Most headlines featuring India today focus on its impressive economic growth, outsourcing, and impact on information technology globally. Multinational firms eye the country’s growing, confident middle class with enormous interest, while its demographics, with a growing work force, seem favorable to continued economic dynamism. "India shining" became the slogan of the Bharatiya Janata Party (BJP), headlining the ruling coalition in the 2004 parliamentary elections. Dig deeper, though, and the numbers on basic health, nutrition, and education still leave much to be desired. According to Devesh Kapur in his article "India’s Promise" in a recent Harvard Magazine article, governance – including law and order, provision of basic needs in health and education, and overall fiscal management – continues to be one of India’s greatest weaknesses, despite the resilience of its democratic system. Symptoms of governance failure include an increase in grassroots insurrections in several Indian states and voter dissatisfaction. In 2004, the BJP-led coalition lost over a quarter of its parliamentary seats and the chance to govern India, despite India’s economic progress under the coalition. The Indian National Congress party, leader of the successor coalition government, has since struggled to find a policy orientation that provides greater inclusiveness in economic development.

Unfortunately, much of the political and policy debate in India is mired in rhetoric and outmoded theoretical constructs, and lacks empirical analysis. The political left rails against globalization in general, while economic reform proposals often lack coherence and consistency. The diversity of the country, the complexity of the political and economic issues, and resistance from the beneficiaries of the status quo all make progress difficult. Nevertheless, if one assesses India’s experiences over the last six decades, particularly the struggle for reform in the last two, lessons emerge that point the way forward. If India is to emerge as a prosperous and stable nation, it must (1) understand the role of the market and reflect this in policy, (2) make the government more focused as well as more effective in its focus, and (3) reform governance so it can enable citizens to make their representatives more accountable.

The role of the market

From 1947 through the 1970s, the perceived vagaries of capitalism and the inequities of imperialism shaped India’s post-independence policy stance towards the market. The government was to occupy the “commanding heights” of the economy, managing basic heavy industries and finance in order to make the requisite big push towards development. This strategy had some initial success, creating industries and infrastructure from the ground up, and perhaps contributed to political and social stability. However, gradually the words of James Madison, writing in The Federalist Papers in 1788, became more and more salient: “men are not angels,” even within government. India’s government increasingly encroached into the marketplace for less than noble reasons (i.e., the patronage and corruption that accompanied controlling or usurping market-based economic activity), and the “license-permit-quota raj” strangled private enterprise.

Economic reform in the last twenty-odd years has meant removing a web of controls on international trade and domestic corporate investment. The success of India’s information technology firms, operating below the radar of government controls, has become an exemplar of what Indian entrepreneurs can accomplish when given half a chance. Unfortunately, a myriad of unnecessary controls persist, often at the state level. Small and medium enterprises, as well as the agricultural sector, continue to be constrained by restrictions on investment, production decisions, and domestic trade. Part of the problem is that it is difficult to leave things to market forces without having the adequate laws, rules, institutions, and safety nets in place. Nevertheless, the dynamics of the market still need to be fully accepted in India, as the country needs even faster industrial growth if it is to absorb all the young people that will enter the labor market as well as those left unemployed from India’s days of slow growth. The path of economic liberalization has a long way to go, even as governance needs to improve by removing government participation from the business of running airlines, hotels, and other non-core activities, thereby focusing more explicitly on the proper roles of government.

Government as referee

The pre-democratic model of government was that of the “big man” or “chief,” (terms used by Jared Diamond in his 1997 book Gun, Germs and Steel: The Fates of Human Societies), and India’s democratic veneer has not altered this view of government, which still remains as the figurative mother and father – the “mai-baap sarkaar.” This attitude pervades the bureaucracy and the political class, preventing constituents from fully enforcing electoral accountability. In particular, it still influences government regulation of the market economy. Committees on private and foreign investment in higher education, capital account convertibility, telecommunications and other areas where the government needs to set the rules for market players continue to be pervaded by the “father knows best” attitude. Instead, the government needs to recognize that the “children” (whether companies or citizens) are grown up and need a different kind of support.