India Transformed

by Rakesh Mohan

China

  Japan

  4

  Germany

  Germany

  5

  France

  India

  6

  UK

  Russia

  7

  Italy

  France

  8

  India

  Brazil

  9

  Canada

  South Africa

  10

  Brazil

  Italy

  Source: Basu et al. (2011), pp. 25–34.

  IV. Post-Pokhran Sanctions and Liberalization

  That this new thinking has been internalized across the national political spectrum was demonstrated in the aftermath of the Pokhran-II round of nuclear weapons testing in May 1998. Having declared India as a nuclear weapons power, the Atal Bihari Vajpayee government immediately declared a policy of ‘no first use’ and reached out to friendly countries seeking their understanding of India’s national security interests. Faced with economic sanctions imposed by important economic partners, including by USA, Japan, Australia and some European economies, as a response to the nuclear tests, India chose to reach out to them with the message that it sought a mutually beneficial economic relationship with them, that it was forced to conduct nuclear tests in defence of its long-term security, and that it would not pursue a belligerent strategic posture in its neighbourhood. Having unilaterally declared that its nuclear doctrine would be based on the principle of ‘no first use’, India consciously reduced its defence spending over the next several years, focusing instead on the fiscal sustainability of economic growth.

  After Pokhran-II, the government deputed non-official delegations to travel to USA, Germany, Japan and other countries with this message. I was part of a non-official delegation constituted by the director general of the Institute of Defence Studies and Analysis, which comprised retired diplomats and research scholars who travelled to Washington DC, Paris and Tokyo to explain India’s national security challenges and strategy. I was asked to make presentations on the business opportunities India offered and on India’s commitment to a liberal economic order, to draw attention to the fact that India seeks a mutually beneficial economic relationship with developed economies.

  By taking this step, the Atal Bihari Vajpayee government demonstrated its recognition of external economic liberalization and the creation of relationships of ‘interdependence’ as an important element of a national security strategy. This relationship manifests itself in two ways: first, increased foreign trade and investment creates benign webs of interdependence and mutual benefit with the outside world; second, it extends to the rest of the world the cost of a crisis in India. While trade economists generally emphasize the purely economic and ‘rational’ reasons for trade liberalization, political economists and strategic policy analysts must also appreciate the ‘foreign policy’ and ‘strategic’ dimension of external liberalization.

  In the quarter century after 1991, India has not only remained an active participant in multilateral economic institutions, it has also woven new webs of interdependence with all major powers, including China, and with a large number of Asian nations. It has also kept defence spending to a minimum, not allowing it to overwhelm the finance ministry’s fiscal stabilization agenda.

  In more recent times, India’s ‘strategic partnerships’, entailing defence pacts, have also included economic agreements. The Joint Statement issued by Prime Minister Narendra Modi and President Barack Obama in June 2016—‘The United States and India: Enduring Global Partners in the 21st Century’—in which ‘the leaders affirmed the increasing convergence in their strategic perspectives and emphasized the need to remain closely invested in each other’s security and prosperity’ is the product of this thinking.24

  While the government of Prime Minister Narendra Modi has been viewed by many critics as being hyper-nationalistic in its orientation, there has been no change in the thinking about the fiscal sustainability of defence spending. Defence expenditure as a percentage share of GDP remains well below 2 per cent of GDP and nowhere near the 3 per cent level recommended as an ideal ballpark figure in SDR 1999. India remains committed to its ‘no first use’ nuclear doctrine and the Modi government has vigorously pursued closer economic relations with both Western and Asian economies, including China and Pakistan. The 1991 shift in the view on national security in an open economy still endures.

  IV

  CHANGING CONTOURS OF INDIAN GOVERNANCE

  10

  India’s Governance Challenges: Why Institutions Matter

  Sarwar Lateef1

  The economic reforms of the past twenty-five years have transformed the country in many ways but India’s institutions have failed to keep up with these changes. Sarwar argues that unless India invests in its institutions, it cannot take for granted the high growth rates it is experiencing.

  The major transformation that India has experienced in twenty-five years of economic liberalization has left its key governance institutions behind. This chapter reviews the strengths and weaknesses of Indian governance in the context of a rapidly growing economy, liberated from a regime of controls and state domination. It focuses on a few core institutions, principally at the national level, which are critical to good governance. It does not attempt to review governance at state and local levels, where these challenges are equally, if not more, severe.

  I. Economic Liberalization and Institutional Reforms

  The 1980s and 1990s saw a wave of economic liberalization reforms in the developing world. These typically included fiscal, financial, trade and exchange-rate reforms, opening up to FDI, privatization and deregulation. By the end of the 1990s, with most reforming countries showing relatively poor results, there was increasing recognition of the neglect of institutions in these initial reform programmes.2 A number of studies emphasized the importance of addressing institutional reforms. Institutions, it was argued, played a key role in creating, regulating, stabilizing and legitimizing markets.3

  India’s 1991 reforms were no exception. Institutional reforms were largely ignored with two important exceptions.4 First, financial liberalization was accompanied by efforts to strengthen the regulatory framework to improve prudential norms, capital adequacy standards and external supervision. Second, capital-market reforms were accompanied by the establishment of a modern regulatory framework under a new Securities and Exchange Board of India (SEBI).

  Governance formally entered the official vocabulary in the Tenth Five-Year Plan (2002–07) prepared under the NDA, which saw it as a ‘cornerstone’. ‘Weak governance’, it argued, ‘manifesting itself in poor service delivery, excessive regulation, and uncoordinated and wasteful public expenditure, is seen as one of the key factors impinging on growth and development’.5 The Plan document also stressed the importance of a market-based economy of law and order, the sanctity of contracts, and the speed with which they were enforced. This recognition came late in the life of the NDA government’s term.

  Manmohan Singh, prime minister of the UPA government that came to office in 2004, echoed the same concern in his first address to the nation: ‘No objective in this development agenda can be met if we do not reform the instrument in our hand with which we have to work, the government and public institutions’.6 And indeed, there were a number of governance initiatives during the UPA’s first term, including the establishment of the Second Administrative Reforms Commission (ARC), the passage of the transformative Right to Information Act and a number of e-governance initiatives, including the Unique Identity ‘Aadhaar’ Card. Ironically, the second term of the UPA government was marred by major corruption scandals reflecting regulatory failures; the nexus between corrupt politicians, civil servants and crony capitalists; and the perennial need of political parties for election finance. All these issues are discussed below.

  II. The State of Indian Governance

  The authors of the Indian Constitution bequeathed to independent India a document th
at has largely stood the test of time. Under its benign influence, a democratic experiment has flourished that is quite unique in this world. Many of the institutions it created have taken root. The citizens of India, and particularly its poorest, have demonstrated a faith in the democratic process that is profoundly touching. They take their duty as voters seriously and each election demonstrates their good sense and their capacity to send strong messages to their leaders. So, it is important that the country’s leadership and its elite do not betray this trust.

  The economic reforms of the past twenty-five years have transformed the country in many ways and demonstrated its immense potential. India is richer, more urbanized, better integrated economically, and better connected. But, as noted above, India’s institutions have failed to keep up with these changes. So, while the country, in terms of per capita GNI, is fourfold richer since 1990 and has been making considerable progress in social indicators, in 2015, it is still ranked 138th in terms of per capita GDP and 130th on the UN’s Human Development Index. Its citizens continue to experience significant failures in the delivery and quality of the services the state provides in such critical areas as health, education, and law and order. Some 283 million citizens over the age of six remain illiterate,7 and 21 per cent of its population is below the poverty line.8

  Underlying India’s crisis of governance is a steady deterioration in its institutions, which began in the mid-1970s following Indira Gandhi’s state of Emergency, and has continued largely unchecked. This is reflected in India’s low ratings on international governance indicators, but its principal symptoms, defined broadly, are widespread corruption, failures of quality and quantity in service delivery, deterioration in the rule of law and the related progressive weakening of institutions of restraint.

  The importance of reversing this deterioration in institutions cannot be overstated. India has quickly transitioned from low-income to lower-middle-income status. As Gill and Kharas argue, governments in a middle-income country must manage several important transitions.9 As a market-based economy, India will need to enable a smooth entry and exit from sectors as comparative advantage shifts.

  Industrial policy must facilitate greater technological sophistication, and ensure both an adequate supply of skilled labor and a high-quality managerial and technical output from universities to meet increased demand. Public regulation of infrastructure and natural resources must balance the interests of citizens and investors, and public–private partnerships must be managed with greater transparency and effectiveness. Governments must also learn to effectively manage the growth of cities as urbanization rates increase. They must ensure that public policy addresses income and asset inequalities. And above all, they must ensure the rule of law, enforcement of contracts and speedy dispute resolution. All these call for high-quality public institutions. Unless India invests in its institutions, it cannot take for granted the high growth rates it is experiencing.

  III. The Accountability Triangle

  The social contract implicit in the Constitution calls on citizens to elect its representatives to national, state and local legislatures. These legislatures, in turn, elect a government from amongst their ranks that runs the administration, empowering civil servants to collect revenues and provide a range of services that citizens expect from it, including law and order, health and education. An accountability chain, which runs from citizens to elected officials and from elected officials to civil servants and service providers, links these three sets of players in what constitutes an accountability triangle.10 How accountability works in practice is discussed below, focusing on a few key institutions: the Election Commission, political parties, Parliament, the civil service, the police and the judiciary.

  • Citizens and Their Elected Representatives

  Election Commission

  India’s reputation as a liberal parliamentary democracy has been greatly boosted by the effectiveness with which its Election Commission conducts elections. The 2014 elections involved an electorate of 834 million, of which 553 million, some 66 per cent, exercised their vote in almost 1 million polling stations, requiring some 5 million personnel to conduct the elections. That elections on this massive scale in twenty-nine states and seven union territories are conducted, by and large peacefully, every five years, in what is seen as a free and fair process, and that their results are rarely questioned, is a hugely impressive achievement. But as the Commission frequently argues, the process would be even freer and fairer if the political will existed to address the significant criminalization of politics, the huge sums that are expended by candidates to fight elections well above the specified limits under the law, and the inability to better manage electoral rolls and prevent ‘political parties and influential persons to manage large-scale registration of bogus voters, or large-scale deletion of names of “unfriendly” voters’.11

  Political Parties

  The problems faced by the Election Commission in establishing a freer and fairer process reflect the unwillingness of political parties to subject themselves to a reform process that would better demonstrate the intent of the Constitution. The three key problems facing political parties are (i) criminalization (ii) lack of transparency in the way elections are financed; and (iii) lack of inner-party democracy.

  These problems are not a result of economic liberalization, but they have grown worse over the years. The 1993 Vohra Committee report on criminalization pointed to the clear ‘nexus between the criminal gangs, police, bureaucracy and politicians’ and the fact that ‘some political leaders become the leaders of these gangs/armed senas and over the years get themselves elected to local bodies, State assemblies, and national parliament’.12 In the 2014 Lok Sabha elections, of 8214 candidates scrutinized by the Association for Democratic Reforms (ADR), 1405 faced criminal charges. Of these, 909 were serious, such as murder, communal disharmony, kidnapping and crimes against women. ADR found that the likelihood of being elected was greater for those facing criminal charges.

  Why do political parties nominate criminals? Duraisamy explains that their defence usually is that criminal charges are framed by opposing parties because of ‘animosity or revenge’.13 Criminal actions may have been undertaken on behalf of the party, and those charged are being rewarded for their behaviour. In some cases, these may be wealthy local businessmen who have broken the law. Those facing conviction may find it convenient to seek protection in parliamentary membership.14 But why do voters elect those facing criminal charges? While lack of awareness may often be used as an excuse, it is usually a more complex calculus in which caste, communal and party loyalties compete with charges of criminality.

  Although declared expenditures on elections are usually substantially below the limits prescribed by the Election Commission, it is an open secret that political parties depend heavily on black money and other illegal contributions that supplement the substantial legal contributions they receive predominantly from corporates as tax-deductible contributions. Dependence on legal and illegal political contributions creates obligations that must be met in terms of political favours while in office, a classic example of crony capitalism. Political parties have so far successfully resisted efforts by the Election Commission to have their audited finances disclosed to the public. Not surprisingly, as J.P. Narayan notes, ‘since power is a source of future wealth and income, it becomes an end in itself, not just [the] means to improve society for the public good’.15

  From a long-term perspective, the lack of inner-party democracy represents an even more serious failure. Party posts are not subject to democratic processes but to the whims and fancies of party leadership. In a political system based on feudal leadership styles, chief ministers of states that are larger than most European countries get appointed through consensus among a top coterie of political leaders sitting in New Delhi, and candidates for parliamentary and assembly seats are chosen through a highly opaque and murky process. This prevents a political market from emerging where leaders get
elected by party members for their ability to deliver results as perceived by voters rather than by leaders who have themselves been chosen through an opaque process.

  Parliament

  Political parties determine the quality of Parliament. The average member of the Sixteenth Lok Sabha is older than was the case a decade or two ago, better educated (75 per cent of MPs have graduate degrees), and substantially richer: some 443 of 543 members (who are currently paid Rs 6,00,000 a year)16 are ‘crorepatis’ (those with assets exceeding Rs 10 million). The proposition that you get rich in politics is illustrated by the fact that the 165 MPs who were re-elected from the Fifteenth Lok Sabha saw their assets rise in nominal terms by 137 per cent to an average of Rs 128 million, albeit partly reflecting the high inflation rate and rise in asset prices over the five-year period (see Table 1).

  A disturbing trend, as noted above, is the steady increase in the number of MPs who face criminal charges, many of whom are in the ruling party. The percentage of MPs facing serious criminal charges (murder, rape etc.) has risen from 15 per cent in the Fifteenth Lok Sabha to 22 per cent in the Sixteenth. While it is easy to file First Information Reports (FIRs) and lodge criminal charges against any person in India—given a corrupt police force—the failure to frame and enforce rules that prevent criminal elements from seeking office, as suggested by several eminent committees, reflects the increasing dependence of all parties on such elements to win seats in legislatures.

  Parliament has also seen its productivity decline. While there are many outstanding members who are fully capable of engaging in debate, political parties have taken to using ‘unparliamentary’ tactics to disrupt proceedings and prevent discussion. Time spent on interruptions and adjournments due to disorderly scenes rose from an average of 9 per cent in the 1991–99 period, to 19–20 per cent in the 1999–2009 period, and 40 per cent in the 2009–14 period. Time spent on actual business declined steadily from 2528 hours in the Tenth Lok Sabha to 1345 in the Fifteenth (Lok Sabha Secretariat 2014).