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Indian development: the state and the market.

The World Bank has recently published the India Development Policy Review. What are the challenges and how realistic is its assessment of the chances of institutional change as part of the drive to rapid growth?

India is one of Asia’s ‘driver economies’ and is a country that is of growing international commercial and political significance. The United States sees India as a potential partner, perhaps capable of assisting the United States in its developing relationship with China, another potential superpower. India has its own priorities and these it will guard with great care as it cherishes its independence. This is a country that needs to be understood by businesses in the United States (currently besotted with China and Chinese economic success) with respect to its potential and to its high-level entrepreneurial abilities (marred perhaps by the domination of family rather than market-driven senior appointments). United States policy-makers need to understand the country in its own terms, rather than simply as a potential hedge against China. The legal conflict between consumer groups and state authorities and Coca Cola and Pepsi Cola over health and quality issues (Down-to-Earth, 2005) attests to the potential sophistication of those who wish to see continued regulation of the Indian market. An ‘independent’ India is a key traditional value amongst many Indian National Congress Party members and there are aspects of ‘globalization’ that may challenge this sense of independence. Outsiders need to see both the whole picture and the contradictory detail with respect to continued economic change. The World Bank Review helps in this respect.

The Indian economy is growing rapidly. In the past, India was a state intent on detailed economic planning led by the government and the planners. The aim was very much to protect people from markets and to find a regulated and stable basis for economic growth. In short India looked to internal economic development, state regulation and protection. For most years since Independence, but not all, India has achieved slow growth under this regime. Since the economic reforms of the 1990s, India has steadily moved to towards new forms of economic activity (call centers on the one hand and software engineering on the other, to mention only two contrasting areas of economic life) and greater participation in the world economy, including inward and outward flows of investment. Economic growth is now high and sustained and as such presents both better prospects for the future as well as internal strains and problems. In China, increased economic activity has come at the price of increased inequality (regional, sectoral, urban-rural and by social class). Rapid growth often leads to uneven growth. However, the Indian economy is still primarily an agricultural economy. The search for equality in income distribution has been an Indian objective over time.

The India Development Policy Review highlights the contrasts in economic performance between regions and sectors, between urban and rural, and points up the changing relationship between the State and State institutions and the Indian public. The main theme is set out in the contrast between ‘the best’ (which compares favorably with the best elsewhere) and the ‘worst’ (which compares unfavorably with the best in India and with conditions elsewhere) when it comes to the performance of government (at all levels) in practice. Although the Review does not necessarily use the term ‘spread of best practice’ it is clear that good practice in one area of public life does not necessarily inform practice in other areas. This is a huge weakness. As the fundamental nature of the relationship between government and markets shift so there needs to be a corresponding change in institutions and attitudes within national and state public services. These changes are both institutional (accountability, transparency, effectiveness and increased customer-focus: an agenda too for administrations in developed market economies) and broadly cultural given the long traditions of the Indian Civil Service.

What is interesting about the Review is the extent to which it links its views with those of progressive elements in the in the Government of India who are stressing the need for policy and practical ‘outcomes’ rather than ‘outlays’. It also picks up on successful reform and in so doing sets out the possibility of internal bench-marking. It is clear that reform of the public service needs to keep pace with economic change and with the rising service and value-for-money expectations that this brings. In this urge to change, there are political problems. The Indian National Congress Party (the predominant party) forms the Government only by the support of smaller parties and there is no single view on economic reform. Privatization is low on the official agenda. The communists continue to object strongly to market-oriented reform and hence there is a need for careful internal negotiation around such issues. Social welfare remains high on the Indian agenda as is exemplified by the Government’s commitment to rural regeneration and to rural health and education. The World Bank does not, essentially, question the policies but rather the effectiveness of delivery. It points out that if jobs are to move out of present growth centers, to achieve equality, many poorly performing states will need to improve performance and decrease regulation.

Another key issue identified is that of making sure that the benefits of economic growth are inclusive. This is a long standing theme of Indian economic policy with the concerns for regional and class equality, for land reform and agricultural growth (think of the Green Revolution, a major state effort) informing the planning process. Amartya Sen who writes on inequality and poverty sees development not simply to increases in terms of increased real income but within a framework of various freedoms and cultural and democratic capacities and his insights inform the general tenor of the Review when it comes to social inclusion. What the Review is very good at is showing the internal contrasts between states and sectors, particularly with respect to education and health. Rather shockingly, in some sense, it compares Indian failures (say in the delivery of secure and reliable water supplies) with African successes.

The Review casts the issues in simple terms: across-the-board public sector reform and inclusive growth. In commenting on this the Economist newspaper (August 10) holds that the simplification of the issues ‘makes the solutions seem simpler’ and certainly the Review is up-beat about the prospect of building on existing examples of ‘good-practice’. Whilst the Indian Civil Service, like others elsewhere, can hold up change, it also has a tradition of public service and prioritized action when needed. There will be progressive and professionally motivated civil servants at national and state level that will be anxious not to fall behind similar professionals elsewhere in India. Change or not, a competitive private sector will poach administrative resources and recruits away from Government. The issues are ‘political’ in a wider sense and this will put politicians on the spot. Moving from low growth to high growth is the result of political change and of millions of decisions coordinated through the market. Institutional change is more difficult but relies to some extent on a big idea backed by masses of detail and sustained by political will. The will is both ‘political’ in the sense of political leadership (though constrained by factors within the government) and in the sense of democratic demands from Indian society. There are costs and benefits to change and the social outcomes of such costs and benefits can be unpredictable. There are political discontents that do not approve the present relationship with the United States. There are others, consumer groups included, who do not approve of unregulated markets and indeed of the concept of capitalism (the Economist on the 17 August, mentions communist insurgents in ‘several of India’s eastern states’).

Issues of ‘governance’ and of institutional reform are in the end political and social rather than economic questions. Is India up to securing the reforms as depicted as necessary by the World Bank or are the World Bank (not always as sensitive as it ought to have been in the past to domestic political considerations in developing countries) and the Economist over optimistic?