Resurgent India: Politics, Economics and Governance

PREFACE

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ESURGENT INDIA IS THE sequel to an earlier book, Emerging India: Economics, Politics and Reforms, published in 2012. Emerging India comprised a collection of essays written over several years (1974–2011). The essays were divided into four sections and covered topics ranging from money, finance and banking to politics and policies for economic reforms. Resurgent India is an attempt to look ahead and analyse what more needs to be done, in light of the significant advances made with respect to politics and governance in India, which is now among the fastest-growing developing countries in the global economy.

While deciding on the content and structure of the book, I was principally guided by two considerations. The first was to cover various subject areas that may be of interest to the general reader, in addition to policymakers and professional experts. The second was to try and make this volume relevant to the contemporary and ongoing debate on India’s approach to its economy and political reforms in the twenty-first century. Since 2014, the political profile of the government, with a single-majority party in Parliament, has changed dramatically, and I hope that the new government, elected in 2019 with a full majority, will be in a position to launch political reforms to reduce the discretionary powers of members belonging to different ruling parties. This book identifies some important priorities that can be implemented by the government in power post the 2019 elections. The primary focus is on promoting India’s national interests, irrespective of a particular party’s specific political agenda, either on the right or the left wing (or a mix of both).

Resurgent India could not have been written without the support of Krishan Chopra, Publisher—Non-fiction and Business, HarperCollins. He was always available for informal meetings to collaborate on the contents of the book and to give advice on the possible policy direction that India could take regarding politics, economics and governance to realize its full potential as one of the fastest-growing nations. I am particularly grateful to Satish Choudhary for his meticulous work in preparing the manuscript for publication and to K.D. Sharma for his organizational and other help.

INTRODUCTION

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ESURGENT India: Politics, Economics and Governance seeks to give an overarching picture of possible change in India. Hence, it is divided into four sections: ‘Political Context’, ‘India’s Economy and Prospects’, ‘Money, Banking and Finance’ and ‘Governance and Reforms’. In each section, there are four interconnected chapters.

The first section, ‘Political Context’, highlights the strengths of India’s democracy along with some issues that need to be addressed by the government to improve governance, reduce friction between the various agencies of state and eliminate political opportunism. Without doubt, India’s democratic politics has some highly positive and admirable features. Irrespective of caste, creed, religion, income bracket or personal well-being, the people of India enjoy all basic human freedoms as a matter of right. Elections to local bodies, state legislatures and Parliament are, broadly speaking, also free and fair. Governments have to seek periodic mandates from the people and, if voted out, they peacefully yield their place to new governments, which may have similar or radically different agendas. However, in recent years, there has been increasing politicization in the functioning of all branches of government. There is little accountability or autonomy in the various institutions set up under the Constitution to ensure equality, social justice and liberty. Thus, in the executive branch, though the entry into the civil services is still largely immune from political pressures, the functioning of the bureaucracy has become politicized. Entry into parastatal organizations is also becoming subject to political pressure because of the ability of ministers to create jobs and start projects, irrespective of their viability or need.

The functioning of India’s democracy from Independence until 2014 can be divided into four distinct phases. The first fifteen years, up to 1962, generally yielded positive results in strengthening democratic political institutions and generating faster economic growth. The second phase, up to 1979, was volatile in the political sphere, and saw a suspension of democracy followed by a strengthening of democratic political processes. Except for some years of high growth during this period, the Indian economy was mostly in the doldrums, ranging between 3 and 3.5 per cent and facing frequent balance-of-payments crises. The third phase, up to 1989, bolstered the country’s democracy as well as its economy. The fourth phase, from 1989 to 2014, saw the emergence of a totally new scenario of coalition politics involving parties with different ideologies. This period was marked by political instability and uncertainty, which had major repercussions on the functioning of public institutions. Since 2014, uncertainty about the stability of the government has practically disappeared, and the government has been in a position to take any measures that it considers desirable to improve the functioning of India’s political system over the long term and minimize the divisive powers of multiple small parties.

The doctrine of ‘Separation of Powers’ is acknowledged as an integral part of the basic features of our Constitution. It is also commonly agreed that all three organs of the state, i.e., the legislature, the judiciary and the executive, are bound by and subject to the provisions of the Constitution, which demarcates their respective powers, jurisdictions, responsibilities and relationships with one another. It is assumed that none of the organs of the state, including the judiciary, will exceed its powers as laid down in the Constitution. It is also expected that in the overall interest of the country, even though their jurisdictions are clearly demarcated, all the institutions would work in harmony and in tandem to maximize public good.

However, over time, there have been conflicts between these three organs of the state, particularly when a majority-party government is in power. As far as the functioning of Parliament is concerned, in the last few years, the government in power has been deciding the length and timing of parliamentary sessions as well as legislative measures, which Parliament needs to approve, with or without consensus among different parties. In case of a prolonged dissension between the major parties within Parliament, the executive is also empowered to end the session earlier than announced, and then introduce urgent legislative measures through ordinances if it so wishes. In 2017–18, as is well known, there was some discord among judges about the functioning of the Supreme Court benches and assignment of cases under consideration. Looking ahead, it is not yet certain as to how the doctrine of Separation of Powers and the constitutional boundaries between the three organs of the state would evolve.

The enormous discretionary powers available to politicians at different levels of society have also had several unintended consequences, including diversion of fiscal resources for the benefit of the better-off sections of society at the expense of the poor, uneconomical selection of projects, increase in bureaucratic complexity and criminalization of politics. These adverse economic, developmental and social effects of enormous political power, in an environment of fiscal stringency, judicial delays and administrative apathy, are not widely appreciated.

‘Political Opportunism’ is a euphemistic phrase, commonly used in the literature of behavioural economics to describe the bias among elected representatives at different levels to divert resources under a particular government programme to their own villages, constituencies or states. Generally, such political opportunism is regarded as a legitimate exercise of power in the interest of selected groups of constituents. Thus, it is quite common for the leaders of parties, when in power, to ensure that disproportionate benefits under various government programmes flow to their own electoral constituencies. As a consequence, a strong vested interest develops among residents to re-elect their leaders. Leaders of state parties have the same preferences and derive the same benefits in terms of periodic re-elections. Interestingly, there is a tacit understanding among leaders of political parties, be they in power or in the opposition, that their constituencies and interests would receive preferential treatment in the allocation of governmental resources.

The second section, ‘India’s Economy and Prospects’, deals with some economic issues that need to be tackled to improve India’s prospects in terms of growth, as well as poverty alleviation over the long term, perhaps by 2025. Fortunately, there are very few developing countries that are as well placed in the twenty-first century as India to take advantage of the phenomenal changes that have occurred in production technologies, international trade, and movement and deployment of skilled manpower. The shift in India’s comparative advantage has substantial implications for its growth potential. The growth of national income is now considerably higher (over 7 to 8 per cent per annum) than the historical average of only about 3.5 per cent per annum for as long as forty years after Independence. If the recent growth performance of the Indian economy can be further accelerated and sustained at a level of, say, 8 to 9 per cent per annum over the next twenty-five years, extreme poverty in India can be virtually eliminated.

Among the significant areas of India’s economic strength are the emergence of a strong and diversified industrial sector, self-sufficiency in food, growth of indigenous technological capability in several core areas and a steady growth of higher education, which has helped create a large pool of technical talent. The country has a fairly developed institutional infrastructure in financial, legal and corporate governance, which is essential for the market growth. On the productivity front too, there has been evidence of significant improvements in recent years. India’s competitiveness score, as revealed in the Global Competitiveness Index for 2017–18, also remains high. India ranked forty among the 137 economies included in the index, one of the highest among all developing countries. Investor perception regarding growth prospects of the Indian economy also remains strong, which is a positive indication of long-term investment prospects.

In order to achieve its high economic potential, India needs to move on a number of fronts. Legal reforms should focus sharply on the interests of the public, as against those of the public servants and in the functioning of the governmental and public delivery systems. All public monopolies should be eliminated and there should be no purchase preferences for public sector enterprises or agencies. The government should be free to engage the services of non-governmental organizations or private service providers at competitive costs to ensure effective delivery of essential services. There should be full disclosure of all financial decisions made by governments and its multifarious agencies on a daily rather than quarterly or annual basis. India needs a new ‘political–bureaucratic’ compact based on well-defined divisions of responsibility and accountability. There is also an urgent need for fiscal empowerment at the state and local levels, since without financial resources, it is not feasible to lay a road or build a school.

As is well known, India’s nationalist leaders also recognized the importance of science and technology in development as early as 1939, when a National Planning Committee was constituted under the chairmanship of Jawaharlal Nehru. India was perhaps one of the first countries in the world to create a separate ministry of scientific research and natural resources in 1951 for organizing and directing scientific research for national development. Successive governments since then have also emphasized the role of science and technology in the development process and recommended the adoption of a multi-faceted approach.

Since Independence, India has come a long way in its quest for scientific pursuit, both in material and intellectual spheres. The winds of change currently blowing through technologies globally have changed the scenario a great deal. They have posed new challenges and opened fresh opportunities. There is still much to be done in the policy and legal spheres in India but the directional indications are right. In a liberal global environment, India is fortunate in having the talent, skills and resources to be at the forefront of the technological revolution taking place in new sectors of growth. In future, researchers in the scientific, industrial and financial communities, with the support of the government, must make it possible for India to capitalize on the opportunities that lie ahead.

The third section, ‘Money, Banking and Finance’, deals with India’s record in the development of the financial sector and certain operational issues relating to banking, capital flows and management of exchange rates. The significance of the financial system for an economy arises from at least three major sources: first, it performs various transformational functions relating to intermediation of funds in the economy; second, it reflects the underlying real economy and the basic macroeconomic balances; and third, it is one industry whose basis of operation is underpinned by public trust. The strength of the bond between the banking system and the people in general depends on how the financial viability of the banking system is perceived. The organization and conduct of the financial markets should be such that they reflect the underlying fundamentals of the economy. The financial system as a whole must remain sound and stable in order to enjoy a high level of public confidence.

First and foremost, it is necessary to continue with the process of strengthening India’s prudential provisioning and capitalization norms and align them with the best of international standards. It is equally important to continue with efforts to introduce maximum transparency, disclosure and accountability, so that investors and counterparties to financial transactions can make their decisions based on full and complete information and their own assessment of market (and other) risks. Given the new international focus, and externalities and linkages involved, the regulation of the financial sector is no longer a matter of choice or of domestic concern alone. Financial reforms and the liberalization of markets are, of course, only the means to an end, not ends in themselves. The final objective of a successful development strategy remains what it has always been: a sustained and rising income for all the people and the eradication of poverty, deprivation and illiteracy within a reasonable period.

An important issue that has emerged in recent years regarding the functioning of India’s banking system is the emergence of high volumes of non-performing assets (NPAs), particularly in the public sector banks, which have a high share of total household savings and credit delivery. Studies on high NPAs in the banking system in India suggest that a sizeable overhang component arising from infirmities in the existing processes of debt recovery, inadequate legal provisions on foreclosure and bankruptcy, and difficulties in the execution of court decrees. Owing to their deteriorating finances, the Reserve Bank of India (RBI) has placed several public sector banks under the prompt corrective action (PCA) framework. The thrust of the PCA framework is to prevent further capital erosion and nurse the banks back to health. It is expected that if corrective action is taken promptly and well, it will not only improve the financial performance of the banking sector but also reduce operational risks.

With respect to capital flows, from the policy point of view, over the long run, while foreign capital inflows should continue without any restrictions, excessive reliance on such flows for investments and equity market developments should be avoided. As is clear from the experience of several countries in Latin America, Africa and even Europe, any unexpected and negative development in the domestic economy, in view of change in government or external environment can create panic and undermine investor confidence in foreign exchange markets. This was dramatically illustrated by one of the worst crises that erupted in Mexico in the 1990s and the somewhat less severe crises in several other countries in recent years.

In India, a frequently discussed question relates to capital account convertibility (CAC), more specifically, when is India going to move to full CAC? A whole host of capital account transactions have been liberalized and deregulated. It is probably fair to say that for most transactions needed for business or personal convenience, the rupee is, for all practical purposes, convertible. In cases where specific permission is required for transactions above a high monetary ceiling, this permission is also generally forthcoming. It is also the declared policy of the government and the RBI to continue with this process of liberalization.

On exchange rates, India has ‘managed’ floating with no fixed rate target. Daily movements in the exchange rate of the rupee are closely watched by the RBI. The declared policy of the apex bank is to meet temporary demand–supply imbalances, which arise from time to time.

The last section, ‘Governance and Reforms’, highlights some critical issues with respect to the administrative system, social sectors, corruption and reform of politics in resurgent India. Some of these have also been briefly discussed in other sections; the objective here is to lay down a programme of action which can be implemented in a relatively short period by the government formed in 2019.

In the next few years, an important challenge before the government will be to redefine its administrative role. At the macroeconomic level, the political (i.e., ministerial) role of the government should be to ensure a stable and competitive environment with a strong external sector and a transparent domestic administrative system. While the macroeconomic priorities (for example, the so-called trade-off between growth and inflation) may be decided by the government, the instrumentalities for achieving these objectives must be left to autonomous regulatory and promotional agencies. Similarly, the government’s direct role in economic areas should be reset, in favour of ensuring availability of public goods (such as roads and water) and essential services (such as health and education) to the people. In these areas, the government’s role must expand substantially. At the same time, its role in managing commercial enterprises deserves to be correspondingly reduced.

It is also necessary to further simplify administrative procedures and reduce the number of agencies at various levels, especially those involved in providing clearances for undertaking any activity. For example, at least thirty different clearances, involving several agencies at the