Things India must do to be a functioning social democracy

If even a modest but growing social welfare package is to be affordable, the public sector has to perform or be disbanded so that the govt can shut down one of the two cash burners, writes T N Ninan

Does India practise social democracy, or democratic socialism? That might sound like wordplay, but the two are very different creatures. The first system is democratic and functions broadly within a regulated capitalist framework. Budgets in such a system are instruments for funding universal social security provisions that benefit the poor more than the rich, such as for elderly care, a public school system, state-provided or state-paid medical services, along with provisions for the disadvantaged, like unemployment benefits. Democratic socialism is different: It emphasises state ownership or control of production, but within a democratic polity (therefore different from communist regimes, which typically call themselves “people’s republics”). 

France does both. It has a massive public sector because of waves of nationalisation, and liberal social benefits. The system has worked surprisingly well, unlike India’s similar straddling of the two political-economic systems. We have a large public sector that burns taxpayer money, even as we have slowly opened up the second burner—that is the social welfare system: The right to employment in rural areas, cash pay-outs and free medical insurance, quite apart from the longstanding government school and medicare programmes. This package has been steadily expanded, with some now proposing that the government provide a universal basic income. This, when the social democracies of Western Europe have found their welfare packages unaffordable and moved to limit them — even France, under President Emmanuel Macron. 

Affordability is not yet a debate here, despite our double-burner problem. Of course, some state enterprises have proved to be systemic strengths as well as profitable: State Bank of India, Indian Oil and Life Insurance Corporation, though even these have struggled against private sector competition. The real problem was Indira Gandhi’s belief that if you couldn’t run a market properly, you should simply take it over (foodgrain procurement, mandatory state trading for imports), and that saving jobs in the tiny organised sector was more important than the efficient use of scarce capital. Hence the state takeover of hundreds of textile, engineering and other firms. These were mostly unable to perform, despite or even because of the change of ownership, while Air India, the two sick telecom firms and the nationalised banks have continued to burn cash. 

The choice is clear: If even a modest but a growing social welfare package is to be affordable, the public sector has to perform or be disbanded so that the government can shut down one burner. The test is what economists call a hard budget constraint: Public sector managements in banks or airlines should not get soft bail-outs. 

A proper social democracy also needs a high tax-GDP ratio, which for India’s level of per capita income is par for the course (16-17 per cent). But it is stagnant or declining, and in any case nowhere near enough to fund serious social welfare. The heart of the problem is evasion of both the goods and services tax and income tax. Only a third of the eight million estimated to earn more than a pre-tax income of Rs 1 lakh per month pay the tax due from them. 

The last leg of the stool is of course equality. France has a strong sense of it, having beheaded its nobility in the late 18th century. That’s unlike Britain, where even in the late 19th century fewer than 11,000 families owned two-thirds of all land. As D H Lawrence noted, if you were wealthier than your neighbour in Britain, you thought yourself better than him, whereas in Australia you were merely better off. The chief executive officer of a French energy company in India once explained that if you bought a car that stood out from the others on your street in France, someone was likely to use a car key to scratch a long line of paint off a side panel—just to give you the message. India, more an electoral democracy than a system-respecting republic, is moving in the direction of pre-socialist Britain, with powerful billionaires controlling the state. 

These present the basic challenges worth dwelling on at Budget-preparation time. If India is to be a functioning social democracy, it has to stop practising state capitalism while creating a disciplined tax system and reining in corporate power.