The two most critical weaknesses of the Indian state have been its low tax to GDP ratio and its labor laws that make it difficult for companies to fire and thus make it risky to hire industrial workers.
When Narasimha Rao became prime minister, India faced a multifaceted crisis. Foreign exchange reserves had dwindled to $1 billion, forcing a sharp decline of industrial production, and discrediting the established development strategy. The assassination of Rajiv Gandhi terminated the dynastic model of leadership. There were major separatist insurgencies in Punjab, Kashmir, and the Northeast, and communal rioting increased sharply as the Bharatiya Jananta Party sustained its Ayodhya campaign. Internationally, the end of the U.S.S.R. destroyed India’s non-aligned foreign policy.
When Narasimha Rao left office, a new development strategy was in place, and had shown improved results. It was demonstrated that a political lightweight could become prime minister and function as effectively as dynastic heirs. Rao contained the Kashmir and Northeast insurgencies and eliminated Khalistani terrorism. After the Babri Masjid destruction and subsequent riots, there was an era of communal peace. Rao also elevated India’s international position. Narasimha Rao’s achievements were possible because he tackled vested interests. Within the bureaucracy and the public sector, Rao and Manmohan Singh destroyed privileged positions that had been built up over decades.
After the United Front interregnum, the NDA inherited a state with momentum. It has failed to sustain the momentum. Upon taking power, the NDA created a major opportunity for itself with the nuclear tests. The wave of patriotism that followed could have been exploited to impose needed sacrifices. However, the opportunity was fully squandered within months. Instead, the government used its political capital to allow traders to hoard agricultural commodities, and the people punished it suitably in the state elections held seven months after the nuclear tests.
Gen. Musharraf offered India another great opportunity in the form of his foolish Kargil venture. This prompted another wave of patriotism. Further, the general timed his attack to occur just before an election, and helped the formation of a stable parliamentary majority after years of falling governments. Even this gift was declined by Vajpayee, mainly because he was afraid of offending vested interests. The Indian people, especially the poorer majority, have paid a devastating price for his cowardice.
India currently collects around a tenth of its output in taxes. That figure is below that of some African states poorer than India and far below that of advanced Western and East Asian states. If the central and state governments could take in about 15 percent of GDP in taxes, there could be dramatic improvements in education, health, and infrastructure, as well as in external and internal security. That would still leave India as a low-tax state. This would mean taxing rich farmers, conducting more ruthless tax raids on business owners who cheat on taxes, and taxing the service sector. The attempt to do this would lead to strikes and large-scale protests from the middle class. The failure to do this has exacted a higher price.
Vajpayee came into office promising to generate employment and to make it easier to dismiss workers in order to encourage employers to hire them. Around 8 percent of the Indian labor force, those in the organized sector, get job security from the existing laws. The remaining 92 percent in the unorganized sector are absolutely insecure, have no access to capital and technology, and have little hope of getting into the organized sector. The law requires a job-seeker to demand: give me a lifetime job or no job! Instead of actually doing what he promised, Vajpayee created an endless chain of committees to study the problem. Meanwhile, secure Indian workers did not work very diligently, especially compared to their insecure Chinese counterparts. Employment and wages in China raced ahead. Employment in China grew faster than industrial output, which rose much faster than in India. China enjoyed a virtuous cycle of rising output and rising demand; India did not.
The IT boom in India was possible because the service sector labor laws permit employers to fire at will. Therefore, they hire freely, and employees work diligently, and actually invest in their own training to be able to get the high-wage jobs. While all this has been good in itself, the information sector boom has exacted an enormous unrecognized cost. It has detached the fates of the upper middle class and the rest of society. It made it possible for Vajpayee to betray workers in the unorganized sector without doing collateral damage to the middle class. In most developing countries, the middle class has been a powerful and articulate advocate of capitalist reforms because they depend on industrial growth. In India, the articulate demand for second-generation reforms has disappeared.
As of now it seems that NDA will be re-elected in 2004. That is not grounds for optimism for a stronger Indian state.
Sanjoy Banerjee teaches International Relations at San Francisco State University. He writes about India, America, and the world.