INDIAN POLITICAL AND ECONOMIC IN INDIA

Those who believe in the universality of economic logic and incentives maintain that India’s poverty is due to its political and economic system. Among the British colonies that gained independence in this century, India is the only one to have sustained democracy. But India is not immune to the paradox of democracy. Democracy is the least coercive form of government, but its workings expand government’s coercive powers. The dynamics of democracy, coupled with the adoption of the “Nehruvian model of growth,” left no area of Indian life safe from the government’s visible foot.

The government did not abolish private property but micromanaged each and every aspect of production, distribution, and consumption through its now famous license-permit-quota system. The system conferred unlimited power on politicians and bureaucrats. The leaders plundered the country in the guise of developing it. India put an end to the British raj only to usher in the Neta-Babu raj (politician-bureaucrat raj).
Here’s an example of the Neta-Babu raj. Cars were declared luxury goods and until recently only two companies were allowed to produce them—in the numbers dictated by the government.

They sold the same model for some 40 years, and one could buy it in any color as long as it was white. Justifications for government controls always become self-fulfilling; cars remained a luxury good until recently. One more example of the fatuity of Indian rule: government experts toured several countries to “study” the design and construction of roads. Following the common practice in those countries, they decided to put wider medians lush with grass, shrubs, and trees on highways. Suddenly highways began to suffer serious traffic jams.

The abundance of the median had been discovered by cows. The traffic meandered through the hungry cows stomping toward the median and the thirsty ones swaying toward the curbs, where there were water canals. Food and water were at the highway—where else would cows go? This was socialist economic planning with Indian characteristics.As Henry Hazlitt’s fable prophesied, Time Will Run Back. Dwindling foreign exchange reserves and a crumbling economy forced India to liberalize. And liberalize she did. The auto market was opened up. At first, foreign companies could not establish their own manufacturing units, but were allowed to form joint ventures with Indian companies. The memory of the British raj still haunts India; she is wary of foreigners. Initially, foreign companies were allowed to own a 25 percent stake in joint ventures; control had to remain, it was argued, in the hands of Indian partners. Then the ceiling was raised to 40 percent. Sometime later, after much wrangling, it went up to 49 percent.

It stayed there for a while, precariously balancing India’s sovereignty and the demands of her economy. India then lost its “sovereignty”; the ceiling was finally raised to 51 percent. Some new models and colors came in. Foreign companies are now allowed to roam the auto market freely—as long as they get permission from the appropriate government ministries. The ministries habitually remind people of their promise to make speedy decisions; all major investment decisions are on the fast track. If they actually expedited requests, would they need to repeatedly promise to do exactly that? The memory of the British raj keeps the Neta-Babu raj alive and well.

Some months back—don’t worry about when I’m writing this, nothing gets dated in this ancient civilization—the commerce minister called a press conference and proudly announced the list of items that were on OGL (Open General License). Import of these items no longer required permission from the government. Did the list include information-technology products to move India into the 21st century and to allow its software engineers to compete globally? Not exactly. The list included cosmetics and stockings. Prior to liberalization, someone actually had to get a license to import L’Oréal and L’eggs products. Now with free access to cosmetics and stockings, at least Indian women are allowed to compete with their sisters abroad. This is liberalization with Indian characteristics.Some months back—don’t worry about when I’m writing this, nothing gets dated in this ancient civilization—the commerce minister called a press conference and proudly announced the list of items that were on OGL (Open General License). Import of these items no longer required permission from the government.

Did the list include information-technology products to move India into the 21st century and to allow its software engineers to compete globally? Not exactly. The list included cosmetics and stockings. Prior to liberalization, someone actually had to get a license to import L’Oréal and L’eggs products. Now with free access to cosmetics and stockings, at least Indian women are allowed to compete with their sisters abroad. This is liberalization with Indian characteristics.Given such controls and especially the mindset of the Neta-Babu raj, the persistence of India’s poverty, the argument goes, does not need any other explanation. But the question does remain.