Economic policy in a functioning democracy

The Evolution of Economic Policy in India: Selected EssaysBy P.N.DharOxford University Press, New Delhi.251 pages.

The Evolution of Economic Policy in India is a selection of essays written over some four decades. Some of the earlier chapters, written in the 1960s, tend to stand out rather as staccato variations on the central theme. The main theme of the book, the evolution of economic policy in India since the 1950s, is discussed in a number of major chapters, also written over a number of years, the most recent one in 1993. Essays written on the same set of issues at different points of time are bound to contain overlaps and this is true of some of these chapters.

The book is of course not just a history of evolution of economic policy in India; a critical examination of policies followed is a far more important objective of the essays contained in it. This the author does skilfully and in considerable detail, bringing to bear a lifetime of expertise and experience. Dhar calls the book, a` la Keynes, a collection of essays in persuasion. Those he seeks to persuade, I believe, are primarily Indian policy-makers and students of development, but their counterparts in Bangladesh and Pakistan, which after all share with India some of the heritage that has in various ways influenced their economic performance, will also find the story interesting and instructive.

The book is about the "changing nature of India's political economy", which makes it interesting. Students of Indian economic development will be familiar with many of the landmarks Dhar revisits: the Second Five Year Plan (1956-1961), crafted by Mahalanobis, that sought to lay the foundations of Nehruvian socialism, with its emphasis on the public sector; the crisis of the mid-1960s which exposed the weaknesses of Indian economic policy, particularly its neglect of agriculture and its export-pessimism; the disastrous results of the devaluation of 1966, partly as a consequence of the promise of external financial not materializing; the constraints imposed by the Indo-China and Indo-Pakistan conflicts ; the crisis of political leadership of the 1960s and the break-up what Dhar calls the "Nehruvian consensus"; the oil crisis of the early 1970s; and the financial crisis of the 1990s.

The Indian economy may not have been actually shining as brightly as the ruling political party claimed in the days before the recent elections, but the achievements, made within a democratic political framework that can be an envy of other developing countries, has been considerable. One of the major failings of economic policy that Dhar stresses is the lackluster performance of manufacturing industry. The original expectation, he reminds us, that heavy industry would lay the foundation of rapid industrialization was frustrated by excessive regulation and control as well as by policy objectives in a federal framework of the country that served purposes other than those of rapid industrial growth.

In a book devoted to economic policy, one naturally expects to find out whether the achievements and failures can be attributed to policy successes and failures. It is a measure of the complexity of issues of economic development that the answer is "complicated by the fact that in the course of the last three-and-a half decades there has been constant need to arrange and rearrange priorities between development objectives and to adjust to circumstances as they evolved". There is no better way to say that there is no simple answer to such questions. One can easily argue, however, that the answer can apply to any other country. Dhar expresses his frustration that Indian policy makers are apt to make policy changes only in a crisis. Here too India is not alone.

To Dhar, acceleration of economic growth must be a critical goal of economic policy if poverty is to be reduced. Here, inevitably, the emphasis is on policy reform. But, in a democratic society, the success of reform will depend on "the political management of change" that can be exceedingly difficult. To start with, political "excesses" of the past that resulted from the failure to distinguish between instruments and objectives have to be dealt with. Examples of such excesses abound: the process of import substitution was carried beyond the requirements of protection of infant industry; the growth of the public sector was nurtured without regard for its costs and returns; while policies of protection of workers' rights were laudable by themselves, they were made use of to the point where organized labour itself became an "exploitative class". Similarly, policies that ushered in the green revolution also created a strong political interest group among rich and middle-income that still clings to state subsidies those policies started with.

The author's emphasis on growth as the primary instrument to reduce poverty will be acceptable to many. He does not dismiss other instruments to achieve that objective but calls for making existing poverty reduction programmes more cost-effective. Perhaps more importantly, he warns against purely populist measure such as artificially raising the minimum wage. One wonders, nevertheless, whether there is any automatic link between high economic growth in the aggregate and, say, provision of clean drinking water in the remote villages, where the bulk of the poor still lives. To cater to such needs must also be a part of the "political economy" of reform and development. The recent elections in India seem to suggest how, in a democracy, reformist regimes can founder on their inability to supply basic amenities for the poor. Perhaps these considerations should play a larger role in policy than Dhar seems to assign them.

Dhar unambiguously opts for an open economy. He commends the economic reforms initiated a decade ago in deregulation of industry, liberalizing foreign trade, and devaluation of the rupee, but emphasizes what still needs to be done: reduction of subsidies, reform of the public sector, review of labour legislation. But the critical areas of reform are those "in which vested interests, the beneficiaries of old policies, are bound to be hurt, and therefore, are politically difficult to manage", a statement with which it is easy to agree.

Dhar points the finger to a number of such interests in the Indian context, especially organized labour, farm interests, big and medium, and even small-scale industries that can mount powerful political lobbying. He reserves some of his sharpest criticism for organized labour, the labour aristocracy, as he calls them. Here and elsewhere his critics might easily detect a certain ideological colour, which Dhar, to his credit, makes no attempt to hide. His ready acceptance of the inevitability of the diminution of national sovereignty in an increasingly interdependent world economy will also not meet with ready approval from anti-globalisers. Neither is he overly eager to criticize the IMF.

Most readers conversant with the voluminous literature on economic reform in developing countries and Indian economic history will, I believe, find themselves on familiar grounds in much of the book. An important exception is the somewhat discursive Epilogue where he puts the future of the Indian economy in the context of recent developments in the world economy and polity, and in the regional context. In the latter, Dhar devoted considerable space to the country's relationship with Pakistan. Far more than trade and other economic relationships with its neighbour to the west with which it fought three wars, it is the political relationship between the two countries that concerns him. It is interesting to see him delve at some length into the question of the nuclear equation between the two countries and issues of Kashmir.

This may be strange in a book on economic policy. But it can be argued, without necessarily sharing all his points of view on the subject, that here Dhar has come down from the proverbial ivory tower of economics to a very real world of geopolitics that can either nurture or stifle economic development. He wishes India to take the lead in allaying suspicion and fear of its smaller neighbours and "lead the subcontinent out of its fractious history". In the discussion of regional relations his concern is, of course, the place of India in the region and the world. But, refreshingly, he also stresses the preservation and strengthening of secular and democratic traditions of the country as a way to secure that place.

Postscript. How would Nehru have acted as leader of India had he been alive today? The leader of the independence movement and prime minister of the country during its first seventeen formative years makes several cameo appearances in the book. The author's admiration for Nehru is evident in its pages. In an appendix to the book Dhar attempts to rescue Nehru from Nehruites, and presents him as an eclectic thinker who would have altered his socialist policies to meet the requirements of changing times. A number of Nehru's actions and pronouncements towards the end of his life are presented as evidence. The least one can do is to give the man the benefit of the doubt. The pages of the appendix are among the most interesting in the book.

Mahfuzur Rahman is a former United Nations economist.