India Reckoning: Rewards and Discontents of Democracy

By Bimal Jalan

For Jalan, there are two clear priorities for the future: to continue and benefit from the dramatic global changes in technology, trade, and investment over the previous three decades, and to get rid of the deadweight of the past in order to maximize the benefits from our economic and political strength.

Jalan offers a blueprint for the government to launch reforms to reduce corruption and administrative bottlenecks in the delivery of services to the people, such as by
· Reducing corruption in the administrative system
· Improving the role of the legislative, executive and judiciary in policymaking
· Improving governance and politics in a resurgent India and
· Strengthening the functioning of the financial and banking sectors.

In nine succinct chapters, Jalan with his characteristic insight and brilliance, discusses a range of political and economic issues which will help India realize its full potential as one of the fastest-growing, emerging economies in the world.

• Language: English
• Publisher: Bloomsbury Publishing
• Release date: Nov 18, 2021
• ISBN: 9789354351365

Book preview

India Reckoning

India Reckoning

Rewards and Discontents of Democracy

Bimal Jalan

BLOOMSBURY INDIA

Bloomsbury Publishing India Pvt. Ltd

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First published in 2021

This edition published 2021

Copyright © Bimal Jalan, 2021

Bimal Jalan has asserted his rights under the Indian Copyright Act to be identified as the author of this work

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ISBN: HB: 978-93-54351-34-1; E-book: 978-93-54351-36-5

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For

Ananmay, Tanay, Mihir, and the future generations of our democracy

Contents

Preface

Introduction

1. Evolution of India’s Democracy since Independence

The Benefits of Freedom

The Functioning of India’s Democracy

The Shrinking Role of Parliament

The Politicization of the Bureaucracy

An Overburdened Judiciary

2. The Rewards and Discontents of Democracy

Growth and Democracy

Votes and Equity

The Price of Liberty

3. Role of Parliament, Executive, and Judiciary

The Diminishing Role of Parliament

The Executive and the Judiciary

The Principle of Collective Responsibility

The Politicization of Administration

Separation of Powers

4. The Effects of Corruption in India

The Economic Effects of Corruption

The Need for Institutional Reform

Supply-Side Measures

Demand-Side Measures

5. Governance and Politics

Democracy, Politics, and Economics

Administrative Structure

Concluding Observation

6. The State of the Financial Sector

East Asian Crisis

The Indian Experience

Financial Reforms in the 1990s

Agenda for the Future

7. Towards a More Vibrant Banking System

The International Context

Non-Performing Assets

New Technology

Human Resource Development

8. Politics in Resurgent India

Fragmentation of Parties

Federation of States

Criminals in Politics

Administrative Reforms

Ministerial Responsibility

Depoliticization of Bureaucracy

Rationalization of Subsidies

9. Priorities for the Future

Making the Right Choices

The Cost–Benefit of Economic Policy

Fiscal Situation

Legal and Administrative Reforms

Benefits of Globalization

Index

Copyright Acknowledgements

Preface

This book, as its title suggests, deals with the current situation and future prospects of the country vis-à-vis politics, economy, and governance. As one looks deeper into India’s recent experience and that of other countries, two priorities for the future become clear. First, as is well known, global changes in technology, trade, and investment in the previous three decades have been dramatic. Many of these changes were favourable to developing countries. In particular, these changes provided immense new opportunities to countries such as India, which had a relatively mature technological and industrial base. Second, in order to benefit fully from the opportunities, it was necessary to get rid of the deadweight of the past, and take measures to maximize the benefits of India’s economic and political strength.

This book has nine chapters that cover a range of political and economic issues. Several important priorities for the future are discussed, which will help India realize its full potential as one of the fastest-growing, emerging economies in the world. Two chapters each on the financial system and politics are interconnected and some points may be repeated. In writing this book, I was principally guided by two considerations. The first was to cover different subjects that may be of interest to the general reader, in addition to professional experts. The second issue was to try and make this book relevant to the contemporary and ongoing debate on India’s approach to economic and political reforms in the 21st century.

Since 2014, India has had a single majority party in Parliament, and it is feasible for the government to launch reforms to effectively reduce corruption and administrative bottlenecks in the delivery of services to the people. This book highlights some priorities for the future that can be implemented within a relatively short period of three to four years, by 2024, when the present government completes its full term. Among the priorities are: enhancing the quality of life of citizens; reducing corruption in the administrative system; improving the role of Parliament, Executive, and Judiciary in policymaking; improving governance and politics in a resurgent India; and strengthening the functioning of the financial and banking sectors.

I am particularly grateful to Satish Choudhary for his painstaking work in preparing the manuscript for publication and to K.D. Sharma for his organizational and other help. Paul Kumar of Bloomsbury took the trouble of completing the final editing of the book within a relatively short period. I am thankful to him for his meticulous work.

Introduction

This book India Reckoning: Rewards and Discontents of Democracy has been divided into nine chapters, which discuss issues of contemporary interest relating to politics, economy, and governance. All the chapters, although interlinked, are separately discussed and highlight several issues which require urgent growth prospects and alleviation of poverty among large sections of citizens. The first two chapters are on ‘The Evolution of India’s Democracy since Independence’ and ‘The Rewards and Discontents of Democracy’. Without doubt, India’s democratic politics has some highly positive features. Irrespective of caste, creed, religion, the level of income or well-being, the people enjoy all basic human freedom as a matter of right. Elections to local bodies, state legislatures, and Parliament are, broadly speaking, also free and fair. Governments have to seek periodic mandates from the people and if, voted out, they peacefully yield their place to the new government, which may have similar or radically different agenda.

The chapters also provide an overview of the functioning of India’s democracy, and the actual functioning of the three vital institutions of India’s democracy—Parliament, the permanent bureaucracy, and the judiciary. There have been five distinct phases in the functioning of India’s democracy since independence. The first 15 years, upto 1962, generally yielded positive results in strengthening democratic political institutions and generating faster economic growth. The second phase, upto 1979, was volatile in the political sphere. This period saw a suspension of democracy followed by a strengthening of democratic political processes. The third phase, upto 1989, was also generally good for strengthening the functioning of India’s economy and providing higher annual rates of growth. The fourth phase, from 1989 to 2004, saw the emergence of an altogether new scenario of coalition politics of parties with different ideologies. This period was marked by increasing expectations of political instability and uncertainty, which had major consequences for the functioning of democratic institutions. In the last phase during 2004 to 2020, governments in power had a majority of their own and were in a position to implement several policy reforms in the economy.

The doctrine of separation of powers among three vital institutions of India’s democracy, as mentioned above, is acknowledged as an integral part of the basic features of the Constitution. Chapter 3 on ‘Role of Parliament, Executive, and Judiciary’ discusses issues about the functioning of these institutions, and what more needs to be done to make them accountable for their actual performance on the ground for the benefit of the people. As is well-known, over time, the role of Parliament in policymaking by government in power has substantially diminished. Even the relatively fewer days on which the two Houses meet are often marked by unseemly incidents, including use of force to intimidate opponents and shutting out of debate and discussion, resulting in frequent adjournments. The responsibility of the Council of Ministers to Parliament is also largely pro forma. Over time, slowly but surely the role of bureaucracy and the executive has also been seriously compromised. The common experience of most citizens who have to deal with a government agency for any purpose, large and small, is that of insuperable problems and delays. Fortunately, the ‘Right to Information Act’, adopted in 2005, is an important step forward in making the executive accountable to the people directly.

In recent years, the government has taken some important initiatives to accelerate the pace of poverty alleviation and making the transfer of subsidies less cumbersome. In this context, given the large base of the poor in India, it is obvious that people’s access to social services cannot be improved without increasing social expenditure substantially over time. In addition to the need to increase social expenditure, there are three general principles which should be observed in the organization of social services for the poor. The first principle which should be adopted is to encourage people receiving social benefits to cover at least part of their revenue expenditure through charges and fees (with appropriate waivers for those who are not able to pay). A second principle which should be applicable for all services, including those meant for the poor, is the levy of a reasonable fee which can be waived by the local provider of these services in cases where beneficiaries are unable to pay. A third principle is to involve the local Non-Government Organizations (NGOs) in the provision of basic services to the poor. The main advantage of involving NGOs is their higher level of motivation and the elimination of indifferent government officials from the process of delivery.

The fourth chapter deals with the effects of corruption in the administrative system, and the need for institutional reform. The most repugnant aspect of corruption in India is not that it is there, nor that it is so pervasive, but that it is widely accepted as an unavoidable feature of Indian life. In addition to wide acceptance as a necessary evil, another area of grave concern is the interlocking of ‘vertical integration’ of corruption at various levels of government hierarchy—elected politicians, higher bureaucracy, and lower bureaucracy. Without doubt, the widespread corruption is a major hurdle in growth, development, and poverty alleviation. Research has established that corruption reduces productivity, lowers investment, causes fiscal drain, and has a debilitating effect on efficiency. This chapter deals at length with the effects of corruption, the need for institutional reform, and supply-side as well as demand-side measures which can be taken to reduce the extent of corruption in India.

There are two chapters on India’s politics: ‘Governance and Politics’ (chapter 5), and ‘Politics in Resurgent India’ (chapter 8). As is well-known, India has the largest number of people below the poverty line in the world. This points to something other than mere economics that is slowing the pace of poverty alleviation and employment generation. This factor is the ever present politics in the governance structure. An important priority for the future is to redefine the primary role of the government in the economy. At the macro-economic level, the political role of the government should be to ensure a stable and competitive environment, with a strong external sector and a transparent domestic financial system. While the macro-economic priorities (for example, the trade-off between growth and inflation) may be decided by the government, the instrumentalities for achieving these objectives must be left to autonomous regulatory and promotional agencies without any political interference.

Similarly, the government’s direct political role in economic areas should be reset in favour of ensuring the availability of public goods (such as roads and water) and essential services (such as health and education) to the people. In these areas, government’s role must expand substantially. At the same time, its role in managing commercial enterprises deserves to be correspondingly reduced. The latter objective should be achieved without affecting, in any way, the financial and other benefits to those who are presently employed. These two chapters have highlighted several policy issues for redefining the political role of government in the economy. The suggestions made here are by no means exhaustive or permanent over time. The political role of the government in the management of the economy should be kept under continuous review and evolve as necessary for the benefit of the people as a whole.

The next two chapters are on ‘State of the Financial Sector’ and the need for a more ‘Vibrant Banking System’. Over time, India has made commendable progress in improving its financial system and establishing a financial regime that relies less heavily on detailed controls and directives and more on initiative, autonomy in decision-making, and accountability. Policy initiatives in this area have been directed towards reinforcing and ensuring the safety and stability of the financial system. Against the backdrop of the lessons from the Asian financial crisis, these chapters highlight issues relating to India from the perspective of experience, present stage of development, and policy framework for the future. The severe balance of payments crisis in 1990–1991 has been the trigger for reform in the financial sector in India. Interest rates in various segments of the financial markets were de-regulated in a phased manner. This preceded the abolition of controls on capital issues and freeing of interest rates on private bonds and debentures. While government borrowing rates were market-determined, there was a gradual phasing out of interest-rate subsidies on bank loans.

In the sphere of external financial policy, while the exchange rate was market-determined, over the years there was a progressive liberalization of foreign direct and portfolio investments, and approval procedures were considerably simplified. There was also considerable liberalization of policy regarding industry’s access to foreign equity and borrowing through long-term debt instruments. Prudential regulation and supervision also formed a critical component of the financial sector reform programme. In the area of supervision, a full-fledged institutional mechanism was developed, keeping in view the objective of a strong and stable financial system.

While there has been progress in developing various segments of the market, including money and debt markets, the depth of these markets remains low, and the volumes as well as number of participants are not very large in India. An important priority of the future is to develop the depth and breadth of these markets and to allow a multiplicity of intermediation possibilities with a wider range of risk and leverage profiles. The RBI should continue to work with financial experts and market participants to develop an appropriate procedural and policy framework to move in this direction.

The last chapter highlights certain priorities for the future to ensure that India makes the right policy choices to provide maximum benefits to the people in the 21st century. In considering future policy options, it is necessary to distinguish between ‘ends’ and ‘means’. Thus, political freedom, alleviation of poverty, universal literacy, equal economic opportunities, and so on, are objectives or ‘ends’. While these objectives are non-negotiable, specific policies or ‘means’ that are adopted to achieve them, are matters of choice for policy makers. For a better future, it is important to have a consensus on primary development objectives over the next few years and then have a debate on the means of achieving them.

A few points have also been included in this book from some of my previously published books which are topically relevant.

An important priority in the future is that in a democratic country like India, the choice of appropriate strategies and policies must be based on a reasonable consensus (not necessarily unanimity) across the political spectrum. In making right choices it is also