Vol. 18 No. 14 · 18 July 1996

‘The difficulties of governance now are dauntingly stupendous’

Geoffrey Hawthorn writes about the Indian General Election

3717 words
India’s Economic Reforms 1991-2001 
by Vijay Joshi and I.M.D. Little.
Oxford, 288 pp., £25, September 1996, 0 19 829078 0
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Fifteen thousand candidates contested 545 seats in the Indian lower house, the Lok Sabha, in the May General Election. Four hundred million of the 590 million who were eligible to do so voted. It was the largest election in history. Yet it might have seemed odd. The Congress Government has been introducing far-reaching reforms. But the economy was not discussed. India has more than a third of the world’s poor. But poverty was not an issue. Congress’s secularism has been challenged by ‘Hindu fundamentalists’. But the Bharatiya Janata, the Party that’s been mounting the challenge, scarcely mentioned religion. The quarrels were more political than religious, and even where candidates from Congress itself were concerned, largely local and particular.

Congress did take 30 per cent of the votes. This was the largest percentage gained by any one party, but it was spread across most of the country, and under India’s first-past-the-post system, the Party gained disproportionately few seats – fewer than in any previous election. All the other contenders had a regional base. The BJP, who got fewer votes but a larger number of seats, was strong in six states in the north and west. The strength of the most successful party of those in the ‘social justice’ bloc, the Communist Party of India (Marxist), was concentrated in West Bengal, as it has been since its breakaway from the Communist Party of India in 1964. The other large party in the bloc, the Janata Dal, drew most of its support from Bihar in the north and Karnataka in the south. Others had even more localised support: eleven thousand of the fifteen thousand candidates simply stood as independents.

To some degree, Congress was merely incompetent. In the southern state of Tamil Nadu, for instance, the Prime Minister, P. V. Narasimha Rao, made an alliance with the Jayalalitha, the deeply disliked leader of one of the local Tamil parties. The Congress MPs there all defected to the other Tamil party. The Jayalalitha’s party went down, and 37 Congress seats went with her. The incompetence, however, goes deeper, and started thirty years ago. In 1966, the cynical old men who had come to run Congress made Mrs Gandhi its leader. They thought that Nehru’s daughter would give them grace and that they’d have nothing to fear from a woman whose political ambition had hitherto reached only to the portfolio for Information. She surprised them. Alarmed at the Party’s failure in the state elections in 1969, she divided it and left the old men and their provincial clients behind her. In the General Election in 1971, she appealed directly to the poor. (She even had subliminal clips of herself shouting her slogans inserted into the battle scenes of Bombay movies.) But she was unable to deliver. Having furiously declared a State of Emergency in the face of mounting opposition in 1975, she then in 1977 lost the General Election that she’d been told she could win at the end of it; so she and her younger son Sanjay proceeded to centralise the Party. They brought in people with no local base whose central and sufficient qualification was their loyalty to the Family. But Sanjay Gandhi was killed doing aerobatics over Delhi, and his mother, who’d gone on to win again in 1980, effectively caused her own murder through a grotesquely cynical mishandling of the opposition in the Punjab. Sanjay’s more pleasant but also more indolent elder brother, Rajiv, succeeded them, and his victory in 1984 was Congress’s most decisive.

It was also fleeting. The understandable if never well-founded fear of secession in Punjab subsided (the argument for a Khalistan was always more intense in Southall and Acton) and the Party’s support started once again to trickle away. Its local offices were abandoned to bats and owls and the occasional sad janitor, and after the General Election in 1989, Congress found itself once again with too few seats to form a government. The unlikely coalition that did, made up of the Janata Dal under V.P. Singh (Rajiv Gandhi’s former finance minister who’d resigned in disgust at what he claimed had become pervasive corruption at the top), the Bengal Marxists and the now lively and strikingly well-organised BJP, split within the year. The BJP could not accept the prospect of extended reservations in public employment for the lower castes and classes, and others in the Government found it increasingly difficult to accept the BJP. For a few months, the Janata Dal and the CPM continued with the tacit support of Congress until Rajiv himself was assassinated in the run-up to the election in the spring of 1991. His Italian wife (whom he’d met in Cambridge when working, intermittently, for his degree at Trinity) wisely rejected a request from the frightened old men of Congress to assume the leadership. They now had no choice but at last to leave the Family and elect one of themselves.

To a degree, Congress has been the victim of its own early success. It was seen to have brought India to self-rule. It embodied the new nation, secular, democratic and united, and was its central symbol. It also had support from abroad. The Americans were irritated by Nehru’s insistence that post-Revolutionary China should be allowed into the United Nations and by his more general non-alignment. But they could discount that. What worried them more was that China would succeed and present an irresistible model to the rest of the ex-colonial world. India had come fairly quietly to independence, and it was committed to democracy.

It was also committed to what the India Office (unlike the looked-down-on Colonial Office, which presided over Britain’s lesser jewels) had always disdained to describe as ‘development’. ‘Honey,’ Jagdish Bhagwati observes, ‘attracts flies; gold attracts diggers’; India now attracted economists.* Bhagwati himself is one of the cleverest of the many very clever ones that the country has produced. But he was at pains to explain in his glittering Radhakrishnan Lectures – which form the briefest and not the least entertaining of the accounts of what has subsequently happened in India – that the economists were wrong. They devised ‘a model that couldn’t’. Economically, they argued that if capital investment was planned and the industries to which the investment was directed were protected, the economy would grow, and do so soundly. The Planning Commission was supreme. Politically, they were socialist, though, as Bhagwati says, in Thomas Balogh’s sense, not Arthur Lewis’s. (‘Tommy,’ the distinguished St Lucian economist is reported to have said, ‘the difference between your socialism and mine is that when you think of socialism you think of yourself as behind the counter, whereas when I think of socialism, I think of myself as being in front of it.’) The Planning Commission’s ‘controls over production and investment had many complementary and reinforcing rationales,’ Bhagwati insists, ‘none of them compelling in their logic and all of them misguided.’ Private initiative was stifled; the controls diverted resources into what Bhagwati in a famous paper called ‘directly unproductive rent-seeking activities’; there were costly bottlenecks; and the whole system had ‘a corrosive influence on the moral ethos and integrity of political and public life, as corruption was inevitably spawned by politicians and (largely lower-level) bureaucrats tempted to exploit the control system to their advantage’.

In their detailed analysis of India’s macroeconomic fortunes from the early Sixties to the early Nineties, Vijay Joshi and Ian Little argued that until the beginning of the Eighties, its macroeconomic management had been good. In the face of severe shocks, such as droughts and the oil price rises of the Seventies, India avoided high inflation and serious industrial recessions, and did not resort to debt. (A man who took part in one of the last discussions in the Seventies between the Planning Commission and the economic ministries about whether to take loans at low rates from the international banks’ huge new deposits of Eurodollars, told me that the technical arguments were in the balance; the chairman looked round at his colleagues, many in the high-collared khadi cotton jackets that the high-minded then wore, and said that it was surely their integrity that mattered.)

There are still about 420 million poor people in India, yet even by the early Eighties, the proportion in poverty in the countryside, where nearly three-quarters of the population still lives, had dropped by a third in 15 years. (Indeed, India was almost alone among all countries, rich and poor, in not experiencing a relative rise in poverty in the Eighties.) The pervasive controls may have been slowly tying manufacturing and services up in tape, farmers may have been subsidised in order to keep the price of food down, and in absolute terms, if not proportionately, the poor may have been increasing in numbers. But the economy was stable, and mere was slow growth. This was not what Africa became in the Eighties, or Latin America.

Nor, however, was it China, which had changed course after Mao, and was roaring away. The success of some of the smaller economies in East Asia, Singapore, Taiwan, and especially South Korea, also suggested that the early pessimism about India’s capacity to generate growth through exports had been mistaken. Mrs Gandhi had begun a modest liberalisation of the economy, and Rajiv continued it for a while in the mid-Eighties. (Bhagwati wonders whether the Parsi genes on Rajiv’s father’s side might have prompted an access of common sense. But he really thinks that the liberalisation happened because Rajiv, who’d been a pilot for the then hideously inefficient Indian Airlines, was the first prime minister to have done honest work outside politics. Unfortunately, his row with V.P. Singh and the latter’s defection caused him later to brand the reforms, in which Singh had had a hand, as ‘reactionary’.) Manufacturing expanded. To do this, however, required capital, and India began to borrow heavily from abroad. As Joshi and Little made clear, it was these loans, together with a growing fiscal problem, that led to a crisis. External public sector debt as a proportion of the national product doubled in the Eighties. Debt service as a proportion of the value of exports (necessary to earn me foreign exchange to pay the debt) more than trebled. The reserves of foreign exchange were shrinking, and by 1990 India’s international credit rating had all but collapsed.

Meanwhile, like many governments in poor countries between the late Forties and the Seventies, Rajiv Gandhi’s was committed to high levels of spending on slender revenues. For a while, the Finance Ministry maintained a reasonable fiscal balance by getting concessional finance from abroad and paying low interest on the loans it took from the country’s own banks (many of which had actually been nationalised in the late Sixties), but by the second half of the Eighties, it was losing its grip. Subsidies to agriculture and through that to the manufacture of fertilisers, but also to the water and electricity industries (electricity was in some places provided free to farmers), had risen, to account for nearly a third of the public sector deficit. Because even commercial banks were required to direct 40 per cent of their credit to these sectors, at rates of interest that were not merely subsidised but in some cases actually negative, other areas were starved of capital. The inefficiencies that all this induced were exacerbated by controls on trade. Foreign direct investment, not surprisingly, was in decline. And there were misfortunes. The Soviet Union collapsed, interrupting a profitable trading relationship and diverting Western aid; the new Russian state was prohibited by the Americans from continuing overseas assistance of its own, Iraq’s invasion of Kuwait stopped the stream of remittances from migrant workers in the Gulf. But the crisis in the Indian economy at the end of the Eighties was created internally. At the beginning of 1991, there was no alternative but to seek an agreement with the IMF and make the reforms that the Fund would require.

Rao accepted this when he came into office later that year. He appointed as his finance minister Manmohan Singh, who with other economists (including Bhagwati) was a longstanding advocate of reform and wrote a doctoral thesis on ‘export pessimism’ under Little at Oxford. Singh set out to implement the changes. In India’s Economic Reforms, 1991-2001, Joshi and Little calmly assess them. Production has increased, and there has been a liberalisation of trade. (Joshi and Little, observe, however, that if P.C. Mahalanobis, the Bengali statistician who was the most influential author of the original economic policy, had not been a Hindu, he would be turning in his grave to know that there are now more import controls on consumer than on capital goods.) Foreign direct investment is increasing (although ownership is limited in most cases to 51 per cent, and Bhagwati, who in the early Nineties had hopes of Japan, will be disappointed to see how little investment has so far come from there). Foreign firms have even been invited to invest in those ‘public goods’, such as electricity and roads, that were once so sacred. There have also been attempts to correct distortions in taxation. India has replenished its reserves and is creditworthy again. But almost nothing has been done to get expenditure down. ‘Huge explicit and implicit subsidies’ – the losses incurred by public enterprises, for instance, the privatisation of which, as in China, has scarcely begun – ‘have become a major part Of Indian public finance. Their effectiveness in promoting social ends is at best abysmal,’ Joshi and Little argue, ‘at worst counter-productive.’ In the last two years of Rao’s Government, there was still no overall strategy, and little had been done to try to explain the reforms. The reason, as Joshi and Little say, is not far to seek. The weakening Government of a crumbling party was increasingly frightened of the constituencies that remained to it, even of those, like public sector unions, that didn’t matter electorally. The politics of command had become a politics of demand. Desperate to sustain itself, Congress had conceded too much. Having, in Joshi’s words, at last ‘awakened’ all those to whom it was beholden, Congress had caused its own decay.

Joshi and Little finished their book in December. In the week before the election in May, there was gloom in the camp of the economic reformers. Congress was collapsing, the BJP was unlikely to be able to form a government and the local parties, especially those in the ‘social justice’ grouping, were strong. It seemed likely that the elections could result in an ‘immediate pressure’, as the editor of a magazine in Madras put it, ‘to increase resource allocations from the centre to the states, and to alter the bias of resources towards health, education and social welfare’. The BJP agreed that its president L.K. Advani, the man who’d done so much since the mid-Eighties to rouse the resentful middle classes (especially middle-class youth) with his cry of Hindutva and support for the destruction of the Babri Masjid mosque at Ayodha, would be unacceptable as its leader in Parliament, and instead chose A.B. Vajpayee, who, despite his past connections to stridently communalist organisations like the Rashtriya Swayam Sevak Sangh and the Jan Sangh, had in the late Seventies been a successful minister for external affairs. But the Party continued to insist that it would end the ‘appeasement’ of India’s 110 million Muslims. Even with Vajpayee as leader and a moderate economic programme, there was no support for the BJP in the House when it tried to form a government. The President then called H.D. Deve Gowda, who’d emerged as the leader of a United Front of 14 ‘social justice’ parties. Gowda is a pragmatist. He was in the Congress Party before serving for three years as a Janata Dal MP and returning as chief minister to his native Karnataka in 1994. Gowda’s finance minister, P. Chidambaram, was commerce minister under Rao, and is an even firmer advocate of reform.

The Front was given a vote of confidence by Congress and the Bengali Marxists, and on 5 June presented a programme that promises to reduce the fiscal deficit from last year’s 5.9 per cent of GDP to less than 4, to spend more on agriculture, infrastructure, public enterprises, anti-poverty programmes, health and education, and to abolish poverty by 2005. It’s less forthcoming about how it might raise the revenue. But the markets aren’t perturbed. They haven’t even waited for the budget in mid-July, in which Chidambaram has promised to cut government spending and make ministries more accountable by preventing them postponing their bills and accounting their expenditures to the following fiscal year. The Bombay stock market is getting stronger, there’s been a rush of interest by foreign investors, and with no obvious irony, the President of the Indian CBI welcomed the United Front’s programme as ‘historic and unprecedented’. The more cautious say that much depends on whether the recent growth can continue. If it doesn’t, things could unravel.

In politics, things finally have unravelled. ‘The days when the central government was run by one party are over,’ Gowda declared in May. ‘The regional parties are stronger now, and their voice has to be heard.’ This is not in any interesting sense, even in the BJP, a question of ideology. The implosion of Congress’s old strategy, the collapse of its former coalition of higher castes, Muslims and those at the bottom who now call themselves dalits – a coalition on which even five years ago the Party could still just rely – together with its seemingly irremediable corruption (the day before Gowda won his vote of confidence, the Supreme Court had filed a case against Rao himself and four ministers for bribing MPs in 1993, and Rao’s son and another relative are being questioned about a £25 million import scandal), have served at last to release the country’s multitude of identities and interests. It’s not simply that one party can no longer govern from the centre. It’s also that no one party, Congress, the BJP or any other, can now speak for ‘India’.

Even the bhadralok in Writers’ Building in Calcutta, the gentlemen intellectuals of the Communist Party of India (Marxist) who have governed West Bengal since 1977 and continue in public to refine their doctrine, have accepted the changes. Jyoti Basu, the venerable Chief Minister, fights hard for investment (he was keen to get Coca-Cola to Calcutta), and the more pragmatic in his party know that the impressive reduction in rural poverty in the state probably owes more to the growth in employment outside agriculture than to any direct transfers the West Bengal Government may have made. The differences in India now are not about reform itself, but about who will lose from it and who will gain. Politicians are appealing more or less explicitly to allegiances of community, caste and what used to be called ‘untouchability’. These calls appeal in large part merely to self-interest. And they’re directed, as they are now also largely excited, locally. The gradual relaxation of the old controls has given greater economic discretion to the states, which have always been responsible for agriculture and social services as well as for reservations for what are, as a result, the expanding ‘back ward classes’. Power in India is passing to these states – to the different parties that govern in each of them – and the provincial politicians, to men like Gowda himself, who barely knows Hindi (unlike Rao, who speaks more than two dozen languages and has an unfinished novel in hand, or Vajpayee, an orator and a published poet), disingenuously describes himself as a peasant, and lives only for politics.

For some, this raises the spectre of secession that haunted Nehru and walked again after his daughter’s death. ‘The difficulties of governance now,’ says the Pioneer newspaper, are ‘dauntingly stupendous’. But one looks in vain for anyone, even the most provincial of provincial politicians, who’s suggesting that India should dissolve. The instinct for unity is secure. The Supreme Court commands respect, and everyone was struck by the authority of the Commission that administered the election itself. Old habits, however, may die hard. Indian MPs have always found it easy to cross the floor. On hearing Chidambaram’s programme in June, the Marxists, on whose votes the Front depends, were already expressing their displeasure. If Gowda and his government are weak, India may well go the way of that other great federal state, Brazil, concede too much to the states and ruin the Government’s financial good intentions. If they’re shrewd, they will content themselves with setting a framework in which the states can compete more effectively, perhaps even fiscally, between themselves.

But as Joshi and Little concede at the end of their book, there are limits to what the states can do independently of the centre. These authors are themselves ‘mildly pessimistic’. If one accepts their arguments, the composition of the United Front can readily make one more pessimistic. Its dependence on local interests that Congress is seen to have ignored, particularly on those who represent farmers and those who speak for the poor, is unsettling in a society in which reform, although accepted, is by no means everywhere welcomed. Joshi and Little make it very clear that it is necessary to press on with the relaxation of controls, privatisation and the liberalisation of trade, taking care only not to destroy indigenous firms, or allow those from abroad to take excessive profits. Above all, the Government must stop protecting the farmers and trying to conquer poverty by spending; like most such measures, these have done more for the better-off than the poor. Subsidies to farmers will have to be lowered, the price of food will have to rise and revenue from this (taxing farmers is a state responsibility) could at least in part be used to try to stimulate employment for the otherwise endangered poor. Given the mixture of interests in the Front, this doesn’t demand an impossible coalition. What it does demand, not easy in a country in which the uncertain futures of democracy really have now arrived, is the will to look beyond the next election.

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