A liberal India: The Triumph of Hope over Experience

Asian Survey

Volumn 38, Issue 5, 1998, Pages 510-533

  Root, Hilton L ^a  

^a STANFORD UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ECONOMIC REFORM; LIBERALISATION; POLITICAL ECONOMY;

INDIA;

EID: 0031668359     PISSN: 00044687     EISSN: None     Source Type: Journal    
DOI: 10.2307/2645506     Document Type: Review

References (50)

1. Far Eastern Economic Review, August 21, 1997, p. 42.
2. Completed reforms include an initial devaluation of the rupee and subsequent market determination of the exchange rate; abolition of import licensing with the important exceptions of restrictions on imports of manufactured consumer goods and on foreign trade in agriculture; convertibility (with some notable exceptions) of the rupee on the current account; reduction in the number of tariff lines as well as tariff rates; reduction in excise duties on a number of commodities. For a detailed account, see T. N. Srinivasan, "Indian Economic Reforms: Background, Rationale, Achievements, and Future Prospects," in India's New Economic Policy: Liberalization and Regionalization, ed. George Rosen (Greenwich, Conn.: JAI Press, 1996), pp. 14-15.
3. The long list of needed reforms includes amending the labor laws, closing the 58 public sector enterprises that are chronically ill and trimming the rest, closing loss-making bank branches, privatizing the insurance sector, reducing the number of public sector employees, increasing oil prices, imposing user fees for public utilities, and allowing 100% foreign ownership of business ventures.
4. Populist pressures derailed the reforms attempted by Rajiv Gandhi in 1985 after only six months. The party could not find support to liberalize. Gandhi concluded that a new moral center was needed; trust was absent. While giving a speech celebrating the 100th anniversary of the Congress Party, he bluntly asserted that "millions of ordinary Congress workers are handicapped, for on their backs ride the brokers of power and influence who dispense patronage to convert a mass movement into a feudal oligarchy. Corruption is not only tolerated, but [is] regarded as a hallmark of leadership." Atul Kohli, Democracy and Discontent: India's Growing Crisis of Governability (Cambridge: Cambridge University Press, 1990), p. 5. It is widely acknowledged that corruption is worse now than when Gandhi made this statement.
5. The Civil Service Commission is a statutory-constitutional body; however, lines of authority do end in the hands of the politicians. The commission reports to the prime minister and presents an annual report to Parliament. The prime minister appoints the commission and can appoint people it controls. Guarantees of autonomy are weaker than in the United States; parliamentary hearings to oversee appointments do not exist in India. Provincial civil service commissions operate in a similar manner. When different parties exist between the state and center, problems will develop as central government can tell local seekers that there are no postings available.
6. Although the civil service is grounded in the Constitution, accountability is ultimately to the politicians. The prime minister appoints the commissioner without the constraint of congressional hearings as in the U.S. system.
7. Each state has its own administrative cadré that can bid on posts that exist in any region within the state. Some of the states are larger than most countries.
8. Police stations are repeatedly auctioned; officers of rank base their bid for the rights on the post's corruption prospects. As a result, honest officers have limited hopes of rising to the top.
9. Not all posts are for sale and not all careers are made through graft. Many situations exist in which the bidding is based on technical competence, making it possible for highly motivated and competent individuals to rise in the system and serve at the highest levels. They too must labor with the overall breakdown of integrity and perhaps ultimately can be counted on to support reform from inside.
10. In the early 1980s, transfer policies laid down norms calling for postings of three years, but numerous independent studies reveal that this has not been followed. One study shows that 80% of IAS officers held posts for less than two years, and a majority stayed for less than one year; only 20% stayed for two or more years. See David C. Potter, India's Political Administrators, 1919-1983 (Oxford: Clarendon Press, 1986), p. 218.
11. The transferring authority is accountable for transfer decisions only to the immediate officer; no justification for one assignment rather than another need be given to anyone else. Who the transfer officer is depends on the rank of the transferee and on the distance of transfer. Procedures do not exist by which individuals are entitled to be consulted or even to express their preferences. No reasons need be given and no appeal procedure is available. Roben Wade, "The Market for Public Office: Why the Indian State Is Not Better at Development," World Development 13:4 (April 1985), pp. 467-97.
12. Ibid., p. 485. Canal managers are under pressure to behave almost exactly contrary to the ostensible objectives of their job: instead of reducing water uncertainty, they artificially increase it if they wish to maximize bribe revenue; instead of maintaining the canals in good condition, they leave large stretches of canal unmaintained to save maintenance funds for other uses. Similarly, agricultural officers are under pressure, if they wish to have congenial postings, to adulterate the special inputs they are in charge of so as to sell the balance on the black market and to approve the substandard seeds or fertilizers of private dealers.
13. Government of India, Report of the Committee on Prevention of Corruption (New Delhi: Government of India, Ministry of Home Affairs, 1964).
14. Voting in India does not seem to reflect awareness of major issues and/or the intention to maintain or change specific policies - that is, contrary to the description sometimes made of voters in America, Indian voters do not vote in expectation of certain policy outcomes. See Ralph C. Meyer, "How Do Indians Vote?" Asian Survey 29:12 (December 1989), p. 1121.
15. Because the Congress Party controlled much of that sprawling governmental structure, the party elite could readily channel those economic resources to build and sustain political support. The economic development implications of using scarce economic resources for political ends or, for that matter, of adapting to local power structures and thus foregoing any reforms that might adversely affect the influential "big men" probably were negative. Nevertheless, those strategies were political in motivation and, when judged by political criteria, quite successful. They helped Congress build and sustain a sprawling network of supporters across India (Kohli, Democracy and Discontent, p. 186).
16. Lloyd Rudolph and Susanne Rudolph, In Pursuit of Lakshmi: The Political Economy of the Indian State (Chicago: University of Chicago Press, 1987).
17. "Since 1951 India has had several hundred political parties; more than 130 parties contested the 1998 Lok Sabha elections alone and 38 of these won seats in the 545-seat Parliament. Most of these parties have grown out of the will of a handful of people with only a local base. Others were confined to a linguistic region and only a few were organized across state boundaries. There have been thousands of individual defections, dozens of party splits and mergers, and frequent electoral alliances" (Ralph Meyer, "How Do Indians Vote?" p. 1113). Discontented castes or factions are often geographically confined, making it difficult for opposition parties to unify a broad coalition of discontent. Congress deals with discontent on a piecemeal basis; although it opposes casteism and communalism, its local calculations usually employ ethnic arithmetic.
18. The economic data are in Jagdish Bhagwati, India in Transition: Freeing the Economy (Oxford: Clarendon Press, 1993), pp. 6, 63-66. Public sector industry has absorbed 55% of the planned investment and controls 70% of fixed assets. The share of the public sector has increased from 10% of the gross domestic product in 1960 to 15% in 1970 to 21% in 1980. (The Economist [London], January 8, 1983, p. 64, cited in Kochanek 1987, p. 1281).
19. The economic data are in Jagdish Bhagwati, India in Transition: Freeing the Economy (Oxford: Clarendon Press, 1993), pp. 6, 63-66. Public sector industry has absorbed 55% of the planned investment and controls 70% of fixed assets. The share of the public sector has increased from 10% of the gross domestic product in 1960 to 15% in 1970 to 21% in 1980. (The Economist [London], January 8, 1983, p. 64, cited in Kochanek 1987, p. 1281).
20. The economic data are in Jagdish Bhagwati, India in Transition: Freeing the Economy (Oxford: Clarendon Press, 1993), pp. 6, 63-66. Public sector industry has absorbed 55% of the planned investment and controls 70% of fixed assets. The share of the public sector has increased from 10% of the gross domestic product in 1960 to 15% in 1970 to 21% in 1980. (The Economist [London], January 8, 1983, p. 64, cited in Kochanek 1987, p. 1281).
21. Bruce Bueno de Mesquita provides evidence that India did not progress under Congress rule from being an "uneasy amalgamation of interests" to becoming a "politically integrated nation." See his "Redistricting and Political Integration in India," Comparative Political Studies 11:2 (July 1978), p. 279. One reason that the Congress Party failed "in its efforts to integrate India's population into a single political framework" (p. 287) was its reliance on locally based patronage networks. See also Pranab Bardhan, The Political Economy of Development in India (Oxford: Basil Blackwell, 1984).
22. Bruce Bueno de Mesquita provides evidence that India did not progress under Congress rule from being an "uneasy amalgamation of interests" to becoming a "politically integrated nation." See his "Redistricting and Political Integration in India," Comparative Political Studies 11:2 (July 1978), p. 279. One reason that the Congress Party failed "in its efforts to integrate India's population into a single political framework" (p. 287) was its reliance on locally based patronage networks. See also Pranab Bardhan, The Political Economy of Development in India (Oxford: Basil Blackwell, 1984).
23. Hamish McDonald, "Demolitions Zealot: K. J. Alphons," Far Eastern Economic Review, May 4, 1995, p. 78.
24. According to Myron Weiner: "The local Congress party aids its membership and its supporters in the countryside in their efforts to influence tax enforcement, to get the necessary permits for the purchase of cement, fertilizers, and other commodities, and to influence local administration in its appointment and myriad other activities" (Weiner, Party Building in a New Nation, p. 464).
25. Hans Schenck, "Corruption . . . What Corruption? Notes on Bribery and Dependency in Urban India," in Corruption, Development and Inequality, ed. Peter M. Ward (London: Routledge, 1986), p. 117.
26. The Santhanam Report in 1964 confirmed this observation. See Government of India, Report of the Committee on Prevention of Corruption.
27. Indira Gandhi gave her justification on November 16, 1969, when she publicly criticized the civil bureaucracy as the "stumbling block" in the way of the country's progress. See Chandra Prakash Bhambhri, Administrators in a Changing Society (Delhi: National Publishing House, 1972), p. 23. At the time, the idea was widely expressed by Congress leadership that the Indian Administrative Service (IAS) with its orthodox and conservative leadership and upper-class prejudices would not promote social and economic change along socialist lines. An administrative cadré "committed" to the cause was urgently requested.
28. Mrs. Gandhi attempted to strengthen her position by undermining the security and durability of chief ministers. She promoted factionalism in the Congress-ruled states to make herself indispensable as mediator. She allowed no state chief minister to develop a local power base. The overall cohesion and stability of the party were weakened as she catapulted chief ministers who enjoyed a limited local power base into national politics. Some of her ministers were not even members of the state legislatures they were requested to pilot. She kept chief ministers in constant flux to make sure that none could dispense with her patronage. Factional leaders were given preference over those chief ministers who seemed secure on their own. The result was loyalty to the leader at the expense of party coherence. The same logic of patronage pervaded the entire system of administration. Loyalty to the leader overrode all other principles of management (Bhagwan D. Dua, "Federalism or Patrimonialism: The Making and Unmaking of Chief Ministers in India," Asian Survey, 25:8 [August 1985], pp. 793-804).
29. By changing the system of accountability, one can change the outcomes. In Kerala, pay and supervision are overseen by village legal institutions rather than by the states. Literacy rates are significantly above national averages as one generation of literate villagers demands the same opportunities for its children.
30. Lower-court judges, prosecutors, and police are widely suspected of corruption, and in the higher courts legal delays are endemic. Even if the Supreme Court ensures prosecution, it could take decades and achieve little, so that probity even where it tends to be concentrated rarely provides results.
31. All major banks and insurance companies were nationalized in 1969, and these accounted for more than 90% of the financial sector's assets by the early 1990s. Although the public sector banks have succeeded in mobilizing savings, extending banking to rural areas, and directing credit to "priority" sectors, the subsidies and defaults are now so common that the policy of subsidized and directed credit has become unsustainable. The net worth of the banking sector has been eroded. See Srinivasan, "Indian Economic Reforms."
32. Based on a survey of 2,000 business executives from 49 countries. Sunil Jain, "Shame and Scandal," India Today (November 30, 1996), p. 97.
33. J. Edgardo Campos and Hilton L. Root, The Key to the East Asian Miracle: Making Shared Growth Credible (Washington, D.C.: Brookings Institution, 1996). A corporatist agreement raised the cost to government of predictable changes to future policies.
34. Atul Kohli, Democracy and Discontent, pp. 325-26.
35. Stanley A. Kochanek, "Briefcase Politics in India: The Congress Party and the Business Elite," Asian Survey 27:12 (December 1987), p. 1283.
36. Observation of China's rapid growth converted the Indian planning commission to the advantages of openness.
37. Even India's largest private conglomeration has faced the threat of public bashing. Indira Gandhi's George Fernandez, a prominent labor leader and Minister of Industry, threatened to break up the big private holdings, such as the Birlas, and talked of nationalizing India's most succesful steel firm, Tata Iron and Steel Company (TISCO). John Waterbury, Exposed to Innumerable Delusions: Public Enterprise and State Power in Egypt, India, Mexico, and Turkey (Cambridge: Cambridge University Press, 1993), p. 58.
38. One problem doing business with goverment-owned entities is that seem more solvent than in fact they are. Major discrepancies are known to arise in the accounts of public sector firms that are notorious for being able to avoid the annual scrunity of auditors; however, deregulation compels government firms to show a profit. India's central bank, the Reserve Bank of India, has been ineffectual in monitoring the activities of the banks under its supervision. The inspectors are highly competent, but their reports are submitted to a superior who is not subjected to outside accountability. Sensitive information can often be withheld since everything is secret. Often the directors of the central bank have conflicting interests, as they also serve as directors of the private banks they oversee. All this means that firms never know where they stand when they deal with the government. "False Profits," Grant's Asia Observer (October 14, 1996), p. 9.
39. Government can randomly change prices of price-controlled products to penalize or favor particular interests. For example, in 1989, a private firm that had just completed a new Vitamin C production line became obsolete when the government cut the vitamin's price.
40. Stanley A. Kochanek, "Briefcase Politics in India," pp. 1290-92.
41. Laws protecting shareholders of Indian companies lack teeth. Regulatory bodies rarely play the role of watchdogs. The staff of the Securities and Exchange Commission is inadequate and under-trained. Few are lawyers. When investigative agencies are weak and understaffed, corporate fraud cannot be effectively prosecuted. Companies cannot be expected to provide realistic information to oversight boards when the books are cooked to avoid restrictive laws. See Shaw Wallace, "Oilfield Awards . . . Striking Murky Deals," India Today (November 30, 1996), p. 105.
42. "False Profits," p. 9.
43. A distinctive feature of the private corporate sector of India is the dominant position enjoyed by a relatively small number of large, family-controlled business houses. The top 37 houses were drawn predominantly from families who belonged to the major traditional trading communities of India (Kochanek, "Briefcase Politics," p. 1281). In the family holding company, the majority of shares are owned by the family; only with great difficulty can shareholders monitor firm performance.
44. See Francis Fukuyama, Trust: Social Virtues and the Creation of Prosperity (New York: Free Press, 1995) for a discussion of the commonalties in firm organization of the world's industrial leaders.
45. It is widely believed that India's business elite lacks ideological legitimacy in a society that traditionally views the profit motive and private gain as antisocial. A similar traditional bias existed among the "Confucian" societies of East Asia that have prospered dramatically since 1960. However, it seems more likely that India's socialist economic legislation, by making rational, profit-driven calculations illegal, turned profit-seeking businesspeople into quasi-criminals.
46. Hilton L. Root, Small Countries, Big Lessons: Governance and the Rise of East Asia (London: Oxford University Press, 1996).
47. For example, much of the opposition campaign in India's 1989 national election was based on Rajiv Gandhi's alleged involvement in a scandal that involved kickbacks on a government contract with Bofors, a Swedish armaments manufacturer, and on the Congress charge that the opposition leader, V. P. Singh, had a large secret bank account in the Caribbean.
48. Traditionally in the economic literature, uncertainty has not been viewed as a powerful explanatory factor in neoclassical investment and growth models, which rarely analyzed the impact of volatility on economic activity. However, recent empirical studies indicate that volatity can adversely restrict investment. Ramey and Ramey ("Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review 85:5 [December 1995], pp. 1138-51) demonstrated a strong negative correlation between volatility in real gross domestic product and the average rate of growth using cross-country evidence. Others have found a negatived relationship between various volatility measures and private investment. See J. Aizenman and N. Marion, "Policy Uncertainty, Persistence, and Growth," Review of International Economics 1:1 (June 1993), pp. 145-63; and Alberto Alesina et al., Political Instability and Economic Growth, Working Paper no. 4173 (Cambridge, Mass.: National Bureau of Economic Research, 1992), both indetified adverse growth effects of political instability in developing countries after controlling for other variables. Aizenman has argued that underinvestment will occur in the absence of a commitment mechanism ensuring no future tax. For example, populist political pressures have created volatility in India by weakening institutional commitment mechanisms. Investment subsidies needed to overcome policy uncertainty are made unsustainable through these pressures. The Enron controversy also revealed that considerable political gain can be obtained by overlooking why investors might want to charge a risk premium to enter a market that has experienced considerable policy uncertainty. Renegotiation in turn created additional policy uncertainty.
49. Traditionally in the economic literature, uncertainty has not been viewed as a powerful explanatory factor in neoclassical investment and growth models, which rarely analyzed the impact of volatility on economic activity. However, recent empirical studies indicate that volatity can adversely restrict investment. Ramey and Ramey ("Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review 85:5 [December 1995], pp. 1138-51) demonstrated a strong negative correlation between volatility in real gross domestic product and the average rate of growth using cross-country evidence. Others have found a negatived relationship between various volatility measures and private investment. See J. Aizenman and N. Marion, "Policy Uncertainty, Persistence, and Growth," Review of International Economics 1:1 (June 1993), pp. 145-63; and Alberto Alesina et al., Political Instability and Economic Growth, Working Paper no. 4173 (Cambridge, Mass.: National Bureau of Economic Research, 1992), both indetified adverse growth effects of political instability in developing countries after controlling for other variables. Aizenman has argued that underinvestment will occur in the absence of a commitment mechanism ensuring no future tax. For example, populist political pressures have created volatility in India by weakening institutional commitment mechanisms. Investment subsidies needed to overcome policy uncertainty are made unsustainable through these pressures. The Enron controversy also revealed that considerable political gain can be obtained by overlooking why investors might want to charge a risk premium to enter a market that has experienced considerable policy uncertainty. Renegotiation in turn created additional policy uncertainty.
50. Traditionally in the economic literature, uncertainty has not been viewed as a powerful explanatory factor in neoclassical investment and growth models, which rarely analyzed the impact of volatility on economic activity. However, recent empirical studies indicate that volatity can adversely restrict investment. Ramey and Ramey ("Cross-Country Evidence on the Link between Volatility and Growth," American Economic Review 85:5 [December 1995], pp. 1138-51) demonstrated a strong negative correlation between volatility in real gross domestic product and the average rate of growth using cross-country evidence. Others have found a negatived relationship between various volatility measures and private investment. See J. Aizenman and N. Marion, "Policy Uncertainty, Persistence, and Growth," Review of International Economics 1:1 (June 1993), pp. 145-63; and Alberto Alesina et al., Political Instability and Economic Growth, Working Paper no. 4173 (Cambridge, Mass.: National Bureau of Economic Research, 1992), both indetified adverse growth effects of political instability in developing countries after controlling for other variables. Aizenman has argued that underinvestment will occur in the absence of a commitment mechanism ensuring no future tax. For example, populist political pressures have created volatility in India by weakening institutional commitment mechanisms. Investment subsidies needed to overcome policy uncertainty are made unsustainable through these pressures. The Enron controversy also revealed that considerable political gain can be obtained by overlooking why investors might want to charge a risk premium to enter a market that has experienced considerable policy uncertainty. Renegotiation in turn created additional policy uncertainty.