Wednesday, May 15, 2013

Bad Economic Stupid Politics

Indian economy is held back by licence-raj era politics that calls out for urgent reform-Economic times ---By T K Arun

By TK Arun

t is once again open season on Manmohan Singh. He presides over the most corrupt government India has seen, his inertia has infected policy with paralysis, he has no authority except to twitch as desired by puppeteer Sonia Gandhi, he loves power too much to just resign and leave if he cannot fix things. The litany is long. And perfectly wrong. 

India's current travails stem from the tension between a reformed economy and an unreformed polity. The politics of the licence-permit raj era has survived into the era of globalised growth, to become a fetter. 

The economy, as it were, had two cocoons: the direct controls that liberalisation broke and an outer one of political interaction with the economy, more like a roomy cage than a tight corset. The butterfly could spread its wings after emerging from its first cocoon, but soon found itself flapping haplessly against the steely mesh of the outer shell. The point is to recognise the reality of this shell, and not blame one individual. 

India's economic reforms began at a fortuitous conjuncture of important trends. One, capital ceased to be scarce and became globally mobile. Today, cross-border flows of capital are taken so much for granted that India's traditional dependence on an Aid India consortium put together by the World Bank to meet its annual hard currency requirement is now a faint memory. 

Two, a communications and an information technology revolution were merging — to democratise knowledge. 

Three, the Soviet Union had collapsed, to demolish the myth of noncapitalist development. This helped shift focus of policy from sham socialism to broadening the base of participation in admittedly capitalist growth. 

Four, in the World Trade Organization, large chunks of trade got an institutional framework to maintain openness. This helped India integrate into global trade on reasonably fair terms. 

And one fortuitous factor was internal to India: the demographic transition, in which the share of the working to the dependant population rises, increasing savings and raising aggregate output even without any increase in productivity. 


Globalisation means that Indian producers become part of a global division of labour to meet the world's needs and wants. This creates opportunity as well as challenges. It made India a star in IT services. But it also meant that garments sold in India could just as easily come from Bangladesh as from Tirupur. 

Indians can take advantage of the great opportunities that have opened up only if they are empowered with human capital and physical and policy infrastructure. This is where politics has failed the people. 

Indian politics has been characterised by sham democracy, the form facilely imported into the Constitution at Independence while the substance, which has to grow organically through sustained mass action against an oppressive power structure, developed in few places. Democracy has been reduced to elections, where votes are garnered through promise of sham socialism, patronage and identity-based mobilisation.

Failure to institute formal funding of politics and its obverse, realistic accounting of funding and expenditure, has made politics the surest route to riches. Misuse of the state machinery — to loot the exchequer, sell patronage and extort from the public, all to mobilise political funding and personal fortunes — has converted civil servants into corrupt collaborators, eroded accountability and savaged governance. A dysfunctional legal system does little to stop this criminal politics. 


The need to mobilise political funding through corruption means proliferation of rent-seeking opportunities. This is what keeps India low on the World Bank's ease of doing business surveys, makes coal a state monopoly so that captive mines can be allocated to those who pay up, converts PSU jobs into saleable commodities and renders theft large enough to make the power sector unviable. Corruption is systemic, not opportunistic, thanks to this manner of funding Indian democracy. 


Thanks to economic reform, some segments of the economy can flourish without state patronage. They pay bribes not to get favours but as victims of extortion. They resent such victimisation. This feeds the anti corruption movement, which has produced false prophets and some wrong-headed moves that recommend inaction as the safest policy even for honest civil servants. This leads to policy paralysis, in the absence of firm political resolve. 

Political resolve is dilute in a fragmented polity, riven by divisions arising from identity politics that mobilises people based on region, religion, caste, language and ethnicity. Some sections are alienated enough to take up arms against the state, in the jungles or as terrorists. 

The challenge is to reform politics on all these counts, not make a scapegoat out of the PM. That means reform at the level of the political party, rather than in the government.

No comments: