An elderly man sits in front of the Vadala Mission Hospital in India, patiently waiting for a doctor. While many have benefited from India's growth in the past decade, some, like this elderly man, are still waiting for results.

Getting out of this trap will require a political consensus to prune the government’s activity portfolio and prioritize basic health and education. Much of this prioritization will have to be accomplished at the state and local levels, where implementation really takes place. Some states, even poorer ones, have prioritized and made progress. In other cases, the national government may need to push the states into action – but in a more targeted way than in the past. Aside from basic humanitarian concerns, there are pragmatic reasons for basic investment in people – the need to create productive citizens and facilitate sustained growth. Physical infrastructure currently receives more headlines, but ultimately, people matter more, and there is a greater need for a direct (as opposed to facilitating) government role in basic health and education than in building ports and highways. Even in this instance, seeing the government more as facilitator can help: private providers may sometimes do a better job of providing certain kinds of health and education services, even to rural households. The government can focus on back-end support, such as regulation, training, and infrastructure finance.

Government as backstop

Every functioning government plays a major role as provider of last resort for the destitute, disabled, and unfortunate, especially those who cannot turn to family or other private sources. India is no exception in this respect. Everyone is a potential candidate for being looked after by the government and this can go to absurd lengths, with even private-sector factory jobs becoming de facto hereditary. Even more problematic, the government takes two unsatisfactory approaches to mitigating the vagaries of fortune. One is by legislative fiat, which just transfers the problem elsewhere, as in laws that do not allow firms to fire workers or shut down in order to protect those same workers. Another is to throw money at the problem somewhat indiscriminately, as is the case with farm subsidies of all kinds. Farm subsidies reduce the costs of irrigation and electric power to zero, disproportionably benefiting well-off farmers much more than the rural poor. Targeted social insurance policies for workers, farmers, and others would make much more sense, costing less and truly benefiting those that are most unfortunate. However, the government seems to suffer either from a failure of imagination or a lack of political will in the face of those who benefit from the status quo.

Inertia and the quality of governance

Governance in India is relatively poor, and in some ways, deteriorating. Liberalization, the success of Indian businesses, and the entry of multinationals have intensified the competition for talent. At the same time, a new esprit de corps has not replaced the old paternalistic, control-heavy ethos within the government. Even the most honest and able are constrained by the system’s inertia. Some leaders (most notably the current Prime Minister, Manmohan Singh) have been clear and consistent in calls for reforms, but realistically, pressure for performance and accountability will come from civil society. By identifying and publicizing failures of governance, articulating a reform agenda, and collectively pressing for reform, the growing middle class, the dynamic entrepreneurs, and most importantly, the media, have crucial roles to play in facilitating this change. Under the old regime, the “license-permit-quota raj,” the media was heavily controlled. Technological advances and policy reforms together have helped create a vibrant media sector that shines a light on parts of the government that often are not shining examples of probity or competence. Even Bollywood’s often-frivolous film industry reflects and critiques governance and society.

Unpacking “India”

Writing about “India” can downplay the reality of its size and diversity. Economic reforms in the 1990s benefited state governments by providing them with more policy room, thus more in line with India’s ostensible federal structure. Some states have taken advantage of the reforms, while other states have been handicapped by poor economic pre-conditions, and regional inequality has worsened in some ways. Overall, though, the signs are encouraging, say Rao and Singh, as federalism in India is becoming more vibrant. Systemic reforms of taxes, spending, and intergovernmental relations have been pursued in an accelerated manner over the last 15 years. Fortuitously, the 1990s also saw India move towards creating true democratic local governments. Local governments had previously been pawns of the state governments but now have independent existences as well as constitutionally-recognized responsibilities. If these reforms continue, accountability and performance of the local, state, and federal government can improve, bottom-up. State and federal governments will need to support this development rather than hamper it. Government bodies that influence intergovernmental transfers, such as the Finance Commission and Planning Commission, still need to change their practices. In particular, they must improve targeting and the fiscal incentives of local and state governments at the receiving end of transfers from the national government. At the same time, only by removing quantitative restrictions and distorting trade taxes can an internal common market that is free of trade barriers be created within India.

Engagement with the world

A major aspect of India’s reforms has been to open up its domestic market to the rest of the world. Colonization left a deep wound on the Indian people and encouraged economic self-reliance as a goal. Now, India is beginning to participate more fully in the global economy and as a result, information technology has been a major success and exemplar in India’s external engagement. Trade barriers have come down, but more can and needs to be done for India to grow in a manner that absorbs its young people into the labor force of close to 500 million. Currently, 3.5 million youth are being added to the labor force each year, but employment generation is not keeping up. India continues to remove capital controls, both for pure financial flows, and for foreign direct investments, which bring technological and organizational expertise with it. By drawing more on foreign capital and expertise for removing constraints in physical infrastructure, workforce training and higher education will be critical if India is to keep growing at current rates. Many among the political and even intellectual elite are uncomfortable with this further intrusion of the market (and of foreigners), but the Indian diaspora, which has already positively influenced reform, may help overcome this timidity.