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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It must be said to the credit of our planners that the Second Plan did ask itself the question whether the civil service would prove equal to the tasks assigned to it by the Plan. The Third Plan, too, explicitly recognised that the administrative machinery had become strained and the available personnel to implement the plan were not adequate in quality and number. The subsequent Plans, particularly the Seventh Plan, sounded a note of desperation about widespread administrative inefficiencies and bottlenecks that were slowing down the economy. However, this desperation was not reflected in actual planning. We went on adding newer, larger and more comprehensive schemes to tackle national problems in virtually every walk of life, calling for greater and greater administrative involvement.

In fact, as perceived needs and requirements of the economy became greater and resources shrank, the administrative process became even more complex, requiring more people to perform the same task. As a result, there are more people employed by government in what statisticians euphemistically call “community and personal services” than in the public sector manufacturing enterprises or the private organised sector! To bring about this sort of result, some kind of an “invisible” dominant coalition has certainly been at work. One has to recall the functioning of the exchange control system in the past to appreciate how far removed policy planning was from administrative realities. Or, take the urban ceiling laws, which were supposed to free excess or surplus land for public housing and other uses. Even after 30 years, hardly anything has been acquired, and these laws, instead of increasing the supply of affordable housing, have simply frozen the availability.

It is not that the problems were not understood or that the people who ran the system were ill-motivated. It is an un-fortunate fact of administrative and political life that sys- tems and programmes, once introduced, acquire a momentum of their own because of the benefits that they provide to some sections of the people. When implementation problems occur, inefficiencies are identified, or misuses are detected, the response normally is to add one more level to the administrative chain.

More than 40 years ago, a well-known economist A H Hanson, a sympathetic observer of the Indian scene, felt compelled to ask this question: “Men are able, the organisation is adequate, the procedures are intelligently devised. Why then have the Plans since 1956 so persistently run into crisis?” This question was asked in 1963. Many of us are probably still asking the same question. Hanson’s answer to his own question is also of some interest. In his view, the real problem was not with the theory of planning or the people who were making the plans, but with the unrealistic assumptions about the way people and societies were likely to respond. Too many of the government’s assumptions about economic behaviour were simply unrealistic and differed from the way in which people acted in their own or in their groups’ interests.

The IIM fee issue also vividly illustrates the interplay of these three elements — economics, politics and govern-ance. From a purely economic point of view, the critical issue is not the fees the IIMs charge, but the entry policy and the cost per student. If the entry is competitive and a particular level of cost, after due scrutiny, is found to be justified, then any teaching institution — through pricing, endowment, subsidy or a combination of these — has to recover the cost. Otherwise, it will either go out of business or the quality of its output will deteriorate. Now, let us assume that the government, in its wisdom, decides to further subsidise and reduce the fees that a particular institution charges to cover its costs. Then the economic issue from the public policy point of view is: Why this larger subsidy from public funds, and for whose benefit?

This is where political considerations come in. It is al-ways a popular move to say that no one, irrespective of income, should have to pay for use of water, electricity, food, education, including higher education. However, no government can subsidise everyone and everything. There- fore, the political leadership has to choose among various kinds of subsidies and target groups. If the government decides to subsidise specialised technical or management education by more than what is necessary from the public interest point of view, it is legitimate for the public to ask: Why should the government increase subsidy even for those who can pay? In the parlance of public choice theory, an across-the-board subsidy, irrespective of the need for it, leads to “perverse equity.” In-stead of making government expenditure more equitable for society as a whole, an across-the-board subsidy of this type makes the system more inequitable and less progressive.

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