Political Economy of Reforms

Professor Bhavani, a student of Suresh, modestly says in the Preface Tendulkar and Bhavani (2012) that with Suresh’s untimely demise she ‘had to take the responsibility of completing the draft’. The draft she refers to is the one that Suresh and she began drafting with the information (particularly on Political Economy) and data that they had discussed and put together between February 2011 and April 2011 when Suresh left for Pune. As I mentioned earlier I will focus on Tendulkar and Bhavani (2012). The discussion of Tendulkar and Bhavani (2012) of political economy issues and drawing on them at appropriate relevant contexts of policies adopted are deeper and more extensive than in Srinivasan and Tendulkar (2003). In particular the questions in the post 1991 reforms process in this chapter and the analytical framework in Chap. 2 reflect the remarkable depth and width of coverage.

The authors justifiably characterize Indian reforms as systemic, continuing, and wide-ranging though the reforms process was by no means smooth, internally synchronized, complete, or fully successful. They cite the oft repeated argument by political scientists (e.g. Roy Jenkins cited by them) that India is an unlikely candidate for systemic reforms because of its being a low-income democracy with large diversity in religion, language and other socio-economic-political dimensions (ethnicity, caste, regional origin) inhibiting consensus building in favour of systemic change. Moreover India’s institutional environment with its entrenched belief in economic nationalism and socialism and a governance structure of coalition politics is widely believed to be inimical to any reforms. Importantly the originators of reforms constituted minorities within their own parties, with no strong political bases of their own. The questions that arise are how such political leaders not only initiated reforms in a presumably hostile political context but also managed the reforms to move in the same consistent direction over a decade and a half.

I find the hypothesis of political scientists that a consensus in favour of reforms is a necessary condition for them to be adopted to be unpersuasive. I would argue that as long as the reform agenda has elements of interest to each of the major parties it would be difficult for them to build a consensus to prevent its adoption as argued by the reformer of New Zealand’s economy, Roger Douglas, who successfully transformed New Zealand from a socialist swamp into a thriving market economy. Be that as it may, the authors set themselves the task of offering a ‘set of coherent and plausible clues towards unscrambling the puzzling features of Indian reform process...’ (p. 5).

In Chap. 2 the authors present their chosen analytical framework for completing their task, drawing on the work of Douglass North augmented by certain conceptual distinctions suggested by William Baumol. In this framework, ‘the performance of economies over time is determined by path-dependent responses of individual entrepreneurs and organizations to changing incentive structure generated by the evolving institutional matrix consisting of mutually interacting formal and informal rules of the game in the social, political and economic domains (Ibid.)’. The thoughtful authors recognize that it is easier to describe the framework in words than to formally model it algebraically let alone rigorously estimate it econometrically and derive policy implications.

They quote North himself as admitting that no theory of economic dynamics comparable in precision to general equilibrium theory (e.g. Arrow-Debreu theory of general equilibrium in a complete set of contingent commodity markets) is available and that he offers ‘an initial scaffolding of an analytical framework that help an analytical understanding of the way economies evolve over time’. Interestingly Professor Mahalanobis rationalized the Feld’man-Mahalanobis two sector model as ‘scaffolding’ for building an understanding of essential aspects of dynamics of growth and capital accumulation from a policy perspective. The mathematical model abstracts from non-essential features of reality and retains only essential features for the sake of tractability. Once the model is put through its paces and the features of policy gleaned (i.e. heavy industry strategy) the foundation for building of development analysis is complete and the ‘scaffolding’ is thrown away. Of course, North does not offer an algebraic analogue of the two-sector model. Yet the authors amply demonstrate that North’s scaffolding is as useful in policy analysis as the two-sector model.

The elaboration in Chap. 2, of formal and informal rules of the game, the introduction of a broader than Schumpeterian role of entrepreneurs invoking Baumol to include all those who use creative, novel, and ingenious methods to gain social recognition, power prestige, or wealth is innovative and very useful. Given that not much is known about the supply of entrepreneurs, Baumol focuses on their available supply in three types, those engaged in productive, unproductive and destructive activities. The section on institutions and economic performance draws on North’s attempt to unify the approach to the distinct processes of technological and institutional change by redefining the terms of factor augmenting or attenuating technological change to include the effect of institutional change on the marginal product of inputs brought about by the change. The chapter concludes with a very brief discussion of Interest groups, Distributional Coalition and Distributional Equilibrium. The distinction due to Sudipto Kaviraj between vertical mobilization that appeals to commonality of non-economic identity (e.g. caste) and cutting across economic identities and horizontal mobilization that appeals to commonality of economic interests (e.g. wages) and cutting across non-economic identities in the context of reforms is appealing.

Chapters 3, 4, 5 and 6 overlap the chronology laid out in sections of Chap. 2 primarily drafted by Suresh in Srinivasan and Tendulkar (2003). Naturally they cover more events, policies and politics of each phase of the chronology. The basic difference is the consistent emphasis on political economy reflected in each chapter of Tendulkar and Bhavani (2012). Chapter 3 on post-independence development strategy describes the emphasis on state-directed and state-controlled strategy with emphasis on the expansion of the public sector and insularity from world markets. Except for minor changes of phrases used and their relative emphasis the account is the same in the two books. Chapter 4 on the slow growth phase of 1950-80 is suggestively subtitled Incentive Structure and Economic Performance and draws on North. It argues that the slow growth, low fiscal and current account deficits of this phase constituted growth equilibrium. Scarcity rent creating quantitative controls and their selective and discretionary exercise enabled rent allocation to chosen interest groups without affecting the budget or current account, thus enabling the pursuit of a low fiscal and current account deficits. Insularity from world markets and eliminating domestic competition through discretionary import and investment licensing which created significant scarcity rents were the policy instruments. The interest groups were small in size and conflicts among them were minor.

The gains from the incentive structure provided domestic savings, which combined with external aid were adequate to finance the investment needs of slow growth. The authors argue plausibly that the interest groups and the government had no incentive to move from this path of policies and their outcomes thus generating equilibrium of slow growth, low fiscal and current account deficits. Chapter 5 on the decade of the 1980s looks at the emergence of regional parties and the entry of farmers, small industrialists/ traders as disturbing the growth and distributional equilibrium of the previous three decades inducing a shift away from horizontal to vertical mobilizations. Chapter 6 on the context and timing of the 1991 reforms considerably overlaps the story in Srinivasan and Tendulkar (2003). It seems to me that Chaps. 7-9 are primarily the contributions of Professor Bhavani. Since my focus is on Suresh’s contributions I will not elaborate on them except to say that their substantial political economy content is very impressive and I agree with most of it. The two Appendices, Appendix I (itself consisting of Appendices A, B, C and D on Economic Data) and Appendix II with 4 tables on Pre-poll alliances and the electoral performances and 17 more with various economic data, would be extremely useful to students and scholars of India’s Development.

In conclusion, let me first emphasize that Suresh’s analytical and policy contributions during his ISI period continue to be relevant. His emphasis on the need to establish the political feasibility of proposed changes in the method of planning as he emphasized in the seventies are as relevant now as they were then, except that the proposed change is a broad agenda of reforms (‘big bang’ and others). The grounds for his scepticism of the feasibility of change to rolling plans seems to be relevant also to the feasibility of “big bang and other” reforms for example. Second the number and range of his contributions after he resigned from ISI, particularly his books with Professor Bhavani (Tendulkar and Bhavani 2007, 2012) are remarkable for their depth in their exploration of India’ s Development and Political Economy.

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