Jwas Director of the Center for Development Finance at the Institute for Financial Management and Research in Chennai, India. She is currently a Fellow at the Council on Foreign Relations and senior advisor to the Indian Institute for Human Settlements.

Geologists have an evocative term for majestic landscapes prone to tectonic shifts: catastrophic landscapes. India is in many ways similar: the economy is reaching new heights, but the forces playing out not so far beneath the surface have the potential to suddenly alter the terrain.

India has built up substantial momentum, but on a creaky substratum of weak infrastructure and poor services. The country’s failure to deliver the public goods its policymakers promise and its constitution guarantees undercuts one of its greatest economic assets: its human resources. More importantly, the political-bureaucratic strata that shape this foundation for sustained growth are like molten lava: slow-moving, but occasionally explosive. Electoral pressure on leaders to perform is building as existing practices of making and implementing policy come under increasingly critical scrutiny. The combination led to some unpleasant surprises in the fall of 2010 and may well produce more if India does not move rapidly toward systemic reform that encourages greater transparency, accountability, and capability at all levels of government.

Economic prospects are often measured in terms of progress on particular policy changes: labor market reform, budgetary allocations to education and health sectors, financial sector reform, or rationalization of tax codes. This is the wrong calculus for predicting India’s trajectory. The next set of economic reforms has to be political. It must consist of revamping the state’s ability as an organization to deliver on the infrastructure, services, and policy context its citizens demand.

Surface and Substrata

“Incredible India” (the government’s slogan for its global public relations campaign) has world-class airports, shiny high-rises, and world-renowned universities. It boasts five of the top 50 richest billionaires according to the 2010 Forbes list and a growing number of companies bailing out or buying out their “developed country” competitors. The country’s economic growth has recovered from the dip it took in the past couple of years to almost break into the double digits. The IMF’s October 2010 World Economic Outlook projects India’s growth rate for 2010 at 9.7 percent, up from its estimate of 9.4 percent in July. India’s National Council for Applied Economic Research upped its October projections for growth in fiscal year 2010-11 growth from an 8.1 percent forecast in July to 8.4 percent, mostly due to an increase in projected agricultural growth rates.

India, however, still lacks many of the fundamentals for sustained, distributed, inclusive growth. The electricity supply persistently lags behind the demand for power. Those who can fill the gap do so with generators and captive power plants, adding to entrepreneurs and households’ basic costs of struggling doing business. Large swathes of some of the poorest rural areas have intermittent power at best, with obvious consequences for the prospects for modern agriculture, rural non-farm employment, and schoolchildren’s ability to do homework at night. India’s transport network is congested and crumbling. The interstate highway system formed by the Golden Quadrilateral and the North-South East-West corridors has knit some of the major cities together and eaten into the railways’ share of freight transport, but the vast majority of roads are unpaved, rural, and accessible for just part of the year. Mobile phone use is growing rapidly, but the internet backbone required to move serious amounts of information around reliably is mostly limited to urban India. According to the latest data (2006) from World Bank World Development Indicators, nearly 70 percent of India’s citizens do not have access to improved sanitation facilities and 12 percent do not have access to even minimally improved sources of clean water.

India’s investment in one of its greatest resources, the “demographic dividend” created by its comparatively young workforce, is similarly lacking. The country has a public health care system charged with providing free health care for all, but about three quarters of health expenditures comes directly from private pockets. Those who go to public hospitals seeking care often find indifference, misdiagnoses, and myriad extra fees for everything from consultation to prescriptions. Education, the foundation for a prepared workforce and the key to economic opportunity for the individual members of that workforce, is also weak. The role of private schools and “tuitions,” or extra classes for a fee, in education is expanding as parents become increasingly skeptical of public options. Private healthcare and education obviously have their place, but in this case they are symptoms of public failure to provide basic services. India is a country where less than half of all births are attended by a skilled worker, nearly 40 percent of adults and nearly half of adult women are illiterate, and where 40 to 50 percent of the children below five years of age are undernourished.

Some of these gaps can be blamed on the fact that India is still a very poor country, with a per capita income similar to Cameroon and Papua New Guinea. However, India’s 2010 Human Development rank, an admittedly ambiguous composite ranking of educational, health, and economic outcomes, was just above that of Timor-Leste, a much poorer country. The country also came in well behind many other nations with comparable levels of income. The sometimes double-digit percentages of funds allocated for infrastructure that remain unspent at the end of every fiscal year suggests that disbursement, rather than purely insufficient earmarking of funds, hampers the development process.

The Dynamics Beneath

These infrastructure and service outcomes are, in turn, the product of a political-bureaucratic substratum currently in flux. The headlines at the end of November 2010 neatly illustrate the political dynamics at work. Two episodes dominated the media: the “2G Scam” and the Bihar elections. In the first, Andimuthu Raja, the Minister of Telecommunications, stands accused of allocating valuable second generation spectrum to various mobile phone companies at rock-bottom prices. The Comptroller and Auditor General estimates about US$38.5 billion was lost to the public exchequer, while financial flows to the minister and his party remain a matter of speculation. The economic losses from the distortion and delay of the development of India’s communications infrastructure are impossible to calculate.

More importantly, the incident displays the fragility of India’s political system. It illustrates the compromises made to create stability, as well as the speed with which the status quo can unravel. The minister, a member of an important party in the ruling coalition, has been under suspicion for some time. The Central Vigilance Commission first filed a report against some individuals involved in the scam a year ago, the media and some members of Parliament raised questions two years ago, and the rush of applications for 2G spectrum happened three years ago. The matter may never have hit the headlines if related transcripts of cell phone conversations between prominent reporters, corporate leaders, and political figures had not been mysteriously leaked to the press.

The scandal has had a domino effect on the workings of the central government. Raja resigned quickly, but the investigation is just unfolding. Parliament was closed for 95 percent of the winter session due to protests about how to investigate the matter. At the time of writing, opposition parties continue to call for a specially appointed Joint Parliamentary Committee (JPC) to probe into the matter, while the government stands by its position that the standing Public Accounts Committee (PAC) of Parliament should lead the investigation aided by the Comptroller and Auditor General and Central Bureau of Investigation (CBI). The core of the matter is how far the investigation will reach. A JPC, which is specially appointed for the occasion, can summon any concerned party including the Prime Minister. The opposition parties are eager to have this power; the government contends that it would be misused. The PAC is more constrained in its focus, but it does not have the power to summon ministers such as the accused, and the CBI’s “boss” (the leader of its supervising body, the Central Vigilance Committee) used to be a top bureaucrat in the Department of Telecommunications before he was appointed under controversial circumstances last year. The Supreme Court has taken charge of the investigation for now.

The second event is widely heralded as a triumph of good governance and a turning point in Indian politics. Voters in Bihar, one of India’s poorest and most populous states, overwhelmingly voted to return the incumbent chief minister, Nitish Kumar, and his allies to government with a three-quarters majority of seats in the state legislative assembly. Kumar and his party, the Janata Dal United, are widely regarded as having brought a new era of good governance, functional justice, and promise of economic development to the state. The state has seen double-digit growth and a noticeable improvement in infrastructure, services, and rule of law over the five years since he was first elected. As a reward for these efforts, Kumar gained support from a “rainbow coalition” of upper and lower castes, Hindus and Muslims alike, a combination that contrasts the traditional image of pre-determined vote blocks manipulated by local satraps with little regard for leaders’ promises or performance. Kumar was directly pitted against an icon of the old order, a former chief minister who, along with his wife, had ruled Bihar for decades by evoking his kinship with marginalized castes and using his powers of the purse strategically.

India is clearly moving into a new era of performance-focused politics. The Bihar story comes on the heels of similar electoral rewards for strong economic performance in Orissa in 2009. The incumbent leaders in Tamil Nadu are up for consideration next. Reportedly, they are concerned about the potentially adverse electoral impacts of the “perceptions” created by the 2G scandal, since Raja hails from the same state and party. Broader data back up the anecdotes: a recent paper by the Delhi School of Economics’s Poonam Gupta and Columbia University’s Arvind Panagariya finds that above-average state growth performance generally gave incumbents an electoral advantage in the 2009 elections of the lower house of Parliament, the Lok Sabha.

But can the system deliver this performance? The government is as creaky an organization as ever. Voters may be calling, but party leaders still select candidates for various reasons including “favors” and “donations.” Politicians’ performance is still difficult to measure since the statistical system produces little data that can be used to compare outcomes or even expenditures at the level of political constituencies. Elected representatives, in turn, have limited power as individuals to propose policies or otherwise bring their constituencies’ interests to the fore in public debate in India’s Westminster-style parliamentary system. Discussions and resolution of differences about policies used to take place within parties in the early years of India’s democracy; these must now take place between parties. Parliament’s procedural rules do not create a conducive atmosphere for deliberation and the backdrop of coalition politics colors all negotiations. Relatively small parties (such as Raja’s) have disproportionate influence when their support is essential for the survival of the government. India’s political system also has substantial executive privilege built into it. Much of the decision-making about development expenditure programs, for example, happens outside of the walls of the parliament as part of the formation of five-year-plans. The budget sessions provide a tool for political oversight and prioritization, but the discussions rarely last long. Overall, the authority to deliver infrastructure and services is fragmented among 47 ministries and three levels of government that often have overlapping responsibilities.

Bubbling to the Surface

The cracks in infrastructure and services have already left scars on the economy at the surface. Companies and individuals that can afford to develop their own infrastructural solutions do so, but others are cut out. Investment dedicated to in-house training, “captive” power plants, ports, and logistics infrastructure creates a competitive advantage for already-large entities and a disincentive for influential groups to support reforms and public-access infrastructure. The ingenuity, innovation, and industry channeled into solving infrastructural problems that should not exist could be redirected toward more productive pursuits. The effort spent on obtaining licenses and permits during India’s era of intense government intervention in the economy inspired the term “directly unproductive activity.” The modern equivalent is directly unproductive ingenuity.

India’s growth was faltering even before the economic crisis. The conventional story of India and the global crisis describes a crisis-induced slow-down in late 2008 and early 2009 followed by a relatively quick rebound this year. A closer look at the data, however, suggests a more complex story in which the global recession exacerbated a pre-existing drop in growth rates. India could have felt the effects of the global slowdown in early 2008 at the earliest. The National Bureau of Economic Research dates the United States’s recession as starting in December 2007, and the growth rate of global merchandise trade slowed around the same time. World trade and output didn’t fall until later in 2008. India’s manufacturing sector growth peaked at just below 13 percent year on year in the first quarter of 2007; however, it declined to 6.3 percent in the second quarter of 2008, before dropping to less than 1 percent during the global slowdown. Annual growth in financing, insurance, real estate, and business services peaked at 14.7 percent in late 2006 and was already down by nearly a third before it dropped from 10.3 percent to 6.9 percent between the first and second quarter of 2008. Overall GDP reached its high of 10 percent year on year growth in fall 2006 and had already declined to 8.6 percent by the first quarter of 2008 before dropping to a low of just under 6 percent in the end of the year. The post-crisis rebound could just represent the economy picking up the slack in infrastructure capacity that the recession created. If so, growth rates will run into the same wall as before.

The economic data suggest creeping challenges, but there is also the potential for more sudden disruptions to surface. The Naxalites, an armed rebel group with roots in a 1960s movement for land redistribution, have been exercising increasing control over larger areas of eastern India, recruiting sympathizers at least in part by appealing to peoples’ disillusionment with governmental inability to deliver public goods. The movement has suffered some military setbacks, but it is not clear in what direction public support is moving.

The political pressure to “perform” can also provoke policy surprises. India’s microfinance industry, for example, was brought to its knees within a few weeks after the state of Andhra Pradesh passed an ordinance imposing strict controls on microfinance providers’ practices. The law was billed as protecting poor consumers, but it has also made loans in that state nearly impossible to collect. Lenders in other states feared similar legislation and slowed or stopped lending, and financial backers stopped funneling investment into the microfinance providers. Investigation of the 2G scam has spread from being a matter of telecommunications policy to a broader threat to the government, as coalition partners and the Prime Minister’s concessions to them come under scrutiny.

Building Resilience

What lies ahead? There is no question of rolling democracy back in India. Policymakers and commentators may complain about the challenges of policy reform in India’s coalition-led, federal democracy, but citizen support for democracy as a system is solid and on the rise. Alfred Stepan of Columbia University and his co-authors recently analyzed data from the National Election Studies and the Center for the Study of Developing Societies’ State of the Nation Surveys to show a steadily increasing support for democracy and elections.
Indian leaders must focus on a management overhaul of the state in order to build the country’s resilience. There are three generic elements of any overhaul: simplify and clarify roles and responsibilities, improve management information systems, and set up systems to recruit the right people. Each implies a substantial and difficult agenda. After all, India obviously does not have the luxury to hire an army of consultants, rewrite the constitution, reconstitute its state, and build a brand-new bureaucracy.

The first element of overhaul would involve untangling three layers of government, the financial flows between them, and the explicit and implicit divisions of authority that have accumulated since the constitution set out somewhat orderly lists. This is happening on several fronts already, from environmental oversight to tax policy, but one way to accelerate the process and demonstrate the value of creating clear lines of authority and accountability would be to increase cities’ autonomy and responsibility to plan and provide services. India’s cities are home or part-time home to an increasing share of the population and account for nearly three-quarters of economic output, yet they can neither set their own property tax rules nor be held accountable for the state of their infrastructure. Both are heavily influenced by, and can thus be blamed on, state and national government policies.

Improving management information systems is also a tall order; new information always reveals new aspects of performance, both positive and negative. India has improved dissemination of information to enable citizen-managers. The 2005 Right to Information Act empowered citizens as watchdogs by giving them the right to request most information from public servants. Ongoing citizen audits of payments made under India’s flagship rural employment program have produced noticeable reductions in the funds siphoned from the program. India has not, however, paid serious attention to generating information required to manage its work more effectively. Reworking some of its legendary social surveys to enable outcomes to be tracked at the political constituency level would be an important first step.
Setting up systems to recruit the right people would require some alterations in the details of the democratic process. Intra-party democracy or even transparent primaries would be a start, as would campaign finance reform that lowered barriers to competition from those outside party leaders’ coteries. Rewriting the rules of parliamentary debate to allow individual members rather than parties more leeway in collaborating, discussing, and representing their constituencies is probably unthinkable, but this would change the composition of the workforce by changing the job itself. Such adjustments to the fundamental rules of politics have happened: Parliament itself approved many of the reforms that transformed the Election Commission into one of the most respected bodies in India.

Institutional change is the underpinning of economic resilience to the inevitable currents below the surface. The pressure to evolve is building, and the response over the next few years will be telling.