entry are getting stiffer, as elections become inordinately expensive and all campaigning politicians are increasingly dependent on scarce, often illicit, financial and organisational resources.
The impact of rentier capitalism on politics is to encourage oligarchic forces. In US history the “robber barons” of the 19th century were partially checked by the institutions created by the politics of the “progressive era.” Much will depend on if or how a sufficient number of accountability institutions develop in India. Our elections are vigorous but our democracy is enormously flawed in terms of various kinds of accountability failures, particularly at the local level. It is this uphill democratic struggle that will shape the future of Indian political economy
