Bimal Jalan’s formidable analysis of the last four decades of India’s economic journey illuminates the nation’s transition from a strictly regulated, slow-growth state enterprise to one of the fastest-growing economies in the world. Dr Jalan has had a ringside view of financial governance during his long and distinguished career, which included stints as Union Finance Secretary and Governor of the Reserve Bank of India. Drawing on this vast experience he compares two distinct periods: 1980–2000 and 2000–15, to examine the core changes and their significance, and considers their lessons for the immediate future.
Dr Jalan suggests six critical issues where change can make a difference: revisit the anti-defection law so parties that join a coalition cannot defect without having to seek re-election; make the states—rather than the centre—responsible for financial development programmes and poverty-alleviation schemes; establish rules to make Parliament’s proceedings orderly and purposeful; ensure a stable and competitive economic environment; make sure ministries are accountable for actual performance; and, finally, rationalize the system of delivery of public services to persons below the poverty line.
With such measures, India can become one of the fastest-growing emerging global powers and ensure that the benefits of such growth reach all her people. - www.Amazon.com
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Introduction
In 2017—the year of this book’s publication—India will celebrate the seventieth year of its independence. On 15 August 1947, when India became independent, in a celebrated and oft-quoted passage in his address to the nation, Jawaharlal Nehru said, ‘Long years ago, we made a tryst with destiny, and now the time comes when we shall redeem our pledge, not wholly or in full measure, but very substantially. At the stroke of the midnight hour, when the world sleeps, India will awake to life and freedom.’
As we look back to that day, there is certainly much to rejoice in what our nation has been able to achieve. Seventy years ago, in the light of India’s poverty and diversity, there were not too many political observers who believed that Indian democracy would survive for long. Over time, however, India’s democratic system has not only survived but is universally regarded as a role model for the peaceful transfer of power from one government to another after periodic elections.
The Indian economy, which for quite some time—in the 1960s and the 1970s—was in the doldrums, also recovered and has shown steady growth since the beginning of the 1980s. The economy’s potential for even faster growth is now believed to be high, according to experts from all over the world. The view that India will become one of the dominant economies of the world by the middle of the twenty-first century is fast gaining traction.
At the same time, it is important to recognize that while all this is true, the working of our political and economic system requires constant vigilance and the launching of reforms, as necessary, from time to time. The processes of governance, the distribution of power among the different agencies of the state, the functioning of political parties and the work of Parliament must be under periodic review. The real issue now is not whether India’s democratic electoral system has proved its sustainability, but whether it can be made to work better in the light of political developments over time.
In terms of governance structure, the twenty-year period of 1980–2000 was significantly different from the first fifteen years, i.e., from 2000–15, of the twenty-first century. During the earlier period, there were as many as nine different governments in power at the Centre at various points in time, including two Congress governments, led by Indira Gandhi and Rajiv Gandhi, which were in office for their full terms. During the 1990s, however, there were seven different governments formed by the coalition of parties in Parliament, of which as many as six governments were in office for less than one year.
In contrast, during 2000–14, there were three governments that completed their full terms, one led by the National Democratic Alliance (NDA), followed by two Congress-led coalitions. Currently, since 2014, for the first time in the twenty-first century, we have a new government formed by a party that commands a majority on its own. In terms of governance and politics, the situation is now dramatically different. The present government is now in a position to launch the major reforms or administrative changes that may be required to realize India’s full economic potential of high growth combined with a faster rate of poverty alleviation.
As is clear from the table of contents at the beginning, the book is divided into two sections, ‘India Then (1980–2000)’ and ‘India Now (2000–15)’. The first section highlights the initiation of the reform process during the twenty-year period of 1980–2000, when there were several different governments in power. The second section highlights the economic situation at the beginning of the twenty-first century and the changes that occurred in governance and the administrative system under the previous three governments that were in power for their full terms. The last chapter in this section highlights some important priorities for the future in the areas of politics and governance in the light of recent developments in the economy.
On 18 January 1991, India’s foreign-exchange reserves stood at only $930 million. This was barely sufficient to meet even the daily cash requirements of an economy of India’s size. But for a loan from the International Monetary Fund (IMF), which was approved in mid-January of 1991, there was a strong possibility that India would have been forced to default on its international obligations for the first time in its post-Independence history.
In the light of India’s highly disappointing record of the way in which the economy was organized during the years before 1990, the first essay in this book outlines a ten-point programme of action which, in future, could lay the foundations of sustainable growth and could also be implemented quickly.
As it happens, the suggestions made in the essay, published twenty-five years ago in 1991, are still relevant. Some of the suggestions of contemporary importance, for example, are:
Early action to eliminate revenue deficit altogether;
Reorganization of public-sector enterprises, particularly loss-making ones, through disinvestment;
Replacement of direct physical controls by non-discretionary fiscal, credit and financial regulations;
Decentralization of planning and financing of public projects to state governments;
Ensuring that the highest priority is assigned to achieving full literacy within a decade;
Reducing administrative costs in the delivery of services to the poor; and
Making the administrative system at the Centre and the states more functional and accountable to the people.
The second chapter, ‘Controls, Regulations and the State’, written in 1996, highlights the slow progress in reducing the role of the state in controlling and regulating the allocation of resources in the economy, or for that matter, in improving the functioning of the administrative system for the benefit of the people. As it happened, over time, there was, in fact, a vast expansion of the Central government, which, by early 1990, had as many as 3.5 million employees (in comparison to the total employment figures of about 4.5 million persons in manufacturing in the private organized sector). The number of ministries and departments at the Centre and in the states also proliferated.
In the context of the above background of developments during the 1980s, Chapter 3, in the section ‘India Then’, highlights certain priorities for initiating a new strategy that would ensure economic stability, reduce high fiscal deficits and accelerate public investment in infrastructure as well as loss-making public-sector enterprises. A basic point made in this chapter is that the key to accelerating growth in India, as elsewhere, lies in higher investment in industry. This was particularly so at low points in industrial and business cycles when the current output was growing slowly. In looking for a strategy for higher industrial growth in the 1990s, this chapter tries to identify those factors that could facilitate higher investment by industry in new plants and technologies, and significantly accelerate India’s industrial and overall growth rate.
The fourth chapter in this section deals with the evolving role of finance and development. This role has, of course, always been recognized. However, the events of the last few years, particularly after the East Asian crisis of 1997, have brought to the fore the critical role of the financial system in determining the stability and sustainability of the real economy. As a result, the reform of the financial system, and the rules and codes that should govern the conduct of financial business, figure high on the domestic agenda for reform as well as on the international agenda for global cooperation.
The most important lesson emerging from the Asian crisis is the need to be vigilant about developments—domestic and international—that may impinge on a country’s financial relations with the rest of the world. The process of integration of worldwide financial markets has resulted in product innovation and greater efficiency, but it has also made developing countries subject to greater vulnerability and new risks. Strong fundamentals alone cannot provide full immunity from a crisis. There is a need to take early preventive action, to build firewalls and to keep some safety nets handy.
In the light of the above discussion, the fourth chapter ends with a review of the recent Indian experience in financial management and lays down some priorities for the future. In working out these priorities, it is important to remember that financial reforms and liberalization of markets are the means to an end—not ends in themselves.
The second section in the book, ‘India Now (2000–15)’, deals with India’s economic and political situation since the beginning of the twenty-first century and highlights some important priorities for the future for the country to realize its full potential as one of the fastest-growing emerging economies. The first essay in this section (in Chapter 5) emphasizes the need for India to move towards more and deeper economic reforms in the future.
In addition to economic reforms, which figure prominently in the national discourse, it is now essential to embark on an urgent programme to revitalize the governance and public delivery systems at all levels of the government—the Centre, state and districts. Without strengthening the ability of the government to do what it alone can do, and narrowing the focus of its activities to what matters most for the future development of the country—education, health, clean environment and a functioning infrastructure—India cannot adequately seize the opportunities that lie ahead.
Chapter 6, titled ‘Politics and Governance’, deals with some issues that require action at the highest level of the government to improve governance and delivery of public service to the people. Chapter 7, ‘Separation of Powers: The Myth and the Reality’, deals with issues relating to the separation of powers among the three organs of the state—the legislature, the judiciary and the executive.
The last chapter of the book deals with certain important ‘Priorities for the Future’, particularly with respect to the reform of politics and governance so that India is able to realize its full economic potential as an emerging power. The objective is to put these priorities together in a form that makes it feasible to implement them within a relatively short period of time—hopefully, before the next General Election in 2019.
As we look back to that day, there is certainly much to rejoice in what our nation has been able to achieve. Seventy years ago, in the light of India’s poverty and diversity, there were not too many political observers who believed that Indian democracy would survive for long. Over time, however, India’s democratic system has not only survived but is universally regarded as a role model for the peaceful transfer of power from one government to another after periodic elections.
The Indian economy, which for quite some time—in the 1960s and the 1970s—was in the doldrums, also recovered and has shown steady growth since the beginning of the 1980s. The economy’s potential for even faster growth is now believed to be high, according to experts from all over the world. The view that India will become one of the dominant economies of the world by the middle of the twenty-first century is fast gaining traction.
At the same time, it is important to recognize that while all this is true, the working of our political and economic system requires constant vigilance and the launching of reforms, as necessary, from time to time. The processes of governance, the distribution of power among the different agencies of the state, the functioning of political parties and the work of Parliament must be under periodic review. The real issue now is not whether India’s democratic electoral system has proved its sustainability, but whether it can be made to work better in the light of political developments over time.
In terms of governance structure, the twenty-year period of 1980–2000 was significantly different from the first fifteen years, i.e., from 2000–15, of the twenty-first century. During the earlier period, there were as many as nine different governments in power at the Centre at various points in time, including two Congress governments, led by Indira Gandhi and Rajiv Gandhi, which were in office for their full terms. During the 1990s, however, there were seven different governments formed by the coalition of parties in Parliament, of which as many as six governments were in office for less than one year.
In contrast, during 2000–14, there were three governments that completed their full terms, one led by the National Democratic Alliance (NDA), followed by two Congress-led coalitions. Currently, since 2014, for the first time in the twenty-first century, we have a new government formed by a party that commands a majority on its own. In terms of governance and politics, the situation is now dramatically different. The present government is now in a position to launch the major reforms or administrative changes that may be required to realize India’s full economic potential of high growth combined with a faster rate of poverty alleviation.
As is clear from the table of contents at the beginning, the book is divided into two sections, ‘India Then (1980–2000)’ and ‘India Now (2000–15)’. The first section highlights the initiation of the reform process during the twenty-year period of 1980–2000, when there were several different governments in power. The second section highlights the economic situation at the beginning of the twenty-first century and the changes that occurred in governance and the administrative system under the previous three governments that were in power for their full terms. The last chapter in this section highlights some important priorities for the future in the areas of politics and governance in the light of recent developments in the economy.
On 18 January 1991, India’s foreign-exchange reserves stood at only $930 million. This was barely sufficient to meet even the daily cash requirements of an economy of India’s size. But for a loan from the International Monetary Fund (IMF), which was approved in mid-January of 1991, there was a strong possibility that India would have been forced to default on its international obligations for the first time in its post-Independence history.
In the light of India’s highly disappointing record of the way in which the economy was organized during the years before 1990, the first essay in this book outlines a ten-point programme of action which, in future, could lay the foundations of sustainable growth and could also be implemented quickly.
As it happens, the suggestions made in the essay, published twenty-five years ago in 1991, are still relevant. Some of the suggestions of contemporary importance, for example, are:
Early action to eliminate revenue deficit altogether;
Reorganization of public-sector enterprises, particularly loss-making ones, through disinvestment;
Replacement of direct physical controls by non-discretionary fiscal, credit and financial regulations;
Decentralization of planning and financing of public projects to state governments;
Ensuring that the highest priority is assigned to achieving full literacy within a decade;
Reducing administrative costs in the delivery of services to the poor; and
Making the administrative system at the Centre and the states more functional and accountable to the people.
The second chapter, ‘Controls, Regulations and the State’, written in 1996, highlights the slow progress in reducing the role of the state in controlling and regulating the allocation of resources in the economy, or for that matter, in improving the functioning of the administrative system for the benefit of the people. As it happened, over time, there was, in fact, a vast expansion of the Central government, which, by early 1990, had as many as 3.5 million employees (in comparison to the total employment figures of about 4.5 million persons in manufacturing in the private organized sector). The number of ministries and departments at the Centre and in the states also proliferated.
In the context of the above background of developments during the 1980s, Chapter 3, in the section ‘India Then’, highlights certain priorities for initiating a new strategy that would ensure economic stability, reduce high fiscal deficits and accelerate public investment in infrastructure as well as loss-making public-sector enterprises. A basic point made in this chapter is that the key to accelerating growth in India, as elsewhere, lies in higher investment in industry. This was particularly so at low points in industrial and business cycles when the current output was growing slowly. In looking for a strategy for higher industrial growth in the 1990s, this chapter tries to identify those factors that could facilitate higher investment by industry in new plants and technologies, and significantly accelerate India’s industrial and overall growth rate.
The fourth chapter in this section deals with the evolving role of finance and development. This role has, of course, always been recognized. However, the events of the last few years, particularly after the East Asian crisis of 1997, have brought to the fore the critical role of the financial system in determining the stability and sustainability of the real economy. As a result, the reform of the financial system, and the rules and codes that should govern the conduct of financial business, figure high on the domestic agenda for reform as well as on the international agenda for global cooperation.
The most important lesson emerging from the Asian crisis is the need to be vigilant about developments—domestic and international—that may impinge on a country’s financial relations with the rest of the world. The process of integration of worldwide financial markets has resulted in product innovation and greater efficiency, but it has also made developing countries subject to greater vulnerability and new risks. Strong fundamentals alone cannot provide full immunity from a crisis. There is a need to take early preventive action, to build firewalls and to keep some safety nets handy.
In the light of the above discussion, the fourth chapter ends with a review of the recent Indian experience in financial management and lays down some priorities for the future. In working out these priorities, it is important to remember that financial reforms and liberalization of markets are the means to an end—not ends in themselves.
The second section in the book, ‘India Now (2000–15)’, deals with India’s economic and political situation since the beginning of the twenty-first century and highlights some important priorities for the future for the country to realize its full potential as one of the fastest-growing emerging economies. The first essay in this section (in Chapter 5) emphasizes the need for India to move towards more and deeper economic reforms in the future.
In addition to economic reforms, which figure prominently in the national discourse, it is now essential to embark on an urgent programme to revitalize the governance and public delivery systems at all levels of the government—the Centre, state and districts. Without strengthening the ability of the government to do what it alone can do, and narrowing the focus of its activities to what matters most for the future development of the country—education, health, clean environment and a functioning infrastructure—India cannot adequately seize the opportunities that lie ahead.
Chapter 6, titled ‘Politics and Governance’, deals with some issues that require action at the highest level of the government to improve governance and delivery of public service to the people. Chapter 7, ‘Separation of Powers: The Myth and the Reality’, deals with issues relating to the separation of powers among the three organs of the state—the legislature, the judiciary and the executive.
The last chapter of the book deals with certain important ‘Priorities for the Future’, particularly with respect to the reform of politics and governance so that India is able to realize its full economic potential as an emerging power. The objective is to put these priorities together in a form that makes it feasible to implement them within a relatively short period of time—hopefully, before the next General Election in 2019.
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