One seldom comes across different papers on Indian economic system (IES). There are usual papers – India’s growth prospects, the need to reform India’s financial markets, the need for reforms etc. We still don’t know so much about Indian economic system- like labor markets, the legal system, property rights etc (for each we know we need to reform it). I am unaware of different papers on IES and would be great if the readers could point to a few.
I came across this superb paper by Sadiq Ahmed and Ashutosh Varshney on Indian political economy. It is a wonderful read and discusses the nuances of how political decisions are taken, what shapes these decisions, relation with economics etc.
The authors first discuss the growth trends growth composition, states performance, poverty etc in India. They then ask:
- How exactly does the policy process operate in India?
- How did the transformation in policies begin to come about in the 1980s and pick up momentum in 1991?
- Why was the economic strategy not changed earlier despite a long period of low growth?
- What role did leaders play in ushering change? How did they learn what was wrong and, more importantly, how to set things right?
- Why did they change some policies (investment, trade, exchange rate), but not others especially labor laws)?
- Why has growth rates of different states diverged so much in the second period?
- Finally, moving forward, inclusiveness is a critical issue, especially as urban-rural, interpersonal, and regional inequalities have grown. Are the decision makers thinking about inclusiveness?
The authors then seek answers and this is what makes a fascinating reading. I can’t discuss the entire paper….Wull just point to a few interesting points:
Surprising as it may seem, economic issues and policies have generally not made, or unmade, governments in India. On the whole, economics does not determine India’s election results. The sole exception is inflation.
Why should this be? Read this:
The concept of master narratives of politics also makes clear where economic policy belongs in India’s political space. Religion and caste have dominated mass politics in India; economic policy has basically been a contentious matter in elite politics (Varshney 2000a and 2007).
What are the key differences between mass politics and elite politics? The primary arena of mass politics is the street and the ballot box.
The major theaters of elite politics are the English language press, the Internet, university seminars, corporate conferences, and the corridors of power, where corporate executives, officials of the international financial institutions, foreign government representatives, and lobbies meet with the bureaucrats and politicians.
Negotiations, discussions, and bargaining are the typical forms of elite politics. Voting, agitations, protests, and demonstrations are the principal forms for mass politics; riots are also sometimes a key element. Only occasionally disrupted by mass agitations and protests, authoritarian polities are normally driven by elite politics.
This is so true. So how do mass politics decide when to oppose or let go of a policy?
Three factors are typically critical: (a) how many people are affected by the policy, (b) how organized they are, and (c) whether the effect is direct and short-run, or indirect and long-run. The more direct the effect of a policy, the more people are affected by it and the more organized they are, the greater the potential for mass politics. Underlying, long-run, and indirect links do not flourish in mass politics where the basic message has to be simple, intuitive, clearly demonstrable, and capable of arousing mass action.
This explains why only inflation is a matter of concern:
Within economic policy, following this reasoning, some issues are more likely to arouse mass contestation than others. For example, inflation, by affecting more or less everybody except those whose salaries are inflation indexed, quickly becomes part of mass politics. Privatization, a change in labor laws, withdrawal of agricultural subsidies, and reforming the reservation policy for small-scale industry also have similar properties. Either a large number of people are negatively affected in the short run (agriculture and small-scale industry), or those so affected, even when not in large numbers, are well organized in unions (privatization and labor laws).
And this also explains why certain reforms go through:
Contrariwise, stock markets directly affect the shareholders, whose numbers are not likely to be large, and who are also not likely to be organized, in a poor country. As a result, short of a financial collapse, stock market fluctuations and the developments in the capital markets rarely, if ever, arouse mass politics in less developed countries. Similarly, overhauling industrial investment rules— delicensing—concern primarily the investor, foreign and indigenous. Their numbers are also typically small. Since 1991, India’s reformers have achieved their greatest success in reforming capital markets and investment regimes.
if trade is a small part of the economy, as has been true of India and Brazil historically, changes in trade and exchange rate regimes remain peripheral to the mass concerns. In 1991, India’s trade/GDP ratio was a mere 15 percent. Of late, this ratio has been rising rapidly, nearing 35–38 percent. Trade is likely to be a matter of mass contestation before long.
This is precisely the point I keep making. Max reforms have taken place in financial markets and the elites want more of it. There is hardly any movement in other reforms and duo make a good point why this is so….
The authors then go on and discuss the political economy in a timeline and the impact etc.
Overall A fantastic paper. Highly recommended.