Bimal Jalan at IIM-A on the inter-relationships between economics, politics and governance in India’s national life
Economics, Politics And Governance
The problem with the Indian economy is not that its market is less or more free, but that its freedom is in the wrong domains
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To illustrate the point, I refer to the Mahalanobis-Nehru development strategy, which dominated our post-independence economic policies for close to 40 years. Several of these policies have undergone a drastic change after 1991. However, it is striking that despite many problems and tribulations, the basic framework of economic policies introduced soon after independence remained intact for four decades and more.
The basic elements of the post-independence economic strategy are too well known to need repetition. The Indian nationalist movement had given very high priority to making India economically independent — in addition to political independence — through aggressive import substitution and reduction in India’s dependence on foreign trade and foreign investment. Also, based on the Soviet experience, it was believed that economic independence and high domestic savings could be achieved only if the “commanding heights” of the economy were in the hands of the public sector. It was assumed that if the means of production were owned by the State, all the value-added in production will flow to the people. Further, if consumption was disco-uraged, public savings would automatically increase. These could then be used for further investment and growth, and India could soon catch up with the developed world.
This was a most heart-warming economic vision, supported by leading economists of the day and widely respected academic models of savings, investment, and growth. Unfortunately, it paid scant regard to the political and administrative implicat-ions of the favoured strategy. The political assumption was that the representatives of the people would selflessly promote the greatest good of the greatest number. In public enterprises, in the absence of private capitalists, labour and management were expected to work together in harmony without political interference, in line with national priorities as laid down by the planners.
Another important assumption was that India was one, and, as was the case during the struggle for political independence, all citizens would work selflessly without sectional interests to achieve the country’s economic objectives.
The reality has proved to be vastly different. The political decision-making on economic issues in our country, as indeed in most democracies, is often driven by special interests rather than the common interests of the general public. These special interests are also more diverse in India than in other more developed and mature economies. Thus, there are special regional interests, not only among states, but also within states, depending on the electoral strength of the party in power in different parts of the state. Economic policy-making at the political level is further affected by occupational divide (eg, farm vs non-farm), the size of enterprise (eg, large vs small), caste, religion, political affiliations of trade unions, or asset class of power-wielders, and other divisive factors. As a result, most of the economic benefits of specific government decisions are likely to flow to a special interest group or, in Mancur Olson’s famous phrase, to “distributional coa-litions.” These coalitions are always more interested in influencing the distribution of wealth and income in their favour, rather than in the generation of additional output which has to be shared with the rest of society.
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