May 29 2009:
In June 1989 a project at an American university involving Pakistani and other scholars, including one Indian, led to the book Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s published in Karachi, New Delhi and elsewhere. The book reached Nawaz Sharif and the Islamabad elite, and General Musharraf’s current proposal on J&K, endorsed warmly by the US State Department last week, derives from the last paragraph of its editorial introduction: “Kashmir… must be demilitarised and unified by both countries sooner or later, and it must be done without force. There has been enough needless bloodshed on the subcontinent… Modern Pakistanis and Indians are free peoples who can voluntarily agree in their own interests to alter the terms set hurriedly by Attlee or Mountbatten in the Indian Independence Act 1947. Nobody but we ourselves keeps us prisoners of superficial definitions of who we are or might be. The subcontinent could evolve its political identity over a period of time on the pattern of Western Europe, with open borders and (common) tariffs to the outside world, with the free movement of people, capital, ideas and culture. Large armed forces could be reduced and transformed in a manner that would enhance the security of each nation. The real and peaceful economic revolution of the masses of the subcontinent would then be able to begin.”
The editors as economists decried the waste of resources involved in the Pakistan-India confrontation, saying it had “greatly impoverished the general budgets of both Pakistan and India. If it has benefited important sections of the political and military elites of both countries, it has done so only at the expense of the general welfare of the masses.”
International law
Such words may have been bold in the early 1990s but today, a decade and a half later, they seem incomplete and rather naïve even to their author, who was myself, the only Indian in that project. Most significantly, the position in international law in the context of historical facts had been wholly neglected. So had been the manifest nature of the contemporary Pakistani state.
Jammu & Kashmir became an entity in international law when the Treaty of Amritsar was signed between Gulab Singh and the British on March 16 1846. British India itself became an entity in international law much later, possibly as late as June 1919 when it signed the Treaty of Versailles. As for Pakistan, it had no existence in world history or international law until August 14 1947, when the British created it as a new entity out of certain demarcated areas of British India and gave it the status of a Dominion. British India dissolved itself on August 15 1947 and the Dominion of India became its successor-state in international law on that date. As BR Ambedkar pointed out at the time, the new India automatically inherited British India’s suzerainty over any and all remaining “princely” states of so-called “Indian India”. In case of J&K in particular, there never was any question of it being recognised as an independent entity in global international law.
The new Pakistan, by entering a Standstill Agreement with J&K as of August 15 1947, did locally recognise J&K’s sovereignty over its decision whether to join Pakistan or India. But this Pakistani recognition lasted only until the attack on J&K that commenced from Pakistani territory as of October 22 1947, an attack in which Pakistani forces were complicit (something which, in different and mutating senses, has continued ever since). The Dominion of India had indicated it might have consented if J&K’s Ruler had decided to accede to Pakistan in the weeks following the dissolution of British India. But no such thing happened: what did happen was the descent of J&K into a condition of legal anarchy.
Beginning with the Pakistani attack on J&K as of October 22 upto and including the Rape of Baramulla and the British-led Pakistani coup détat in Gilgit on one side, and the arrival of Indian forces as well as mobilization by Sheikh Abdullah and Bakshi Ghulam Mohammad of J&K’s civilians to repel the Pakistani invaders on the other side, the State of Jammu & Kashmir became an ownerless entity in international law. In Roman Law, from which all modern international and municipal law ultimately derives, the ownership of an ownerless entity is open to be determined by “military decision”. The January 1949 Ceasefire Line that came to be renamed the Line of Control after the 1971 Bangladesh War, demarcates the respective territories that the then-Dominions and later Republics of India and Pakistan acquired by “military decision” of the erstwhile State of J&K which had come to cease to exist.
What the Republic of India means by saying today that boundaries cannot be redrawn nor any populations forcibly transferred is quite simply that the division of erstwhile J&K territory is permanent, and that sovereignty over it is indivisible. It is only sheer ignorance on the part of General Musharraf’s Indian interviewer the other day which caused it to be said that Pakistan was willing to “give up” its claim on erstwhile J&K State territory which India has held: Pakistan has never had nor even made such a claim in international law. What Pakistan has claimed is that India has been an occupier and that there are many people inhabiting the Indian area who may not wish to be Indian nationals and who are being compelled against their will to remain so ~ forgetting to add that precisely the same could be said likewise of the Pakistani-held area.
Accordingly, the lawful solution proposed in these pages a year ago to resolve that matter, serious as it is, has been that the Republic of India invite every person covered under Article 370, citizen-by- citizen, under a condition of full information, to privately and without fear decide, if he/she has not done so already, between possible Indian, Iranian, Afghan or Pakistani nationalities ~ granting rights and obligations of permanent residents to any of those persons who may choose for whatever private reason not to remain Indian nationals. If Pakistan acted likewise, the problem of J&K would indeed come to be resolved. The Americans, as self- appointed mediators, have said they wish “the people of the region to have a voice” in a solution: there can be no better expression of such voice than allowing individuals to privately choose their own nationalities and their rights and responsibilities accordingly. The issue of territorial sovereignty is logically distinct from that of the choice of nationality by individual inhabitants.
Military de-escalation
Equally significant though in assessing whether General Musharraf’s proposal is an anachronism, is Pakistan’s history since 1947: through Ayub’s 1965 attack, the civil war and secession of Bangladesh, the Afghan war and growth of the ISI, the Kargil incursion, the 1999 coup détat, and, once or twice removed, the 9/11 attacks against America. It is not a history that allows any confidence to arise in Indians that we are not dealing with a country misgoverned by a tiny arrogant exploitative military elite who remain hell-bent on aggression against us. Like the USA and USSR twenty years ago, what we need to negotiate about, and negotiate hard about, is an overall mutual military drawdown and de-escalation appropriate to lack of aggressive intent on both sides. Is General Musharraf willing to discuss that? It would involve reciprocal verifiable assessment of one another’s reasonable military requirements on the assumption that each was not a threatening enemy of the other. That was how the USA-USSR drawdown and de-escalation occurred successfully. If General Musharraf is unwilling to enter such a discussion, there is hardly anything to talk about with him. We should wait for democracy to return.
Someone once wondered if you can play chess without the Queen; I wonder, can a poem be written without words?
Certainly no country other than the United States might have its modern history sought to be told of in a medley such as this.
SR
Constitution for a Second Indian Republic
Author’s Note April 2007: I wrote “A Second Constitution for India” on October 2 1990 while working in an advisory capacity for Rajiv Gandhi, then Leader of the Opposition. But he did not get to see it and I was not able to guide any coherent discussion towards this vital subject. I published it on April 20 1991 in The Statesman in its Saturday supplement. While I am not sure I agree with all of my 1991 “Constitution” today, it may be useful for discussion. One salient feature of this concise 60-article Constitution is having a directly elected PM and Deputy PM with a tough Senate somewhat on the US pattern (though the distinction between Head of Government and Head of State is maintained as in the present system) with a modified British pattern of parliamentary democracy continuing in the States.
I do, however, fully endorse what I wrote on December 30 2002 in a personal letter to the late C. R. Irani, in his capacity as a member of the “Constitutional Review Commission” (to which he responded with very warm agreement). That letter is placed below the text of the proposal and outlines some of what I think is most urgent today in India’s constitional progress.
“Nai Duniya”, Constitution of a Second Republic
by Subroto Roy
First published in The Statesman, April 20 1991
Preamble
We the People of India, in order to establish a more perfect Union of PERPETUAL PEACE; in which the ancient virtues of COURAGE,TRUTHFULNESS and JUSTICE may be better practiced; in which the FREEDOM and WELFARE of all our People may be more easily secured, do adopt, enact and give to ourselves this Constitution, on this the 26th day of January 1995.
FOUNDATION
1. India, that is Bharat or Hindustan, shall be a Union of States and Territories, and a sovereign member of the community of nations.
2. The Union of India shall be a democratic republic, and the Union shall guarantee a democratic and republican form of governance in each of its States and Territories.
3. The Union of India shall protect every State and Territory against foreign aggression and armed rebellion, and shall ensure its governance to be in accordance with provisions of the Union Constitution.
4. A State or Territory may elect to establish its own Constitution, but no provision of the Constitution of any State of Territory shall be valid if it violates any provision of the Union Constitution.
FUNDAMENTAL RIGHTS OF CITIZENS
5. Every person born in the territory of India, or either of whose parents or any of whose grandparents was born in the territory of India, or who is a citizen of India at the commencement of this Constitution shall be a citizen of India by birth. Any person who has been domiciled in India for five years may become a citizen of India by naturalization according to law.
6. Every citizen of India who is not less than 21 years of age shall have the right to vote, and the right to vote shall not be denied or abridged on account of religion, race, sex, descent, caste or place of birth, or by reason of failure to pay any poll tax or any other tax.
7. The Union of India or any of its States or Territories shall not deny to any person within the territory of India equality before the laws or the equal protection of the laws.
8. No person within the territory of India shall be deprived of life, liberty or property save by authority of law, nor shall private property be taken for public use without just compensation.
9. The rights of citizens to be secure in their persons, homes, communications, papers and effects, against unreasonable searches and seizures shall not be violated, and no warrants shall issue but upon probable cause, supported by oath or affirmation, and describing the place to be searched, and the person or things to be seized.
10. No person accused of a criminal offence shall be compelled to be a witness against himself or herself, nor shall any person be arrested without being informed of the grounds of such arrest, nor shall any person in custody be deprived of the right to legal
counsel, nor shall the privilege of the writ of habeas corpus be suspended unless in the case of war or armed rebellion the public safety requires it.
11. No person shall be prosecuted or punished for the same offence more than once, nor shall excessive bail be required or excessive fines imposed, nor shall punishments be cruel or unusual.
12. The Union of India or any of its States or Territories shall not deny to any citizen the right to move freely throughout the territory of India or to reside or settle in any part of the territory of India.
13. The Union of India or any of its States or Territories shall not deny to any citizen the right to freedom of conscience, or the right to freely profess or practice religion, or establish, maintain and manage religious institutions in accordance with law and subject to public safety, order and health.
14. No citizen shall be subject on account of religion, race, caste, sex, descent or place of birth to any disability, liability or restriction with regard to public institutions, public places or places of worship, or use of public facilities, maintained wholly or partly out of public funds or otherwise dedicated to the use of the public.
15. The Union of India or any of its States or Territories shall not deny any citizen equality of opportunity or discriminate on account of religion, race, caste, sex, descent or place of birth.
16. The Union of India or any of its States or Territories shall not deny or abridge the freedom of speech, inquiry or expression of citizens, or the freedom of the press or broadcasting, subject to public safety, order, health, laws of defamation and standards of common morality.
17. The Union of India or any of its States or Territories shall not deny the right of citizens to form associations and unions, to assemble peaceably without arms, or to petition for redress of grievances, subject to public safety, order and health.
18. The Union of India or any of its States or Territories shall not deny to any citizen the right to practice any profession, trade or business, or carry on any occupation or means of livelihood, subject to public safety, order, health and standards of common morality.
19. Trade, commerce and enterprise throughout the territory of India shall be free, and the Union of India or any of its States or Territories shall not make any law to restrict them except in the interests of public safety, order, health, standards of common morality or economic efficiency.
20. No tax shall be levied or collected except by authority of law.
DUTIES OF CITIZENS
21. It shall be the duty of every person within the territory of India to abide by the Constitution of India and show no disrespect to its institutions; to participate in democratic processes and to vote in elections according to law; to make timely payments of taxes, fees and dues according to law; to keep clean and hygienic streets, roads, highways, neighbourhoods, waterways, railways, parks, public buildings and institutions; to protect public property; to protect the natural environment and to treat living creatures without cruelty; to abjure violence and promote harmony among all people; to value and preserve the languages and cultural history of the Indian subcontinent; to renounce practices derogatory to women or children.
EXECUTIVE, LEGISLATIVE AND JUDICIAL POWERS
22. There shall be a President of India in whom shall be vested the executive power of the Union, and who shall be the Supreme Commander of the Armed Forces of the Union. The President shall be elected indirectly by the citizens of India in the manner prescribed in Article 40 of this Constitution.
23. There shall be a Vice-President of India, who shall exercise the duties and functions of the President in the event of the death, resignation, incapacitation, absence or impeachment of the President. The Vice-President shall be elected indirectly by the citizens of India in the manner prescribed in Article 41 of this Constitution.
24. The President of India shall appoint a Prime Minister upon the advice of the citizens of India in a direct election in the manner prescribed in Article 43 of this Constitution. The Prime Minister of India shall be the Chief Executive Officer of the Union, and the President shall, in exercising the executive power of the Union, act at all times upon the advice of the Prime Minister. The Prime Minister shall keep the President of India informed at all times, and shall reconsider advice rendered if the President so requests it.
25. There shall be a Union Parliament which shall consist of the President, the Vice-President, the Prime Minister and two elected Houses.
The Upper House, or Council of the Nation, shall consist of members elected directly by the citizens of India according to States in the manner prescribed in Article 37 of this Constitution. The Lower House, or House of the People, shall consist of members elected indirectly by the citizens of India according to States, in the manner prescribed in Article 35 of this Constitution. The legislative power of the Union of India shall be vested in the Union Parliament.
A Bill, except a Tax Bill, may originate in either House. A Tax Bill, that is to say any Bill for the raising of revenue, shall originate in the Lower House. After a Bill has been passed in one House, it shall be sent to the other House which shall pass, modify or reject it. A Bill passed by both Houses shall be sent to the Prime Minister, upon whose approval it shall be sent to the President for signature upon which it shall become law. A Bill passed by both Houses which does not receive the approval of the Prime Minister shall be returned to the House where it shall have originated. If, after reconsideration, both Houses pass the Bill, each House by two thirds of its members, then the Bill shall be sent to the Prime Minister who shall advise the President that it be signed and become law.
26. There shall be a Supreme Court of India, consisting of a Chief Justice and Associate Justices appointed by the President upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The judicial power of the Union of India shall be vested in the Supreme Court and such courts inferior to it that it may establish or authorize. The Supreme Court of India shall have its seat in the capital of the Union and also in every State of the Union.
27. Each State shall have a Governor appointed by the President of India upon the nomination of the Prime Minister with the advice and consent of the Upper House of the Union Parliament. The Governor shall be vested with the executive power of the State, and shall be the supreme commander of all police forces within the State.
28. Each State shall have a Parliament, which shall consist of the Governor of the State and one or two chambers, elected by the citizens of the State in accordance with the Constitution or laws of the State. All legislative power of the State shall be vested in the State Parliament or such duly elected bodies of local government which the State Parliament shall establish by law.
29. The Governor of a State shall appoint a Chief Minister who shall be a member of the State Parliament enjoying the confidence of that Parliament. The Governor shall act upon the advice of the Chief Minister in exercising the executive powers of the State except in conditions of Emergency as stated in Article 56 of this Constitution. In the event no member of the State Parliament shall have its confidence, or in conditions of Emergency as stated in Article 56, the Governor of the State shall exercise the executive powers of the State in consultation with the State Parliament, until such a time as either such confidence comes to obtain, or new elections to the State Parliament take place within a maximum time of one year, or conditions of Emergency come to an end.
30. Each State Parliament shall elect its representatives to the Lower House of the Union Parliament in accordance with the provisions of Articles 34 and 35 of this Constitution.
31. Each State shall have a Supreme Court consisting of a Chief Judge and Associate Judges appointed by the Governor as the Constitution or laws of the State may establish. The judicial power of the State shall be vested in the Supreme Court of the State and such courts inferior to it as the Constitution or laws of the State may establish.
ELECTIONS AND TERMS OF OFFICE
32. All elections in the Union of India and its States and Territories shall be held on the 2nd day of October in any year, and this day shall be known as Election Day or Gandhi Jayanti and shall be a bank holiday. There shall be no more than 14 other bank holidays in the year, and no more than 2 in any month of the year.
33. The power required for the conduct of all elections to the Union Parliament and all State Parliaments shall be vested in a Chief Election Commissioner, who shall be appointed by the President upon the nomination of the Chief Justice of India with the advice and consent of the Prime Minister and the Upper House of the Union Parliament. The Chief Election Commissioner shall be assisted by four Associate Commissioners, one each for Northern, Central, Southern and Eastern India, and State Election Commissioners, one for each State.
34. Election to any State Parliament shall be for a maximum term of 4 years. A State Parliament shall consist of no more than 1000 members, chosen by direct election from territorial constituencies of the State, each member representing no more than 100,000 citizens so far as is possible.
35. Elections to the Lower House of the Union Parliament shall be for a term of 2 years, and the House shall stand dissolved every 2 years. The Lower House shall be elected indirectly by the citizens of the States, the delegations from a State being elected by members of the State Parliament. Each member of the Lower House shall represent indirectly 1 million citizens of the State so far as is possible. The Lower House of the Union Parliament shall have no more than 1000 members, each member having one vote.
36. The Lower House shall choose its own Speaker; determine the rules of its own proceedings; punish its members including by expulsion with the approval of two thirds of its members; keep a record of its proceedings and publish the same regularly except such parts as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Lower House be questioned in any other place. No member of the Lower House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.
37. The Upper House of the Union Parliament shall have no more than 100 members, of whom 90 shall be chosen by direct election from territorial constituencies of the Union and shall have one vote each. Elections to the Upper House shall be for a term of 6 years, with one third of the elected members retiring every 2 years. No person shall be elected to the Upper House for more than three terms successively. For purposes of elections to the Upper House, the Union of India shall be divided into territorial constituencies each of approximately 10 million citizens, so long as there are no more than 22 constituencies from the States of Southern India (presently consisting of Tamil Nadu, Kerala, Andhra Pradesh, Karnataka and Goa); 22 constituencies from the States of Eastern India (presently consisting of Arunachal Pradesh, Tripura, Mizoram, Manipur, Meghalaya, Nagaland, Assam, Sikkim, West Bengal and Bihar); 22 constituencies from the States of Northern India (presently consisting of Uttar Pradesh, Himachal Pradesh, Jammu and Kashmir,Rajasthan, Punjab and Haryana); and 22 constituencies from the States of Central India (presently consisting of Gujarat, Maharashtra, Madhya Pradesh and Orissa). There shall be one constituency in the Union Territory of Delhi and one constituency in all other UnionTerritories together.
38. The President of India may appoint up to 10 members of the Upper House each of whom shall have no vote and shall hold one term of office of 2 years. The President shall make such appointments in view of considerations such as the representation of the arts, sciences, sports, literature or social work, as also the representation of any community, caste, religion or other group which, in the opinion of the President, deserves a voice in the Upper House in the national interest.
39. The Vice President of India shall chair the Upper House but shall have no vote unless they are equally divided. The Upper House shall choose its own Chairman pro tempore in the absence of the Vice President; determine the rules of its own proceedings; punish its members including by expulsion with the concurrence of two thirds of its members; keep a record of its proceedings and publish the same except as may in the judgement of the House require secrecy in the national interest. During their attendance in Parliament or their travel to and from Parliament, members shall be privileged from arrest except for treason, felony or breach of peace. Nor shall any speech made in the Upper House be questioned in any other place. No member of the Upper House shall hold any other office of profit or honour of the Union of India or any State or Territory of India.
40. The President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Upper House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Lower House which shall elect between them by secret ballot. The President of India shall not hold any other office of profit or honour.
41. The Vice-President of India shall be elected for a term of 5 years by the Union Parliament, and shall be a citizen of India not less than 35 years of age. If there are more than two nominations, there shall be a primary election in the Lower House by secret vote, and the names of those receiving the highest and second highest number of votes shall be sent to the Upper House which shall elect between them by secret ballot. The Vice-President of India shall not hold any other office of profit or honour.
42. The terms of the President and Vice-President shall not be concurrent.
43. The Prime Minister of India shall be appointed by the President upon the advice of the citizens of India in a direct election, and shall hold office for four years. The Prime Minister shall be a citizen of India not less than 35 years of age, and no person shall hold the office of Prime Minister for two terms successively. Candidates shall register 12 months prior to the date of the election with the Chief Election Commissioner. The Chief Election Commissioner shall report to the President the results of the election to the office of the Prime Minister, and the President shall appoint the candidate receiving the highest number of votes.
44. Upon the nomination of the Prime Minister, the President shall appoint a Deputy Prime Minister and a Council of Ministers, who shall hold office at the pleasure of the President and who shall assist the Prime Minister in the discharge of the duties of the office. The Deputy Prime Minister shall exercise the duties and functions of the Prime Minister in the event of the death, resignation, incapacitation, absence or impeachment of the Prime Minister.
45. The Prime Minister, the Deputy Prime Minister and the Council of Ministers shall from time to time answer the questions of members of the Union Parliament as requested by the latter, and the Prime Minister shall no less than once every year address the Union Parliament on the State of the Republic.
46. Neither the Prime Minister nor the Deputy Prime Minister nor any member of the Council of Ministers shall hold any other office of profit or honour.
DUTIES OF THE UNION AND THE STATES
47. The duties of the Union of India shall include
— defence of the Republic from foreign aggression, armed rebellion and crime
— foreign relations and foreign trade
— management of currency and exchange-rate
— management of the public debt of the Union
— inter-State highways, waterways and dams
— regulation of inter-State railways
— regulation of harbours and airports
— regulation of civil aviation
— regulation of communications and broadcasting
— protection of national monuments and archives
— development of space and atomic research, research
universities and institutes of national importance
— planning of metropolitan areas
— environmental protection, national forests, parks and wildlife
— regulation of banking other than rural banking
— regulation of stock exchanges and futures markets
— census, voter registration, and social security
48. The Union of India shall in addition
— promote and encourage State and local democracy
— reduce disparities of income and wealth consistent with economic efficiency
— reduce inequitable transfers of debt to future generations by ensuring balance in the Union Budget over a quincennial period
— promote harmony among the nations of the world, abjure violencein the settlement of international conflicts, foster respect for international law, and maintain just and honourable relations with other nations.
49. The original jurisdiction of the Supreme Court of India shall extend to substantive questions of law and constitutional interpretation; fundamental rights of citizens, and relations between the citizen and the Union and its States and Territories; international law; inter-State relations and commerce; relations between the Union and any State.
50. There shall be a Reserve Bank of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Governor and Deputy Governors of the Reserve Bank of India. It shall be the duty of the Reserve Bank of India to maintain a sound currency, that is, a stable value of the Rupee for transactions within the Union and outside it. The Reserve Bank of India shall be further responsible for the charter and regulation of banks, and the efficient working of financial and credit markets.
51. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Comptroller and Auditor General of India, who shall be responsible for the issue of public moneys and the audit of the accounts of the Union of India.
52. There shall be a Public Services Commission of India. Upon the nomination of the Prime Minister and with the advice and consent of the Upper House of the Union Parliament, the President of India shall appoint a Secretary-General of the Public Services Commission, who shall be responsible for all matters relating to the civil services of India.
53. The duties of each State of India shall include
— civil order and police forces in the State
— State highways, waterways and dams
— regulation of State railways
— land registration and tenurial reform
— agricultural pricing, stocks and extension
— animal husbandry
— colleges and non-research universities
— finance of schools and setting of school standards
— regulation of electricity
— regulation of insurance
— regulation of rural banking
— management of the public debt of the State
— vital statistics
— public health
— environmental protection
— State parks and forests
A State of India shall in addition
— extend processes of democracy by promoting ad encouraging constitutional local government
— reduce disparities of income and wealth consistent with requirements of economic efficiency
— reduce inequitable transfers of debt to future generations by ensuring balance in the State Budget over a quincennial period
— endeavour to secure a common civil code for citizens of the State
— promote harmony among the peoples of India.
The duties of local governments established in a State by law shall include provision of primary and secondary education or regulation thereof; provision of and maintenance of streets, roads and lighting or regulation thereof; provision of fresh water and sewage disposal or regulation thereof.
54. The original jurisdiction of the Supreme Court of a State shall extend to substantive questions of law and interpretation of the State Constitution; civil and criminal law within the State; marriage, divorce, custody and guardianship of minors; fundamental rights of citizens and relations between citizens and the State.
WAR AND EMERGENCY
55. The President of India, upon the advice of the Prime Minister and with the consent of a majority of each of the Union Parliament, shall have authority to declare and make war on behalf of the Union of India and its State and Territories, and to raise armed forces and resources for this purpose. A declaration of war may include the suspension of fundamental rights so long as that no such suspension shall continue for longer than 30 days without the consent of a majority of each House of the Union Parliament.
56. The President of India, upon the advice of the Prime Minister and with the consent of a two thirds majority of the Upper House of the Union Parliament, shall have authority to declare the whole of India or any part of its territory to face an imminent danger from foreign aggression, armed rebellion, disturbance or natural calamity, and proclaim an Emergency accordingly. Proclamation of Emergency may include declaration of Governor’s Rule in a State according to Article 29 and suspension of fundamental rights, so long as that no such suspension shall continue for longer than 30 days without the consent of a two thirds majority of the Upper House, and no elections to any State shall be delayed for longer than one year.
AMENDMENTS AND MISCELLANY
57. Within the groupings of States given in Article 37, new States may be formed or State boundaries altered by authority of the President of India, upon the advice of the Prime Minister and with the consent of two thirds of the members of each House of the Union Parliament and the consent of a majority of each State Parliament affected thereby.
58. The provisions of this Constitution may be amended by the authority of the President of India with the consent of a four fifths majority of each House of the Union Parliament.
59. Impeachment from office of the President, Vice-President, Prime Minister or Deputy Prime Minister of India shall be initiated by a four fifths majority of each House of the Union Parliament. The Speaker of the Lower House shall inform the Chief Justice of India of such a majority in each House, whereupon the Chief Justice shall constitute a Special Bench of the Supreme Court of India which shall act as the Court of Impeachment.
60. Written and printed communications between the Union of India and foreign nations; between the Union of India and the States of India, and between the States of India and the Union of India; and between the Union of India and citizens of India shall be in the Hindustani (Hindi) and English languages. Any language or dialect of India may be spoken in the Union Parliament or any State Parliament with the prior permission of the Chairman or Speaker of the chamber.”
December 30 2002 letter to Mr C. R. Irani, Constitutional Review Commission:
“Dear Mr. Irani, Other than yourself and Mr. Sorabji, most other members of the Constitutional Review panel seem to be retired judges or bureaucrats. How many are under 50 years of age? Or have demonstrable knowledge of e.g. modern economics or constitutional political theory? Such a panel may be worse than nothing, since after its fossilized reports are in, it will take another 50 years before genuine constitutional reform can be addressed. Here are some examples:1. There is no such thing as a “Central” Government of India. There used to be one taking orders from London, giving orders to “Provinces” on the periphery. Free India has been a Union of States. Each Indian is supposed to be and to feel as being a citizen both of the Union and of his/her State, owing loyalty and taxes at both levels. Yet the colonial anachronism continues in all our thought with devastating results, so, e.g. the States remain mendicants before an all-powerful “Centre” which remains a mendicant before the new “London”. Ergo, your panel should be talking about Union-State relations, and the proper nature of federalism in modern India. But is any member a recognised expert on fiscal finance? For a start, all our State and Union Government accounting would need to be sorted out properly before anyone can comprehend what is going on between them. 2. The Governor of the RBI must be made a Constitutional post, on par with e.g. the Auditor-General. Reason: Monetary policy needs to be made independent of the fiscal compulsions of the Government of the day, which was the intended function of the RBI at its inception in 1935. Instead it has become a large Department of the Finance Ministry. The RBI’s sole job should be to establish and maintain the soundness of the currency, both domestically and internationally. I wonder if such an idea will arise from the panel appointed to look into it. 3. Our 16 large States have an average population of 61 million people. Each needs to be allowed to have its own Constitution if it so wishes on the American model, where the Union Constitution presides over a large number of State Constitutions. Indeed the resolution of the J&K problem and indeed our problems with Pakistan may rest in a broad, controlled devolution of fiscal and monetary powers to all States, with the Union’s mandate becoming clearer and more focussed and feasible and realistic as a result. Will your panel talk about this? (Delhi does not forsake its own power, as even Old Man Tughlak found many years ago.) I could go on. Eleven years ago, I wrote in Foundations of India’s Political Economy “The 1950 Constitution was a marvellous document at the time. Since then it has become too bulky, too full of exceptions and qualifications, and far from comprehensible to the ordinary Indian. A neater, cleaner and shorter document may be sought which keeps the best of the 1950 Constitution and integrates it with the experience of forty years as well as the best of foreign constitutions, with the aim of promoting a system with less uncertainty and more stability.” The Statesman on April 20 1991 published my proposed Constitution for a Second Indian Republic, now … I enclose a copy for your interest. In Keshavananda Bharati the Supreme Court meant that liberal, republican, representative democracy in a free society with separation of powers must not be subverted by any sort of constitutional gimmickry. My proposals enhance such political values. I hope your panel may do the same.”
THREE MEMORANDA TO RAJIV GANDHI 1990-1991
I. PAKISTAN, SECULARISM AND HINDU COMMUNALISM
II. FOREIGN POLICY
III. ECONOMIC POLICY
by
SUBROTO ROY
Author’s Note, April 2007: As told elsewhere here, in September 1990 I was appointed by Rajiv Gandhi to advise on the long-term agenda for the country. These advisory memoranda were first written by me in that capacity. The Economic Policy Memo was written in September-October 1990; the Foreign Policy Memo was written in February 1991 (during and after the Gulf War); the one on Secularism was a compendium of several smaller ones written in late 1990. These were confidential at the time though were based on the work of the perestroika projects on India and Pakistan that I had been leading since 1986 at the University of Hawaii. As has been told elsewhere, I warned against Rajiv’s vulnerability to assassination. My warnings went in vain. When he was killed, I published these documents in The Statesman Editorial Pages of July 31, August 1, August 2 1991. The published subtitles were “Stronger Secular Middle”, “Saving India’s Prestige”, and “Salvation in Penny Capitalism” respectively. Needless to say, I do not today at age 52 agree with everything I wrote in these documents some 16 years ago at age 35-36, and my perspectives on the economy, Pakistan etc have matured further as may be seen from my current writings; but I am pleased to find I am today not embarrassed more than very slightly by any statement I made back then. My most recent writings relevant to the change in my thought since these documents include “What to tell Musharraf”, “Solving Kashmir”, “Law, Justice and J&K”, “India’s Macroeconomics”, “Fiscal Instability” and “India’s Trade and Payments”.
I. PAKISTAN, SECULARISM, AND HINDU COMMUNALISM (“Stronger Secular Middle”)
The world political order has seen immense structural changes recently. The most important of these are the result of the collapse of totalitarianism in the Soviet Union and Eastern Europe, and its replacement there by free and self-critical thought and debate, with all the risks and responsibilities that these carry. As a result, the world economy too is on the verge of major change. There may well be by 2000 a pact led by people of European descent from Australia via the Americas and Europe to Siberia, and a smaller pact of East Asian peoples from the Sea of Japan to the Straights of Malacca. Competition between the powers in such a world will be for new markets and cheap sources of labour, energy and natural resources. Given the fragmentation of the Islamic world and the overall weakness of Africa, it is China and our subcontinent which may be the only significant counterweights in this new balance of power. Both have long histories, resilient cultures, and vast populations, which make others apprehensive. But the future of China is far from clear to anyone. The collapse of totalitarianism seems certain after the passing of the present gerontocracy, but what will follow is anybody’s guess. At best, it may be the emergence after a power struggle of a Chinese Gorbachev who will free the domestic economy, restore political freedom, and restore Tibet’s self-governance. At worst, it may be a civil war between the remnants of the communists and some new Kuomingtang nationalists backed by Taiwan and Hong Kong. The one thing certain about China’s near term future is the oncoming uncertainty. This leaves our subcontinent, and here the key is India-Pakistan relations.
There is little doubt that the post-Partition configuration of India, Pakistan, and a divided and disputed Kashmir has been extremely detrimental to the welfare of all the people of the subcontinent, and has impoverished the general budgets and distorted the economies of both countries. If it has benefited important sections of the political and military elites of both countries, it has done so only at the expense of the general welfare of the masses. So long as the arms-race and elite-rivalry continues, the economies of both countries are likely to remain severely distorted, and there is little genuine prospect of improvements in mass welfare or the large-scale economic development of either country.
It seems hard to remember that little more than a generation or two ago, there was no problem of Kashmir on the subcontinent, or that, for the most part, the Muslims and Hindus lived in amity in undivided India. Partition came about because of the failure of the political dialogue between the Congress and Jinnah. This dialogue failed for three sets of reasons: the British role in the middle, the specific international context at the time, and the fact Congress and Jinnah were more often at cross-purposes than addressing the same issues. The proof they were largely at cross-purposes is indicated by the fact that Kashmir was never on the agenda of any serious discussion before Partition, yet ever since it has come to precisely symbolize the crisis over national identity in both India and Pakistan.
Now, in general, a country cannot have large land and naval forces at the same time. If it is assumed Pakistan and India must remain the perpetual military enemy of one another, both may have today more than adequate land and naval forces. But if that assumption is mistaken, then the real military weakness of the subcontinent taken as a whole becomes immediately apparent. This is made clear by the recent Gulf War, which is a defining event of the last half-century, and even perhaps of the whole century. If India and Pakistan are to protect themselves adequately in the modern world, they must do so by combined forces.
From a practical point of view, this cannot happen so long as each has its army trained at the other and calling it the “dushman”. On the other hand, the combination of both forces would immediately make the resulting force one of significant power, even though there would have to be further transition towards naval forces while infantries are transformed towards amphibious, airborne, reserve, and civil duties.
In the modern age, the defence of our subcontinent as a whole has to be naval and strategic, and such a defence cannot be made adequately so long as there are instead large rival armies facing one another in anger across a disputed border in Kashmir. The lesson of the Gulf War for the people of the subcontinent is that our bitter problems must be resolved, and resolved completely and permanently, in the way the bitter problems between France and Germany came to be resolved by De Gaulle and Adenauer.
Eventually, Kashmir (with or without Jammu and Ladakh) has to be united and demilitarized by both countries. But Kashmir cannot be independent any more than Punjab, Sind or Assam. Nor can a united Kashmir “go” to either India or Pakistan without further needless bloodshed. So the solution must be to try to mutually re-define the foundational basis of the sovereign states of our subcontinent after Partition. Indians and Pakistanis are free peoples who can voluntarily agree together to alter in their own interests the terms set hurriedly by Attlee or Mountbatten in the Indian Independence Act of 1947. Nobody but we ourselves keeps us prisoners of British or American definitions of who we are or might be.
For such a redefinition to take place, there has to be recognition that the configuration which occurred after Partition was a monumental mistake, which even Jinnah — the chain-smoking secular-minded Muslim nationalist — had not wanted at the time. (Jinnah’s cheerless speech to the Constituent Assembly of Pakistan is, incidentally, as secular a document as any.) The solution must be to reopen the dialogue where it failed almost fifty years ago, and to work towards a major constitutional revision for a new and stable configuration to emerge in all of our subcontinent. Fifty years is, after all, not a long time in the history of our peoples. This kind of a solution is further implied by an understanding of the nature of the three nationalist forces on the subcontinent: secular nationalism as is supposed to be represented by the Congress and its offshoots; Muslim nationalism as represented today by Pakistan; and Hindu nationalism as represented today by the BJP. For the whole of the present century, these have been the three permanent political forces on the subcontinent. Congress has been the most important and central force. But the fact Congress was started mostly by Hindus was enough for a Muslim political force in the form of the Muslim League to get created on one side of it. Muslim politicization had its own reaction of an explicitly Hindu politicization in the form of the Hindu Mahasabha on the other side of Congress. It is not long ago, relative to the length of our history, that the Muslim League and Hindu Mahasabha were just factions of the Congress in its struggle for independence, and many people like Jinnah had joint membership of both a communal and a secular organization.
The fact these three forces are permanent fixtures of our politics is of the highest importance. Each has changed in name, form and strength from time to time. The Muslim force went into the hands of Jinnah who, in course of bluffing his way with Congress and the British in the hope of gaining maximum advantage for his constituents, inadvertently created a moth-eaten Pakistan, which soon collapsed into military rule, foreign domination, civil war and secession. The Hindu political force became associated in the public mind with the assassination of Mahatma Gandhi, was eclipsed for a short while, then re-emerged in the form of the RSS, the Jana Sangha and now the BJP. Congress has stayed more or less in the middle. But with a frequent policy of expediency instead of a clear and convincing national philosophy, during decades of extreme economic and political crisis, Congress has been experiencing continuous factionalism and splintering into various disunited and opportunistic groups.
Nevertheless, a permanent configuration of political forces on the subcontinent can be identified of a secular middle, with Hindu and Muslim communal interests on either side of it. Each force is of such a size and importance that it must be respected and cannot be ignored. None of the three can be destroyed or converted by any one or combination of the other two. Congress and the BJP cannot destroy Muslim communalism as represented today by Pakistan. Congress and the Muslims cannot destroy Hindu communalism as represented today by the BJP. And the BJP and Pakistan will destroy one another and the whole of our subcontinent with them before they destroy secularism. Much as they might like to, neither can the RSS impose universal Hindu domination nor can the Pakistani ulema impose Islamic law over all parts of the subcontinent. Nor, for that matter, can Congress and its offshoots expect to spread secularism everywhere on the subcontinent.
These are the fundamental facts of political life on the subcontinent. They have not changed for 100 years, and, come what may, they are not likely to change for the next 50 years. If the forces are not recognised correctly and accomodated and reconciled properly, all that will happen is that the real and emotional resources of all sides will be drained against each other, until such a time as there is perhaps a break-up of the subcontinent and a repeat of the 18th century, with elites panicking and fleeing abroad if they can, mass blood-letting, while foreigners roam the country competitively in search of aluminium, manganese, coal, iron ore, oil, women, cheap labour, quick profits or whatever. Both the national movement for Independence from European rule and Jinnah’s desire to preserve the cultural identity of Indian Muslims will have become ghastly long-term failures. So long as the conflict between the Hindus and Muslims of the subcontinent continues, with secular forces caught in the middle, it is certain that the people of our subcontinent will not experience genuine mass economic improvement or be able to take their proper position in the world. Instead, we shall be completely vulnerable and defenceless with respect to predaory foreign powers in the post-Cold War world.
A genuine reconciliation between Pakistan and Hindu communalism is possible only via the revitalised leadership of a secular centre, with a clear-headed understanding of the facts and the way forward. It will require courage and calm statesmanship of a high order, of the kind shown by Willy Brandt, Sadat and Gorbachev in recent years. (Postscript: Rajiv Gandhi may have been able to show such statesmanship in his second term.)
II. FOREIGN POLICY (“Saving India’s Prestige”)
A key principle by which to guide the foreign policy of a large and potentially great nation like ours can be stated simply as follows:
An action of the Government of India outside the territory of India, i.e., an act of foreign policy, should be undertaken if and only if it protects or promotes Indian interests outside the territory of India.
Indian interests outside India encompass the private interests of Indian businessmen, Indian migrant workers and their descendants, Indian pilgrims, Indian students, Indian tourists etc, as well as the public interests of the Indian Republic such as the defence of the territory and property of India and the promotion overseas of the culture, languages and values of India.
It is a fact that Indian prestige on the world-stage has declined steadily since Independence. India’s share of world trade and finance used to be large in the 1750s, considerable in the 1850s, small but significant in the 1950s. It is close to insignificant today as we approach 2000. Accurately or not, we are perceived by those who think about us at all as a complex mess of a society, rife with caste, class and religious conflicts; moralistic and hypocritical beggars and braggarts on the world stage; very weak relative to our potential and our pretensions; with all talk and little ability. True or false, whether we like it or not, that is how we are perceived by many people outside India.
Repercussions of this view that the world has of us today are felt everywhere. A cynical Pakistani foreign minister once said about Non-Alignment: “Zero plus zero equals zero”. He was wrong then but would be right today. In public international circles, the Government of India is mostly ignored, and not even humoured or flattered the way some are because of their oil. Many Indians outside India face harrassment, hostility and discrimination of various degrees. This is related not only to the fact they are often competent and successful relative to local populations, but also to the perception that India is a weak and flabby country unable to protect her citizens abroad or offer them a proper life at home. If we are to formulate a new and effective foreign policy for India, we have to be first candid and realistic in our assessment of the facts and circumstances of the world situation and our present place in it.
Ideally, the foreign policy and defence of the subcontinent should be common. Differences between private Indians, Pakistanis, etc tend to disappear outside the subcontinent in face of common opportunities and adversities. If we are not able to persuade our neighbours about this in the short run, we may nevertheless act as far as possible as if we have a common policy, hoping to thereby persuade our neighbours by our example of the gains from such a policy. With this in mind, the broad aims of a new foreign policy may be formulated as follows:
A. Independence from so-called “foreign aid”. We do not ask for or accept public foreign aid from foreign Governments or international organizations at “concessional” terms. Requiring annual foreign aid is an indication of economic maladjustment, having to do with the structure of imports and exports and the international price of the Indian rupee. Receiving the so-called aid of others, e.g. the so-called Aid-India Consortium or the soft-loans of the World Bank, diminishes us drastically in the eyes of the donors, who naturally push their own agendas and gain leverage in the country in various ways in return. Self-reliance from so-called foreign aid would require making certain economic adjustments in commercial and exchange-rate policies, as well as austerity in foreign-exchange spending by the Government. Emergency aid from abroad (e.g. for disaster relief) or private voluntary aid need not be affected.
B. Promotion of amity and demilitarisation on the subcontinent. The idea would be to aim towards a more or less common foreign and military policy on the pattern of Western Europe within five or ten years. This will require some outstanding statesmanship and domestic political courage vis-a-vis Pakistan on the lines suggested in the previous memorandum.
C. Resolving the border-dispute with China by treaty. This too will require some clear-thinking statesmanship. The general trade-off between sectors may be a commonsensical way of breaking the impasse. Prima facie at least, Arunachal which we already have is probably more valuable to us than Aksai Chin which they already have, unless there are defence reasons to the contrary. A sound settlement should allow us to take a firm if quiet stand with them on Tibet. What they do at Tiannanmen may be not be our affair but what they do in Tibet is. Our position on Tibet has not been an altogether honourable one in the last 40 years. Also we should seek to protect those of Indian descent in Hong Kong from the chaos that is likely to occur in 1997.
D. Promotion of emigration and reverse migration to and from e.g. North America, Hong Kong, Africa etc. On the one hand, we should export our most exportable product, which is inexpensive good quality labour skills. At the same time, any Indian or descendant of an Indian living abroad should be encouraged to return at will. This is important for economic reasons, in effect adding value to the stock of human capital in the country. It is even more important for political reasons, as it will undercut to some extent the overseas financing of domestic terrorism. Nationality laws have to be amended giving Indian nationality to as many people as possible of Indian descent. Every Indian abroad who has taken a foreign passport but wishes to retain or re-acquire Indian nationality at the same time should be encouraged by us to do so. This may go to isolate extremist opinion, as thousands of moderate emigrants in Britain and North America will presumably prefer to maintain or freely re-acquire Indian nationality alongside their new nationalities. Many may rediscover patriotism for their homeland, where they now feel rootless in alien cultures which is what subconsciously motivates the demand for an abstract separatism.
E. Promotion of commerce, finance and investment abroad — exports, imports, capital flows in and out, tourism, contacts and exchanges. This is of fundamental importance for economic reasons. It will entail establishing as quickly as possible conditions favourable for the freeing of the rupee, as will be described in the next memorandum.
F. Achievement of tolerable standards in sports, music, and the arts. Our sporting prowess has become laughable. This contributes to our dismal image in the outside world. The present system is utterly hopeless, because of the heavy and completely unnecessary Government involvement in sports. Sports can be and must be privatized as completely as possible. Let commercial advertising and private sponsorship help our athletic development with minimum Government involvement. For example, Government can give tax breaks to sponsors who finance athletes for competitive international sport. There is plenty of black money in the economy which can be induced to come out to support sports in the country. To a lesser extent, the state of music and the arts and the culture in general have also become hopeless due to the unnecessary Government involvement.
For these six new objectives of an effective Indian foreign policy to be achieved, there must be a clear-headed and consistently formulated long-term view. The basic means would be to make a major and distinct move away from multilateralism towards bilateralism in international affairs. This would begin with Pakistan, on the lines discussed in the previous memorandum. Our most active foreign policy must be on the subcontinent, followed by South East Asia to where we once exported Buddhism, Islam, Sanskrit and Hinduism. South East Asia is today thriving economically and is quite stable politically. We have to learn what we can from them and offer whatever we have in exchange. Then there are the major powers: the United States, the Soviet Union, Germany, Japan, Britain and France. Then there is the Islamic crescent from Morocco to Indonesia. Then there are the countries where Indians have gone or can still go as emigrants or where there are significant Indian interests. These include Australia, Canada, South Africa, East Africa, Fiji and the West Indies. Then there are continental powers like Brazil, Argentina, Egypt and Nigeria. Then there are regional groups like the European Community and Scandinavia as collectivities.
On the subcontinent, the relationship should be made domestic and familiar with the aim of identifying common interests and forging a common policy as soon as possible. With the others, a rational bilateralism would involve starting with a thorough assessment of bilateral relations country-by-country. What are the principal components of imports and exports and their rates of expansion or contraction? What are Indian assets and liabilities in each of these countries and how liquid are these? How significant are private Indian interests in each — immigrants, tourists, students, businesses, etc.? What is the scope for expansion of ties in view of our objectives? Etc. Long-term foreign policy requires a constant stock of reliable information and also a continuous flow into and out of that stock. This may require overhauling some of the civil services. For good foreign policy to be made and implemented, there should be easy flow between the IFS and IAS, academia and the military and intelligence services. The aim would be to have a pool of highly qualified people voluntarily pursuing foreign languages and research of national importance with respect to the different countries of the world. The dozens of unthinking think-tanks in Delhi may have to be drastically overhauled to actually produce something useful after all.
Having determined what are the priorities and what are not, a reallocation of the foreign exchange resources of the Government of India will be called for to achieve stated foreign policy objectives. This has to accompany the process of economic reform, as well as the vigourous pursuit of reasonable solutions to the subcontinent’s continuing political problems. Obtaining a broad national consensus on the objectives is very important. Once the thinking has been clarified and the pieces put in place, this may not be so hard to achieve.
III. ECONOMIC POLICY (“Salvation in Penny Capitalism”)
Our economic problems have to do with the misdefinition which has occurred since Independence of the role of government in the economy. Partly under the influence of numerous domestic and foreign economists and pseudo-economists, our Government since the 1950s has frequently done things which need not or should not be done by government at the expense of things which have to be done or can only be done by government. The prime indicator of economic mismanagement today is not the annual deficit, but rather the vast public debt today of more than Rs. 273,000 crores. Our Government has borrowed something like Rs. 3500/- on behalf of each man, woman and child in the country — and spent it. A pile of rupee coins adding up to the public debt of India would stretch 4.55 million km into the sky, or be as long as six trips to the moon and back. That is the size of the problem.
Commonsense says that for the individual family or business or the nation as a whole, if you borrow funds for productive purposes which repay their worth, the size of the debt incurred is immaterial. If you borrow on the credit of the Government of India and then add to the country’s capital stock (whether human capital via better health and education or physical capital like roads and bridges), then the size of the debt does not matter, as long as the payments of interest on the debt are matched by increases in the capital stock. But if Government spends borrowed funds recklessly without a thought to rates of return, no capital gets created and instead the economy approaches technical bankruptcy at which time foreign creditors come knocking at the door.
The roots of the crisis may be traced to the following:
(A) Politicians in democratic systems make competitive soft promises of cash and immediate benefits, without thinking of where the revenue is going to come from. It is recognition of this which this has led to the turnaround in the Western economies since 1979, and made politics there much more sober from an economic point of view.
(B) Our closed economy with a captive Reserve Bank and credit market has caused any amount of the currency to be debased internally. To correct the problem at the roots, these two factors have to be faced squarely.
Short Run Policy (0-6 months) All political parties, national or regional, whether they have been in power or not, are mutually responsible for the crisis. It has been one of the unintended side-effects of the democratic system we have chosen. Therefore, all parties have a responsibility to set things right, and the way to do so was thoughtfully placed in the Constitution by its framers in Article 360: in a situation in which the “financial stability or credit” of India is threatened, the President is entitled to declare a financial emergency. This would permit freezing all levels and increases in Government spending outside essential functions (defence, law and order, roads, transport and comunications, basic education and health), initiate cost-cutting in all non-essential parts of the Government, and create the appropriate mood of seriousness in the country.
Next there will have to be an increase in revenue without increasing taxes. Can this be done? (Bush had once called this Reagan/Thatcher idea “voodoo economics”.) In our economy it may be possible via the appropriate use of two facts — the vast black economy of undeclared income of perhaps Rs. 43,000 crores, and the vast Government-owned industrial and services sector plus any amount of Government-owned land and capital. The black economy has made our businessmen waste their enterprise in trying to cheat or buy out the Government. The Government-owned sector has led our workers to waste their skills and learning abilities in overmanned and unproductive occupations. Any reform-minded Government must be prepared to tackle corrupt or lazy businessmen, union bosses and Government employees, while creating a system which rewards initiative, honesty, enterprise and effort on the part of business, labour and the bureaucracy.
As part of the financial emergency, every Government department can be instructed to reduce costs by 10-25% every year for the next five years. Much of this may be possible without layoffs but by internal economies and tough administration — freezing wages and benefits, saving office-space, more clatter and less chatter, etc.
More crucially, there must be an absolute moratorium on strikes in the public sector. Only if an industry is vital to the national interest should it be in the public sector, e.g. space research, defence production or oil. Strikes in such industries damage the whole country and not just the individual employer. Therefore, either there are no strikes, or the industry is not vital to the nation and can be safely placed in the private sector.
This will set the example for more fundamental changes in industrial relations. Labour laws have to be applied or amended to ensure unions are run for the benefit of their members and not of union bosses or political parties. Unions are vital in industrial society to protect individual workers from exploitation, discrimimation and safety hazards. They are not supposed to be empires for unelected union bosses, arenas for party politics, or excuses for overmanning. Our productivity is shockingly low relative to international standards, and without crucial improvements in it we shall be wiped out if and when the economy is opened as it will have to be for other reasons.
Increasing productivity per head throughout the economy is therefore a vital preparatory step, and must be tackled in the first few months. The device of a strike has to be made a last resort. Workers have to be free to elect their leaders by secret ballot without fear or intimidation. Political parties have to be removed from the workplace. The power of toughs and vandals has to be broken by the ballot box.
At the same time, employment can be made to increase by leaps and bounds by freeing all domestic enterprise from licensing, controls and permits. Freeing domestic enterprise from retrograde Central and State laws may be again most easily done via the Constitution. Subject only to local laws of safety, morality and environmental protection, all trade, commerce and enterprise throughout the territory of India should be made free from Government interference or restriction. That was what was envisioned by Articles 19 and 301 of the Constitution.
The increase may be incalculable in employment, wages and income, and hence the consumption of the masses of our people. Important side-benefits will be that urban discontent, political vandalism and communalism will be reduced. An idle mind is the devil’s workshop — with increased employment via enterprise, there will be less time and inclination for political or communal crimes.
Special notice has to be given to banking policy, as banks affect all other enterprises. Our nationalised banks are in disastrous shape. Private banks are responsible to their share-holders; if bad loans are made or bad risks taken, or if costs are too high or service poor, then managements get replaced by the power of share-holders. In public sector banks this does not happen. Costs are very high, profit rates low or negative, loans are not repaid or should not have been made in the first place, and service is appalling. Small depositors place their confidence in them because they have no other place to put their meagre savings, and because they believe the Government knows best and is not itself bankrupt. If a serious opening of the economy is to be planned in the medium and long-term, there has to be adequate preparation of the monetary system, else there may be a run on the banks and a collapse in public confidence in the currency.
It becomes essential that costs in the public sector banks are slashed, loans get repaid, loan melas stop, and banks are run as banks and not as public charities or employment agencies. At the same time, the Reserve Bank has to be made independent of the Ministry of Finance and of parliamentary pressure, and preferably made constitutionally independent like the UPSC or the Auditor-General. The task of any central bank is to maintain a currency in which the domestic public can have confidence in making their economic transactions, and to reflect a realistic price on international currency markets. The Reserve Bank’s role has been severely distorted by it being forced practically at gunpoint to hold massive amounts of the Government’s debt, and to finance this by printing more and more paper money. Instead, the currency has to reflect real economic transactions, and the Reserve Bank can be instructed (as its own 1985 report said) to follow a non-inflationary monetary rule of expanding the money-supply only relative to the rate of growth of real income and output in the economy.
Similarly, markets for insurance and life-insurance have to be rescued from the bankruptcy of nationalisation. Insurance is a highly complicated industry involving the correct assessment and sharing of business and personal risks. The present industry is in a shambles and will probably have to learn the modern business almost from scratch. Yet reforming it is vital to a new and invigorated economy, and also to laying the basis for heath-insurance for the masses.
Medium-Run Policy (6-18 months) Next, a concerted effort will have to be made to raise revenue without raising taxes. To the contrary, tax rates have to be simplified and reduced if possible, and especially the system of invisible indirect excise taxes (which tend to hurt the poor most heavily) gradually changed as far as possible to visible direct income and wealth taxes. If revenues are to be raised without increasing taxes, it is black money and the public sector which must be made to come to the rescue of the country. The public sector belongs to the public — not to the IAS, not to the public sector unions and certainly not to local politicians. Ideally, the most efficient and equitable means of share-holding of the public sector would be for every Indian adult to receive at the address of his or her domicile (or voter registration), upon a simple application and a processing fee, oe share-certificate in each enterprise being run by the Government of India. (An even better model would be to have a poverty-citerion, and give the shares to the poorest of the poor villages or village panchayats.) The shares would become tradeable; markets of penny-capitalism would spread throughout the villages of India, as each penny-capitalist decided whether to hold or sell the share-certificates thus received, and the Government would have safely handed over the ownership of the public sector to its rightful owners.
It would be a historic move for the distribution of national wealth, as scores perhaps hundreds of millions of new shareholders are created. The hidden hoards of black money would come out and become distributed equitably. Of course the shares of some public sector enterprises will not be worth much, but they will not be worth less than nothing. Nor would anyone be obliged to sell until it was privately profitable to do so. Future entrepreneurs (domestic or foreign) who wished to take over or turn around the fortunes of a bankrupt public sector firm would have to solicit the shares from a vast population of penny-capitalists.
Long-Run Policy (18+ months) Thus the key objective would be to control wasteful Government spending in order to place the Government in a position to redirect public resources towards the fundamental sources of economic growth for the common people of India. One further step would be necessary. This would be to make the rupee a hard currency of the world.
This will have to be done with utmost care and proper preparation of economic and political expectations. It will mean making every Indian — high or lowly, rich or poor — free to hold his or her assets, small as these may be, in any currency or precious metal of choice without Government intervention. Government would use its own reserves of foreign exchange and gold for its own purchases and obligations abroad — e.g. defence, diplomacy, or emergency reserves. Success or failure will depend squarely on the credibility and resolve of the Government that there will be no U-turn. If the Government is steadfast and is believed, the rupee will fall some distance for some months and then turn upwards and rise some lesser distance, at which point it would have become a hard currency. The initial fall will bring out black money and pent-up demand, and may reduce the present (October 26 1990) artificial price of Rs. 20 to the dollar to even Rs. 40 or Rs 50 to the dollar. The import bill will become enormous, and immediate relief will have to be given by cutting back on import duties and excise taxes on petroleum equivalently, leading to a fall in revenue from these sources. Export incentives should be immediately withdrawn, as Indian exporters will face an unprecedented boom as the dollar prices of their goods tumble, and goods which were previously high-cost and unexportable become very exportable. The export boom may be so huge as to be inflationary in the short term, requiring the same steady monetary policy plus corrective action by release of food and other stocks. The critical burden will fall on expansion of supply and production — it is here that the importance of first establishing domestic free enterprise and cooperative industrial relations is seen, as domestic enterprise must be in a position to respond to an export boom when the rupee becomes a hard currency. The rupee would become a hard currency the moment its initial fall comes to an end and it starts upwards at a new and steady equilibrium value. At this value, our credit-worthiness in the world would be firm, our export-led boom would have begun, capital owned by Indians abroad would have begun to flow freely in, and the Government would be in a position to embark on fundamental changes for long term economic growth and welfare of the masses — specifically, village-based economic development and school-based village development. Most important, as people gain more control over their own individual futures, the mood and momentum should make the position one of strong confidence.
In August 1980, I went to Blacksburg in Virginia from Cambridge to work with James M. Buchanan’s Center for Study of Public Choice and to be Visiting Assistant Professor and later Assistant Professor at the Economics Department. When The Times editorial appeared in London on May 29 1984, I did not come to know of it for several days until foreign newspapers reached the Virginia Tech library and a friend phoned me with having seen it there. The Times (then under the editorship of Charles Douglas-Home) had been laudatory but also inaccurate as to what I did or did not have to say. My letter dated June 16 1984 corrected what was said about my work. The editorial is republished elsewhere here.
Pricing, Planning & Politics: A Study of Economic Distortions in India Subroto Roy
First published on May 29 1984 as Occasional Paper No. 69 of the Institute of Economic Affairs, London
Preface March 2007
A quarter century has passed since my 1982 doctoral thesis at Cambridge University under Frank Hahn, examined by Christopher Bliss and Terence Hutchison, and titled “On liberty and economic growth: preface to a philosophy for India.” I wrote what follows shortly afterwards in Blacksburg, Virginia, and Ithaca, New York, and it was published on May 29 1984 in London by the Institute of Economic Affairs as Occasional Paper No. 69, ISBN: 0-255 36169-6. The day it was published it turned out to be the subject of the main editorial of The Times, then London’s leading newspaper. (I learnt later this had been due to Peter Bauer, and also that 700 copies sold in the first month, a record for the publisher.) The Times editorial though laudatory was misleading, and I had to clarify the contents of the monograph in a letter published on June 16 1984; both documents are available elsewhere at this site.
This work was the first explicit critique of post-Mahalanobis Indian economic thought from a classical liberal perspective since B. R. Shenoy’s initial criticism decades previously. I was 29 when it was published, I am 52 now. I do not agree with everything I wrote back then and find the tone a little puffed up as young men tend to be; it was five years before publication of my main “theoretical” work Philosophy of Economics: On the Scope of Reason in Economic Inquiry (Routledge: London & New York, 1989, also now republished here). My experience of life in the years since has also made me far less sanguine both about human nature and about America than I was then. But I am glad to find I am not embarrassed by what I said as a young man, indeed I am pleased I said what I did in favour of classical liberalism and against statism and totalitarianism well before it became popular to do so after the Berlin Wall fell. (In India as elsewhere, former communist apparatchiks and fellow-travellers became pseudo-liberals overnight.)
The famous November 1955 Milton Friedman memorandum is referred to herein for the first time as “unpublished” in note 1; I was to meet Milton and Rose Friedman at the Mont Pelerin Society meetings held at Cambridge later that year, where I gave them a copy of this monograph; when Milton returned to Stanford he sent to me in Blacksburg his original 1955-56 documents on Indian planning. I published the 1955 document for the first time in May 1989 during the University of Hawaii perestroika-for-India project that I was then leading, it appeared later in the 1992 volume Foundations of India’s Political Economy: Towards an Agenda for the 1990s, edited by myself and WE James. The results of the Hawaii project reached Rajiv Gandhi through my hand in September 1990, as told elsewhere in “Rajiv Gandhi and the Origins of India’s 1991 Economic Reform”. The 1956 document was published in November 2006 on the front page of The Statesman, on the same day my obituary of Milton appeared in the inside pages (both are republished here too).
It is apparent from this monograph that I knew almost nothing then about Pakistan or Islam; that has changed as may be seen especially from the other book I created with WE James at the University of Hawaii, Foundations of Pakistan’s Political Economy: Towards an Agenda for the 1990s, as well as my more recent work on Pakistan and Islam. It is of course impossible to understand India without understanding Pakistan and vice versa.
In general, this monograph had to do with India’s microeconomics and theory of value and resource allocation while my latest work – “India’s Macroeconomics”, “Fiscal Instability”, “India’s Trade and Payments”, “Our Policy Process”, “Fallacious Finance”, “The Dream Team: A Critique” . “Against Quackery”, “Growth & Government Delusion” etc – has to do with India’s macroeconomics and monetary and fiscal theory and policy. Part of the criticism of “distorted incentives” prevailing in Indira Gandhi’s India may still be relevant to India today, while the discussion of ethnic problems, agriculture, the “public choice” factors that stymie Indian progress, misgovernance etc will almost certainly be found so.
Pricing, Planning and Politics:
A Study of Economic Distortions in India
First published on May 29 1984 as Occasional Paper No. 69 of the Institute of Economic Affairs, London
“The economic laws which operate in India are the same as in other countries of the world; the causes which lead to wealth among other nations lead to prosperity in India; the causes which impoverish other nations impoverish the people of India. Therefore, the line of enquiry which the economist will pursue in respect of India is the same which he adopts in inquiring into the wealth or poverty of other nations.” Romesh Chunder Dutt, 1906, The Economic History of India
“Satyameva Jayathe” (“Let truth be victorious”), Motto of the Indian Republic
I. INTRODUCTION
IN THE last 15 years, considerable evidence has accumulated to suggest that the most important policies pursued by successive governments of independent India have not been conducive to economic development, and have indeed gone against some of the most basic lessons that political economy has to offer. Forewarnings of the present predicament of India had come from a few economists in the late 1950s and early 1960s, but their arguments were either ignored or maligned as dogmatic and motivated by`ideology’.[1] My thesis in this Occasional Paper will be that, if the basic and commonsensical lessons of political economy had been acknowledged early on in the history of the Indian Republic, we might have found today a much more prosperous economy and a much healthier body politic than is the case.
To argue this, it is first necessary to describe an economy where the pursuit of the individual good by rational agents is conducted within some set of orderly political institutions which is conducive to both civil peace and sustained mass prosperity. Accordingly, Part I of this short Paper begins by describing the broad and familiar features of what may be called a neo-classical or liberal model, and then proceeds briefly to contrast it with a model in which individual incentives and public institutions have been distorted from their efficient characterizations.
The practical question that arises is: Where in practice have independent India’s policies led most conspicuously to distorted incentives and institutions? This will be the subject of Part III. Part II places the discussion in context by briefly describing a few relevant aspects of the political history of the Indian Republic.
I have argued elsewhere that every normative proposal for action is, in principle, open to question and criticism on the logical and factual grounds upon which it is founded. Whenever two people disagree about what ought to be done, it will be found either that at least one of them has made a mistake of logic or that they are also in disagreement about the facts of the case.[2] In Part IV, a tentative manifesto for political and economic reform in India is proposed, and I hope these proposals too will be subjected to critical scrutiny on the positive grounds upon which I shall seek to establish them.
Part I: Theory
2. EFFICIENT INCENTIVES AND INSTITUTIONS
A `FACT’ may be understood as the opposite of that which could have been the case but is not. A basic fact of the study of men and society – one which was acknowledged first by Aristotle and then, very importantly, by Adam Smith, and which has been emphasized in modern times by Friedrich Hayek – is that, while we are able to study and speak of the nature of human decision and action in general terms, we do not and cannot have a knowledge of how particular actions are moved by particular causes and circumstances.[3]
We might certainly know, for instance, that every household in an economy views some horizons, wants to fulfill some aspirations, and faces some constraints. But if we were asked to specify what all these characteristics happened to be as a matter of fact at any one moment, we would certainly not be able to do so. Men are concerned almost wholly with (and are experts at) living their own lives as best they can – foraging for food, shelter and work, celebrating weddings and births, rearing children, and mourning deaths. For the most part, they are neither interested in, nor competent at judging, what others happen to be doing in their private lives. Neither benevolence nor envy extends much beyond a man’s immediate vicinity, and, certainly, neither can extend to people he does not know or come to know of in the course of a lifetime.
This fact is also acknowledged in modern microeconomics, when it is said that, for the individual agent to be able to make decisions and act upon them, it is sufficient for him to know (besides his own desires, abilities and constraints) only of the relative prices prevailing locally of the goods and skills he wishes to trade.`Efficient incentive’ defined We might then provisionally define an `efficient incentive’ as a set of relative prices and wages such that, when economic agents act upon them, three conditions are fulfilled:(i) the difference between the total demand for and the total supply of every good and skill is zero; (ii) every consumer succeeds in trading the amounts of different goods that he desires, and so obtains the highest utility he can within the constraint of his budget; (iii) every private enterprise maximizes the difference between its total revenues and total costs, that is, its profits. [4]
Rational action, however, occurs within a particular institutional context. Which action is rational and which is not will depend on what institutions there are and how well or poorly they function. As both classical liberals and Marxists argue, the neo-Walrasian tradition in modern economics – as exemplified by the Arrow-Debreu model – is practically devoid of any explicit institutional description, and so may best be regarded as a useful but grossly incomplete metaphor in the economist’s inquiry.
The institutions most relevant to economic activity are those of government. We might therefore add a fourth condition to characterize an efficient economy, namely, that government institutions work in such a way as to allocate tax revenues towards providing public goods in the amounts desired by citizens. This must be an institutional assumption implicit in the general equilibrium construction, without which it would be impossible to see the sense of that model.
The question that follows is how we are to ascertain the composition of the set of public goods to be provided. As is commonly known, this seems to confront the economist with numerous conceptual and practical problems. I propose here to circumvent all the typical difficulties of how to discover and combine individual preferences for public goods, or how to prevent free-riders, and to take a somewhat different route.
Functions of civil government: protection, public goods, education
To answer the question `What should be public goods first and foremost? I suggest we look for the kind of answer Adam Smith or Jeremy Bentham or J. S. Mill might have given to a related but different question : `What should be the functions of government in a large civil society, regardless of whether or not it is constituted democratically?’ This was the relevant question before the modern era of mass democracy. And it is still interesting because, first, it probably remains the appropriate question for the many countries today which either do not have democratic governments or do not have long histories of democracy, and, secondly, because the kinds of answer given by classical authors were very similar to those we might expect from individual citizens in modern democracies as well.
The most important practical functions of civil government include defence against external aggression, the dispensing of civil and criminal justice, the protection of life, property and trade – broadly, the Rule of Law – and the pursuit of a judicious foreign policy. All are different aspects of the same broad objective of ensuring the survival of the community and the security of individual life.
Yet no pretext has been more common than that an imminent danger to the security of the community requires the government to take despotic measures. The guarantee by a civil government of the freedom of inquiry, discourse, criticism, and historical research should take precedence, therefore, even over ensuring security and survival, for it is probably the only final check there can be on whether what a government says is or is not in fact the case. Where this freedom is forcibly denied, or where it exists but people are too apathetic, ignorant or busy with their daily lives to exercise it, public life soon becomes self deceptive and absurd, with propaganda taking the place of discourse, and pretensions and appearances diverging more and more from attainments and reality. Wherever the questions `What is true?’ or `What is the case?’ are not asked frequently enough, there will be fewer and fewer correct answers as to what the case happens to be.[5]
After collective and individual security, the functions of government include the building of dams, embankments, bridges and canals, the provision of roads and fresh water, and so on – activities which, as Adam Smith put it, “. . . though they may be in the highest degree advantageous to a great society, are, however, of such a nature that the profit could never repay the expence to any individual or small number of individuals, and which it, therefore, cannot be expected that any individual or small number of individuals should erect or maintain.” [6]
Each may be more or less a “pure” public good in the modern sense :“that each individual’s consumption of such a good leads to no subtraction from any other individual’s consumption of that good”.[7]
Such a list could be extended to include activities as diverse as: the prevention of soil erosion; the public finance of school education, and’ of measures of basic public health such as vaccinations against contagious diseases; the issuing of currency; sewage disposal; population censuses; the standardization of weights and measures; and so on. It is unnecessary to be more specific here since some people will find even this list controversial. Dogmatists will deny the need for free inquiry; pacifists will dispute that defence is a public good; communists will protest against the public protection of private property; `anarcho-capitalists’ will contest the public dispensation of justice; and so on. To these critics, I would offer merely the following short and incomplete reply.
First, a sound argument can be made that what functions civil government should have can be ascertained, without prejudice, by reasonable citizens, though which particular functions these are may well vary according to circumstances. Secondly, if we could spend time in thoughtful and leisured conversation with every citizen of a large community, it might be predicted – as a matter of cold, empirical fact – that practically everyone would agree with the suggestion that the first destinations of tax revenues should indeed be activities like defence, civil protection and the Rule of Law, the provision of roads, and so on. If such a prediction is correct, my thesis is plainly much more democratic than it might appear to modern economists, though I shall later claim that an objective defence of democratic institutions can be made on quite different grounds as well.
If there is a clear family resemblance between classical liberal authors – from Smith and Mill through to Hayek, Robbins, Friedman, Buchanan, Bauer and many others – it has to do, not so much with the denunciation of government activity in the market-place, as with the recognition of the existence of certain duties of government outside it, the fulfillment of which are indispensable to civil life, let alone the pursuit of economic prosperity. Their protest is at the high opportunity cost of the alternatives foregone.
This raises the question of how we might tell whether government is working well or badly in a particular country at a particular time, or, generally, how we might tell whether different public goods are provided in too small or large amounts. For present purposes it will again be sufficient to suggest a very rough and common sense way of proceeding: let us look first, and think second.
For example, the Iran-Iraq war has clearly been a perfect public bad as far as the ordinary citizenry in either country are concerned. Similarly, if there happen to be millions of cases queuing outside the courts waiting to be heard, or if crime is rampant and police protection ineffective, that may constitute prima facie evidence that too few public resources have been devoted to civil order and justice. Or, if heavy rainfall annually causes landslides in the hills and floods in the plains, devastating crops and leaving innumerable citizens destitute, that also might prompt us to ask whether sufficient public resources have gone towards precautions against such havoc. And so on.[8]
Which goods happen to be public goods depends on the circumstances and the level of government being discussed. For similar circumstances and levels, similar goods will most likely be public goods in different countries. The state ordinarily consists not only of the national government but also of several provincial governments and a myriad of local governments. In particular, a premise of the liberal state would be that public goods should in fact be provided by various levels of government, financed through taxes paid respectively at those levels. The citizen is a taxpayer at a variety of levels, and accordingly public goods are due to be provided at a variety of levels. Just as the national government may not usurp the power to tax for, or spend money on, a public good which is best provided by a provincial government to the citizens of a province, so a provincial government may not tax for, or spend on, a public good best provided by a local government to the citizens of a locality.
The broad principle involved has two aspects: first, a recognition that knowledge of particular circumstances – and hence the ability to act – is infinitesimally dispersed within a population; and, secondly, as direct and visible a matching as possible of the benefits a citizen receives from a particular public good with the taxes he pays towards it, thereby perhaps reducing his incentive to be a free rider on the contributions of others.8Uncertainty and ignoranceProvisionally, therefore, efficient incentives may be thought to consist of a set of market-clearing relative prices and wages, occurring within an institutional context in which the basic and indispensable functions of government have been adequately performed at a variety of appropriate levels.
Such a definition would still be seriously incomplete in one major respect. For we must now recognise: (i) that history is unique and irretrievable, that the present consists only of the fleeting moment, and that the future, by its very nature, cannot be fully known; (ii) that such a thing as human freedom exists; and (iii) that, as a consequence, uncertainty and ignorance are ubiquitous.
Some of the uncertainty derives from the unfolding of natural events (like the rains) over which man has little or no control. The rest derives from the fact that the individual is a free agent who is affected by the actions of others but who cannot predict those actions completely because they too are free agents like himself. Game theory would have had no appeal for the economist if the existence of human freedom had not been a fact. It is this which makes it impossible to read everything in another person’s mind and thus makes it impossible to predict everything he might do. The lasting contribution of Keynesian economics could be its emphasis that such uncertainty and ignorance are important to the economist’s inquiry.
Mathematical economists have been saying for several years that what is required if we are to be realistic are models which reflect the sequential character of actual decision-making and account for the past being immutable and the future uncertain.[9] However, they have proceeded to write even more complex mathematics than we already have – disregarding Aristotle’s advice not to seek more precision from the subject of an inquiry than it may be capable of yielding.[10] My question is the more mundane one of what becomes of the classical liberals’ concept of efficient incentives and institutions in a dynamic world. I shall answer it too in a pedestrian way.
The single overwhelming reason why uncertainty and ignorance are relevant to the economist’s descriptions is that they make real the possibility of mistakes by economic agents. To extend the previous discussion to a dynamic context, what we can do is to ask which institutions are most likely to reduce or mitigate the social consequences of mistaken decisions, whether made by private agents or by those in public office. And it is here that the classical liberals advocate two important institutional features: competition and the decentralisation of decision-making.
The major value of democratic institutions over authoritarian ones is that they encourage these two principles to be put into effect. Because, in a large economy, particular knowledge is infinitesimally dispersed, it may be better for adjustments to a multitude of variables to be made continuously in response to changing circumstances by a vast number of small economic agents, rather than for adjustments to a few variables to be made at political intervals by a small group of very powerful agents. The concentration of power to make major decisions among a few fallible men is a much more ominous prospect than the distribution of power in small amounts among a large number of fallible men. It is much more dangerous for a monopoly of ideas to be claimed about where the political good of a country lies than for there to be free and open competition among such ideas at the bar of reason.
D. H. Robertson put it well when he warned “that all the eggs should not be in the same basket – that in this highly uncertain world the fortunes of a whole trade, or a whole area, should not depend on the foresight and judgement of a single centre of decision”.[11] The presumption in favour of democratic institutions is that they reduce the potential damage from wrong political decisions damage which can be rationally expected in an uncertain world.[12] Elections, in the liberal understanding, are then not so much the means to promote the interests of one’s confederates as to remove from office without bloodshed rulers who fail to do what they are entrusted with, and to replace them by those from whom better is expected. Economic efficiency in an uncertain worldThe economic notion of efficient incentives is also modified by uncertainty and ignorance. In the theory, a set of prices is market clearing only relative to unchanging preferences, resources and technologies. In a dynamic world, however, demand and supply functions are themselves changing and the notion of efficient incentives must accordingly be adapted to one in which relative prices move in the direction of the excess demand: that is, if the parameters change so that the total demand for a good or skill comes to exceed the total supply, we should want to see its relative price rising (and, conversely, if total supply exceeds total demand, we should want to see its relative price falling). During such a process of adjustment, many people may suffer very considerable hardship – something which reasonable Keynesians do well to emphasise.
If changing preferences, resources or technologies cause the demand for a product to diminish, we should want to see the firms which manufacture it either entering different markets, or improving its quality by technological innovation, or lowering prices. Similarly, we should want to see workers in these firms whether blue- or white-collar – who have skills specific to a product whose price is falling either increasing their productivity or retraining themselves in different skills more specific to the manufacture of goods whose prices are rising. Numerous enterprises can go bankrupt, and numerous workers can find themselves unable to sell the skills they possess, if they fail to adapt quickly enough to changing market conditions. The more specialised the product and the more specific the skill, the more hardship there may be. There could well be orthodox Keynesian consequences whereby laid-off workers reduce their consumption expenditures and firms on the verge of bankruptcy reduce their investment expenditures, leading to lower incomes for others, and thus to lower expenditures by them too, and so on. An anti-Keynesian who denied the existence of such hardship would be closed to the facts. He might also not be doing his own theory justice: for it is not unreasonable to argue that, while adjustments are inevitable in an uncertain world, the classical response of prices moving in the direction of excess demand probably minimises the hardship in the transition from one equilibrium to the next.
In a dynamic world, therefore, in which supply and demand functions are shifting continually and unpredictably (though probably incrementally, and not drastically), efficient incentives are better thought of as relative prices which are not stagnant but which are moving – and moving quickly – in the direction of excess demand. It should, in general, be continually profitable at the margin for firms and workers to be innovating technologically and improving productivity. As everyone knows from experience, the principle goad to such activity is fair and free competition. If a job or contract is sought badly enough, and if better quality or lower price are known to be the only criteria of selection, the expected outcome is a differentiation and improvement by competitors of the individual quality or price of what is sold.
In broad summary, the liberal understanding of how material well-being can be improved rests on the assumption that the basic functions of civil government are performed satisfactorily. Government provides the backdrop of civil order and protection necessary for private citizens freely and fairly to conduct their own lives and their transactions with one another. It is a theory which acknowledges a fundamental fact in the study of society, namely, that the individual household : (a) most commonly defines its own horizons; (b) knows the particular opportunities available to it to produce, trade and consume; (c) recognises the particular constraints which prevent it from doing all that it may desire; and(d) perceives how these opportunities and constraints may be changing. Where, as in the liberal picture, there are large numbers of producers and consumers, sellers and buyers – each family acting more or less independently – the efforts of one family do not directly make for other than its own success, while at the same time the repercussions of its mistakes are felt by itself and do not reverberate throughout the whole community. Such has been, as I see it, the American secret to mass prosperity.
3. DISTORTED INCENTIVES AND INSTITUTIONS
DISTORTED INCENTIVES are the logical opposites of efficient ones. Relative prices and wages send distorted signals to individual economic agents when they do not move in the direction of excess demand, so that there is no general tendency for markets to clear. A long-run or endemic excess demand for a good reveals itself in rationing, queueing and black markets. The price at which trade nominally takes place is too low and shows no tendency to move upwards.
Conversely, in a product market, a long-run or endemic excess supply reveals itself in surpluses and spoilages. In a labour market, it reveals itself, on the one hand, in armies of tenured employees who have no incentive to improve productivity, and, on the other hand, in lines of involuntarily or disguised unemployed who cannot sell all the skill they possess and have to settle for selling their less-specialised ones. The price at which trade nominally takes place is too high and shows no tendency to move downwards. In practical terms, firms do not find it profitable to be continually entering new markets or improving quality or enhancing technology or reducing price in order to attract and retain customers. Farmers in particular may face output and input prices which make technological improvements unprofitable.
In politics, distorted incentives are ones which make it profitable for politicians and government officials to be corruptible and taxpayers to be evasive. Because corruption is not penalised and honesty not rewarded, the pursuit of private interest may make it rational to be corrupt and irrational to be honest.
Individualism and statism
A neo-classical economic model like the one outlined above presupposes among citizens a political attitude of individualism. This may be defined as a condition in which citizens have the idea (a) that it is the individual household itself which is principally responsible for improvements in its own well-being, and (b) that government merely “is, or ought to be, instituted for the common benefit, protection and security of the people …”, and that government officials are merely the citizens’ “trustees and servants, and at all times amenable to them.” [13]
Its logical opposite may be called an attitude of statism – defined as prevailing when various classes of citizens have the idea that it is government which is and should be principally responsible for improvements in individual and public well-being. A good sense in which `power’ can be defined in political and economic contexts is as “the capacity to restrict the choices open to other men”.[14] An attitude of statism entails a willingness, or at least an acquiescence, on the part of citizens to relinquish to those in government, with little or no questioning, the power to make decisions which may affect their lives intimately. At the same time, responsibility for relapses or lack of progress in individual well-being is also thought to be the consequence of governmental and not private decision-making. Whereas individualism is a self-assertive attitude, statism is a self abnegating one. For those in government to have a statist mentality is the same as saying they are paternalistic, that is, making the presumption that the citizen is often incapable of judging for himself what is for his own good.
The suggestion that government should have the principal responsibility for improvements in individual and collective economic well-being – in the sense that the collectivity can and should satisfy the material aspirations of every individual – appears straightaway to be self contradictory. An individual can have enough difficulty trying to articulate his own horizons, aspirations and constraints, let alone trying to do the same for others. For a politician (or economist) to claim (or imply) not only that he knows(or can know) the relevant characteristics of everyone at once, but also that he knows how to ameliorate the condition of humanity at a stroke, as if by magic, would have been considered ridiculous in more candid times than ours. If we understand `collective effort’ to mean the sum of individual labours engaged in a common pursuit or endeavour, then for the collectivity to try materially to satisfy every individual would amount to imposing a duty on everyone to try materially to satisfy everyone else – an absurd state of affairs, flying in the face of the fact that most people most of the time do not wish to, or cannot, cope with much else except their private lives.
Exhorting government directly to improve the material wellbeing of `the people’ cannot mean what it seems to because it cannot refer to literally all the people but only to some of them perhaps only a majority, or only the well-organised. That the state is endogenous to the polity implies that no government has resources of its own out of which to disburse the amounts a politician may promise or an economist recommend. To fulfil new promises, given an initial condition of budgetary equilibrium, a government is only able either to print more fiat money or to tax the resources of individual citizens more heavily. Leaving aside the first alternative, fulfillment of the exhortation amounts to using public institutions to transfer resources from some people in order to keep promises made to others.
When the attitude spreads that, in politics, one man’s gain is another man’s loss, and where political control is to be had by winning majorities in elections, the citizen comes to face a perverse incentive to try to coalesce with more and more others in the hope of capturing the public revenues in his favour – instead of thinking critically about the nature of the political good as the institutions of democracy require him to. Political power becomes less dispersed, and the size of the polity diminishes in the sense that it comes to have fewer and fewer constituent agents, each of which is a larger and larger coalition of like-minded confederates intent on acquiring control for its own benefit.
Perhaps the worst consequence of a general attitude of statism, however, is that the basic, commonsensical functions of government are obscured, ignored, and neglected. Instead of requiring politicians and government officials to fulfill these functions, a citizenry allows its public agents to become brokers and entrepreneurs – trading not only in the products of government controlled industries but also in an array of positions of power and privilege, all in the name of directing a common endeavour to help the poor. The state places itself at every profitable opportunity between private citizens who might otherwise have conducted their transactions themselves perfectly well. The result is that governments do, or try to do, what either does not need to be done or ought not to be done by government, while they neglect that which only governments can do and which therefore they ought to be doing.
Part II: History
4. INDIVIDUALISM AND STATISM IN INDIA
AN ATTITUDE of statism has probably been present in India since Mughal times at least. If anything, it spread during the British period since the raison d’être of British rule in India would have vanished without paternalism (as in the course of time it did) and the existence of British rule was the raison d’être of the nationalist movement. Paternalism towards India was espoused even by those Englishmen known for their liberal views at home. Thomas Macaulay, for instance, declared to the House of Commons in 1833: “It may be that the public mind of India may expand under our system till it has outgrown that system; that by good government we may educate our subjects into a capacity for better government; that having become instructed in European knowledge, they may, in some future stage, demand European institutions. Whether such a day will ever come I know not. But never will I attempt to avert or retard it. Whenever it comes, it will be the proudest day in English history.”[15]
Less than a hundred years later, in 1930-31, the Indian National Congress – to the considerable chagrin of the British Government – resolved to bring about an independent India in which every citizen would have the right to free speech, to profess and practise his faith freely, and to move and practise his profession anywhere in the country. There would be universal adult suffrage and no-one would be unjustly deprived of his liberty or have his property entered, sequestered or confiscated. In particular, all citizens in the future republic would be `equal before the law, irrespective of religion, caste, creed or sex’, and no disability would attach`to any citizen by reason of his or her religion, caste, creed or sex, in regard to public employment, office of power or honour, and in the exercise of any trade or calling’.[16]
These resolutions were made in the thick of the battle for independence, and underscored the fundamental argument of the nationalists that, in spite of the infinitely diverse characteristics of the inhabitants of the sub-continent, a free and secular India was possible in which all would be ruled by a common law. That argument had been in contradistinction to the frequent taunt from British Conservatives that an
India without Britain would disintegrate in internecine bloodshed, and also to the later `two nations’ theory of the Muslim League which led eventually to the creation of
Pakistan. With the departure of the British and the Pakistanis, in 1950 the Constitution of the first Indian Republic was finally able to bring into force the idea of secularity which had inspired the nationalist cause. Thus, among the Fundamental Rights established by the Constitution, Article 14 provided that the state `shall not deny to any person equality before the law or the equal protection of the laws within the territory of
India’. Articles 15.1, 15.2, 16.1, 16.2 and 29.2 went on to prohibit discrimination on the arbitrary grounds of religion, race, caste, sex or place of birth in matters of public employment or access to publicly-funded education.
The century between Macaulay and the resolutions for independence was by far the most important to the country’s intellectual history since earliest antiquity. While it took its turbulent course, long severed since the time of the early Greeks – came to be re-established. The common interest and the common contribution became one of admiring and learning from Europe and from India’s own past what there was to be admired and learnt, whilst forsaking and resisting what was self contradictory or base. The maxim for a century might have been : learn the good and let the evil be buried in history. As Tagore wrote :`The lamp of Europe is still burning; we must rekindle our old and extinguished lamp at that flame and start again on the road of time. We must fulfill the purpose of our connection with the English. This is the task we face in the building up of a great India.’[17]
The ideal aspired to was swaraj, or `self rule’. It literally meant not only a government of India by Indians accountable to Indians, but also the governance of the individual by himself. Not only was the country to be sovereign vis-à-vis other states; its individual citizens were to be free vis-à-vis each other and equal before its laws. Swaraj meant, in other words, a condition of political autonomy where the citizen constrained his own free actions so as not to harm others, and where the Rule of Law would protect him when he acted autonomously and resist him when he did not. Given a backdrop of civil order, the infinite number of ways to individual happiness and prosperity in an infinitely diverse sub-continent could then be pursued. Statism all pervading
An attitude of statism, however, has pervaded all public discourse in independent India, and has been reinforced by the social and economic policies pursued by successive governments.
In the first place, a ghost from earlier controversies with the British was to remain in the 1950 Constitution. Immediately after the provisions establishing equality before the law and equality of opportunity in public employment and publicly funded education, the following caveats appeared. Article 15.3 said that the state could make “any special provision for women and children”; and then, of more significance, Article 15.4 allowed the state to make “any special provisions for the advancement of any socially and educationally backward classes of citizens or for the Scheduled Castes and the Scheduled Tribes”.
Article 16.4 allowed it to make “any provision for the reservation of appointments or posts in favour of any backward class of citizens which, in the opinion of the State, is not adequately represented in the services under the State.” Lastly, Article 335 said that “the claims of the members of the Scheduled Castes and the Scheduled Tribes shall be taken into consideration, consistently with the maintenance of efficiency of administration, in the making of appointments to services and posts [under the State] . . .” Who was to decide who was `backward’ and who was not, or which group was to be `scheduled’ and which not? Article 341.1 said that `The President may . . . by public notification specify the castes, races or tribes which shall for the purposes of this Constitution be deemed to be Scheduled Castes’, and Article 341.2 added that `Parliament may by law include in or exclude from the list of Scheduled Castes specified under 341.1 any caste, race or tribe or part of or any group within any caste, race or tribe . . .’ Articles 342.1 and 342.2 said the same for the Scheduled Tribes.
Subsequently, two Presidential Orders named no fewer than 1,181 different groups in the country as `Scheduled Castes’ and more than 583 other groups as `Scheduled Tribes’. Roughly a sixth of the population thus came to be termed `backward’ by executive decree and were segregated by statute from the rest of the citizenry.
The direct precursor of these provisions was the `Communal Award’ by the British Government in 1932, who had taken it to be their duty “to safeguard what we believe to be the right of Depressed Classes to a fair proportion in Legislatures ”.[18] (`Depressed Classes’ was the official name for those misleadingly called `untouchables’ outside the Hindu fold.)
The complex customs of the Hindus call for endogamy and commensality among members of the same caste, thus making anyone outside a caste somewhat `untouchable’ for its members. In marriage and dining habits, many orthodox Hindus would hold foreigners, Muslims, and even Hindus of other castes at the same distance as those formally classified as `Depressed Classes’. Indeed, non-Hindus in India -including the British often maintained social protocols that were equally as strict.
No serious Indian historian would doubt that members of the `Depressed Classes’ had been oppressed and had suffered countless indignities throughout Indian history at the hands of so-called`caste Hindus’. At various times, persecution had led to mass conversions to the more secular faiths. But the ancient wrongs of the Hindu practices had to do not so much with the lack of physical contact in personal life which the word `untouchability’ connotes for Indian society has always consisted of a myriad of voluntarily segregated groups – but rather with open and obvious inequities such as the denial of equal access to temples, public wells, baths and schools.
Gandhi, who by his personal example probably did more for the cause of the `Depressed Classes’ than anyone else, protested against the Communal Award with one of his most famous fasts. Privately, he suspected that `…the communal question [was] being brought deliberately to the forefront and magnified by the government because they did not intend to part with power’.[19] Publicly, he argued that the pernicious consequence would be a further exacerbation of the apartheid under which the `Depressed Classes’ had suffered for so long, when the important thing was for their right to be within the Hindu fold to be acknowledged by `caste’ Hindus.[20]
The Fundamental Rights in the 1950 Constitution establishing the equality of all citizens before the law evidently had the 1930-31 resolutions as their precursors; while Article17 – which specifically declared `untouchability’ to be `abolished’ and its practice `forbidden’ – was part of Gandhi’s legacy, placing those who had for centuries been denigrated and persecuted on exactly the same footing in the eyes of the laws of the Republic as their denigrators and persecutors. The subsequent clauses authorizing the state to discriminate in favour of `Scheduled Castes’, and allowing it to define by executive decree who was to be so called, were evidently the remnants of the Communal Award of 1932. Discrimination by the state was initially to last for a period of 10 years only. It has, however, been extended three times -for another 10 years on each occasion – and so continues to the present day. We shall examine a few of the consequences in Part III.‘A socialistic pattern of society’As for economic policy, while the original 1950 Constitution had ambiguously stated certain ends – such as that government was `to strive to promote the welfare of the people’ – it made no mention at all of any specific economic institutions, statist or liberal, which the new Republic was to nurture as means towards those ends. In spite of this omission, successive governments have explicitly avowed their espousal of` socialism’ as the means to the good and prosperous society.
For instance, a “socialistic pattern of society where the principal means of production are under social ownership or control” was declared to be a national objective at the ruling Congress Party’s convention in 1955; and, in 1976, the notorious 42nd Amendment purported to change the very description of the country in the preamble to the original Constitution from the sober `Sovereign, Democratic Republic’ to the awkward `Sovereign, Secular, Socialist Democratic Republic’. It is an open and important issue of constitutional practice whether a temporary majoritarian government can change the legal description of a republic so fundamentally that it necessarily begs every question now and in the future about the efficacy of socialism as the route to mass prosperity.[21]
Even so, `socialism’ is a vague and equivocal word, meaning different things to different people. Briefly, what happened in the Indian context seems to have been that the Nationalist Government explicitly took upon itself the responsibility of becoming the prime mover of the economic growth of the country. This was in addition to its other fundamental and urgent political responsibilities at the time, namely, to establish peace and civil order in the aftermath of a bloody partition, re-settle several million destitute refugees, integrate into the Republic the numerous principalities and fiefdoms run by the princes and potentates, re-draw provincial boundaries on a sensible linguistic criterion, and generally educate people about their rights and responsibilities as individual citizens in a new and democratic republic.
In a poor country which had just ended a long period of alien rule, it was understandable, if in advisable, that a nationalist government led by cultured, educated men among unlettered masses should take upon itself the responsibility for economic growth. Part of the nationalists’ critique of British rule had been precisely that it had worked to the considerable detriment of the Indian economy. And, certainly, whatever the exact calculation of the benefits and costs of the British presence in India, while there had been obvious benefits, there had also been obvious costs such as iniquitous taxes and overt racial discrimination in employment. [22]Thus, when the nationalists practically swore themselves to provide better government for the economy, it was certainly a very praiseworthy aim; 1947 would indeed be the year of India’s `tryst with destiny’.
Better government not necessarily more government
What the Nehru Government came to believe, however, was that better government for the economy necessarily meant more government activity in the economy. A similar nationalist government led by cultured, educated men among an unlettered public had chosen differently in 1776 at Philadelphia, but the times and circumstances were very different. The Indian nationalists, and most especially Prime Minister Nehru, had just witnessed what they took to be, on the one hand, the collapse of the market economy in the Great Depression and, on the other, the rapid growth to greatness of Bolshevik Russia. In his presidential address to the Congress in 1936, for instance, Nehru spoke of the immediate past in these terms: `Everywhere conflicts grew, and a great depression overwhelmed the world and there was a progressive deterioration, everywhere except in the wide flung Soviet territories of the USSR, where, in marked contrast with the rest of the world, astonishing progress was made in every direction . . .’ Thus, it seemed to him, there was`. . . no way of ending the poverty, the vast unemployment, the degradation, and the subjection of the Indian people except through Socialism”. Socialism meant, inter alia, ` the ending of private property, except in a restricted sense, and ttte repla emenr of the ,private profit system by a higher ideal of co-operative service. It means ultimately a change in our instincts and habits and desires. In short, it means a new civilisation, radically different from the present capitalist order. Some glimpse we can have of this new civilisation in the territories of the USSR. Much has happened there which has pained me greatly and with which I disagree, but I look upon that great and fascinating unfolding of anew order and a new civilisation as the most promising feature of our dismal age. If the future is full of hope it is largely because of Soviet Russia and what it has done, and I am convinced that, if some world catastrophe does not intervene, this new civilisation will spread to other lands and put an end to the wars and conflicts on which capitalism feeds’.[23]
Equally as certain and deep as his admiration for the liberal values of the West was Nehru’s evident misunderstanding of the causes and consequences of Stalin’s Russia. The political and economic history of India in the past 30 years cannot be understood without regard to her most powerful leader’s ambivalence about the nature of the political and economic good.
By the mid-1950s, many of India’s other prominent statesmen had died or retired from public life, and there was hardly a public figure of’ stature left (with the exception of Rajagopalachari) to challenge Nehru’s socialist vision of the country’s future. Moreover, men who were ostensibly `expert economists’, but whose writings revealed no knowledge of prices or markets or the concept of feasibility, were encouraged to endorse and embellish this vision, which they did without hesitation in the secure knowledge that they were shielded from critics by the intellectual patronage of a charismatic and elected leader.[24]
The choice between alternative models of mass economic prosperity must have seemed quite clear at the time. The cold fact did not, however, vanish that one of the oldest objective lessons of political economy has been that more government is not necessarily better government. It is to the consequences of ignoring this lesson that we now turn.
Part III: Practice
ECONOMIC POLICIES IN INDEPENDENT INDIA
INDIA TODAY is a bizarre maze of distorted incentives, which I (and no doubt others) have found very difficult to untangle and understand. I shall, however, list and discuss the most significant of them as methodically as I can.
(i) Industry
The Indian Government has declared a large `public sector’ in commerce and industry to be a national objective. Towards this end, it has therefore progressively acquired numerous enterprises, large and small, so that it now has either a full monopoly in an industry or is one of a few oligopolists. These industries range from banking, insurance, railways, airlines, cement, steel, chemicals, fertilisers and ship-building to making beer, soft drinks, telephones and wrist-watches. There are no explicit penalties for indefinite loss-making; indeed, bankrupt private enterprises have often been nationalised to serve politicians’ ends. And, certainly, there has been no general rule of marginal-cost pricing. In public utilities, like electricity generation and distribution or city buses and trams, prices appear to be well below marginal cost, leading to severe rationing and queueing. Sudden stoppages of electricity for hours at a time and monumental congestion on buses and trams have become endemic facts of life for millions of urban Indians.
At the same time, private industry in India has been made to face labyrinthine controls. The government has continually exhorted private firms to work in the `national interest’ – which means accepting the constraints of centralised planning. It has left no doubt that, while there is a `role’ for the min the growth of the economy, they exist at the sufferance of government and had better realise it, otherwise the dark forces of revolution which have so far been kept at bay will inevitably sweep them away altogether, as happened in Russia and China.
The constraints imposed on the operation of a private business are legion, and would make a businessman from the West or Far East reach for a psychiatrist or a pistol. An entrepreneur may not enter numerous industries without government approval of the `technical’ viability of his project; once it is approved, he cannot find credit except from a government bank; and he cannot buy raw materials and machinery of the highest quality at the lowest price since, if they are produced in India, he will be denied a licence to import better and/or cheaper foreign substitutes. The onus is on him to satisfy the government that no production occurs within India of the input he requires; only then will an import licence conceivably be granted, subject to periodic review by the government. He may be compelled to export a specified proportion of his output as a condition for the renewal of his import licence, which therefore places him at a disadvantage with foreign buyers who, of course, are aware of this restraint. He may be unable to compete internationally because the rupee is priced above its likely equilibrium and some of the inputs he uses are high-cost, low-quality domestic substitutes. As a result, he may be compelled practically to dump his output abroad at whatever price it will fetch.
The entrepreneur’s factory may be subject to random cuts in electricity for hours at a time. He may require government approval before he can increase his fixed capacity, modernise his plant, change a product-line, or even change the number of labour shifts. He may face minimum-wage and stringent unfair dismissal laws on the one hand, and price controls on the other. If he fails to meet credit obligations to the nationalised banks, he may be penalised by the appointment of one or more government directors to his board – a form of `creeping’ nationalisation. Further, he may be subjected to a constant threat of full nationalisation as and when the government decides that his industry should be in the public sector in the interests of national planning.[25]
The consequence of all these controls has been a monumental distortion of incentives away from encouraging private firms to try to attract customers by improving technology and quality or reducing prices towards encouraging them to concentrate on `rent-seeking’, in the term made familiar by Professors Gordon Tullock and James Buchanan.[26]
As Anne Krueger says in her excellent study of the automobile ancillary industry, the very notion of entrepreneurial efficiency changes in such circumstances: `Under conditions in India, the most important problem confronting entrepreneurs is that of assuring that production will continue. The combined effects of import licensing and investment licensing give virtually every firm a monopoly or quasi-monopoly position. The entrepreneur who is most successful in getting licences of greater value and/or in getting licences more quickly than his fellow producers will have higher profits. `The producer who does not compete successfully for licences cannot produce at all, no matter how skilled he is in achieving engineering efficiency, unless he enters the “open market” and pays a premium to the successful licence applicant for some materials . . . Successful entrepreneurs are therefore those who are best at obtaining the greatest number of licences most expeditiously . . .’ [27]
Moreover, firms which are low-cost and efficient (in the free market sense) and which are successful at rent-seeking as high-cost, inefficient firms may still not be able to compete the latter out of business because government will not usually allow a particular firm to expand – regardless of its efficiency – if there is excess capacity in the industry of which it is a part. High-cost firms can thereby rationally count on staying in business simply by maintaining significant excess capacity.
(ii) Foreign trade
The Government of India has always claimed that foreign exchange is a `scarce’ resource which must be rationed by fiat in the national interest. The total foreign-exchange revenue (at an exchange rate which was fixed until 1971 and has since been on a managed `peg’) has been allocated in the following order of priorities: first, to meet foreign debt repayments and government expenditures in the conduct of foreign policy, such as the maintenance of embassies (G1); secondly, to pay for imports of defence equipment, food, fertilisers and petroleum (G2); thirdly, to meet ear-marked payments for the imported inputs of public sector industries so that they may achieve projected production targets (G3); fourthly, to pay for the imported inputs of private sector firms which are
successful in obtaining import licences (P1); and, lastly, to satisfy the demands of the public at large for purposes such as travel abroad (P2).
Foreign exchange is `scarce’ in India, or elsewhere, in precisely the same sense that rice or petrol or cloth is scarce. Just as there exists some positive price for rice, petrol or cloth which, at any moment, will match total supplies with total demands, so there exists some positive price for rupees relative to dollars which, at any moment, will match the transaction and asset demands of Indians for dollars with the transaction and asset demands of foreigners for rupees. Underlying that market-clearing price would be (a) the demands of Indians for foreign goods whose f.o.b. prices were lower than those of domestic substitutes, and, similarly, the demands of foreigners for goods in which India has had a comparative advantage; and (b) the expectations of Indians and foreigners about the future purchasing power of the rupee relative to the dollar, using as a proxy, say, the difference between interest rates in India and abroad.
A free market in foreign exchange would first have encouraged India’s traditional exports, like jute manufactures and textiles, and then (if the positive theory of international trade is broadly correct)progressively encouraged the export of other non traditional goods which used India’s relatively inexpensive labour relatively intensively and thereby enabled Indian entrepreneurs to compete successfully in foreign markets. At the same time, capital flows into and out of India would have given the monetary authorities an incentive to keep domestic interest rates in line with the real opportunity cost of forgoing consumption in favour of savings.
Thus, the case against a free market in foreign exchange has always been, to say the least, far from obvious.[28] But even if, for the sake of argument, we accept the presumed superiority of rationing, the elementary theory of optimisation which underlies the so-called theory of `planning’ dictates that the government should allocate dollars between alternative uses such that the marginal dollar yields the same increase in social utility in any use. The Indian Government, however, appears to have allocated foreign exchange simply on the basis of giving a higher priority to its own foreign expenditures (categories Gl, G2 and G3) than to private foreign expenditures (categories Pl and P2). That is to say, regardless of how much social utility might have been derived from a particular increase in private-sector imports, it would not be considered until after the government had met all its own expenditures abroad.[29]
Jagdish Bhagwati and T. N. Srinivasan put it as follows : `The allocation of foreign exchange among alternative claimants and users in a direct control system . . .would presumably be with reference to a well-defined set of principles and criteria based on a system of priorities. In point of fact, however, there seem to have been few such criteria, if any, followed in practice.’[30]
With respect to imported inputs for private- and public-sector industries, a rule of `essentiality’ (that is, the input must be technically `essential’ to the production process) and a rule of `indigenous availability’(that is, there must be absolutely no domestically-produced physical substitutes, regardless of cost and quality)seem to have been followed. But, as Bhagwati and Srinivasan report, `. . . the sheer weight of numbers made any meaningful listing of priorities extremely difficult. The problem was Orwellian: all industries had priority and how was each sponsoring authority to argue that some industries had more priority than others? It is not surprising, therefore, that the agencies involved in determining allocations by industry fell back on vague notions of “fairness”, implying pro rata allocations with reference to capacity installed or employment, or shares defined by past import allocations or similar rules of thumb’. [31]
Clearly, in abjuring the free market and claiming a monopoly over foreign-exchange transactions, government planners have accepted certain premises as unquestionable: (a) that government sponsored industrialisation is the best means to mass prosperity; (b) that a policy of indefinite import-substitution is the best means to industrialisation; and (c) that such a policy requires all foreign expenditures by government to take precedence over all private foreign expenditures. The trade and foreign-exchange policies pursued cannot be understood except by reference to domestic economic policies and, in particular, to the view held about the proper functions of government in and out of the market-place.
In addition to a plethora of controls, tariffs and outright bans on imports, there have been erratic policies, subsidising the export of `new’, non-traditional manufactures like engineering goods, and taxing- and even banning – the export of goods in which India has traditionally enjoyed a comparative advantage.[32]
Moreover, the rupee has been continuously over-valued. From 1949 to 1959, the official exchange rate of Rs. 4.76 to the US dollar was, on average, 12..3 percent above the black-market rate, a figure which rose to 61 per cent between 1960 and 1965. From 1966 to 1970, the devalued official rate of Rs. 7.50 to the dollar was above the black-market rate by an average of 47.6 per cent, while from 1971 onwards the managed-peg rate has been above the black-market rate by an average of 24.3 per cent.[33]
Simple economics suggests that a free-market equilibrium rate would be somewhere between the black-market and official rates. An official exchange rate for the rupee fixed above that warranted by underlying relative demands for Indian and foreign goods, as well as by relative degrees of confidence in the rupee and the dollar, subsidises imports at the expense of exports. By discriminating in favour of its own foreign expenditures and against those of the private sector, the government has been the principal beneficiary of an over-valued rupee. If capital-intensive goods are the main imports and labour-intensive ones the main exports, an over-valued rupee further distorts incentives so as to favour the use of capital-intensive production processes over labour intensive ones – in a country with a demonstrable abundance of relatively inexpensive labour!
With an eye to India, Krueger has argued the general issue in these terms:`Subsidies can make any industry an export industry, even one that would not produce at all in an efficient allocation. Similarly, taxes can be levied on an industry that has comparative advantage which will penalize it enough to render domestic production entirely unprofitable. When taxes and subsidies are used, therefore, it is possible not only to distort the structure of production, but to distort it so much that the “wrong” commodities are exported.”[34]
The Indian Government’s planners have had the idea of forcibly effecting a reversal in the comparative advantage of the country, as if by magic overnight. The hope might have been that a forced pace of industrialisation would somehow allow economies of scale to be reaped and thus soon make Indian industrial goods competitive enough in international markets to be the country’s principal source of foreign exchange, displacing traditional manufactures like jute and textiles. In practice, however, as the evidence given by Bela Balassa
and other economists demonstrates, such a policy has not succeeded to date and is most unlikely ever to do so.
India’s import bill has risen continuously, most drastically after the 1973-74 quadrupling of petroleum prices; non-traditional manufactures have hardly been able to compete successfully in foreign markets; and the traditional exports of jute and textiles have suffered very severe setbacks. Balassa contrasts the consequences of the freer, outward-looking trade policies of South Korea, Singapore and Taiwan with those of the inward-looking, controlled regime of India as part of a study of 11 countries(including Argentina, Brazil, Colombia, Mexico, Chile, Israel and Yugoslavia) which, along with Hong Kong, account for most of the manufactured exports of developing countries. India’s share of the total manufactured exports of these countries has fallen steadily from 65.4 per cent in 1953 to 50.7 per cent in1960, to 31.2 per
cent in 1966 and to a mere 10.3 per cent in 1973. The proportion exported of India’s total manufactured output fell from 9.7 per cent in 1960 to 9.4 per cent in 1966 and to 8.6 per cent in1973. In contrast, during the same two periods, the proportion of manufactured output exported rose from1 to 14 to 41 per cent in South Korea, from 11 to 20 to 43 per cent in Singapore, and from 9 to 19 to 50 per cent in Taiwan.[35]
Balassa cogently argues that the adverse effects of a sudden change in external factors, such as the quadrupling of petroleum prices in 1973-74 or the 1974-75 Western recession, were absorbed much more easily by developing countries with large foreign-trade sectors than by those like India with relatively small ones: `Outward orientation is associated with high export and import shares that permit reduction in non-essential imports without serious adverse effects on the functioning of the economy. By contrast, continued inward orientation involves limiting imports to an unavoidable minimum, so that any further reduction will impose a considerable cost in terms of growth. Furthermore, the greater flexibility of the national economies of countries pursuing an outward-oriented strategy, under which firms learn to live with foreign competition, makes it possible to change the product composition of exports in response to changes in world market conditions, whereas inward orientation entails establishing a more rigid economic structure.’[36]
In other words, if imports are both high in total value and diverse in composition, a rise in the relative price of a particular import for which home demand is relatively inelastic (like petroleum and its products) can be accommodated by a substitution of expenditure towards it and away from inessential imports for which demand is relatively elastic. A similar argument had typically been advanced by advocates of import-substitution when they maintained that the exports of a small country should be diverse and not concentrated on only a few goods since a decline in world prices would otherwise lead to serious falls in export revenues. This suggests that both critics and advocates of import substitution might agree that, for a country which is a price-taker in world markets, the encouragement of a large foreign-trade sector is a way of diversifying the risk of adverse effects from changes in world prices. The question remains as to whether the positive theory of trade is correct in saying that the encouragement of comparative advantage is superior to import-substitution as a means of achieving a large foreign sector. From the contrasting experiences of, say, South Korea on the one hand and India on the other, the answer seems overwhelmingly to be that it is.
(iii) Agriculture
The Indian Government has instituted a multiple-pricing system for the major food-grains, especially rice and wheat. Farmers are compelled to sell a specified fraction of their output to the government, at a price fixed by the government which is significantly lower than that warranted by underlying supply and demand conditions. Farmers may sell the remainder of their output freely. The quantities the government acquires in this way, plus any it imports (imports being subsidised by the over-valuation of the exchange rate), are sold by ration at lower than free-market prices in the so-called `fair-price’ shops – which happen to be mainly in urban areas. Urban consumers may purchase part of their requirements from such shops and the remainder on the open market at higher prices. Astute middle-class urban housewives know that rationed grain is often of poorer quality than that sold on the open market. Accordingly, the former often constitutes part of the wages of the domestic servants of the urban household, while the family consumes the latter. Insofar as this is true, it suggests that farmers distinguish quality much better than do government officials, and that they use this advantage somewhat to partition their output into low- and high-quality, selling the first under compulsion to the government and the second on the open market.
While such is the general food policy of India, the compulsory procurement of grains and their distribution to the ration-shops is implemented by individual State governments and not by the Union Government. There have usually been numerous restrictions on inter-State movements of grain, so the States do not form a full customs union; instead, the Union Government tries to be a central clearing-house, matching the desired imports of one State with the desired exports of another.[37]
Economic effects of ban on futures contracts
Furthermore, futures contracts in grains have been banned by law, in the belief that futures trading is conducive to speculation and that speculation is undesirable. A futures contract in grain consists simply of a promise by a seller to deliver an amount of grain to a buyer at some specified date in the future in return for payment at a price agreed today. The seller’s incentive to enter into the contract is the guarantee of a certain sale, and the availability of funds now; the buyer’s incentive is the guarantee of a certain price for future deliveries. The contract may be entered into because buyer and seller have different expectations about what the spot price will be in the future. The buyer minimises his expected costs and the seller maximises his expected revenues; both are able to balance their budgets inter-temporally. Even if they have the same expectations about future spot prices, buyer and seller may still find it mutually profitable to enter into a futures contract as a way of insuring against risk. Forbidding such contracts by decree thus forces more risk onto both buyer and seller than they would normally be prepared to carry, and also induces them to balance their accounts in each period rather than it inter-temporally. Alternative kinds of credit markets become it relatively more lucrative, with the potential seller and buyer of futures wheat respectively borrowing and lending more than they would otherwise have done.[38]
The government has also expressed its determination to keep prices in ration-shops low. It has accordingly stockpiled large inventories of grain, apparently regardless of the costs of storage and spoilage or the alternative of holding larger foreign-exchange reserves to permit increased imports when necessary.
The ostensible, declared objective of all such policies has been to ensure that the poor do not suffer severe adverse income effects from sudden rises in the price of food resulting (it has been thought) from the contingencies of rainfall and the actions of speculative traders. It is, however, an open secret that the policies have really been a means of (a) taxing farmers, who pay a smaller percentage of their income in direct and indirect taxes than do urban dwellers, and (b) subsidising urban consumers, who broadly comprise the industrial working class and the middle in classes.
At the same time, however, the government and its advisers — after the considerable hesitation recorded by David Hopper [39]- have also accepted that the best long-run prospects for increasing agricultural productivity lie in modernising traditional farming techniques. Given the outstanding results of the Green Revolution in wheat, they could hardly have arrived at any other conclusion. The problem from the government’s point of view has been, as a sympathetic economist puts it “…how to procure a sufficient quantity of food grains at reasonable prices without jeopardising the farmers’ incentives to produce more”.[40]
Thus, while taxing farmers de facto on their output, on the one hand, the government has tried, on the other, to promote the use of modern inputs by subsidizing them both directly and through low-interest loans from the banks for such investment.
Distortions of incentives in agriculture
The distortions of efficient incentives caused by such policies are not difficult to see. First, the low output prices of wheat and rice have, in effect, been discriminatory taxes on wheat. As Edward Schuh remarks, these discourage the production of `. . . the very crops that policy-makers believe the vulnerable groups should have greater access to . . .’[41]
Vasant Sukhatme and Theodore Schultz have argued that, even between wheat and rice, there has been severe discrimination in favour of the former. At the official over-valued exchange rate, the price of domestic wheat has been significantly higher than imported, while at open-market rates for the rupee, the domestic price approximated the import price. For rice, however, the domestic price has been consistently below the import price. Sukhatme estimated that the dead weight loss in welfare from the under pricing of rice amounted to 8.5 per cent of total agricultural income in 1967-68 and to 2.2 per cent in 1970-71. He also calculated effective rates of protection, which were strongly negative for rice whether at official or open-market exchange rates and positive for wheat at the official exchange rate. Both he and Schultz conclude that the discrimination against rice has been a major factor in explaining the absence of a Green Revolution in rice on the scale of that in wheat.[42]
Secondly, the main beneficiaries of government subsidies for modern inputs have evidently been not the many small farmers but the fewer relatively large ones. As Gilbert Brown reports :`Large-scale farmers buy most subsidised inputs. Poorer farmers usually lack the money to buy adequate amounts of fertiliser and pesticides, and are commonly unable to get credit except at near-prohibitive rates of often 60% to 100% per year. Even in countries with subsidised bank credit for agriculture, rich farmers get most of the credit because of legal or administrative restrictions and/ or through open or disguised bribery. Credit and subsidy programmes for tractors, tube wells and other fixed investments also go mostly to the largest and richest farmers . . .Water is also a subsidised input . . . The farmers who receive this subsidised water generally have substantially higher incomes (because of the water) than farmers without access to public irrigation. Thus, claims that water should be subsidised to help small farmers misses the point that most farmers with irrigation have higher incomes than those who do not.’[43]
Brown argues that subsidies for inputs have been made necessary only to offset the forced depression of output prices. Moreover, the social benefit from subsidising inputs is limited to when the input is first introduced: ‘Once the benefits and technique of using the input are widely known, however, the continuation of such subsidies serves largely to increase the benefit-cost ratio of using the input . . .’.
Whether it is better to continue with artificially low input and output prices or to adjust towards a free market in both must take into account that the subsidies have encouraged more capital-intensity in production, and also that the `. . . low prices of certain inputs, particularly water, are often associated with widespread waste and inefficient use of the resource’.[44]
Thirdly, the farmer who is too small to find investment in storage facilities profitable may also consider it not worth his while to hold any of his output for sale on the open market. He will then sell it all to the government – at a below-market price.
A general conclusion would seem to be that, if the combined effect of input subsidies and forced grain sales to government has been a net subsidy to agriculture, then it has been a progressive subsidy; whereas if the combined effect has been a net tax on agriculture, then it has been a regressive tax. The Marxists may be quite right to protest that what gains there have been in agriculture have accrued to the relatively larger farmers, while smaller peasants and farmers are becoming landless labourers in growing numbers as a result of bankruptcy (that is, there has been increasing `rural proletarianisation’, to use the Marxists’ picturesque phrase). But if this is true, the cause can be traced unambiguously to the Indian Government’s belief – vociferously shared by the Marxists – that the way towards the declared objective of helping the poor is by extensive interference in the price system. Besides, the industrial working class demonstrably benefits from low food prices, so the honest Marxist must face up to being torn by divided loyalties between the rural and the urban proletariats.
Srinivasan put it as follows in a 1974 survey article :`The public distribution system with respect to foodgrains . . . operated to the benefit of all those living in metropolitan cities and other large urban concentrations while all others, including rich and poor in relatively small urban and almost all rural areas, did not benefit at all. When one recalls that the rural population includes the most abject among the poor, namely landless workers, the inequity of the system becomes glaring. And in urban areas, the existence of the system and the fact that the ration is often inadequate provides incentives for a household to falsify the data on its size and age composition given to the rationing authorities, as well as to create bogus or ghost ration-cards, not to speak of the corruption of the personnel manning the rationing administration.’[45]
The history of the extensive control of agriculture – which has included a partial government monopsony, forcibly-depressed output prices, inter-State restrictions on grain movements, and urban ration-shops – can be traced to the last years of British rule, as an attempt to bolster the popularity of the imperial regime. [46] The continuation and reinforcement of statism in agriculture in independent India has evidently rested on certain premises, namely, that the private market would be grossly inefficient and would be dominated by a few traders continually reaping large speculative profits, with both the small farmer and the ordinary consumer suffering in consequence.
Uma Lele’s fine study of the private grain trade, however, shows the real picture to be quite different. She found that the trade was highly competitive, that individual traders were rational agents (given the constraints of technology and government policy), that location price differences closely reflected transport costs, and that temporal price differences closely reflected storage costs. She argued that, while there was considerable scope for government activity, it should be in the form, not of interfering in the competitive market, but rather of encouraging the market to work – by, for example, disseminating relevant information such as crop forecasts, standardising weights and measures, constructing or improving roads and encouraging efficiency in the market for the transport of grain, etc.[47]
The evident neglect of such findings as these, and the continued application of policies inimical to competition and the free market, suggest that successive governments of independent India have been hardly more concerned for the rural poor – whether as farmer or consumer – and hardly less concerned with bolstering their popularity in the urban areas than were the British.
(iv) Employment
An obvious consequence of the economic policies described above has been the distortion of the individual citizen’s calculation of the expected benefits and costs of living and working in urban areas compared with the rural countryside. The forced depression of output prices in agriculture and the plethora of foreign-trade policies which discriminate against agriculture certainly seem to have artificially depressed the expected incomes of farmers. At the same time, a large `public sector’ in industry, plus the array of foreign-trade policies which have protected private industry, plus the indirect subsidisation of food sold in urban ration-shops certainly seem to have artificially raised expected urban incomes. Predictably, the reaction has been a vast and continuing net migration from the villages to the towns and cities, even after adjusting for the seasonal nature of agriculture. This drift has been the subject of much inquiry and discussion by development economists.[48] I propose to set it aside and examine instead a different aspect of employment policy which has not received nearly as much attention, namely, the consequences of putting into effect the clauses in the 1950 Indian Constitution mentioned above which authorised discrimination in employment and public education in favour of the `Scheduled’ castes and tribes, as well as other policies which discriminate on grounds of ethnic origin.
The consequences have been similar in several respects to those in America of `affirmative action’ towards so-called `racial minorities’, and it will be useful to draw out the analogy a little. As Thomas Sowell has cogently argued in recent years, the racial composition of contemporary American society is a complex mosaic, and no-one can say with certainty how it has come to be what it is today. In such circumstances, for the government to try to isolate a single contingent characteristic like `race’, partition society on the basis of census data according to this characteristic, and then construct public policies accordingly, is to introduce an enormous arbitrariness into economic life. By merely defining a group by reference to a single contingent characteristic, which all its members seem to possess, the intrinsic complexity of the individual person is lost or overlooked. Two members of the same race may be very different from each other in every relevant characteristic (income, education, political preference, and so on), and indeed resemble members of other races more closely in them. A policy which introduces a citizen’s race as a relevant factor in the assignment of jobs or college places partitions the citizenry into vague groups : members of groups who are very different from members of other groups in characteristics other than race rarely competing with each other anyway, while the burden and beneficence of the state’s policies fall on members of groups who are not very different from members of other groups in characteristics other than race: `. . . costs are borne disproportionately by those members of the general population who meet those standards with the least margin and are therefore most likely to be the ones displaced to make room for minority applicants. Those who meet the standards by the widest margin are not directly affected – that is, pay no costs. They are hired, admitted or promoted as if blacks did not exist. People from families with the most general ability to pay also have the most ability to pay for the kind of education and training that makes such performance possible. The costs of special standards are paid by those who do not. Among the black population, those most likely to benefit from the lower standards are those closest to meeting the normal standards. It is essentially an implicit transfer of wealth among people least different in non-racial characteristics. For the white population it is a regressively graduated tax in kind, imposed on those who are rising but not on those already on top.’[49]
At the same time, there is, in effect, a progressively graduated subsidy for members of the `minority’ group in favour of those who are already closest to meeting the general standards. Those in the mainstream of each group are largely unaffected; it is at the margins of competition that the bitterness caused by such policies will be felt and will manifest itself. It would seem that the situation in India – where the racial mosaic is if anything more complex than in America – is somewhat analogous. In recent years there has been civil tension and violence in the streets as poor Muslims, `caste’ Hindus, Sikhs and others have protested at being edged out of jobs and promotions by equally poor, or wealthier, members of the `Scheduled Castes’. In March-April 1981, for instance, there was widespread civil tension and violence in Gujarat over the reservation of places in the State’s medical colleges. A quarter of these places were statutorily reserved for members of the `Scheduled Castes’, with any not taken up by qualified candidates from these groups accruing to them in the future, thereby rapidly excluding from general competition as many as half the total number of places.[50]
The cruel paradox is that, while the position of many members (perhaps the vast majority) of the `Scheduled Castes’ vis-à-vis `caste’ Hindus remains one of degradation and persecution – quite regardless of the constitutional guarantees of equality in the eyes of the law – the relatively few who have succeeded in taking advantage of the discriminatory statutes have aroused the indignation of those who have not -causing even more animosity towards the `Scheduled Castes’ in general. One commentator observes the emergence of a `new elite’ among the `Scheduled Castes’ which `ceases to identify with its caste brethren’; while, at the same time, the law on equality `is so widely flouted precisely because the Scheduled Castes have not the means or courage to seek its protection . . .’ He concludes :`Contrived gestures such as are now popular will either not benefit [the Scheduled Castes] . . . or will do so only by further lowering already deplorable academic and administrative standards’. [51]
Moreover, when all government posts are advertised with a caveat that 10 or 15 per cent of themare reserved for members of the `Scheduled Castes’ and `Scheduled Tribes’, there is a considerable incentive for people to persuade Parliament to declare them as being such. And that also has happened. Discrimination in employment on the ground of caste has not been the only kind of discrimination practised by the Indian state. In what may be the most thorough study currently available on the origins, consequences and legal history of official discrimination in India, Weiner, Katzenstein and Rao have described the plethora of policies pursued by the central and state governments which have used not caste but ethnic origin as a criterion for public employment (with the private sector also often being `encouraged’ to follow suit) :`Preferences are given to those who belong to the “local” community, with “local” understood as referring to the numerically dominant linguistic group in the locality.’ [52] The authors conclude that what is emerging in India is`. . . a government-regulated labour market in which various ethnic groups are given a reserved share of that market. Competition for employment is thus not among all Indians, but within specified linguistic, caste, and tribal groups.`. . . various ethnic groups, therefore, fight politically for a share of that labour market. The major political struggles are often over who should get reservations, how the boundaries of the ethnic groups should be defined, and how large their share should be. There are also political struggles over whether there should be reservations in both education and employment, in private as well as in public employment, and in promotions as well as hiring. The preferential policies themselves have thus stimulated various ethnic groups to assert their “rights” to reservations.’[53]
It is not difficult to understand the general economic argument against discrimination on grounds such as caste or ethnic origin. If a private employer indulges a personal preference to hire only people of an kind A when there are more able or better qualified candidates of other ethnic kinds B, C, D, . . . ,available, and if the product of his firm is subject to competition in the market from other enterprises which do not discriminate on criteria which are irrelevant to economic efficiency, we may confidently expect the discriminating employer’s product to become uncompetitive and his profits to fall. The best and most obvious example of this would be in the professional sports industry in the USA : a `whites-only’ basketball or football team would be immediately vanquished on the games-field into bankruptcy. If government pursues employment policies which discriminate according to economically irrational criteria such as caste or ethnic origin, or if it forces all private firms to do likewise, there will certainly be inefficiency resulting in a loss of real aggregate output in the economy. In the terms of modern economics, a vector of total outputs which would be feasible given the parameters of the economy, and which would leave everyone either better off or at least no worse off, would not be achieved. In sum, the consequence of direct and widespread government interference in the labour market in India appears to have been, not only a disregard for the principle of equality before the law for every citizen (in a nascent republic of immensely diverse peoples), but also a loss of real output and an enormous `politicisation’ of economic life whereby individual success becomes increasingly tied to political power and increasingly removed from personal merit, enterprise and effort. In addition, the composition of occupations in the economy has been indirectly distorted by the set of industrial, agricultural and foreign-trade policies pursued by successive governments.
6. THE MALFUNCTIONING OF GOVERNMENT
IT MIGHT be thought that a large and flabby `public sector’ in industry and commerce, labyrinthine controls on private industry, a government monopoly of foreign-exchange dealings, the overvaluation of the currency, indefinite import-substitution, forcibly depressed output and input prices in agriculture, enormous politicization of the labour market, disregard for equality before the law, and distortion of the composition of occupations would constitute a sufficient catalogue of symptoms of grave illness in the political economy of a nation. Sadly, however, there are in modern India other symptoms too which I can mention only briefly here.
An opinion frequently encountered among urban Indians (as well as among the majority of Western development economists) is that government control over the size of the population is a necessary condition for economic development, and indeed that it is the failure of government to do this that has dissipated the economic growth that would otherwise have resulted from the economic policies pursued. The urban Indian witnesses the hovels and shanty-towns inhabited by migrant families from the countryside attracted by the policies discussed previously, and he experiences the resulting congestion. So does the Western development economist when he ventures out of his hotel into the city streets. Very often, that is his only personal experience of the legendary `poor masses’ of India. It is understandable that such princely discomfiture should lead him to the opinion that the poor are mindless in their breeding habits and that they must be persuaded, bullied or compelled to change. If this opinion were true, it would seem to point to a neat and simple solution to many of the woes of poor countries, and India in particular. But if the opinion is false and yet widely believed, it would cause governments to be, as it were, barking up the wrong tree.
It is, however, far from established, and certainly not at all obvious, that demographic control is either necessary or desirable in India or elsewhere. In the first place, when the rate of infant mortality is known and experienced by rural people to be high, there will be mare births than there would have been otherwise. Secondly, it is perfectly clear that children are an investment good in traditional societies such as those of rural India. Even young children are a source of family income, either directly by working outside the home or indirectly by working at domestic chores and thereby releasing adult members of the family for outside work. For a child to be absent from primary school or to drop out within a few years is not necessarily truancy; it may be the outcome of a rational economic calculation about where his time may be better spent towards increasing the household’s income. Furthermore, in traditional societies adult children are the principal source of support for elderly and retired parents.
To know of the existence of artificial measures of contraception certainly enlarges the alternatives open to a couple. Assuming that such knowledge is not in itself a cause of unhappiness (as it can be if there are conflicting religious commitments), a couple may certainly be better off with that knowledge because of their ability to control the number and timing of their children. The couple might also have fewer children – though there is no necessary or causal connection between a knowledge of contraception and the number of children born to a couple. Rational calculation may produce the same number of children as the caprice of nature, the implication being that in general there is no causal connection between the availability of contraceptives and the rate of growth of the population. The value of a public policy which encourages the use of artificial contraception is not so much that it reduces the number of births as that it may allow couples more control over their own lives. Whether or not artificial contraception should be publicly subsidised is quite another question.
The Indian Government has expended considerable resources in propagating and subsidizing artificial birth control. The results appear to have been, at best, indifferent (coupled as birth control has been with indirect incentives for large families and, at worst, cruel – as when frenetic zeal spilled over into demands for, and the implementation of, compulsory sterilisation. For this author, however, the important consideration would seem to be not so much the exact costs and benefits of the demographic policies pursued as the critical acknowledgement that they have little or nothing to do with the fundamental causes of mass economic development.[54]
It remains a stark paradox that, with a general literacy rate of perhaps 30 per cent [NB: In 2007, this has grown to 73% for males and 48% for females] India still produces the third largest absolute number of science and engineering graduates in the world. This reflects the lopsidedness of the educational system, continued from British times, in which higher education is enormously subsidised relative to primary education. In addition, entry into the civil services requires a college or university education, which in turn requires a good private secondary school education, which in turn requires a good preparatory school education. Strenuously competing to enter prep. school, with the help of outside tutoring, is the unhappy fate of many a five- or six-year-old in the towns and cities, followed by strenuous competition in secondary school, college and university, and finally at the doorstep of government (or a foreign university).
A job in government – any job in government – has carried prestige since Mughal times. In addition to the prestige and the obvious benefits of tenure where ether `decent’ jobs are scarce, there has been in recent times the inner satisfaction from a belief that a person can truly do his best for his country only by being in government. Tens of thousands of youths spend significant personal resources (such as whole years in cramming schools) to compete for a few annual openings in government. It is only to be expected that the competent, ambitious, patriotic youth who succeeds will mature into a respected mandarin with an unshakeable conviction in the good his government has done for the masses, and in the further good yet in prospect.
Failure to anticipate monsoon damage and disarray of the judicial system
The most serious examples of the malfunctioning of civil government in India are probably the failure to take feasible public precautions against the monsoons and the disarray of the judicial system. Official estimates, for instance, of the damage caused by flooding to homes, crops and public utilities in a few weeks of July-August 1981 alone amounted to over Rs 1 billion, with 10.8 million people `affected’, 35,000 head of cattle lost, and 195,000 homes damaged. The full magnitude of the devastation which annually visits vast areas can be understood perhaps only by those in rural India, although the towns and cities also regularly suffer considerable chaos. [55] [NB 2007: Monsoon prediction appears far better today than it was when these words were written.]
As for the disarray of the judicial system, The Statesman lamented in July 1980:`The simplest matter takes an inordinate amount of time, remedies seldom being available to those without means or influence. Of the more than 16,000 cases pending in the Supreme Court, about 5,000 were introduced more than five years ago; while nearly 16,000 of the backlog of more than 600,000 cases in our high courts have been hanging fire for over a decade. Allahabad is the worst offender but there are about 75,000 uncleared cases in the Calcutta High Court in addition to well over a million in West Bengal’s lower courts.”[56] Such a state of affairs has been caused not only by lazy and corrupt policemen, court clerks and lawyers, but also by the paucity of judges and magistrates. In addition, however,`. . . a vast volume of laws provokes endless litigation as much because of poor drafting which leads to disputes over interpretation as because they appear to violate particular rights and privileges. Land legislation offers an example of radical zeal running away with legal good sense, giving rise to thousands of suits against the Government . . .’ [57] When governments determinedly do what they need not or should not do, it may be expected that they will fail to do what civil government positively should be doing. In a sentence, that has been the tragedy of modern India.
Part IV : Reform
A LIBERAL AGENDA
IT WILL by now have become evident to the reader from the descriptions and arguments given above that, in the judgement of the present author, only a set of radical changes in policy can put the Indian economy on a path to higher mass prosperity within a free and healthy body politic. I shall therefore put forward a tentative manifesto for reform, adding some predictions about which classes of citizens would be most likely to support or oppose a particular proposal. The scope and intention of such a manifesto should be made clear at the outset. As Aristotle taught, a set of actions which are the means towards certain ends may themselves be the ends towards which other prior means have to be taken.[58]
The ultimate ends of economic advice in India are to seek to bring about mass prosperity under conditions of individual freedom. The proposals I which follow are to be construed as means towards those ultimate ends. But they also constitute a set of intermediate ends, and their implementation would require further judgement about the best means towards achieving them. In economic policy, for instance, a firm but gradual phasing-in over a period of three or four years may be the best way to minimise the hardships entailed by the adjustment. For reasons which will become clear, however, I shall not here try to answer the question as to how the proposals might best be implemented.
(a) Effects of foreign policy on the domestic economy
It will be useful to begin with a short and very incomplete consideration of foreign policy insofar as it may bear upon domestic economic policies. It is a settled fact of international politics that, while there is no obvious connection between a nation’s economic and political institutions and the choice of strategic allies it faces, people’s subjective perceptions and opinions of the social arrangements in a foreign country can be deeply influenced by whether that country is seen as a potential ally or adversary. A related and equally settled fact is that war, or the fear of war, can make for the most incongruous of bed-fellows. In contemporary India, it is quite evident that the antipathy and pessimism towards market institutions found among the urban public, and the sympathy and optimism to be found for collectivist or statist ones, has been caused to a very significant extent by the perception that the United States is relatively hostile towards India while the Soviet Union is relatively friendly. This was not always so. The official affection between the United States and India in the early years of the Republic was grounded in sincerity and goodwill. The roots of its demise are probably to be found in the split between the Soviet Union and China in the late 1950s which, in a short period of time, made the latter a valuable strategically for the United States against the former. By the early 1970s, the spectre of a joint military threat to India from a totalitarian China and a militarist Pakistan – and especially a threat which it was perceived democratic America would do little or nothing to thwart – made it prudent for democratic India to become the virtual ally of totalitarian Russia.
Such a configuration on the international chess-board need not have been detrimental to India’s economic development. It is possible to imagine a liberal state allied to a totalitarian one for strategic reasons, yet maintaining liberal economic policies domestically and internationally. In practice[58], however, the extent of `economic collaboration’, bilateral trading arrangements, `joint ventures’, barter agreements, `cultural exchanges’, and the like into which the Indian Government has entered with the Soviet bloc, appears significantly to exceed what it has achieved with the Western powers. In particular, Soviet arms have in recent years been purchased more often and then manufactured under licence. This too need not have been economically detrimental if the Soviet products had in practice been competitive on international markets in terms of price and quality. As is common knowledge, however, this is often not so. It therefore appears that part of the price India has had to pay for the strategic support of the Soviet Union has been the foisting on her of low-quality, high-priced Soviet goods, whether arms or steel mills or technical know-how. At the same time, for reasons which are partly historical and partly related to these considerations, direct foreign investment by private Western firms has been treated with, at best, coolness and, at worst, open hostility.
A change in India’s foreign policy
If the economic liberalisation that will be proposed here for India is to be effective, a truly independent yet prudent foreign policy may be required to accompany it. A change in the present strategic configuration – in which the United States is perceived in India to be virtually the ally of both China and Pakistan, while India is perceived in the United States to be virtually the ally of the Soviet Union – is unlikely until and unless the United States finds it in her best interests in the region to distance herself from China and Pakistan, which is unlikely to happen without a rapprochement between the Soviet Union and China. A drastic alternative way for India to reduce her dependence upon the Soviet Union would be the kind of divorce Egypt effected some years ago, followed by an alliance with the Western powers. This might, however, undermine once more the independence of foreign policy and be perceived in India as a move from the devil to the deep sea. The prudent remaining alternative would appear to be an earnest and vigorous pursuit of serious no-war pacts with Pakistan and China, combined with an appropriately small independent nuclear deterrent. It seems to the author that the reasons which commend this course are closely analogous to those offered by the present American and British governments for pursuing serious no-war negotiations with the Soviet bloc whilst simultaneously improving the Western nuclear deterrent.
(b) Liberalisation of foreign trade
Not only would the truly independent foreign policy proposed in the preceding paragraph allow India to distance herself from the Soviet Union; it would probably also prompt the Western powers to end the intergovernmental transfers which go by the name of `foreign aid’. For reasons that Peter Bauer has emphasised over many years, an end to such transfers might be a boon in disguise for India.[59] In particular, it would require the government to seek to balance the foreign-exchange accounts without becoming obligated to the Western powers, and this in turn would require a major economic transformation from a closed and protectionist economy to an open one which harnessed India’s comparative advantages.
An initial liberalisation of foreign trade, involving a transition from quotas to tariffs, would probably be supported by private industry as a whole. It would, however, be opposed by incumbent politicians and government officials since it would dissipate the rents they receive under the closed regime. A subsequent reduction in tariffs, a withdrawal of export subsidies, and the free floating of the rupee would be opposed by those private firms (and their labour unions) which would be uncompetitive internationally – probably those in `non-traditional’ industries. The measures would, however, be supported by ordinary consumers, by private firms in traditional industries like jute manufactures and textiles, and particularly by farmers.
Once private industry became subject to the strict discipline of international competition again, there would be no reason whatsoever for government-imposed internal controls which were not conducive to free and fair competition among firms for the consumer’s rupee. The repeal of the plethora of licensing policies would dissipate the large rents attached to the controls under the present regime. Since these rents are paid by private industry and received, directly or indirectly, by incumbent politicians and government officials, the former could be expected to welcome repeal and the latter to oppose it vigorously.
(c) Privatisation of `public-sector’ industries
At the same time, for the so-called `public-sector’ industries to face international competition, when they are currently monopolists or oligopolists, would demand such an improvement in economic discipline as probably to require the shares of most of them to be sold on the open market, with marginal-cost pricing imposed on the remainder. There is no economic reason why the Government of India shouldbe engaged in commercial or merchant banking and insurance, or in industries from steel, machine-tools, ship-building and fertilisers to wrist-watches, hotels and beer. Nor is there any cogent reason why it should be a major producer, let alone a monopolist, in the road, rail, air and sea transport industries. Large-scale privatisation would be supported by private citizens in general, and would also draw out the reputedly vast private funds which circulate in the untaxable underground economy. But such measures would probably be opposed vigorously by the government officials who currently manage these industries, aswell as by the public-sector labour unions.
(d) Free-market pricing in agriculture
With the repudiation of the mistaken premise that government sponsored industrialisation is the best means to mass economic development, the free-market pricing of agricultural outputs and the removal of all controls that are not conducive to free competition among farmers should follow. This would be welcomed by all farmers and perhaps by the rural population in general. It could also be expected to provide much encouragement to the technological transformation of traditional agriculture. The abolition of ration-shops in urban areas would be opposed by the industrial working class, by the urban middle classes in general, and by government officials and employees engaged in the present regime of public distribution. Further, farmers, especially relatively large ones, might be expected to oppose the concomitant free-market pricing of agricultural inputs, including credit and fertilisers, as would those government employees presently charged with distributing these inputs.
The ending of the distortions in agricultural output and input prices would establish a conclusive case for uniform systems of taxation in the economy, and especially for income from agriculture to be treated on a par with income from other occupations. These systems could locally include direct subsidies to those (whether in rural or urban areas) who are unable to provide any income for themselves, such as the insane and the severely disabled – all of whom are currently cared for, if at all, by private charity, and none of whom, strangely enough, appears to enter the moral calculations of socialist and Marxist economists.
(e) Tax revenues for public goods
The first and most important destination of tax revenues, whether raised centrally, provincially or locally, must be the provision of public goods – central, provincial and local. In an earlier section, we have seen what kinds of goods these should be. Among the most urgent in India are more effective precautions against the monsoons and improvements in the efficiency of the systems of civil and criminal justice. The former might include measures to prevent soil erosion and the building of better dams, embankments, canals and roads. Such programmes would be likely to command practically unanimous support in the localities in which they were implemented.
Reforms of the judicial system might include raising the salaries of judges and policemen, as well as the penalties for their misconduct; improving the training and morale of the police, with the object of increasing public confidence in them (especially in the villages); and expanding the number of courts, at least temporarily until the monumental backlog of cases has been reduced and brought under control. A general reduction in the political and administrative direction of economic life would lead to fewer lawsuits being brought against the government itself, and thus provide further relief for the judiciary. Widespread prison reform may also be required if the reports are true that a large proportion of those held prisoner for a number of years have yet to be brought to trial, and that potential prosecution witnesses, if they are poor and uneducated, are themselves sometimes kept in jail until a case comes to court. Such reforms would command the support of everyone except criminals, capricious litigants and corrupt or incompetent members of the police and judiciary, none of which groups, it must be supposed, comprises apolitical constituency.
Together with improvements in the system of justice, the principle of equality before the law would have to be taken seriously. This would require the dispensation of justice by the state to be, as it were, a process blind to the infinitely diverse caste and ethnic characteristics of the citizenry, which in turn would imply the repeal of all laws – whether central, provincial or local – permitting governmental authorities to discriminate in favour of a particular politically-specified caste or ethnic group. Merely to have written `equality before the law’ into the Constitution without really believing it either possible or desirable is to allow the mutual caste and ethnic bigotry of private citizens to be exploited for political ends. That innumerable members of a caste, or religious or ethnic community have suffered at the hands of another, and that members of the `Scheduled Castes’ in particular have been victims of enormous cruelty, should not prevent acknowledgement of the sober fact that the past is irretrievable, or that it is similar cruelty in the present and future against any citizen at the hands of any other, or the state, that the declaration of Fundamental Rights was intended to prevent.
(f) Other reforms
Other proposals could also be suggested : the introduction of vouchers for primary and secondary education; a serious assessment of the benefits from and costs of subsidies to higher education; an end to the government monopoly of radio and television; a revision of government pay-scales to make them competitive with the private sector, together with equivalent reductions in non pecuniary benefits; a decentralisation of public spending decisions from New Delhi to the State capitals and from there to the districts; and so on. However, it is hardly necessary to go further, since even a limited liberal agenda would appear doomed to be still-born.
Incumbent politicians, government officials, and the public sector unions in general would vigorously oppose any reduction in government intervention in the economy for fear of losing the rents and sinecures of the status quo. Indeed, professional politicians in general could be expected to be averse to any lessening of the politicisation of economic life.
In other countries, a political party proposing such a reduction in government intervention would usually enjoy the backing of private industry. In India, however, private industry in general would probably see it in its own interest to support only the reduction of internal controls, whilst vigorously opposing reductions in the neo-mercantilist external controls. In July 1981, for example, I asked a prominent industrialist to imagine first a free-market regime at home : `That would be very welcome indeed’, he replied enthusiastically. I then asked him to imagine a policy of free trade : `That would wipe us out’, he replied gravely. His answers indicate very well what is perhaps the single most important feature of the equilibrium that has emerged in India: by accepting without significant protest the constraints and costs imposed upon it by the government and its `planners’, the private corporate sector has traded the freedom of enterprise for mercantilist monopoly profits in the home market.
When Indian Marxists rail about collusion between the `national bourgeoisie’ (that is, the governmental class) and the `comprador bourgeoisie’ (that is, the private sector), they make a cogent point as old as Adam Smith’s critique of mercantilism.[60] But, again, they fail to see that the fortunes of the industrial working-class have also risen with those of the private and public industries that have gained from the present regime. Moreover, a large proportion of industrial workers and blue-collar government employees are migrants with families left behind in rural areas; these rural families might also oppose reductions in the transfers currently received by their migrant relatives. Finally, while joining other farmers in welcoming a free market in grain, the politically influential larger farmers could be expected to oppose the direct taxation of agricultural incomes and the elimination of subsidies for inputs.
Who is left who would gain from the kinds of reforms proposed here? Only the ordinary citizen qua consumer, the rural poor and the residuum of severely disabled citizens unable to create any income for themselves. None of these has been or is likely to become an effective political force.
India’s `unhappy equilibrium’
The economy of the first Indian Republic has tended towards a broad and increasingly unhappy equilibrium. Distortions of efficient relative prices and wages lead to both substitution and income effects. Those who lose from one distortion rationally seek another from which they may gain; those who lose from the second seek a third; and so on ad infinitum until a maze of distorted incentives are in place and a60Adam Smith, host of income transfers are in progress – sometimes offsetting losses, sometimes not. Tullock has emphasised that the problem is not only that there are dead-weight losses in welfare, but also that people are led `. . . to employ resources in attempting to obtain or prevent such transfers.’[61] In modern India, the waste of productive resources put to the pursuit of such transfers has been incalculable. The reforms pro-posed here would cut through the maze of distorted incentives and institutions all at once – for which very reason it seems unlikely they can come to be implemented.
The economic significance of a political attitude of individualism is that it clearly recognises the relationship between individual effort and reward, and the relationship between cause and consequence generally. An attitude of statism obscures or obliterates this relationship. In republican India, statism has pervaded all public discourse and prompted most public policy. Successive groups of politicians and government officials seem never to have recognised the fundamental nature of those functions of government which are the indispensable prerequisites of civil peace and mass prosperity. Nor have they understood that it is no part of government’s agenda to be the driving force to mass prosperity, and that this can come (if it will) only from innumerable individual efforts in the pursuit of private rewards. This is not at all to say that those in government have been ill-intentioned. On the contrary, they may have sincerely sought the public good whilst introducing a Leviathan government into the market-place and neglecting the proper duties of government outside it. As Bauer has remarked in a related context :`Their financial benefits may appear to be fortuitous, as if Adam Smith’s invisible hand were to work in reverse, so that those who sought the public good achieve what was no part of their intention, namely personal prosperity.’[62] It is indeed possible that the basic fact of human nature that individual households every where ordinarily know most about, and are only concerned with, their own well-being has never been acknowledged in modern India. The simple secret of a stable and prosperous polity is to create institutions which harness the universal pursuit of individual self interest, and not ones which pretend that men are selfless saints. A polity where this fact is acknowledged would not have to depend for the viability of its institutions on mere exhortation, as the institutions of the Indian Republic seem perpetually fated to do, even while the competitive pursuit of self interest is everywhere manifest.
The logic of economic reasoning and the adducement of economic evidence have in the past had little effect in India because the distribution of gains and losses from the policies pursued has been closely matched by the distribution of effective political power. This distribution seems most likely to continue, and so the prospects of significant and sustained endogenous reform seem, to this author at least, very small. Changes in external constraints seem to be the only likely source of a major disturbance to the equilibrium, and there can be no guarantee that the results will be for the better. This is a sad and troubling conclusion to come to, for a citizen of India or anyone else who has loved the country. It places this author in the paradoxical position of believing his arguments to be broadly correct – while hoping they are not.
ENDNOTES (The original monograph in 1984 had footnotes, which have had to be transformed since pages, in this new HTML age, no longer have to be linear as in a book nor have to be turned in order to be read).
[1] The early studies notably include: B. R. Shenoy, `A note of dissent’, Papers relating to the formulation of the Second Five-Year Plan, Government of India Planning Commission, Delhi, 1955; Indian Planning and Economic Development, Asia Publishing, Bombay, 1963, especially pp. 17-53; P. T. Bauer, Indian Economic Policy and Development, George Allen & Unwin, London, 1961; M. Friedman, unpublished memorandum to the Government of India, November 1955 (referred to in Bauer, op. cit., p. 59 ff.); and, some years later, Sudha Shenoy, India : Progress or Poverty?, Research Monograph 27, Institute of Economic Affairs, London, 1971. Some of the most relevant contemporary studies are: B. Balassa, `Reforming the system of incentives in World Development, 3 (1975), pp. 365-82; `Export incentives and export performance in developing countries: a comparative analysis’, Weltwirtschaftliches Archiv, 114 (1978), pp. 24-61; The process of industrial development and alternative development strategies, Essays in International Finance No. 141, Princeton University, 1980; J. N. Bhagwati & P. Desai, India: Planning for Industrialisation, OECD, Paris : Oxford University Press, 1970; `Socialism and Indian Economic Policy’, World Development, 3 (1975), pp. 213-21; J. N. Bhagwati & T. N. Srinivasan, Foreign-trade Regimes and Economic Development: India, National Bureau of Economic Research, New York, 1975; Anne O. Krueger, `Indian planning experience’, in T. Morgan et al. (eds.), Readings in Economic Development, Wadsworth, California, 1963, pp. 403-20; `The political economy of the rent-American Economic Review, 64 (June 1974); The Benefits and Costs of Import-Substitution in India : a Microeconomic Study, University of Minnesota Press, Minneapolis, 1975; Growth, distortions and patterns of trade among many countries, Studies in International Finance, Princeton University, 1977; Uma Lele, Food grain marketing in India : private performance and public policy, Cornell University Press, Ithaca, 1971; T. W. Schultz (ed.), Distortions in agricultural incentives, Indiana University Press, Bloomington, 1978; V. Sukhatme, “The utilization of high-yielding rice and wheat varieties in India: an economic assessment”, University of Chicago PhD thesis, 1977.
[2] S. Roy, “On liberty and economic growth: preface to a philosophy for India”, University of Cambridge PhD thesis, 1982a, Chapters I and II; “Knowledge and freedom in economic theory: Parts I and II”, Centre for Study of Public Choice, Virginia Tech, working papers, 1982b. My epistemological arguments have closely followed those of Renford Bambrough, Moral Scepticism and Moral Knowledge, Routledge and Kegan Paul, London, 1979.
[3] Aristotle, Ethica Nicomachea, in Richard McKeon (ed.), The Basic Works of Aristotle, Random House, New York, 1941. We read: `. . . the whole account of matters of conduct must be given in outline and not precisely, as we said at the very beginning that the accounts we demand must be in accordance with the subject matter; matters concerned with conduct and questions of what is good for us have no fixity, any more than matters of health. The general account being of this nature, this account of particular cases is yet more lacking in exactness; for they do not fall under any art or precept but the agents themselves must in each case consider what is appropriate to the occasion, as happens also in the art of medicine or of navigation.’ (1,104a2-a9.)`. . . we do not deliberate even about all human affairs; for instance, no Spartan deliberates about the best constitution for the Scythians. For none of these things can be brought about by our own efforts. We deliberate about things that are in our power and can be done.’ (1,112a28-30.) Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations(1776), eds. R. H. Campbell et al., Liberty Classics, Indianapolis, 1981. We read: `What is the species of domestick industry which his capital can employ, and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in hislocal situation, judge much better than any statesman or lawgiver can do for him.’ (Book IV. ii. 10, p. 456.) In modern times, Friedrich Hayek has always kept this fact in the foreground of his thinking. In his Individualism and Economic Order, Routledge and Kegan Paul, London, 1949, we read, for example, of `. . . the constitutional limitation of man’s knowledge and interests, the fact the he cannot know more than a tiny part of the whole of society and that therefore all that can enter into his motives are the immediate effects which his actions will have in the sphere he knows . . .’ (p. 14.) The individual agent has a `special knowledge of circumstances of the; thus `. . . practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active co-operation.’ (p. 80.)
[4] The mathematical economist will recognise these three conditions as the characteristics which define a multi-market general equilibrium in the Arrow-Debreu model: Gerard Debreu, Theory of Value, Yale University Press, New Haven, 1959; K. J. Arrow and F. H. Hahn, General Competitive Analysis, Oliver and Boyd, Edinburgh, 1971.
[5] This argument is discussed further in Roy (1982a), pp. 96-107, pp. 133-43.
[6] Adam Smith, op. cit., Book V. i. c., p. 723.
[7] P. A. Samuelson, `A pure theory of public expenditures’, Review of Economics & Statistics, 36, 1954,reprinted in K. J. Arrow & T. Scitovsky (eds.), Readings in Welfare Economics, R. D. Irwin, Homewood, Ill., 1969.
[8] The idea I have in the background is of some implicit public goods function endorsed more or less unanimously by citizens – but not necessarily by those with political power – with commonsense dictating the elements it should contain. Thus Let U = U (π1, π2 , …, πn) be such a function with δU/δπi > 0, δ2U/δπi2 < 0 i=1,2,…,n, where πi = 1,2,…n, is a lateral index of a public good or service like defence, civil protection, roads, dams, or the finance of basic education. Each of these is “produced” by an expenditure of public resources: πi = πi (τi ), δπi/δτi > 0, δ2πi /δτi2 < 0 i=1,2,…,k, Σ i=1,2,…,n τi = τ* where τ* is the total level of public resources available (whether by taxation or borrowing). An efficient condition, i.e., one in which given public resources are efficiently allocated among alternative public goods or services, would be δU/δπi/ δπi/δτi = δU/δπj / δπj/δτj for every i,j = 1,2,. .,n. So, if the marginal tax-rupee was put towards the production of any public good, the increase in social utility should be the same; otherwise we would find an excess supply of some public goods (e.g. bureaucrats) and an excess demand for others (e.g. courts, dams, police protection, etc.).
[9] Two examples are F. H. Hahn, On the notion of equilibrium in economics : an inaugural lecture, Cambridge University Press, Cambridge, 1973, and J. M. Grandmont, “Temporary general equilibrium theory : a survey”, Econometrica, vol. 46, 1977.
[10] Aristotle, op. cit., 1,094b12-1,094b27
[11] D. H. Robertson, `The Economic Outlook’, in his Utility and All That, Allen & Unwin, London, 1952, pp.51-52.
[12] Karl Popper made a similar point in The Open Society and its Enemies, Princeton University Press, Princeton, 1950, when he suggested that Plato’s question `who should rule?’ should be discarded for the question:`How can we so organise political institutions that bad or incompetent rulers can be prevented from doing too muchdamage?’ (p. 120). There is relevant discussion by Renford Bambrough in `Plato’s modern friends and enemies’, Philosophy, 37, 1962, reprinted in R.Bambrough (ed.), Plato, Popper and Politics : some contributions to a modern controversy, Barnes and Noble, New York, 1967. I have discussed the relationship of expertise to democracy in Roy (1982a), pp 80-95.
[13] Virginia Bill of Rights, 1776, in The Constitution of the United States, ed. E. C. Smith, Barnes & Noble, New York, 1979, p. 21.
[14] P. T. Bauer, Dissent on Development, Harvard University Press, Cambridge, Mass., 1971, p. 72, n. 2. The term `statism’ suggested itself to the author after he read M. R. Masani, “Post-Sanjay outlook: where salvation does not lie” The Statesman, 9 July 1980.
[15]G. M. Young (ed.), Macaulay: Prose and Poetry, London: Macmillan, 1952, p. 718. Some 20 years later, in Considerations on Representative Government, ed. H. B. Acton (London: J. M. Dent), J. S. Mill claimed that rule by`a superior people . . . is often of the greatest advantage to a people, carrying them rapidly through several stages of progress’ (Ch. IV, p. 224). Ironically, a few years ago a distinguished retired member of the Indian civil service (who happens to be a recipient of the Lenin Peace Prize) used very similar words in a newspaper article – in defence of the Soviet occupation of Afghanistan!
[16] Resolution of the Indian National Congress, August 1931, reprinted in B. N. Pandey (ed.), The IndianNationalist Movement : 1885-1947, Macmillan, London, 1979, p. 67.
[17] S. Radhakrishnan, The philosophy of Rabindranath Tagore, Macmillan, London, 1918, p. 232. For an excellent account of the intercourse between ancient India and ancient Greece, H. G. Rawlinson, `Early contacts between India and Europe’, in A. L. Basham (ed.), A Cultural History of India, Clarendon Press, Oxford, 1975. For excellent accounts of the growth of liberalism in India in the l9th and carly 20th centuries : Anil Seal, The Emergence of Indian Nationalism : Competition and Collaboration in the later l9th Century, Cambridge University Press, Cambridge, 1971, Chs. 1, 3-6; J. R. McLane, Indian Nationalism and the Early Congress, Princeton University Press, Princeton, 1977; Gordon Johnson, Provincial Politicsand Indian Nationalism,Cambridge University Press, Cambridge, 1973, Ch. 1.
[18] Ramsay Macdonald’s letter to M. K. Gandhi, 8 September 1932, reprinted in Pandey (ed.), op. cit., p. 74.
[19] Devdas Gandhi’s letter to Jawaharlal Nehru, 2 October 1931, reprinted in Pandey (ed.), op. cit., p. 71
[20] Gandhi’s protest succeeded to the extent that the Award itself was superseded; and in unusual, euphoric displays of fraternity, `caste’ Hindus threw open temples to members of the `Depressed Classes’ and embraced them with
garlands. The compromise Pact which replaced the Communal Award removed separate electorates but still guaranteed special political representation for some years following the agreement. For an account of Gandhi’ s position on the Communal Award, Judith M. Brown, Gandhi and Civil Disobedience, Cambridge University Press, Cambridge, 1977, pp. 313-21.
[21] For an eminent lawyer’s commentary, N. A. Palkhivala, The Light of the Constitution, Forum of Free Enterprise, Bombay, 1976.
[22] There is reason to think the Mughals before the British had done no better and had probably done much worse. T. Raychaudhuri, `The State and the Economy: the Mughal Empire’, in T. Raychaudhuri & I. Habib (eds.), The Cambridge Economic History of India, vol. I, Cambridge University Press, Cambridge, 1982.<