Democracy Vs Growth


I recently heard Dr Raghuram Rajan, the Chief Economic Advisor to the Government of India and an eminent academic with impeccable credentials, argue the case for an inclusive growth in a democratic environment, with reference to India.

I agree that economic growth should take the entire population forward in an economic sense, rather than enriching the rich as has been happening in India, thereby widening the rich-poor gap. The situation is not different in the U.S. as well, where that gap has been widening for years.

The key issue is whether the Indian style of democracy is appropriate when you have the unenviable task of advancing the nation of 1.2 Billion people, most of who have been left behind in the past decade of over 8% GDP growth.

Dr Rajan argues that democracy provides the environment for that forward movement by allowing the strengthening of institutions which have been found wanting of late – especially the bureaucracy and the financial institutions of India which could not cope with the rapid economic growth of India. This was cited by him as one of the reasons for India’s recent economic slowdown.

I am not sure – India’s economic policy planners did not do their job properly in the aftermath of the 2008-09 financial crisis. Supply-side bottlenecks and infrastructural gaps should have been addressed faster. There is no dearth of economic talent in the policy-making circles of Indian Government, so I do not understand the logic of the institutional lack of measuring up to the growth demands. The RBI (Reserve Bank of India) has been delivering a fantastic monetary policy control, so it has not been found wanting (except by an impatient government and growth-hungry businesses) in its execution. So, if Dr Rajan is pointing fingers at the RBI, that is patently incorrect and wrongly pointed.

The Government mandarins and economic policy makers at the apex of the Finance Ministry and the Planning Commission did not understand the needs of the growing economy and execute better. That can be one of the reasons why the infrastructure bottlenecks are still firmly in place and constricting the growth of Indian economy. A scandal-prone and scandal-ridden government was basically not able to move fast forward in economic execution, especially in key sectors such as Energy / Power. Since there is no penalty for slow decision-making or no decision-making, the government business goes on and bureaucrats survive to see another day, may be under another government.

Unless the democratic form of government enables a reward / punishment system for positive / zero / negative economic growth and fiscal deficit management, in the same manner that a corporate organization operates, I do not see why things will improve in India. Everything cannot be based on accidental performance criteria.

Think about it – how will such a huge USD 1.8T (on PPP basis) economy grow at 10% a year for the next 20 years (which is the needed growth to lift India from poverty), when democracy disables the economic performance by deliberate measures ?

Cheers,

Vijay Srinivasan
7th April 2013

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