Dr. Bimal Jalan - Governor, Reserve Bank of India     


State of India's Economy, Politics and Governance
- Kerala State Planning Board, Thiruvananthapuram, December 5, 2014

I am grateful to K.M. Chandrasekhar, Vice-Chairman of the State Planning Board, to give me this opportunity to participate in the series of Lectures that the Board organizes from time to time on a variety of subjects of contemporary interest, not only in respect of issues pertaining to the state of Kerala, but also to our country as a whole. I don't wish to say much about the excellent work that the Kerala State Planning Board is doing in promoting growth and development in Kerala combined with poverty alleviation and efficient delivery of essential services to the people of the State.

Having been associated for some time with Planning Commission and different Ministries at the Centre and also RBI, let me just say that KSPB is somewhat unique among Planning Boards in different states of our country. It enjoys full credibility with successive governments, irrespective of the party in power. This is no mean achievement, as Kerala’s experience has been identified as a model in the international discourse on development. The KSPB is special in that has been headed by distinguished persons who have been leaders of their respective professions, ranging from corporate executives to distinguished academics and civil servants. The KSPB has also funded independent research by senior economists and provided an opportunity to students to enhance their skills via its summer internship programme.

Today, I propose to speak on the state of India's economy, politics and governance. As it happens, in addition to being important in itself, this is also subject of some contemporary significance in view of a fundamental shift in the structure of Central government after general elections in May 2014. For the first time after 1989 − a quarter of a century ago − we have a government in power constituted by a party which enjoys a majority on its own in Lok Sabha and is fully accountable to the people for its performance and delivery of public services. Since 1989, until recently, we had as many as 9 governments with an average life of about 2½ years. Five of these had a tenure of 1 year or less with enormous powers to allocate resources, control public enterprises and decide inter-state allocation of investments. Today, we have a government which is likely to be stable over its full term of five years. What is even more important is that it is fully accountable for its performance to the people without any excuses or attribution of its failures to the so-called "compulsions of coalition politics".

By any standards, India's domestic potential today is huge. India is a well-established democracy which grants full freedom to all its people to do what they wish and provides them with adequate powers to hold the government responsible for its performance. Unlike many other developing countries, our domestic savings are high, and dependence on aid and capital inflows from abroad is relatively low. Our economy has also been considerably liberalized since 1980s. Today, we have full access to world-class technology and skills at comparatively low cost. As it happens, unlike the earlier period, at present our foreign exchange reserves are also sufficient to tackle any balance of payments pressures that might arise without having to seek assistance from abroad.

While our opportunities and capabilities are comparatively large, it is also true that actual performance in alleviating poverty and providing minimum essential social services to the people has been abysmally low. The best-known and internationally recognised measure of socio-economic progress is the Human Development Index (HDI) which is computed annually by the United Nations Development Programme (UNDP). The HDI is a composite of several basic components of human development, such as, life expectancy, literacy, standard of living and health. It is believed to be a more comprehensive measure of progress than per capita income or Gross Domestic Product (GDP). According to this index, India's rank in 2013 was 135 among 187 countries globally. In other words, India's rank was close to the bottom one-third of the countries in terms of human development, notwithstanding the fact that in terms of overall growth rate of the GDP, until lately, India was among the fastest developing countries in the world for nearly three decades since 1980s. India was also the lowest performing country in respect of HDI among BRICS nations in all categories (with the exception of life expectancy, which was somewhat lower in South Africa).

Why this sharp and persistent "disjuncture" between growth and human development, notwithstanding the universally acclaimed economic reforms of 1991? Growth and reforms are obviously not ends in themselves, particularly in a vibrant democracy "of the people, by the people, and for the people" like India's. High growth and reforms are "means" to achieve the ends of providing the basic components of human development, specially nutrition, health and literacy, to the people irrespective of their levels of income. And, this is where we have failed and our past performance has been well below the expectations of founding fathers of our Constitution. It is also symptomatic of the persistent failure of our system of "governance" at the highest levels of government and bureaucracy.

To my mind, this is the primary challenge of the future − not growth per se but how to close this gap between growth and human development. I also believe that in order to achieve this task, macro-economic reforms in respect of various components of GDP are certainly necessary, but not sufficient. In addition to economic reforms, we also need some urgent political reforms to reverse the prevailing "incentives" for fragmentation of parties and their ability to join government without accountability, for criminals to enter politics, and widespread corruption in allocation of public resources by ministries.

So far as economic reforms per se are concerned, there has already been a fair amount of consensus about what needs to be done. Government, at the highest levels, has also announced a large package of reforms that it wishes to introduce in order to boost investor confidence and growth. Some important measures, which are still awaiting implementation, include inter-state Goods and Services Tax (GST), insurance and land reforms, completion of existing public projects (such as, in power sector or roads), and the need to reduce fiscal deficit to budgeted levels. All these proposed economic reforms will certainly contribute to higher growth, as and when implemented.

The only point that I would like to emphasise is that, so far as investor and public confidence are concerned, it is much more vital to implement what we announce by way of reforms rather than reverse what has already been announced, or wait, because of differences among parties in Parliament or Cabinet. From investment and growth point of view, uncertainty about public policy is more damaging than status quo in our macro-economic framework and India's widespread reputation as an attractive destination for foreign investments, leading supplier of IT, and high productivity with low costs. Such differences and reversal of decisions announced were the primary reasons for the so-called "policy paralysis" earlier (for example, proposals for retrospective taxation and foreign investment).

In the rest of this lecture, I propose to deal with some of the political and governance issues which require urgent attention and reforms in order to promote higher growth. It hardly needs to be emphasised that a fundamental "systemic" change, which dominated the working of India's politics until the 2014 elections was the emergence of coalitions as a "regular" form of government since 1989. As mentioned earlier, India had as many as 9 governments during past 25 years - with an average life of about 2½ years. Under the present Constitutional provisions, as a consequence of amendments carried out in 1985 and again in 2003 to prevent defections, now there is also a "built-in perverse incentive" for fragmentation of political parties particularly at the state level. This is because smaller a party, the greater the ability of an individual legislator to defect to another party in search of political power. Thus, for example, a member elected from a large national party has very little discretion to defect without the support of a substantial number of other members, who also wish to defect. In a situation where multi-party coalitions are the norm, all regional or caste leaders with a handful of constituencies naturally have a much greater incentive to form their own separate parties rather than join a large single party.

In order to reduce the present built-in incentive for fragmentation of parties and improve governance, it is of utmost importance that the anti-defection law must be made applicable to all parties and so-called independent members who choose to join a government in power. In other words, those parties which join a pre-election coalition should not be able to defect without having to seek re-election. Such an amendment to the "anti-defection law" will go a long way in strengthening the principle of collective responsibility of the cabinet to the people, as enshrined in the Constitution.

A related urgent political reform is to reduce the attractiveness of politics as a career of choice by persons with criminal records. There is a natural reluctance among investigating agencies and ministries of government to speed up investigations and the prosecution of persons who are leaders of political parties and/or members of the cabinet. According to the statistical survey of elections to the Lok Sabha in recent elections, including the 2014 elections, it has been found that nearly 20 percent of the candidates surveyed, cutting across party line (excluding independent candidates) had criminal antecedents. In the present Lok Sabha which has 543 seats in all, well over 100 members had criminal cases pending against them. No wonder that physical scuffles and assaults among some members on the floor of state assemblies, is not an uncommon sight when tempers rise because of charges of corruption and wrong-doing by leaders of one political party or another.

The present incentive for persons who have criminal cases pending in higher courts of appeal (either High Court or Supreme Court) should be effectively reversed by giving such cases highest priority if the concerned person is actually elected to Parliament or a State legislature. Their "presumed" innocence should be proved within six months of election before they can take their seats in Assembly or Parliament. Fast settlement of such cases would provide a big relief to persons with criminal charges who are actually innocent, and not only "presumed" to be so. And those who are actually guilty may choose not to contest elections so that they are in a position to delay hearings through normal legal procedures!

There has been widespread public outrage about corrupt ministers at the centre and states regarding scams relating to allocations of public resources, such as, land, mines and gas. Some ministers were also sent to jail by the Supreme Court and High Courts because of involvement in bribery and other illicit practices. For our so-called Hon'ble ministers to be in jail is a sad commentary about the functioning of India's democracy. But let us also ask ourselves - how is it that these Hon'ble ministers had the opportunity and such enormous discretionary powers to accept massive bribes from corrupt corporates? Who gave them this opportunity? Was it the intention of our Constitution to confer such powers on elected representatives of the people?

Recent history is full of instances where important policy decisions, leading to considerable revenue losses to the government and/or unwarranted allocation of public resources for personal gain by political leaders, were taken without individual and/or "collective responsibility". A striking example was in respect of allocation of 2G Spectrum. Heads of ministries, which were involved in the process of allocation have been "passing the buck", as it were, to some other ministry or to their own civil servants on the ground that they merely concurred in the decision taken by some one else. It has also been claimed that in any case, the final decision was approved by the Cabinet. If this was indeed the case, then the question arises: what does the "collective responsibility" of the Cabinet mean?

Another development, which has gathered further momentum in recent years, is the politicization of India's bureaucracy. In theory, under Indian system of executive responsibility, there is supposed to be a clear division of roles between the permanent civil service and the political leadership. Government's policy priorities and its work program are set by politicians. However, bureaucracy is supposed to ensure that implementation of the approved program is done according to the laws and procedures in force, without fear or favor, for the benefit of all the people regardless of their political affiliations.

Over the years, slowly but surely, the role of the bureaucracy has been seriously compromised. Any party which comes to power is inclined to appoint favoured bureaucrats in sensitive positions who, in turn, are expected to carry out the wishes of its party leaders, irrespective of their merits or legality.

As emphasized by several former cabinet secretaries and other high level officials in their memoirs, most of the administrative powers which were earlier in the hands of the civil servants have now been taken over by political masters at the ministerial level who have no direct or indirect experience of administration. Transfers of civil servants have also become very frequent. Some years ago in U.P., for example, where two parties resolved to have a 6-monthly tenure in government, there were as many as 1000 transfers within a year amongst members of the IAS and the IPS. First head of government transferred senior officers at an average rate of 7 per day. The second head of government, who took office after the expiry of 6-month period, decided to beat this record and transferred officials at the rate of 16 per day!

As a result of frequent transfers, administration has naturally become weak. What is even worse is that civil servants, instead of being independent of political leaders or parties in power, have now become sub-servient to them. Bureaucratic corruption has also become rampant, both to avoid transfers as well as to secure remunerative postings.

In view of growing political corruption and administrative apathy, it is no wonder that India today has one of the worst rankings in the Corruption Perception Index and Global Corruption Barometer compiled by Transparency International. In the latest perception index for 2013, India's score is 36 on a scale of 0 to 100 where zero is supposed to be highly corrupt and 100 is very clean. What is even more disturbing is that, according to TI's corruption barometer, in the past 3 years, nearly 75% of those polled said that corruption in India had increased and only 10 percent thought that it had gone down.

What is equally startling is that, as confirmed on tapes and reported in the press some time ago, corruption now cuts across all professions, corporates, media, public administration - from top echelons to the bottom of the pyramid - and constitutes a serious threat to internal law and order.

Although corruption has always existed in some form or other and its intensity has varied from time to time, there is no doubt that we have now reached a point where it poses a serious threat to the security, freedom and well-being of ordinary citizens and our cherished democratic values.

On the whole, we seem to be going through a period of transition with a growing disjuncture between economics on the one hand, and governance and politics on the other. As we look to the future with a new government in power, the overarching issue that India faces is whether in the years to come we will be able to resolve what can perhaps be described as "public—private" dichotomy in the functioning of our country. It is a striking fact that economic renewal and positive growth impulses are now occurring largely outside the governmental sector—at the levels of private corporations, autonomous institutions and individuals at the top of their professions in India and abroad.

Can something be done to resolve this dichotomy and improve the functioning of politics and governmental system in the future? In this Lecture, I have suggested some areas where political reforms are urgently required with a view to improving the system of accountability and functioning of political parties once they form a government. Let me also briefly mention a few other areas where I believe further action is necessary if we have to realise our full potential as emerging economic power:

  • Within the framework of parliamentary form of government, an important priority is to further reduce the political role of the government in the economy, particularly the power of multiple ministries and governments at the Centre and States over public sector enterprises. Privatisation is not the only answer. The real question is whether we can create an "arm's-length" relationship between the government and these enterprises (i.e. the Election Commission which gives India the largest free and fair elections in human history or for that matter, UPSC-type arrangement, where the board is appointed through an autonomous agency, such as PSEB, and has the power of supervision over the CEO).
  • There is also need to change the distribution of powers between the Union and states under articles 245 to 255 of the Constitution. It will be desirable to give states exclusive economic powers, for example in respect of multiple poverty alleviation schemes and implementation of infrastructure projects.
  • The issue of state funding of elections has also been considered from time to time but has not been found acceptable. Not that state funding would eliminate corruption, but with high cost of elections, the lack of it has become an important defence of corruption in the exercise of political and administrative powers. In a budget of several thousands of crores at the centre and state levels, even an allocation of 0.5 per cent of the budget for elections would generate sufficient resources for providing state funding.
  • Finally, as mentioned, a separation of powers between civil services and ministers for carrying out administrative functions is essential. Greater empowerment of the civil services must, of course, go hand-in-hand with greater accountability of civil services for their performance and ethical conduct.

There is, of course, a lot more to be done to tackle the challenges of the future. But let me not take much more of your time. The over-arching points that I wish to convey for consideration are really two-fold. First, growth of GDP is certainly important and we must do all that is needed to put India on a high growth trajectory. At the same time, high growth is not an end in itself. We must also ensure that the benefits of growth reach all the people, particularly the disadvantaged sections of our society. Second, in order to achieve this objective, reforms have to be broad-based. Highest priority has to be given to some urgent political reforms to enforce collective accountability of government ministries at Centre and states, combined with administrative reforms to devolve administrative powers to states for implementation of central schemes, reduce corruption, simplify rules, and easy access of citizens to public services.

I believe that India today has the capacity to achieve its full potential as an emerging global power, provided we have the necessary will and determination. Despite some current problems in governance and the working of the political system, the innate ability of our people is immense and has been demonstrated beyond reasonable doubt. The open and participative democratic system ensures that a change where necessary can be delayed, but it cannot be avoided altogether.

Thank you.

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