In the last few centuries, the fastest growing economies in the world have been those in which the ruling authority could impose sacrifices on entrenched interests. Such strong states, whether liberal or autocratic, could reform their economies to take advantage of new markets and changing technologies. Capitalist America broke up corporate monopolies a century ago, enabling its economy to vault over Britain’s.
Totalitarian China prospered by depriving its state enterprises of privilege three decades ago.
Despite a strong start, India has not been able to achieve the levels of growth and development of other Asian economies. After India’s independence, Prime Minister Jawaharlal Nehru was successful in extracting sacrifices from the elite landlord class that the British empire had cultivated and protected. He persuaded them to switch land from cash crops (like cotton and jute) to food crops. This ended the great famines of the colonial era, but also reduced India’s exports, which cash crops had provided.
Nehru adapted by building domestic industries in the public sector to reduce the need for imports. Although it is now popular to malign these policies, they were the only choice available at the time. And the policies worked well for a few years.
But then the state hit its limits. After the first round of land reforms, the state could not implement a second wave. The post-colonial landlord class was able to defend its privileges. And most critically, the state could not discipline the new elites it had spawned within the government bureaucracy and public sector. After the early 1960s, India’s growth stagnated.
A serious challenge to the established elites, both in the public and private sector, did not arise again until the 1991 reforms. The Narasimha Rao government began the process of privatization, thus cutting the privileges of the public sector elite. Atal Bihari Vajpayee, who succeeded Rao as Prime Minister, did not follow through on those reforms. He allowed tax revenues to decline as a share of GDP and failed to make it easier for factories to dismiss workers as he had promised in election campaigns, buckling to opposition from the tiny BJP-affiliated trade unions. Factories which could not fire then did not hire.
The current Prime Minister Manmohan Singh presided over a sharp increase in tax revenues as a share of GDP in his first term. This enabled other policies to be put in place. The rural employment guarantee program and the rural and urban infrastructure push were made possible by higher tax revenues, and these were the main factors in the economic and political success of Singh’s first term. But even he could not change labor laws to promote employment, or land acquisition laws to speed up large-scale projects.
The predicament of the Indian government is that further growth will have to be led by a new combination of industrial sectors, and the reforms that remain to be done are those which have been put off earlier due to determined political opposition. On the plus side, the government has a substantial parliamentary majority, and no single coalition partner can pull it down. The recent electoral victory of the Congress party is a sign that the country is supportive of and ready for reforms. However, the more responsible politicians in India have had an exceptionally low capacity to communicate with the people on policy matters. This has been true even of master orators like Vajpayee and brilliant academics like Singh.
India has a high illiteracy rate and low quality mass education, but the point to be made here is not complicated.
While Nehru and Indira Gandhi did propagate the rhetoric of socialism and the mixed economy in some detail, there has been no equivalent rhetoric of inclusive capitalism. Since 1991, only those reforms that could be sneaked past the electorate have been successfully implemented. Critical reforms have been blocked by small but highly motivated coalitions.
The anti-reform rhetoric has been extremely vivid and emotional. Opponents of reform are “pro-people,” “pro-farmer,” and support the “dignity of workers.” There has been no attempt to persuade larger coalitions that the employment benefits of reforms would outweigh the sacrifices needed.
This year, Singh is promoting two controversial and consequential reforms. One is a law regularizing compulsory land acquisition by government and the other is a law permitting temporary labor contracts in factories. These reforms would significantly accelerate industrial growth. Currently, the most frequent cause of delay in infrastructure projects is the difficulty in acquiring land. It has generated great controversy whenever the government has attempted that.
For instance, many attribute the electoral loss of the Communist Party of India( CPI) in the eastern state of Bengal to their tone-deafness in allowing compulsory land acquisitions for the Tata Nano factory. Activists agitated against the factory because they felt that the company had not taken the wishes of the local population into account when displacing farmers for the land. Tens of thousands of jobs moved out of Bengal so that a few hundred farmers would get their land back.
The inability of pro-development politicians to communicate their message combined with the ability of special interest coalitions to communicate theirs have created a deadly handicap for India. The protection of the few has led to the deprivation of the many.
Sanjoy Banerjee teaches International Relations at San Francisco State University.