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Business News/ Opinion / Getting India back on track

Getting India back on track

Progress requires a deep commitment to restoring the centrality of markets in economic decision-making

Illustration: Jayachandran/MintPremium
Illustration: Jayachandran/Mint

The 2014 national elections will be a critical waypoint along the road to restoring India’s economic growth. One survey after another has suggested a deep yearning for change. The electorate—in both the cities and villages—seems seized by the need to return the country to high growth.

The transformations that began with the economic reforms unleashed in the 1990s have given Indians a taste of what structural change can bring to their lives. The explosion of resentment against corruption only testifies to the popular desire for better distribution of the nation’s economic gains. Such an effort will be doomed without continuing growth.

Whatever the causes of India’s economic slowdown may have been, there is a widespread conviction that the leadership failed to steer the country in a productive direction. That leads inexorably to the question of what must be done to recover momentum when the new government takes office.

This article is the first in a 10-part series, drawn from a new book prepared by the Carnegie Endowment for International Peace, which tries to answer that question. Each article will examine an aspect of the Indian economy, or of the country’s social and political system, that is of central importance to the acceleration of growth, offering policy suggestions for the next government to consider for achieving change in the short term. The common themes include the importance of strengthening key state institutions, the priority of getting the details right for the success of long-term transformation, and the need for action at the state level, given the steady shift in power away from the central government.

Above all, the series will look forward to necessary tasks that are yet to be completed. That very fact serves as a reminder of how much India’s future reforms stem from the country’s grand—but in at least one respect problematic—inheritance. This introductory essay reviews that inheritance, highlighting the entrenched challenges that the new government will face.

When India was born in 1947, many sceptics doubted that such a country—marked by crushing poverty, bewildering diversities and weak institutions—could long endure. India has proved the pessimists wrong: not only has it preserved its national unity, territorial integrity and political autonomy, but it has done so through an unprecedented experiment centred on building “a just society by just means," as Jawaharlal Nehru, its first prime minister, told André Malraux. This monumental project was erected on a distinctive triadic foundation of liberal democracy, civic nationalism and socialist economics. The three components were intended to be mutually reinforcing. Together they were meant to fulfil India’s dream of becoming a great power. Success would hinge fundamentally on the ability to produce rapid growth and meaningful development, which would eliminate mass poverty while bringing justice and dignity to India’s socially disenfranchised. But only two of the three foundations proved productive for this purpose.

Liberal Democracy, holding the country together

Liberal democracy clearly turned out to be the singular glue that protected India’s unity and territorial integrity. India’s stunning diversity would have pulled the country apart had it not been for the fact that India consciously gave itself a constitutional order that enshrined the twin components of all real democracies: contestation, or the peaceful struggle for power through an orderly process, and participation, or the right of all citizens, irrespective of wealth, gender, religion, or ethnicity, to vote.

But India went much further. The bedrock of the constitution, centred on inculcating a comprehensive respect for persons, is what makes the Indian political system not simply democratic but also irreducibly liberal, insofar as it holds that the ultimate purpose of governance must be to protect, if not enlarge, the dignity of the individual. Given India’s diversities and its social disfigurements, such a vision led ineluctably to conscious efforts at advancing a conception of secularism grounded on religious tolerance, protecting minority rights, and implementing different forms of affirmative action.

Civic nationalism’s vital success

The formal processes enabling representative rule were boosted further by India’s civic nationalism. Until the arrival of the Raj, it was questionable whether the term Indian could be used to define the people residing within the subcontinent. Despite the broad cultural unity of the region, its inhabitants invariably defined themselves by their ethnicity, religion, or political membership (as subjects of the local kingdoms in which they lived). Often they identified themselves by all three.

India’s success in building a modern state derived from its thorough insistence on institutionalizing what was Mahatma Gandhi’s greatest bequest to the freedom movement: the construction of a new Indian nation, not by suppressing its many particularities but by incorporating them into a composite identity that preserved in marble-cake fashion all its constituent diversities. The modern Indian polity, therefore, emerged not as a nation-state but rather as a nations-state.

India’s post-independence leadership eschewed parochial nationalism in favour of civic nationalism, where the rights and privileges of being Indian were conceived as arising not from some pre-existent modes of belonging—religion, race, or ethnicity—but instead from participation in a collective political endeavour.

Yet the success of Indian nationalism was not intended to be measured by the brute criterion of physical persistence alone. Whether this endurance contributed toward realizing “justice and fullness of life to every man and woman" was equally at issue. And this ambition, in turn, shaped Nehru’s conviction that India’s conquest of material poverty would not be achieved through any means other than the third leg of the foundational tripod, socialist economics.

Socialist economics, the experiment that failed

Socialism was beguilingly attractive at the time of India’s independence. The Great Depression had underscored the failures of market capitalism and the Soviet Union’s successes seemed to prove the superiority of centralized planning.

Socialism’s appeal for Nehru, however, derived from more than purely instrumental calculations. A Fabian socialist from his early years, he was deeply suspicious of the profit motive and saw an intrinsic connection between capitalism and inequality.

If the material foundations of the new Indian nation were to be rapidly rebuilt in the aftermath of independence, a socialist reorganization of the economy was thus inevitable with Nehru at the helm. Given his strong democratic temper, however, Indian socialism involved neither a violent decapitation of the capitalist classes nor a systematic nationalization of existing capital stocks. In fact, it permitted the existence of a private sector, but one that would enjoy only restricted opportunities. And, in light of the country’s desire to become a great power, Nehru’s socialism took the form of a state-dominated mixed economy oriented towards the acquisition of a heavy industrial base.

At its core lay a systematic effort at centralized planning, with vast public-sector enterprises populating the economy’s commanding heights. The endeavour unfortunately resulted in the suppression of domestic competition with all its pernicious consequences: scarcity, compromised product quality and higher prices. Moreover, India’s connectivity with international trade was curtailed. Finally, a high tax regime stifled whatever private initiative was left.

The policies were accompanied by the growth of a vast bureaucracy that quickly became corrupt and stultifying. Over time, the commitment to socialism mutated from idealism into a sclerotic instrument of power and patronage.

By 1980, the sorry results of the socialist experiment were visible for all to see. The 3% or so Hindu rate of growth chalked up between 1950 and 1980 could not transform the lives of India’s people. When measured against the economic accomplishments in the rest of the world, India’s failures were stark. But the damage was worse yet: the experiment had also undermined the other foundational pillars, liberal democracy and civic nationalism.

Going forward

The ravages of the socialist past are by now widely acknowledged, and, of course, a slow rollback of socialist policies has been underway since 1991. But the shift has been hesitant, conflicted and furtive rather than forthright and resolute. Going forward successfully will require diverse reforming actions, but above all a deep commitment to restoring the centrality of markets in economic decision-making and defending them doggedly in the face of the myriad temptations to distort them.

Reform, in fact, requires momentum along three avenues simultaneously: reducing the role of the state in areas where it lacks advantage, such as the production of private goods; increasing the state’s effectiveness through better administrative, regulatory, and adjudicative public institutions as well as more competent creation of tangible and intangible public goods; and improving the state’s capacity for rational public policies by, among other things, subjecting them to market tests.

The reform efforts unleashed immediately after 1991 represented only the initial steps in undoing socialism’s pernicious legacy. The early successes of this effort became visible during the first decade of this century, when India chalked up unprecedented rates of growth. But then came the last five years, which proved so cruel. The global financial crisis undoubtedly played a role in the country’s depressed performance. But the plain truth is that India faltered because its political leadership failed just when it was most needed. The disastrous bifurcation of power witnessed in New Delhi since 2008 created exactly the conditions that undermined the momentum for further reform.

Bringing India back to high growth will be a complex task that requires what Karl Popper once called piecemeal social engineering. The next wave of reforms pertains to liberalizing factor markets, building on the previous wave that focused on product markets. This will involve intricate technical issues, with the locus of action often shifting to the states. The beneficial effects will be realized only through aggregation and careful execution. Progress will require the kind of painstaking translation that transforms lofty concepts into sensible policies, the only thing that finally matters.

This task is now at hand. Neither India nor the world can afford to watch fortune elude New Delhi for another five years.

This is adapted from a chapter in the upcoming book Getting India Back on Track edited by Bibek Debroy, Ashley J. Tellis and Reece Trevor. It will be published in June by the Carnegie Endowment for International Peace and Random House India.

Ashley J. Tellis is a senior associate at the Carnegie Endowment for International Peace specializing in international security, defense, and Asian strategic issues.

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Updated: 16 Apr 2014, 04:47 PM IST
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