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Discussing 'Inclusive Growth' Ahead of Its Time

Inclusive Growth: K N Raj on Economic Development Ashoka Mody (ed)

Reviews

Discussing ‘Inclusive Growth’Ahead of Its Time

Inclusive Growth: K N Raj on Economic Development

Ashoka Mody (ed); Orient Longman, Hyderabad, for Sameeksha Trust, 2006; pp 367 including index, Rs 350.

A VAIDYANATHAN

T
his collection brings together a selection of K N Raj’s essays on various aspects of India’s economic development in the post-independence period published in the Economic Weekly and Economic and Political Weekly. Though only a fraction of his writings on development issues, it brings out the wide range of issues that he studied, his breadth of perspective, and the clarity and insightfulness of his analysis. His work covers both macroeconomic aspects of development strategy and policy as well as specific aspects, notably agrarian structure and land reform, conceptual and measurement rural unemployment, India’s cattle economy, decentralisation and the impact of structural changes in the world economy for developing countries. In all these areas his work generated lively scholarly debates and provided a rich stimulus for researchers.

Since all the articles included in the collection were written before 1990, readers may be tempted to question its relevance in the contemporary post-reform context. Even in respect of dated discussion of specific issues, as is evident from the larger body of his work, Raj was constantly re-examining his interpretation and conclusions in the light of fresh evidence and the evolving situation. His writings dealt with issues and provided insights, which remain relevant and important even now.

A remarkable and abiding contribution of Raj – reflected in the essays ‘Politics and Economics of Intermediate Regimes’ and ‘Poverty Politics and Development in Western Europe’ included in this collection and the well known Centre for Development Studies (CDS) study on Kerala’s development experience – is his attempt to explore economic development and social change as a historical process shaped by wider social, economic and political forces. All these look at development not with clinical detachment but informed by deep and continuing concern about how and to what extent this process can be shaped for the benefit of the poor and the underprivileged. This concern, currently referred to as “inclusive growth”, is an apt title to the collection that Ashoka Mody has put together. His editorial introduction is an excellent account of the highlights of the chequered course of India’s economy since independence, viewed in the light of Raj’s interpretation of the politics and economics of intermediate regimes.

Intermediate Regimes

Michal Kalecki suggested the concept of “intermediate regimes” in a paper published in 1964, discussing the development prospects of third world countries, which became independent after the war. He noted three distinct features of these countries – the emergence of lower middle class and rich peasantry as the ruling class; their adoption of state-led development; and the availability of development aid from socialist countries. He argued that under this conjuncture of circumstances, such regimes could promote economic development through the public sector, provided a land reform to curtail the power of large feudal landlords was implemented and the state was able to mobilise surpluses for investment. While not necessarily beneficial to labourers on farms and in small factories and the unemployed, such development would be highly advantageous to the lower middle class and richer peasants and the regime would be politically viable.

Raj found “intermediate regimes” to be a refreshing departure from conventional Marxist class analysis and an apt description of the regimes in newly independent under-developed countries, many of which did not go through a revolution, and did not have a well developed class of capitalists and proletariat. He recognised that the characteristics and functioning of such regimes differ across countries but did not discuss this aspect except for passing references to China and socialist countries. His critique of the intermediate regimes thesis, though clearly based on the Indian experience, emphasised the ambiguity and fuzziness of the concept of “middle class” and the fact that its composition, comprising small farm and nonfarm enterprises, self employed and those using hired labour, white collar professionals, is too heterogeneous to form a coherent and well defined ruling class. There is not much commonality of interests between the “middle class” and the rich peasantry either.

In such a situation, “intermediate regimes” can do little by way of redistribution. On the other hand, they have a strong propensity to secure and retain their support base by yielding to pressures from one other segment for lower taxes and/or higher subsidies. Expansion of the state’s development role also leads to an expansion of its bureaucracy which emerges as an additional claimant on the state’s resources backed by strong union pressures for increase in salaries and benefits. These factors severely limit the capacity of the state to mobilise surpluses, make effective use of them for promoting rapid growth and achieve a broad-based improvement in the conditions of different constituents of the regime. Moreover, regimes that function within a system of government based on universal adult franchise find it necessary to launch special anti-poverty programmes. This is an attempt to broaden their support base among groups, the rural proletariat, workers in small enterprises and others belonging to the poorest segments, which are not part of the ruling coalition but comprise a significant part of the electorate.

Economic and Political Weekly July 28, 2007

Altogether, he was sceptical about Kalecki’s assessment of the capacity of such regimes to achieve and sustain rapid economic development through state capitalism. Significantly, he refers extensively to heterogeneity and conflicts among various groups in Chinese society even after the revolution; the abuses that state enterprises in socialist countries can lead to; and their inability to find effective ways to check these abuses.

There are differences about the usefulness of the concept of “intermediate regimes” for understanding the dynamics of the political economy of developing countries. Nevertheless, the extent to which the unravelling of the Indian experience corresponds to Raj’s analysis and prognosis is remarkable. Mody’s review does bring this out to a considerable extent but deserves fuller discussion. This is what the present review attempts to do.

Fiscal Discipline and Subsidies

When Raj wrote the paper, subsidies were relatively limited in scope and magnitude. Since then they have proliferated and grown at an explosive rate. While much of them were explicit and direct, a good deal was the result of a calculated failure to adjust prices of goods and services provided by the public sector to meet rising costs, laxity in assessment and collection of dues, and condoning of illegal use. This was also the period of proliferation of poverty alleviation programmes and a phenomenal growth of public expenditure on them to woo the support of the poor who formed a large part of the electorate. Political parties across the spectrum vied with each other to launch schemes for providing employment to the poor. This enabled them to acquire productive assets, providing a modicum of social security to selected segments of the disadvantaged (widows, aged and disabled) and for development of the chronically backward regions. By the turn of the century, these accounted for a substantial part of public sector plan expenditure.

The government and its enterprises posted a miserably poor record in mobilising resources and generating surpluses for development. The government was unwilling and unable to make the tax system more broad-based and progressive; compliance was poor and enforcement lax. Tax revenues, as a proportion of the gross domestic product (GDP), remained low and in fact declined over a considerable part of the period. Public enterprises as a whole generated meagre surpluses with many important sectors posting huge and increasing losses. Personnel costs of the government and public sector enterprises kept soaring under pressure of their unions, which the state was powerless to resist.

Measures to tighten fiscal discipline and ensure reasonably efficient management of public systems were made impossible in the face of stiff political resistance across a broad front. The net result was a progressive reduction in the quantum of public savings available for developmental investment. Public sector plan outlays had to be financed by borrowings and recourse to inflationary deficits. These were also constrained by mounting burden of public debt, high and increasing interest rates and low political tolerance to inflation. As a result, the growth of public sector plan outlays as a whole, and more so in public

Economic and Political Weekly July 28, 2007 sector investment in industries and infrastructure, slowed down.

The past three decades also witnessed a rapid unravelling of internal contradictions in the polity between castes, communities and regions, between rural and urban areas and between employers and workers in the organised segments of both private and public sectors. In large part, the process was driven by increasing competition for access to resources for livelihood, and control over the state’s resources in the context of slow pace of growth, unequal distribution of its benefits, the growing aspirations and political assertiveness of the poor and socially underprivileged segments of society. The pressures on the state on account of these have increased with the growing importance of regional parties and the emergence of the underclass (scheduled caste, scheduled tribe and backward communities) in elected public offices at all levels. The political class has sought to contain and manage these pressures through guaranteed support prices for major crops and subsidisation of agricultural inputs (water, electricity, and fertilisers); cheap credit to agriculture and small enterprises; permissiveness in recovery of loans and grant of waivers; subsidised supply of food and other essentials through the public distribution system; huge expansion in anti poverty programmes; efforts to extend the scope and duration of caste-based reservations in education and jobs; and constitutional amendments aimed at devolving authority and resources to elected bodies for developmental activity at the sub-state level.

These measures have, however, not been effective in some cases because of limited coverage, and more generally due to mismanagement and widespread corruption. Price support for agriculture has been effective only for a few crops and that too not in all regions. Similarly, the network for subsidised distribution of essential commodities is concentrated more in urban areas; it is very thin or non-existent in large parts of rural India. Complaints of inadequate and irregular supply of commodities, and their poor quality are widespread. Corruption in the management of these programmes, the distribution of input subsidies as well as anti-poverty schemes is rampant but continues, unchecked, despite considerable and growing public resentment. The explanation is to be found in the fact that the determination where and what types of works are to be taken up, who should be entrusted with their construction, the identification of individuals entitled to specific subsidies and the actual disbursement of the entitlements, necessarily involve exercise of discretion by the executive arm of the government at all levels. Since these schemes are numerous and dispersed across a large number of communities, effective monitoring by a central authority is very difficult. This creates vast opportunities for misuse of discretionary authority and corruption.

Political Patronage

The political class has been quick to recognise this and has institutionalised a system for exploiting these schemes as a source of funds for dispensing political patronage, personal and party purposes, and also for rewarding their cadre/supporters down to the village level. Credible mechanisms for monitoring and checking the implementation of poverty alleviation and local development schemes have not been created or allowed to function effectively. The political class shows little inclination to tackle this issue. It is not surprising that it has mounted a strong and so far successful campaign to prevent the transfer of resources, authority and responsibility for local development to elected district and local panchayats, even to the limited extent mandated by the 73rd and 74th constitutional amendments.

Raj was of the view that despite their various internal contradictions, intermediate regimes “keep going as a political reality” in several countries. This, according to him, is because the upper middle class and the capitalists are not strong enough to take over and even the radical parties prefer to serve limited sectarian objectives than work for genuine broadbased transformation of society. That this has proved true so far is a reflection of the resilience of the political class and their capacity to manage contradictions. But he did rightly apprehend that “failure to generate surpluses can blunt the growth of state capitalism but also help promote the development of private capitalism”.

Even in the 1970s, confidence about achieving rapid and equitable growth with a dominant public sector had begun to weaken even as the necessity and desirability of tight state control over private sector came to be questioned. This trend became stronger as growth of income and employment in the country continued to be slow with no signs of decline in inequalities or the incidence of poverty. Taiwan, South Korea and subsequently some south-east Asian countries achieved much faster growth and diversification based on exports and private enterprise, with the state providing an environment congenial to them. Besides the private sector, influential segments of economists, bureaucrats, the media and political leadership espoused the latter model. Measures to relax controls on private investment and foreign trade were also taken up gingerly and piecemeal.

The big change came from the early 1990s, with the removal of controls on private large and medium industry and in modern information technology (IT), IT related and financial sectors, progressive liberalisation of foreign trade and the adoption of a proactive policy of wooing private foreign, direct and financial, investment. Though there was little change in respect of other major sectors (agriculture, small industry and trade and services), growth of GDP and employment opportunities for educated people, especially those with professional qualifications, within and outside the country touched unprecedented levels. The balance of economic advantage and political power has shifted significantly in favour of the private corporate sector and the upper middle class. It has also aggravated internal contradictions in the polity.

The distribution of the benefits of accelerated overall growth has been palpably uneven. Inter-class, inter-sectoral and inter-regional disparities have widened; several segments of the society, especially peasants, and underprivileged social groups feel that they have not benefited much even in absolute terms. There is widespread and growing resentment among these groups at attempts to change policies – subsidies, affirmative action, privatisation of health and education, and even anti-poverty programmes – to their disadvantage and to promote policies – notably fiscal concessions, special economic zones, forcible acquisition of farm land and land in tribal areas – favouring the emerging new elite. The spread of the Naxalite movement in the tribal belt, large number of farmers’ suicides, violent agitations over land acquisition for special economic zones (SEZs), intensified conflicts over access to and use of natural resources, and the

Economic and Political Weekly July 28, 2007

growing confrontation over caste/ community reservations in education and jobs are all manifestations of increasing disjunctions in society.

The political class is evidently eager to please the new elite in the belief that it will sustain the momentum of high growth and that fast growth will dissolve tensions by bringing prosperity to all classes and regions. However, this has not happened and there is good reason to be sceptical if it will happen in the future. The concerns of the “underclass” are therefore genuine. Given the preponderance of this class in the electorate and the growing political assertiveness and presence of underprivileged groups in legislatures and government, these concerns cannot be ignored, or overridden with impunity. This larger contradiction in the country’s polity is further complicated by numerous conflicts of interest among different segments of the “intermediate class”. The attitudes and behaviour of the political class hardly gives room for optimism that the challenge of these contradictions will be resolved smoothly, satisfactorily or soon. The capitalists, the upper middle class and aspirants to enter that class have gained unprecedented political influence and also political ambitions. Whether and what kind of balance will be struck between them and the rest of ‘Bharat’ without seriously compromising the latter’s interests and democracy remains to be seen.

EPW

Email: avnathanster@gmail.com

Economic and Political Weekly July 28, 2007

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