this fractious coalition can do a lot
May 26, 2004
Miraculously following the post-election
soap opera, the Indian polity has again confounded the
pessimists by generating a government which can be expected to
continue the reform process under the new prime minister, Dr
Manmohan Singh and the new finance minister, P Chidambram.
Given the fractious coalition to be managed, they have to
chart a tactical course through the diverse pressures they
will face, not least from the Left, which remains wedded to
antediluvian economic policies, which even the two communist
giants -- Russia and China -- have repudiated.
But the past experience of these stewards of reform in
steering past these and other sharks should help.
The auguries are favourable. But what should be their
strategic goals in whatever time is allowed them by their
Second, can coalition politics continue to lead to the
hitherto benign outcomes from the viewpoint of economic
reform? These are the questions I address.
There is widespread agreement that something must be done
about agriculture. But, apart from obvious investments in
rural infrastructure, what can be done?
The important point to note is that by 1995 the impetus to
agricultural growth from the Green Revolution had petered out.
Further intensification of agriculture through increasing
inputs of labour and capital has also reached its limits.
Similarly the irrigation potential is nearly fully utilised.
Two avenues are available for future agricultural growth:
shifting to high value crops, and the adoption of GM
The former is stalled by the various distortions that still
exist in agricultural policy, not least in terms of continuing
divergences between domestic and world prices and the
continuance of various inefficient subsidies. The lack of
adequate road, rail and air transport and refrigeration
facilities is a continuing impediment.
GM technology like the preceding bio-tech Green Revolution
will shift the agricultural production function. It is being
impeded by the Greens' agitation, including PIL cases in the
courts against Frankenstein foods.
Meanwhile, China, which has no truck with the Greens, is
happily planting GM crops, as well as setting up cutting edge
research centres in bio-technology. As this column has argued
repeatedly, the Greens are the enemies of India's rural poor,
and must be fiercely resisted.
But, ultimately the answer to rural poverty must lie in
shifting labour from agriculture into industry. This original
Nehruvian vision was sound. The means adopted -- heavy
industry biased industrialisation -- were not.
The Green Revolution gave India time to begin this process
of mass industrialisation. The removal of controls, and the
opening of the economy to global forces has given a boost, but
in itself is not enough for the massive labour intensive
industrialisation that India needs to alleviate its rural
This is a lesson China has learnt, as it faces similar
constraints on future agricultural growth. Its success in
labour intensive industrialisation, first in the southern
coastal belt, but now increasingly spreading inland, has
converted China into the workshop of the world. India , a
pioneer of industrialisation in the Third World, should hang
its head in shame.
The reasons for this difference in performance are well
known. Southern China, and increasingly the interior, has the
freest labour market in the world, with employers having
complete freedom to hire and fire, despite being ostensibly a
Foreign direct investment, instead of being subject to all
sorts of controls and limits as are still prevalent in India,
is welcomed with open arms.
Nor are there any restrictions on the growth of what began
as small village and household enterprises, as has happened
with the reservations for small scale industries in India. It
is these Indian policies concerning labour laws, FDI, and SSI
reservations -- which have hampered India from becoming the
workshop of the world.
Without their reform little can be expected to dramatically
alter the prospects of India's rural poor. Makeshift welfare
schemes -- whose good intentions are always thwarted by
massive leakages through corruption in any public delivery of
benefits -- will do little for the poor.
By making an appreciable dent on rural poverty, these are
truly the 'reforms with a human face', and the Left's
resistance to them must be faced down.
The strategic goal of privatisation should also be clear:
to get the state out of areas in which it has no business.
This is required both for efficiency, and to eliminate the
"rents" corrupting the polity. The fiscal gains are
less important. Tactically it maybe prudent to begin by
divesting loss making PSUs, but the strategic goal should not
Similarly, given the manifest failure of the Indian state
in providing the basic merit goods of education and health, an
increase in public spending is unlikely to make any
improvement in the educational and health status of the poor.
As the PROBE team documented, most of the poor now
increasingly rely on private provision of education. One
possible reform is to give the public funds available for both
education and health in rural areas to the panchayats, who can
use them to hire private teachers and doctors who would be
accountable to the consumers of these services.
This would be one important way in which the classical
liberal principle, upheld by all classical economists
including Karl Marx (see his Critique of the Gotha Program),
that the state should finance but not produce these
merit goods could be implemented.
Thus much can be done even within this fractious coalition.
But, can India count on its luck in its coalition governments,
when their survival depends on partners with their own often
predatory and certainly local and regional agendas.
In an excellent book Rob Jenkins (Democratic Politics
and Economic Reform in India, Cambridge, 1999) documents
how the political players at the Centre used both a
rearrangement of the previous spoils system, and the various
conflicts of interest within the numerous rent seekers, to
both institute and consolidate economic reforms in the 1990s.
Will this continue? The examples of the French Fourth
Republic, and post-war Italy, with their continual shuffling
of transitory coalitions, does not afford much comfort. If the
state were not economically dominant, such shifting political
fortunes would not be of much economic import -- as is the
case in Italy.
But with a powerful predatory state in place in India, the
shortening of the time horizon of any incumbent coalition
government would provide an incentive for the temporary
custodians of the state to loot as much as in short a time as
possible -- as has happened in many parts of Africa and Latin
America. India is not any where near such dire straits at
present, but this outcome cannot be discounted.
Since 1999, the two national parties have jointly polled
about 50 per cent of the vote. The remainder has gone to
various regional parties.
As in a proportional representation system, the smallest
partner can name its price for supporting the national party
forming the winning coalition. This subverts the principle of
majority rule of the first past the post democratic system
that India adopted in its constitution.
It also leads to political instability, and the shortening
of the time horizon of politicians with the resulting
incentives to loot. So far, the two national parties have been
led by a political elite which is by and large motivated by
old fashioned notions of public service. But can this last?
An alternative, touted by Indira Gandhi, was a presidential
system modelled on the Fifth French Republic. But, this would
be dangerous. The habitual adherence to a constitution takes
time, and if it is continually changed in fundamental ways,
the very belief in constitutional government can be eroded.
India's respect for the constitution and the democracy it
underpins has now become deep seated. To seek to replace it
with a presidential system could undermine faith in
constitutional government itself. There is another alternative
within the existing constitutional framework.
It would be to strengthen the incentives to politicians to
join a national party, by only allowing parties
fielding candidates in all Lok Sabha constituencies to contest
the national elections.
This might concentrate the mind of the electorate in basing
their choices for the Lok Sabha on national rather than
regional or local issues.
Meanwhile, we can only keep our fingers crossed and hope
that Dr Manmohan Singh can survive for the full term, on the
bed of nails on which he has been thrust, to deliver the next
stage of badly needed economic reforms.