Political economy of reforms

Print edition : July 03, 1999

The Political Economy of Development in India: Expanded Edition with an Epilogue on the Political Economy of Reform in India by Pranab Bardhan; Oxford University Press, Delhi, 1998; pages 153, Rs. 150.

WHEN the original version of this book dealing with the political economy of development in India appeared in 1984, it received a great deal of attention because it was a rather rare attempt, especially by an economist, to interpret the problems of economic development in the country in the context of political processes based on what the author had identified as the leading class interests. P. N. Dhar, economist and for some time Principal Secretary to Prime Minister Indira Gandhi, had described it as a "notable contribution in a field which, though exceedingly important, has been neglected by Indian economists."

Although Bardhan, who is Professor of Economics at the University of California, Berkeley, United States, had then expressed concern over prevailing mass poverty in the country, and thus over the distributive aspect of development, he had, for his analytical purposes, identified development with economic growth. His justification for doing so was his perception that the sluggish economic growth in the post-Independence period itself was the main cause for the persistence of mass poverty. And so, towards the end of his introductory chapter he had posed the central development question as: "What are the factors that constrain the growth performance in India" (page 8). He went on to say: "I shall focus primarily on the political and economic constraints, and bring out the role of public investment in the agricultural and industrial infrastructure, and of public management of capital, as key determinants of economic growth. In connection with this role of the public sector, I shall explore the nature of the Indian state and its relationship with society, and the kind of economic classes that dominate the latter and the types of pressures for patronage and subsidies that they generate. I shall then try to trace the impact of these forces on the functioning of the economy, especially its growth process, and on the functioning of the polity, especially its democratic process" (page 9).

I shall briefly indicate how Bardhan elaborates this political economy analysis of development before turning to an exposition and critique of his political economy treatment of reforms. Bardhan recognises the plurality and heterogeneity of interest groups or classes on the Indian scene, but for analytical purposes concentrates on "proprietary classes", dividing them into three groups - the industrial capitalist class, the rich farmers, and the "professionals" consisting of the civil and military bureaucracy and white-collar workers of all kinds. Although these three classes together may constitute only 20 per cent or so of the Indian population, numerically they are a large segment and economically they are the most powerful section. Each one of these groups is interested in protecting and promoting its own interests. How they achieve it using the state as a means is the crux of the political economy problem that Bardhan deals with. The role of the state is significant not only because it exercises political and legal powers, but also and mainly because in a regime of state-dominated planned economic development the state owns and controls a substantial share of economic resources.

In terms of this analytical approach Bardhan makes a review of planned economic development in India of the first three decades since Independence. Over this period the state became a dominant economic power, an "overdeveloped" one, by virtue of the large public sector owned by it, its key role in capital formation, the controls it came to have over the allocation of credit and, above all, the manifold regulatory powers it acquired. Because of such enormous power the state did not become a mere tool in the hands of any of the interest groups. It had a large measure of autonomy which it used to reconcile or constrain inter-class conflicts and thus to shape class realignments.

However, the groups constantly strove to take advantage of the policies and programmes of the state and succeeded in large measure. A few examples may be recalled. It is well known how the big business groups were able to utilise even the measures aimed at preventing monopolies to build up their own empires. The rich farmers succeeded in strengthening their position through a variety of state-sponsored efforts to make the country self-sufficient in food. The professionals exercised their influence over the state to shape policies of taxation and subsidies and thus to divert public funds for their benefit. "The Indian public economy has thus become an elaborate network of patronage and subsidies. The heterogeneous proprietary classes fight and bargain for their share in the spoils of the system and often strike compromises in the form of 'log-rolling' in the usual fashion of pressure group" (pages 65-66).

These processes led to two consequences, according to Bardhan. First, the private draining of public resources led to a gradual, but dangerous, decline in both public and private investment in the economy and consequently slowed down the growth rate. The fiscal crisis that developed (growth of non-developmental public expenditure, budget deficits and so on) also made it virtually impossible to continue the strategy of state-dominated economic development.

On the other hand, the class balance and heterogeneity may have indirectly contributed to the maintenance of democratic processes. Bardhan's interpretation of the situation reads: "In a country where the elements in the dominant coalition are diverse, and each sufficiently strong to exert pressures and pulls in different directions, political democracy may have a slightly better chance."

The combination of these two had, by the early 1980s, led to something of a low-level political economic equilibrium whose stability Bardhan was not sure of when he wound up his analysis.

In the Epilogue, Bardhan's attempt is to use his analytical frame for an understanding of the political economy of the Reforms started in the early 1990s. He recognises "an increase in the diversity, fluidity, and fragmentation in the coalition of dominant interest groups" (page 131). The industrial bourgeoisie is divided, some enthusiastically supporting liberalisation and globalisation and others continuing to seek state support at least to ensure a level playing field. The rich farmer families are diversifying their investments, often branching out into trade, transport, small industry and real estate. And a section of the bureaucracy grudgingly accepts that the state had over-extended itself in the economy. These changes and realignments of the dominant coalition have led to some measure of support for deregulatory reforms.

Secondly, in the realm of politics there has been something of a shift from the Centre to the regions and in favour of the backward and lower castes. Bardhan admits that this is an expression of the "victorious march of democracy in India" although it has its "banality and gaudiness" and the propensity to become populist.

Bardhan also recognises a disjuncture between economics and politics in this situation. On the one hand, the dominant elite, who till now were eager to use the state for their economic advantage, have accepted market-oriented reforms both as beneficial and irreversible. On the other hand, some of the major political events in the last decade and the emphasis they give to group equity and special dispensation to emerging groups are essentially anti-market. They amount, according to Bardhan, "to a drowning of considerations of efficiency in the name of inter-group equity" (page 134). At this point the economist in Bardhan comes out clearly and decisively. "Our collective passion for group equity, for group rather than individual rights, and the deep suspicion of competition... work against the market and allocational efficiency" (page 136).

But, surely, from a political economy perspective this uncritical acceptance of the market - the allocative efficiency it is supposed to achieve and the individual rights it is assumed to guarantee - is not defensible. For, while the market is a useful social institution and arguably can have a greater role in the Indian economy, the allocative efficiency it brings about is not unambiguous, but is conditioned by the pattern of the distribution of resources among the participants, and will favour those who are well endowed. The market does not guarantee the rights of the individual: at best it confers benefits on those who have the resources to make use of it.

The political economy issue of distributive justice cannot be pushed aside merely by invoking the alleged allocative efficiency of the market and competition. It becomes more palpable and pertinent in a situation as in India where, as Bardhan documents in this book, the distribution of resources is glaringly unequal and millions of people cannot claim to have any physical resources at all. There will, therefore, be tension between the economic exclusiveness that the market forces make a reality, and the political inclusiveness which is the essence of democracy. The modalities of resolving this tension are historically contingent, but emphasising group equity is a fairly standard procedure. This emphasis is not an end in itself. Those who plead for group equity are not primarily concerned with the group as such. Their interest is in achieving individual rights, mainly economic rights, but they see in the group the political power to achieve their individual objectives.

Surprisingly, Bardhan does not seem to be aware of this basic principle of political economy, possibly because by reducing development to economic growth and by attributing mass poverty solely to the inadequacy of growth in the 1984 version of the book, he had failed to place the distributive issue at the centre of what he claimed to be a political economy analysis.

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