The State's Conundrum: 'Enabling' Growth, 'Commanding' Development?

The saga of humanity's monumental struggle for dignity and prosperity never allows puzzles to end. Ever since India's celebrated economic reforms of 1991, its principal political formations, the BJP and the Congress, despite concurring on the need for reforms, have engaged in a fascinating clash of ideas on the relative role of Government and the markets in societal progress. The recent emergence of the AAP as a representative of the aspirational underclass has intensified the debate further. While none of them see the State and the market as engaged in an intense zero-sum game, there is considerable difference in emphasis, and in accent, which often is disproportionately skewed in favour of one or the other. A clear understanding of the role of Government in achieving growth with justice is critical to achieving lasting political success. And it is this lack of clarity and conviction that led to the political demise of the post-1998 regimes, and threatens to derail the present Government's initiatives, that are rooted in a long-term vision for systemic change.    

For several decades, the famed Washington Consensus enjoyed a virtual monopoly over providing the “right” prescriptions for growth and development. The essence of the consensus – expanding the role of the market forces and constraining the role of the State – has been considered sacrosanct. By integrating into the world economy, and allowing for greater private participation and more competition, the Indian “tiger’’ seemed to have been uncaged. Resultantly, India entered the 21st century with reforms akin to her ‘second independence’, though with due caution and gradualism.

However, is this road sustainable? Will this counter the charge levelled against the previous socialist path, that it hadn’t made the poor rich, but had made the rich poor in the name of redistributive justice? Or will it make the rich richer and poor poorer? Aggressive growth-promoting strategies seem to crowd in benefits in the already prosperous sub-national regions that have good infrastructure and a developed entrepreneurial class. While GDP growth makes for good headlines, it must transform the lives of common people, not just transform economies. As a scholar strikingly describes, "benefits of reforms for most people seem like what the revolution was for many sceptical leftists: it was always coming and never arriving." Besides, successive Governments have underestimated the curse of inequality. From Joseph Stiglitz to Thomas Piketty, there is no dearth of compelling evidence that inequality is increasing. It is in this that the geneses of slogans such as "development with justice" and "reforms with a human face", which reverberate in Indian politics today, can be traced.

The Delhi elections saw a resounding vote by the poor and the middle class in favour of a political upstart. Globally, the rise of the Workers Party in Brazil, the Syriza in Greece, and the Hong Kong protests have all been triggered by issues of inequality and lack of opportunities. The message for political parties is clear. No Government in India can survive when it is seen as ignoring the needs of the vast masses. The then Government realized this through the "India shining" debacle in 2004, despite scripting pioneering reform success stories, and genuinely improving the quality of public services such as telecom, LPG cylinders and road connectivity. But Governments can also no longer survive by arrogantly donning a mai-baap mantle, simply keeping the poor alive through doles of wage employment, without simultaneous pursuit of transformative income generation programmes, and expanding their capabilities through education and skill development. By denying the poor productive assets, skills or credit, the previous incumbent failed to let them becomes masters of their own destinies.

So how must the State reassert its relevance, or in Dani Rodrik's words, "reinvigorate its capability"? And has the present Government drawn insights from history and politics, and properly understood its mandate? Firstly, the “magic” of the market works only when there exist competitive conditions, via ‘enabling’ institutions - property rights, legal structure, governance mechanism, and regulatory bodies. "Getting institutions right", says Douglass North, is even more important than "getting prices right". A society that establishes the rule of law and enforces property rights witnesses long run economic growth, which is the key pillar of capitalism's relative success in the western world. The State, thus, must design sound laws, ensure their strict enforcement, and put in place an enabling environment for private enterprise to flourish.

The Government seems to be honouring the above social contract rather well. Its series of initiatives on simplifying tax laws, promoting ease of doing business, growth-friendly legislation such as Land bill and GST, creation of a transparent resource allocation mechanism, seizing the demographic dividend through job creation, promotion of FDI, tentative labour market reforms, revival of disinvestment, and concrete steps to bring back black money, point towards a relentless pursuit of enabling conditions for furthering growth.  

But while State the "enabler" facilitates economic growth, for economic development - that decisive shift in society's equilibrium levels - State the "commander" must fulfil its primary obligations, and place itself back at the centre of developmental discourse, even if in a new avatar. By heavily investing in health, primary education and infrastructure, while improving its governance for programmes to work effectively at the grassroots, it must, according to Amartya Sen, build up the capabilities of millions of people in society, who live at its margins, and for whom the market doesn't exist, and empower them to participate in the expanding prosperity, thus rendering it truly inclusive.

Programmes such as Skill India show that the Government is not oblivious to this challenge, but a simultaneous reduction in allocation for pioneering schemes such as Sarva Shiksha Abhiyan, Mid-Day Meal and ICDS has sent conflicting signals. Budgetary allocation for education and healthcare sectors are c. 4% and 1.2% of GDP respectively, much lower than the target of 6% and 2.5%. Ironically, even developed countries never envisioned a trade-off between social spending and growth. Make in India can complete that vital missing link in India's growth trajectory - absence of a job-creating manufacturing sector. But that must be accompanied with devoting resources to education, health and food programmes, as growth depends on creating a dynamic workforce capable of learning.

The long-term gestation period of the Government's major initiatives, which undoubtedly aim at sustainable poverty reduction through job creation and skill enhancement, must be properly conveyed to the aspiring classes, especially the rural poor, who, seduced by promises of acche din, expected instant results. This will require deft political communication, but that is imperative if the pent up aspirations of India's teeming millions are not to spill over onto the streets¸ as famously predicted by Albert Hirschmann in the "Tunnel Effect".

Lastly, it is vital that while encouraging private enterprise, perceptions of a nexus between the ruling and the affluent classes are kept at bay. Perceptions, in politics, are reality, and the Government must be outspoken in its denial. Otherwise, it can cause major electoral reverses, and prevent the Government from fulfilling its long-term developmental vision. That, tragically, will be a colossal betrayal of many a hopes and aspirations, and in countering this, the Government confronts the "fierce urgency of now".