The domestic origins of India’s economic problems lie in that clash.
Over the last few months, India has been going through an experience, namely a clash between democracy and capitalism. Most wealthy democracies have had this experience at a certain stage of development, and one might even argue that the clash has not yet fully disappeared. By looking at the matter comparatively, we can perhaps get a surer perspective on India’s current economic malaise.
Let us begin with a deceptively simple question: what produces the clash between democracy and capitalism? Fundamentally, the building blocks of the two systems — democracy and capitalism — are different. Democracy is premised on the idea of political equality. Capitalism is not about equality, political or economic. It is fundamentally about economic freedoms: freedom to buy and sell, freedom to invest and make a profit, freedom to invent, freedom to reap the rewards of one’s work, capacity or luck. It does not matter whether one is rich or poor; each person has only one vote in a democracy. A person ten times richer than his neighbour would still have one vote, but in the marketplace, the same person would undoubtedly have greater clout. The rich matter more in the economic market; the poor, especially if they are numerous, count for more in the market for votes. Even if the rich finance election campaigns, the vote of the poor must be won.
By giving the right to vote to the subaltern, democracy inevitably tends to put restrictions on economic freedoms. When such restrictions are viewed as excessive, capitalism often punishes democracy. The term “investment strike” best expresses this phenomenon. Faced with a government going supposedly too far in the direction of the poor, the capitalist can simply refuse to invest.
This has well-known consequences for democracy. Without investment, the democratic project of welfare or redistribution begins to falter. One must, therefore, enlarge the cake in order to split it. Where the balance between the democratic desire to provide mass welfare and the capitalist impulse towards economic freedom lies has been a concern for all democracies.
Let us now turn to India. The external origins of India’s macroeconomic fragility are undeniable: as capital leaves emerging markets, the economic recovery of the US is a problem for them to begin with, and a blessing only later. But the domestic origins of India’s economic problems are firmly anchored in the clash described above. As Indian democracy moves towards presenting access to food, education and partial rural employment as a right to the masses, the investment rates have fallen, capital has begun to move out, and the currency has come under enormous pressure.
Only 66 years old, India is a new democracy. How have the older democracies handled the problem? Three things ought to be noted.
First, older democracies instituted universal franchise — the right to vote without any distinction of gender, race, ethnicity or income — only after they had become rich. Universal franchise became a Western institutional practice in the 1910s and 1920s. The West was already highly economically developed by then, producing, for example, 77 per cent of the world’s manufacturing output by 1900. As a result, Western capitalism did not feel intense redistributive democratic pressures until very late. In contrast, independent India was born with extensive poverty and universal franchise.
Second, as franchise expanded in the West, to include the lower classes, welfare states, with public expenditures reserved for low-income groups, also began to emerge virtually everywhere. The first welfare state was born in Bismarck’s Germany in the 1880s, as all male adults got the right to vote; it emerged in 1910-11 in the UK and in 1932 in the US, as franchise became larger. Welfare states have been of different types but, basically, all democracies feel the political necessity to attend to the well-being of the masses, not leaving it to markets alone.
Third, unlike in the West, the poor in India have come to vote much more than the rich. Over the last two and a half decades, India’s poor have defied democratic theory, which says that the rich and the educated tend to vote more.
What inferences does this comparative sketch allow? As at some historical point in the other market-based democracies, capitalism and democracy are at odds in India today. And because universal franchise was instituted at a low level of income and the less educated and the poor have started voting more than the rich, India’s democracy has felt an acute pressure to develop a welfare state even before reaching a high level of income. Moreover, since most of India’s low-income population comes from four social categories — the scheduled tribes, the scheduled castes, lower OBCs and Muslims — the polity has moved quite decisively towards their concerns. Given the continuing tale of mass deprivation, it may not look that way on the urban streets and rural pathways, but India’s policy and voting space has an unmistakable plebeian thrust today, both economically and socially.
What mainstream economists derisively call the reckless populism of India’s government is, in fact, the call of a poor democracy — very substantially, if not wholly. It is not only the UPA government that has supported rights to food, education and rural employment; all political parties have. Indeed, non-Congress state governments in Tamil Nadu and Chhattisgarh have run bigger welfare programmes. Narendra Modi’s critique of the food security bill was that it was not sufficiently ambitious.
Only a third of India, at best, can be classified as middle class. Democratic politics is unlikely to prioritise their concerns over those of the remaining two-thirds, especially if the middle classes, for a whole variety of reasons, vote less than the rest. Mainstream economists would like India’s governments to rely on long-term, growth-based plans for poverty alleviation, interfering little with the market. Politicians, however, have to win the next elections. Something concrete must be done here and now. Long-run considerations often do not work well in electoral politics.
But mainstream economists are absolutely right in one sense. If, in the process of attending to the bottom half or two-thirds, India’s democracy adopts policies that choke the growth process, it will not be able to provide mass welfare either. Revenues to fund welfare programmes depend heavily on economic growth, which in turn is substantially dependent on investment. Therefore, regardless of what the masses want, democracies must also please investors.
That is where UPA 2 has erred. It had to walk on two legs: one that increases the investment rate, makes it easier to do business and enhances growth, and the other that attends to mass welfare. It concentrated on the second leg, taking investment and growth for granted. It assumed that India had become a land of business opportunity, but it did demonstrably little to nurture that belief.
But it is not too late. India’s economic malaise is not yet a full-blown economic crisis. The morale of the narrative sketched above is quite simple. If investment and growth have serious implications for mass welfare, restore investor confidence with greater incentives and simpler rules of doing business. It is not anti-poor to be pro-investment.