Deriving India's democratic dividend

The country's steady march from competitive populism toward competitive good governance will benefit the common man

Watching the final session of the 16th Lok Sabha on February 13, I was overcome with a sense of deep pride. Ours is one of the very few, if not the only, country which, having achieved its independence from colonial rule after World War II, has managed to sustain and even strengthen its democracy over the past seven decades. 

Some will argue that in doing so, we have incurred significant costs in terms of lost opportunities for higher economic growth. Even if this be true, we must recognise that, for India, there was and is no alternative to a full-fledged and unconstrained parliamentary democracy, with its constitutional guarantees for fundamental freedoms and rights. However, it has indeed been an enormous challenge to undertake our economic transition based predominantly on market economy principles and private entrepreneurship in the context of an intensely contested parliamentary democracy. Readers would do well to ponder on how many other countries, in human history, have been successful in implementing their economic transition from a poor economy, while affording full democratic rights to all its citizens. 

Now, as we approach our next general elections, in themselves an exemplar to the rest of the world for the sheer scale and relative peace in which they are conducted, I have a feeling that we are on the cusp of a major breakthrough and transformation on multiple dimensions. Over the years, and especially during the last five years, we can discern a steady move from competitive populism toward competitive good governance as the principle driver of electoral success. Parties are increasingly getting elected or thrown out of office on the basis of their overall and, in particular, their economic performance. Other factors, like caste equations and regional loyalties may well have their role in determining electoral outcomes but the primacy of economic performance and the underlying good governance just cannot be denied. This is a tremendous change, the import of which will hopefully become clearer in the coming years.  

There is now a competition among states to attract private investment, improve their physical as well as social infrastructure and go up the inter-state rankings in ease of doing business, health and nutrition outcomes and educational achievements. This is the essence of competitive federalism that has been greatly encouraged by the several sector inter-state rankings brought out by NITI Aayog. Moreover, the rising aspirations of our young population are compelling administrations at all levels to improve performance and show better results. As the trend towards competitive good governance strengthens in the coming years, the common Indian will stand to benefit from greater transparency, accountability and efficiency in governance. Finally, after seven decades of suffering the adverse consequences of a weak, soft, crony and predatory State (as various authors have characterised governance in India), Indians stand to benefit from the establishment of a development state, which recognises its responsibilities and acts to deliver them efficiently and transparently. 

Second, the rules of the game that drive economic activity have been decisively changed. With the implementation of the Benami Transactions Amendment Act, Real Estate Regulatory Act (RERA) and the Insolvency and Bankruptcy Act, it is no longer possible for fraudsters, disguised as investors, to game the system and generate unaccountable income and wealth and get away with dumping banks and other creditors with assets that have been rendered non-performing either because the project is gold plated or the equity has been covertly sucked out. Now investors have to share both the downside and upside risks. Cleaning up the Augean stables of ‘ghost companies’ by shutting down more than 2.5 lakh such companies has sent a strong signal against those who used these entities principally for either dodging due tax or for money laundering.  

 Those who play the fair game are being rewarded with increasing simplification (through digitisation) of the direct tax regime and the effective lowering of tax rates for 95 per cent of the corporate tax payers. India’s moving up the global rankings for ease of doing business, a remarkable move from 142 to 77 in four years, and on the competitiveness and innovation index has further improved the investment eco-system. With the implementation of investor perception based inter-state rankings for ease of doing business, as is being undertaken by the Department for Promotion of Industry and Internal Trade, significant improvement can be expected in the coming period. FDI norms have been liberalised and virtually all production sectors, including defence and real estate, opened up for majority foreign investment. The economy is more formalised and the licence and control raj has been decisively pushed back. The honest investor can now hope to thrive without having to be on the ‘inside track’ with the bureaucracy either at the Central level or in the state capitals. Crony capitalism and its counterpart, phone banking, have been given a decisive push-back. 

Finally, the macroeconomic foundations for sustained rapid and inclusive growth have never been more robust. Never before has an average 7 per cent real GDP growth been achieved over five years, with a headline inflation of lower than 4.5 per cent! This is partly a result of government’s decision to give RBI the statutory authority and responsibility to achieve a targeted inflation rate. The fiscal rectitude exercised by the government has also surely contributed to this stable macroeconomic condition. This augurs well for ramping up economic growth in the coming period and permanently shifting to a higher, more inclusive and sustainable growth paradigm. Moreover, with the distinct improvement in delivery of public services and direct transfer of benefits, growth has been accompanied with greater inclusion and rising income levels of those at the bottom of the pyramid.

Yes, it is true that much remains to be done. But with these three fundamental transformations, we can expect this momentum to  continue. The good news surely is that henceforth, India can expect its economic transition being propelled forward by twin dividends— demographic and democratic. Credit flow from commercial banks is beginning to flow again. With credit-to-GDP ratio languishing at around 50 per cent, new investment demand can be easily met. The Indian economy may be entering a sweet spot which could push its growth higher towards double digits.

The writer is an Indian economist and is currently the vice-chairman of the NITI Aayog.  Views are personal