‘Economic policies are seldom based on past effectiveness or endorsements alone’: Ashok Lahiri

Economist-turned-politician Ashok Lahiri, now an MLA in West Bengal from Balurghat and, earlier, a member of the Fifteenth Finance Commission and the 12th Chief Economic Adviser to the Government of India, analyses the state of the Indian economy in his new book, India in Search of Glory. Examining the past and surveying the present, he locates India’s economic aspirations squarely in the context of politics and policies.

Lahiri has been a Reader at the Delhi School of Economics, executive director at the Asian Development Bank, chairman of Bandhan Bank, and director of the National Institute of Public Finance and Policy in the past. He spoke to Scroll about his book and his perspective on the Indian economy. Excerpts from the interview:

There have been some notable books about post-independence India, but the narrative has been viewed through the prism of either politics or economics – but seldom the two together. In your account, though, the calculus of politics over time in India, like a double helix, is inextricably linked to the journey of its economy, and vice versa. What were the determinants that informed this particular framing and, consequently, how is your book different from the others?
How does a political leader choose the economic policies that they will propound in the run up to an election or implement after getting elected? They are seldom based only on their effectiveness in other countries in the past, or endorsements by experts including economists in the present. As the famous public choice specialist Anthony Downs said, politicians formulate policies to win elections, they do not win elections to formulate policies.

It may not be as extreme as that, but with their policies, parties and their leaders do want to carry the people. India in Search of Glory recognises this and tries to focus on the symbiotic relationship that plays out behind the evolution of the Indian economy: India changes, and India, with changes in education, health, and physical infrastructure, changes the Indians. Changed Indians want accelerated growth and faster development, and for their own survival, politicians respond with appropriate policies.

Thus, in growth and development, relative to its not-so-democratic neighbours in the east – Hong Kong, Singapore, South Korea, and Taiwan in the first five or six decades after Independence, and more recently, China – while India has lagged behind, with changed Indians, India’s economic performance is likely to improve and its search for glory may not look as elusive as it did in the past.

In a broad-brush comparison with China and the East Asian Tigers, India’s economic performance seems to have been “good, but not good enough.” What in your view are the key benchmarks that would make it “good enough”?
Three areas or sectors critically important for growth and development are education, health, and physical infrastructure. In all these three areas, the progress that we made in the first three or four decades after Independence looked good compared with the virtual stagnation that we suffered under the British Raj. But given what was needed for rapid growth and development, the progress was not good enough. This feeling of not good enough is reinforced when we compare India’s performance with our not-so-distant neighbours to our east, namely Hong Kong, Singapore, South Korea, Taiwan, and China.

After economic liberalisation in 1991, various governments have run India, but sustained economic growth has been an abiding factor, with India now ranked the fifth-largest economy in the world. If liberalisation had started a decade sooner, what would the socioeconomic picture of India have looked like today?
Remember that by 1981, Indira Gandhi had abandoned her socialist policies. Average annual growth during the decade of the 1980s at around 6 per cent was inspiring. The problem with economic policy during the 1980s was mainly the unsustainable fiscal policy. There is a debate among economists about whether Indian reforms started from 1991 or earlier.

For example, former Chief Economic Advisor (CEA) Arvind Virmani claims that the breakpoint came in 1981, after Indira abandoned her socialist policies, while Kaushik Basu, another former CEA, disagrees with Virmani partly because of the unsustainable fiscal policy stance in the 1980s. Some others point to the attempt at liberalisation by Rajiv Gandhi in 1985, but the process was short-lived and came to a halt in 1987 because of the Bofors scandal.

Reforms without macroeconomic stability are unsustainable. Anything unsustainable must stop. The reforms before 1991 did not emphasise fiscal consolidation and macroeconomic stability and were doomed to failure. The 1991 reforms under Narasimha Rao were different. So if Indira Gandhi in the first half of the 1980s or Rajiv Gandhi in the second half of the 1980s had pursued liberalisation with macroeconomic stability, then would everything in the Indian economy from the mid-1990s onward have happened ten years earlier? Unlikely.

Reforms with macroeconomic stability would have allowed India to avoid the balance of payments crisis around the Gulf War. Without a balance of payments crisis, would India have lit the bonfire of permits and licences that it did in mid-1991? Difficult to tell, but chances are the Government of India at that time might have preferred to contain the destabilisation to manageable proportions and adopt sequential steps rather than go for a big bang approach. The outcome naturally would have been very different from events from the 1990s.

In its eighth decade since independence, India still seems distant from the glory it seeks. Could this, at least in part, be a function of the fact that for around half of this time, the glory has been formulated in terms of ethos and ideology rather than the pursuit of economic prosperity?
It is indeed true that the glory that India has sought since independence is not only materialistic but also in terms of principles such as Non-Alignment with both the western bloc led by the US and the eastern bloc led by the Soviet Union, and setting up a socialist pattern of society. As my book points out, the Non-Alignment Movement in the 1950s may have cost India possible friends in the east as well as future economic cooperation with them in the short term.

Reportedly, India found Japanese policies not sufficiently independent to make collaboration worthwhile. While the moral content of some of Nehru’s foreign policies could be laudable, in terms of realpolitik, it may have entailed considerable cost to India when it came to political and economic cooperation with possible benefactors.

Similarly, to prevent the concentration of economic power in large-scale manufacturing units, there was licensing and SSI reservation, and the Monopolies and Restrictive Trade Practices Act, 1969. All “big” enterprises – single large undertakings or groups of interconnected undertakings – with assets over Rs 20 crore were declared national monopolies, required to be registered under the act, and seek the MRTP Commission’s permission for expansion, establishment of new undertakings, and mergers and acquisitions. The same was the case with enterprises with a market share above 25 per cent in any product.

The MRTP effectively prevented firms from growing bigger. For example, with the MRTP, the annual output of Tata Iron and Steel Company, the pioneer of steel production in India and the largest private enterprise in 1969, remained stuck at 1.5 million tonne between 1969 and 1981. The glory that India sought was much more than materialistic. Not only in India, but also in many other countries of East Europe, Latin America and Africa, the glory involved a socialist ethos and ideology beyond the pursuit of Lakshmi. With the collapse of the former Soviet Union, the pursuit had to be abandoned half-way.

Caste consolidation as a lever of progress is a tricky business. Your book argues that while this is a much-welcome development, in the short term, the process could in fact aggravate religious conflicts rather than alleviate them. Could you elaborate on this?
In India, castes exist in almost all religious communities, but is most pronounced in Hindus. “Caste has ruined the Hindus,” Babasaheb Ambedkar had declared in his Annihilation of Caste in 1936. With urbanisation, literacy, secularisation, and Sanskritisation, caste consolidation, especially among the Hindus, is ongoing.

Fractionalisation is defined as the probability of choosing a pair of people at random and finding them belonging to two different groups. It is a convenient measure of how a society is fractured among different groups. The index of polarisation provides a summary measure of the intensity of the intra-group identification and inter-group alienation.

Such animosity may in fact increase when diverse groups form different clusters, or even one group forms a cluster when the others remain as they were. Fractionalisation may decrease, but intra-group identification and inter-group alienation may increase and create a more “polarised” situation, contributing to conflict. Polarisation depends on how the members of a religious group feel similar to each other and dissimilar from another group.

Size matters in polarisation – groups of insignificant size contribute little to it. For this reason, in the Indian context, most conflicts are of the Hindu-Muslim variety. Clearly, in a country with half a dozen medium and many small ethnic groups, fractionalisation may be high, but even with high inter-group alienation, polarisation can be low because of the low salience of identification in groups of medium size.

When two groups coalesce to form a single group, while, with fewer groups around, fractionalisation declines, polarisation may increase with greater salience of the identification factor from a larger group size. Under suitable simplifying assumptions, caste consolidation among groups with more than two-thirds share of the population decreases polarisation, while such consolidation for smaller groups with less than two-thirds share of the population increases it.

Thus, while caste consolidation among Hindus will bring in many beneficial effects, it may exacerbate religious conflicts because of the greater salience of the identification factor until the consolidated Hindu community crosses two-thirds of the population.

Its myriad challenges notwithstanding, India has made discernible progress across many parameters – life expectancy, primary education, sanitation and healthcare, poverty reduction, and the rate of economic growth – to name but a few. Which of these signifiers of progress do you consider to be the most significant, and why?
That is a hard choice. If I had to choose, I would choose primary education along with some measure of the quality of education, primary health care services and physical infrastructure such as roads, ports, airports, and urban infrastructure. You will notice that I have chosen public goods and services that individual citizens find impossible to produce on their own. I believe that satisfactory provision of these public goods and services will lead to rapid improvements in rates of economic growth and poverty reduction.

In the conclusion of your book, you have stated that India’s search for glory is an evolving story of the interplay between changing Indians and changing India. What do you see as some of the most striking manifestations of changing Indians, and how do you see this change continuing to take place in the years to come?
I see changed Indians every day – Indians of today who are very different from the cohort of Indians that we belonged to. Unlike us, for example, they queue up at bus stations and ticket counters without quarrelling, they do not spit on the road or in public spaces, they do not mess up the toilet in a railway carriage or plane like we used to, and they rarely burn public buses and vehicles to vent their political anger.

They are better educated and more healthy than us, and they are producing inventors and innovators by the dozens, many of whose start-ups are going on to become unicorns. They are demanding “Bijli, Sadak, Pani” and not “Roti, Kapda, Makaan”. These changes are going to accelerate in the years to come. The physical amenities in India are going to be more and more like the ones in developed countries, and our grandchildren are not only going to be much better educated and accomplished than us, but also taller, stronger and more athletic.