India: in search of prosperity

The state does things that it should not and does not do things that it should


To be assured of good times to come, structural and institutional changes, well beyond the current agenda of the next generation of reforms, are essential. Photo: Pradeep Gaur/Mint
To be assured of good times to come, structural and institutional changes, well beyond the current agenda of the next generation of reforms, are essential. Photo: Pradeep Gaur/Mint

I was on my way to Bhopal to deliver a lecture on “Understanding Black Money In India”. Vijay Joshi’s book India’s Long Road: The Search For Prosperity caught my attention at the airport bookstall. I bought it, and read it in one stretch. Little did I expect that on 8 November, five weeks later, Prime Minister Narendra Modi would announce demonetisation as a means of attacking black money.

My initial reaction to the announcement was that it was a historic moment, which it still is. I felt that there was bound to be a paradigm shift, which is not improbable. And I thought that the system was ripe for a change, of which I am now certain. After noticing the patience of people in undergoing the pains associated with the process, without serious protests, I am even more certain now.

But there is a big issue. While the pain is now near and clear, the gain is unclear and uncertain.

The gains, in fact, have to be immense and lasting to accord some meaning to the suffering of millions in the effort to nail the few through the process of demonetization.

Also read: Modi’s budget may soothe voters after the demonetisation shock

To be assured of good times to come, structural and institutional changes, well beyond the current agenda of the next generation of reforms, are essential. The manner in which the state functions, the behaviour of market participants and the framework of the relationship between state and market in India, need to change. And they need to change in a fundamental manner. That change should be initiated now when public opinion is demanding it and not later when entrenched interests assert themselves.

In Joshi’s book, I found a work that addressed fundamental issues relevant to black money in India. He has been researching and writing extensively on Indian policy for decades. It was of further interest to me as he had worked as adviser in the Reserve Bank of India. Joshi says, “The argument of this book is that with ‘business-as-usual’ policies, India will be hard put to achieve high-quality and enduring per capita growth of even 6% a year, let alone 8% a year, which would be necessary for it to become a prosperous nation in the next quarter century” (page 6).

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Joshi is spot on. What is wrong with what we have been doing? The state (i.e. the government) does things that it should not and does not do things that it should. Joshi is at his best in describing the disease and its symptoms. “The Indian state has systematically underestimated the prevalence and the cost of ‘government failure’. It often intervenes, arbitrarily or to correct supposed market failures, without any clear evidence that the market is failing, and so ends up damaging resource allocation and stifling business drive.... At the same time, the Indian state does not deliver in the areas that fall squarely in its province, such as administering law and order, ensuring macroeconomic stability, delivering speedy justice, making sure that public services are provided, and creating an effective and adequate safety net for poor people” (page 8).

But, what is missing in the book, at least in detail and emphasis, is the problems with the private sector. With this caveat in mind, one should have no hesitation in endorsing his inferences illustrated below.

“It follows from this sorry tale that both the state and the state-market relationship need urgent reform, which is no easy task in the context of India’s political economy, with its democratic turbulence and powerful vested interests” (page 9).

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What is the current status? Chapter 11, called “The State Of The State”, provides an excellent overview. It starts with the sentence, “States do not function in a vacuum, but in specific social and political settings” (page 217).

The critical question before us at this momentous juncture is: Has demonetisation changed the social and political setting? Does it represent more of the political awakening that Joshi refers to? If so, the institutional decay that Joshi refers to would impede the positive effect of political awakening. Joshi gives two illustrations.

“Firstly, the competence of the state has declined in relation to the increased demands on it, manifested, for example, in the dire condition of the provisioning of public goods such as education and healthcare. There is a glaring ‘administrative deficit’ which needs to be corrected. Secondly, money and crime have taken over politics to a growing extent. Corruption in public life has increased manifold; the prediction of some analysts that it would abate as a result of the 1991 reforms is now seen to be hopelessly optimistic” (page 223). Joshi adds: “Ordinary citizens find that back-handers to police and government officials are necessary to get even the simplest things done” (page 223).

Obviously, the challenge is to ensure, for example, that in government schools, teachers teach; in public hospitals, patients get treated, and common persons do not shy away from them.

Doubtless, Joshi misses some important issues. For example: How to ensure that legislators legislate and that the, judiciary focuses on and dispenses justice in a timely manner. If employees in railways, electricity and water supply follow the example of Parliament, what would be the consequences?

The concluding chapter, “What Is To Be Done? What Lies Ahead”, is a courageous attempt to define the tasks, and deserves to be debated. I agree with much of the book, though I do not share the views expressed in the two appendices, one on inflation targeting and the second on providing a basic income; but that is not relevant.

The recent developments related to demonetisation have given a special meaning and great relevance to this book by an economist who is rooted in the real world, devoting a lifetime to study the Indian economy.

Let us hope that the search for prosperity has begun, on the long road.

Y.V. Reddy is former governor of the Reserve Bank of India.

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