Contemporary Issue 1

8/22/2019 Contemporary Issue 1

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CHRONICLE IAS ACADEMY 1

ETHICAL DIMENSIONSOF GOVERNANCE

The topic 'Ethical dimensions of governance' allowsmost of us to consider the issue the way we think they areright. Since we belong to a country which is multi-cul-tural, geographically very different, the aspirations ofpeople are also very different. Therefore, many a time,whenever the word 'ethics' has appeared, we have tried todraw inspiration more from religion and the religiousbooks. We must have heard and deliberated many defini-tions of ethics. I shall make two quotations, one for ethicsand the other for governance. Bertrand Russell said "With-out civic morality, communities perish; without personalmorality, their survival has no value." This is as far as theissue related to ethics is concerned. It leaves us a very vastfield; it is not as narrow as one looks at it. But when welook at the governance, I could find nothing better thanwhat Gandhi Ji thought, that is, Swaraj. He said that thegovernance takes care of people who are the last in theline. And most famously he said, "If we could remove thetears from the eyes of the people, we have done our job".This was said by Nehru in his speech on Tryst withDestiny while quoting Gandhi Ji. This still remains the

beacon for all of us. Therefore, for me, good governance isnothing but ensuring that the quality of life is delivered tothe people of this country without differentiation of caste,creed, knowledge base, and area which he belongs to.Since I also belong to academic area, I spent my time in theIIT, Delhi. I had a chance to look at a curriculum when Iwas heading Indian Institute of Information Technologyat Gwalior, and I was at a loss to look at what would bea curriculum to be taught to students as far as ethics isconcerned. I called a team of people. They came down andsaid that there could be two or three areas which we candwell upon. And you would not believe that all of themhappened to come from such areas as you draw from best

of the religion, do's and don'ts, you take the best of whatthe luminaries have said and lived in their lives, and thatshould be the curriculum. I do not know whether it is aright approach for a curriculum. But looking the way acurriculum should be, and since college is involved interms of doing this exercise, my belief would be that anycurriculum you design for ethical dimensions, whether itis for governance of corporates, or for any other purpose,should be so open which stimulates the mind of the peopleto say frankly and fearlessly what they wish to say. Don'ttry to narrow down the whole gamut of ethics.

There was an Administrative Reforms Commission-IIand there is one volume especially on ethics in gover-

nance. So, it will be naive to go in for more details thanwhat has been given there. To quote what they have triedto define as far as the ethics in governance is concerned,

it says: "Ethics is a set of standards that society places on

itself and which help guide behaviour, choices in actions".They kept on sayingthatthe Commission is painfully awarethat the standards do not by themselves ensure ethicalbehaviour that requires a robust culture of integrity.

When you look at this issue in the way they had gonethrough, it is an eye-opener that how the gamut could beso large. It could cover political way of life, the politics; itcould cover the people who are ready to receive the fruitsof governance, the public at large. Whenever we look atthis ethical issue it appears that you are too paranoid withthe effect on corruption, and whenever this word is spo-ken, we all get too charged up and say that we all areunethical today.

I need not remind that any time in history there havebeen people who were good and there were people whowere evil. And it is the balance between good and evilwhich has made societies to grow. I do not, therefore,perceive that we today are so different than what we were.It is only the perception through which individual looksat and, therefore, it is said that ethics can be universaltruth, can be universal objectives, but ethics can be per-sonal too. The issue only comes up when the personalethical dimensions do not match with the objectives of thelarger interests of the public at large. For example, some-body says that this man has committed a crime, so I havea right to beat him. He is so charged up because somebody

has made a mistake, and he has made such a grave mis-take that I cannot hold myself to beat him up. But in theeyes of the law, both, the one who made a mistake and theone who is beating are culprits. Is this ethical issue? Shouldone be supported by ethical dimensions or not is reallyvery confusing. Therefore, the point I am trying to make isthat we must tread a very cautious path when we look atthe culmination of ethical dimensions with the governance.For example, somebody has committed a crime, inquiry isstill on, but some of the people have already started mak-ing noise that this and this punishment must be given tohim. You must have heard this happening every day thatinaction has been done as part of reaction, but the way

people try to sell today that suddenly a group wouldemerge and become supporter of somebody who, at thefirst level, appeared to be harmed.

To me, the best may not be the right and, therefore, myperceptional behaviour cannot guarantee an ethicalbehaviour of a group of people. For me, it could be verynice that I am a leader of the team and I say that whatevermy team has done is correct and because of the team,therefore, I get the glory. But there is nothing wrong if themember of the team who actually has done somethingsays that I have done this job. Now, you may look at thedimension both ways, I, as a leader, ensure that the creditgoes to whomsoever it should, but there could be some

person who would say, no, since I was the leader of theteam, the team has done the best. So, these are the kind ofproblems one faces almost every day. Let us look at when

D.P. AGARWAL (CHAIRMAN, UPSC)

CONTEMPORARY

ISSUES-I

Strictly for internal circulation (Not for sale)


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CHRONICLE IAS ACADEMY2

it comes to the governance. In the Conference of the ChiefMinisters, which was held in 2003, the Prime Ministerhad laid down three points for agenda.

1. A comprehensive legal framework that is defendedand enforced by an impartial and competent judicialsystem.

2. A transparent executive decision-making apparatus.So, we have looked at the judiciary, now we want the

Executive, the so-called bureaucracy.3. A system coupled with capable, efficient, people-

friendly bureaucracy and strong civil society.That was the agenda which the Prime Minister put to

the Conference of the Chief Ministers. I shall now quotewhat the Chief Ministers said in conclusion. They saidthat if these objectives are to be met, the quality of gover-nance has to be there. They put down three points:

1. Making administration accountable and people-friendly. So, can this become a rule?

2. Ensuring transparency in Right to Information.

3. Improving the performance and integrity of the civilservices.

Now, kindly look at it here that while making thesekinds of suggestions, we have totally forgotten two veryimportant pillars on which ethical dimensions wouldimpinge- (1) society at large and (2) the person himselfwho is being governed. We had a number of changes. Weare very happy when politicians are asked by the ElectionCommission of declare their wealth. Can you understandthe background by which this disclosure issue hasevolved? You remember the Watergate incident in U.S.when President Nixon had to resign, because there existedrules. We still have conduct rules in this country. But thisis not sufficient. What was then done was that under acrisis, some rules and regulations were made and they

were considered to be in ethical frame.Can you understand that an ethical frame which is

based on a crisis may not give you the kind of situationwhich may stand the test to the time? Therefore, this hasto be a little more than the set of the rules and regulationswhich may govern the people who are in the bureaucracy.We have to do a lot of research. For example, in Govern-ment there is a tool to look at the performance of personswho are working, what is called, confidential report. Ithink all of you are aware that this is an instrument bywhich my superior looks at my work, and without tellingme what he has looked in me, writes something which Inever know. That means I have no faith in trying to tell

somebody who is working with me and convince him thatlook this is what you were supposed to do, this is whatyou were supposed to deliver, and this is what I perceivedthat you have done.

Similarly, if I sit down in a selection committee, a can-didate is a gold-medalist, suddenly he comes in front ofthe committee, the committee members are not happy andthey dispose him off in ten minutes time. This gentlemangoes back and thinks "I have been a topper of a greatuniversity and they did not find me useful to be a lec-turer". This dilemma has to be faced so many times. Itbecomes so difficult for a young person to accept that asystem through which I have come, that the people whoare now sitting on other side were my teachers and through

them I got my gold medal, and now they do not find meworthy of teaching and they find worthy of teaching some-body who is much inferior on records than me. Don't you

think it is an ethical damage?

Therefore, ethical dimension does not end there, it endswith the way of life. It is not a religion but it is about doingthings right. It is not only doing things right by yourstandards, it must be doing things right by what societyperceives and the history perceives you to do. For ex-ample, Aurangzeb in his own time must have done whathe thought was the best, but history does not perceive him

like that. So, your actions today may be perceived to besomething different after some time. You, therefore, have tobe very careful in doing and thinking what you want todo. Let us look at what U.S. has done after Watergate.They said we impinge on all of you a few things. As agovernment servant, as people in public life, you will makefinancial disclosures, and I think you all know now theway the financial disclosures are made in this country.What is not written in the Conduct Rules, which addition-ally we should do? It was written in the Watergate thateven gifts of food, lodging, transportation and entertain-ment have to be declared. That means if ethics are to bebrought in by policing, I am sorry that does not work.

Ethics work through compassion, ethics work within you,what you have and your desire to do the best for peopleat large. That is what the dream of the Father of the Nationwas and that is what Gandhiji said.

I shall conclude by referring just one study, again takenfrom an institution from America, called Josephson Insti-tution of Ethics. There are a number of studies conductedby them. I am only bringing one purely because we shouldunderstand where the malaise lies. The study is done bya teacher in a college. People think that by the time thechild goes to university, he is incorrigible and therefore,this study was down in a high school, which is like our11th and 12th. The teacher had given six questions to beanswered in yes or no.

1. In relationships honesty and trust are essential to me.

2. It is important for me that people trust me.

3. It is important for me that I am a person of goodcharacter.

4. I have cheated at least once during the past year.

5. I know someone who has cheated at least once duringthis year.

6. In the real world, successful people do what they haveto do in order to win, even if others consider it cheating.

Students overwhelmingly reported yes to first threequestions and the support was 97 per cent, and 96 percent-no ambiguity. However, almost 60 per cent admitted

to have cheated at least once-an overwhelming majority-and that is the danger. 93 per cent knew someone wascheating but still kept silent. Everybody knew he wascheating, but nothing was said. The most difficult part isthe last question and that is "In the real world, successfulpeople do what they have to do in order to win even ifothers consider it cheating"-atrociously high number!Therefore, all that remains is to win, whether you do byhook or crook. You get your gold medal, you become suc-cessful, you cheat, you copy, and you do whatever youwant. All that matters is to win. I think all of us have tohit that one issue. We want to win but we want to win sothat people remember us. I close by quoting Gandhiji. He

said in 1930 for the teachers that "Your role is not to teach.Nobody can be taught. You have to facilitate a young manto become a responsible citizen of this country."


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The 1947 or 1950 India was a different kettle of fishfrom Britain. The experience, democratic temper, internallevel of homogeneity in culture, language and social expe-

rience, the level of education and awareness of public

affairs were far apart. However, an Idealistic group ofFounding Fathers, led by Nehru had thought that trans-

ferring the British governance system to India mutatis

mutandis, was the optimal prescription for ushering inand maintaining quality governance in India. This was

thoroughly naive. In British India, the Viceroy and the senior

functionaries (the ICS) enjoyed nearly untrammeled power;they were given a mandate, which they discharged indeed

with extraordinary efficiency. Thus apart from the guid-ance of the Viceroy or the Governor, as the case may be,there was no immediate political supervision over Secre-

tariat, District and field level functionaries. The control

strings from Whitehall had a long lead, and were rarelyexercised. The district magistrate was the 'king of all he

surveyed'. The internal checks and balances in that sys-

tem came from the quality of the men who ruled India, thespirit of sacrifice and missionary zeal displayed by them.

These fundamentals were lost on our founding fathers.The remote Whitehall control was replaced by immediate

home grown domestic control, at all levels from the tehsil

to the District to the State Secretariat, to Delhi. Nobodyenvisaged in 1950 that the local MLA will issue directions

to the district magistrate (frequently for party politics or

monetary considerations); or that Sub-inspectors of policewould be transferred and posted through a computer in

the Chief Minister's office on the bidding of a local politi-

cal goonda, who finds a particular functionary blockinghis path. Suddenly, the rules of the game completely

changed without notice; a whole new set of domestic

politicians rose to the task of detailed micro-managementand local control of the state apparatus, treating them-

selves as the direct operational bosses over the permanent

executive. No doubt this phenomenon took about threedecades to unfold, but the seeds were sown in 1950.

The blunder of that time related to the non-creation of

strong internal and external checks against the politicalclass. Nehru, the idealist that he was, implicitly believed

that all politicians would be in his image, self-less, de-

voted, self-sacrificing, public-spirited and noble. Contrastthis with the way the Founding Fathers in US - the

Washingtons, Jeffersons and the Franklins built in safe-

guards within the system, shrewdly recognizing that vastpowers given to members of the executive will lead to

excesses, unless checked with controls at every step. Thisunderstanding of human nature is really what distin-guishes the Western administrations from what we have

now in India. In the decades after independence, the poli-tician slowly started recognizing his own inherent pow-ers, and finding nothing to stop him has turned into a

greedy monster, gobbling up everything in the way.

It is critically essential to understand this fundamental

point before any reforms can be attempted. This failure of

our founding fathers, who otherwise gave us a fine docu-ment, is the fundamental basis of the difficulties the na-

tion has been put through. Indeed I surmise that if we had

been adequately cautious in 1950, today India would beranking with the best powers in the world in terms of

strength of economy and polity. The only question now is,

can the political system be reformed?, can the politicalclass reform itself - can it devise checks and balances to

guide itself? In Indian experience, no institution has

achieved excellence through self criticism, self regulationand ruthless adherence to standards. Even today the po-

litical class does not see the need for internal reform of

politics - no political voice has been heard to articulatethis thought. This is the true measure of the nation's de-

spair. This is also tragically the reason why the future

seems bleak.

Fall in Probity Standards - Licence to loot

In the first two or three decades after indepen-

dence, the level of integrity among the politicians wasmuch higher than we have seen in later decades. Indeed

the best among the legislators were entrusted with the

responsibility of ministership. Thus in the Cabinets ofNehru, even coming down to Indira Gandhi period, gen-

erally ministers were men of some integrity; many of them

quite scholarly, well-versed in rules, and sufficiently expe-rienced to be able to command the respect of the senior

officialdom. For instance, Sardar Patel, the first Home Min-

ister, was a commanding personality; indeed many hadfelt that the path India took after independence could have

been even more fruitful, had history entrusted him with

the responsibility of leading the country, and had he doneso for a decade or so; there is no point crying over spilt

milk. One can recall many others, the likes of Jagjivan

Ram, C. Subramaniam, R. Venkataraman who controlledtheir ministries with knowledge, understanding, acumen,

and panache - their contribution in setting the initial path

in the country has been invaluable. Similarly the stateswere lucky to have towering personalities as Chief Minis-

ters - Gobind Vallabh Pant, Dr. B.C. Roy, Kamaraj are

among the many who spring to mind - it may be men-

tioned that Kamaraj was hardly literate; he could stillhave the understanding and acumen to have made a last-

ing mark both at the state and centre levels.

GOVERNANCE INPOST-INDEPENDENT INDIA

T.S.R. SUBRAMANIAN


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Alas, there has been a general decline in all standards,

particularly in terms of the integrity levels as well as abilityof ministers from about the 70's. Many observers have

linked this overall decline in standards to the time of

Indira Gandhi's declaration of emergency, and the deci-mation of 'institutions' - indeed as one wag put it, what

was started by the father was 'finished off' by the daugh-

ter! Be that as it may, the reality is that standards in publiclife declined sharply from about that period - the overall

quality of ministers, both at the centre and at the states

was no exception.

The principle of collective responsibility of the Cabinet

demands that all members take interest in all decisions,and the final decision taken is a collective one, even when

the matter pertains to one particular department. This is

the theory part; however in practice, where the matterconcerns only one department, no one in the rest of the

Cabinet usually takes it up for discussion or comment -

the matter is entirely in the province of the minister con-

cerned. Similarly where the matter concerns say two orthree departments, so long as there is agreement between

the ministers concerned, the other members do not raiseany issues. While this is per se not a bad working prin-

ciple, there is also undue room available to each minister

to usher in changes to suit individual parties or groups,for a consideration, without any comment or opposition

from his colleagues. Indeed, whenever such individual

cases come up, it is cleared without comment, everyonerecognizing the benefit accruing to the minister, at the

most with a nod or a wink. Naturally this courtesy is

mutually reciprocal; every minister benefits through such

an informal arrangement. While such a thing is going on,the other ministers look casually unconcerned, while in-

deed they are following the game with some interest. Therecent 2G scam has indeed provided an example of this,

concurrently demolishing the principle of "collective cabi-

net responsibility", and simultaneously ushering in a newphony principle of coalition Dharma.

It needs also to be mentioned that ministers usually

locate staff officers or personal assistants to function asthe conduit for the gratification that they demand in most

instances. Most people in the business world, with mini-

mal effort, could locate the dalals or the conduits, to trans-

act business with the minister - this is a fairly well knownphenomenon in every state government; though this is

done with greater delicacy and finesse in the Governmentof India.

The Higher Civil Services

If I were to dispassionately nominate one institution

which has held the country together in the first 60 years

after Independence, and contributed most to its progresstill now, my choice would be the 'the higher civil services'.

The contribution of the higher civil services and the higher

judiciary to the nation has been incalculable. We havealready seen how the political class has acted as a preda-

tor. The lawyer class played a significant role in our in-

dependence movement, but in the past 50 years or so they

have probably not contributed to nation-building. Theprofessional classes - the doctors, the engineers, the ac-

countants have played their role, in a limited way. As

regards the business community; suffice is to say that theycan hardly take any credit for the growth of the nation,

despite some bright spots. The higher judiciary in fact has

played a key role in nation building - notwithstanding theweaknesses or the major acts of omission by the judiciary;

but the role of the higher judiciary in continuing to uphold

the concept of 'rule of law' in the country has to be ap-plauded. While the role of the judiciary is in full public

view, by definition the role of bureaucracy is played out

silently, behind the scenes, almost anonymously.

There is no question but that the esprit de corps of the

services has vanished; its lan a thing of the past. Indeedthe higher civil services are now seen, especially in urban

areas, with a sense of ridicule and even pity. To some

extent this is well deserved, and has been wrought on

themselves by the members of the services. However, eventoday, if one travels to districts and other rural areas, the

IAS collector or district magistrate, is looked up to by mostcitizens as a bright, effective, and respected representative

of the government. While the public may talk loosely about

corruption at the level of the clerks in the collectorate orin the tehsil office, in general the district magistrate is even

today highly regarded, spoken of with a sense of awe and

is a role model for the youth of the district. He may not bethe 'king of all he surveyed' of yore, but still plays the key

role in holding the district administration together. His

freedom of action has been seriously impaired in recent

years, with the henchmen of the state's political leader-ship looking over his shoulder; however, most district

magistrates still manage to carry themselves with dignityand are highly effective.

We see this dichotomy that the best young men and

women of India join the civil services; you look at eachentrant 20 years later - he has lost his integrity; at least his

intellectual integrity has gone, and in many instances this

is so in the financial sense also; he has transformed him-self from a 'public' servant to a 'private' servant of one

politician or a party or generally to the political class;

either this is his profile, or - he has lost all motivation, he

is apathetic, and has turned himself into a file-pushing'babu'. The above two categories, sadly, describe most of

these bright young men. Why has this happened? Howhas this happened? More often than not a civil servant is

enticed or pummeled to submission; inducements, blan-

dishments, threats and victimization used as weapons totransform the honest civil servant into a conforming robot,

devoid of morality. The well-orchestrated instruments in-

clude irrational frequent transfers (from one station toanother station causing great inconvenience), adverse

annual performance entries, special adverse 'character roll'

entries, harassment through false inquiries, physical threatsor physical attacks, on the one hand; and on the other,

inducements to join the game as a hunter and partaker of


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the spoils. Sadly, many of the middle-level officers, with

growing children to educate, elderly parents to look after,cannot bear the constant pressure, and buckle; they either

switch off and become irrelevant to the system, or they join

the politician, and all is well thereafter! This is true, ingeneral in most situations, in practically every state of the

country. Unfortunately, it is increasingly true also of the

government of India.

The question has been asked as to why the higher civil

servants, who enjoy job assurance and 'status' in society,should buckle to political pressure. This is a legitimate

question. I would blame, to put it bluntly, the weak-kneed

lack of spine shown by the senior-most officers of the 50'sand 60's, who did not stand up to take principled posi-

tions; allowed the first predatory inroads to destroy their

ability to work autonomously. Perhaps this is a harshassessment; however, I do believe that the equations were

set in the 50's and 60's; it was not possible for senior and

junior officers in subsequent decades to battle against odds.

The initial blunder was committed when our constitutiondid not define the relationship between the political ex-

ecutive and the bureaucracy; the relationship was to bedefined in practice, as expediency and experience unfolded.

Alas, the earliest administrators in the post-independent

era could not appreciate the responsibility they carried ontheir shoulders; for petty rewards they curried the favour

of the political class and surrendered their positions.

In a democracy the citizen is the most important entity;

his representative viz. political executive is the undisputedboss; the civil servant has to work clearly under the direc-

tion of the political executive. Having stated this, what are

the terms of engagement between the civil servant and thepolitical executive? What are the relations between the

District Magistrate and the MLA or MP? In a private listed

company, clearly the CFO is subordinate to the CEO. How-

ever, is the CFO required to collaborate and pander to the

not-so-legitimate needs of the CEO, who may represent the

owner and may be interested in swindling the company

for private gain; the situation can be multiplied. There are

defined norms for every functionary of a company in this

regard. There ought to be similar norms in the relationship

between the political executive and the civil servant. There

was failure by the earliest civil servants in the post-inde-

pendent era to establish healthy, transparent and effectivenorms, with appropriate counter checks, to define an

efficient relationship contributing to the public weal. From

the point of view of the civil services of later generations,

this has been a major factor leading to the ineffective-

ness, indeed paralysis, of the public services as they

stand today. We have also seen, how the concept of 'com-

mitted bureaucracy', introduced by the political executive

in the mid-70s, played havoc with the higher civil ser-

vices over the next decade or so. These two phenomena,

the role of the higher civil services in the 50s and 60s, as

well as the concept of 'committed bureaucracy' can behighlighted as the landmarks in the process of the col-

lapse of the Steel Frame.

Administrative Reforms

A large number of administrative reforms recommen-

dations have been made over the past two decades. Start-

ing from the Appleby Committee, followed by theSantanam Committee and many others at least 35 or so

over the years. Some time in the 80's, the Jha Commission

was specially constituted as an ongoing body to make

recommendations for administrative changes. VeerapaMoily has chaired one such body in recent times. By and

large, Moily's prescriptions are palliative and localized innature, tinkering with this aspect or the other, probably

correctly. However, the fundamental flaw is the failure to

recognize the basic malaise and to boldly suggest a cure- what else can you expect from a political spokesman of

the ruling party - clearly his credentials are suspect for

this assignment. Other committees have focused on as-pects of reform, including review of secretariat procedures,

reduction and rationalization of government departments

and government staff, and the like. Many state govern-

ments have also had their own commissions and commit-tees recommending changes.

There is a common thread to all the problems of gov-

ernance confronting the nation. This has been the vice-like

grip of the political class on every aspect of national af-fairs, this is the common denominator. This fundamental

has to be recognized before any reform is thought of, or

undertaken. Most recommendations from reform commit-tees and commissions ignore, or slur over this aspect, and

give 'technical' recommendations for reforms. While these

may be necessary, or even essential, the fundamental re-form has to do with the isolation of politics from all imple-

mentation aspects. Unless this is done, we simply have to

wait till the system follows its current logical path, andcollapses under its own weight. At that stage we may

have to search for a new Constitution - indeed one that

may be imposed on us.

In a democracy, politics is essential, and will play arole. The political executive will be at the helm of affairs.

However, it must be clearly understood that the legislatoris part of the law making machinery - he is not an execu-tive or implementer. Any intervention by him in the imple-mentation process amounts to exercise of authority with-

out responsibility and accountability. This is a fundamen-tal change in attitude and approach the political classneeds to make; and which alone, can lead to a discussion

of the reform process. If this bridge is not crossed, weshould be practical and make the most of what we can -devil take the hind most!

No one questions the crying need for reform of the civilservices. The IAS and other services stand aloof from the

problems of citizens. Politicization of the civil services hastaken deep roots. The level of corruption in many civilservices has reached alarming levels. The morale of thecivil servants themselves is low, be it at the centre or in the

states. Groupism is rampant. Some even ask whether thetime has come to abolish the all-India services.

What is needed is reform, not scrapping the system.


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Civil servants should be enabled to perform with freedom,

efficacy and accountability. For this, one should reach outto tackle the core problems, not just tinker with peripheral

issues. The necessary political will has to be summoned

if such a thing were possible, to tone up and cleanse thecivil services.

The core problems afflicting the civil services stem from

larger political causes, relating to unstable governments,and an insecure political executive exploiting the public

servant for narrow personal ends, as well as a flawedelectoral system, where money power plays an inconsis-

tently large role. Politics having become the most lucrative

business in the country, with few checks and controls,there is compulsion for the minister or political leader to

tempt or coerce civil servants to collude with him for mutual

benefit. The service rules and procedures have been pro-gressively adapted to facilitate this process. Frequent trans-

fers, ministers hand-picking the officials to work with them,

and sidelining of efficient but honest officers are common

now, specially in the states and increasingly, in the Cen-tre. An array of weapons is used: arbitrary transfers,

control over the annual character roll entry, and unleash-ing of departmental inquiries to keep civil servants off

balance and submissive, prodding them to collusion.

These are the key issues which need to be addressed, fora meaningful reform.

The Hota Committee's recommendations for reform of

the civil services has to be seen in the above context. Thereport is said to be under scrutiny of another committee in

the cabinet secretariat. The recommendations are gener-

ally unexceptionable; whether they are implementable is

another question. The weakness of the Hota report, as ofmost other earlier reports, relates to non-recognition of the

deep interface between our political process and the rot inour administration. This issue cannot be solved till there

is reform of the political process itself. Mere change in the

technical aspects would only have cosmetic impact.

Stable tenure in postings is one long-standing recipe,

forming the core of all previous Reform Committee recom-mendations, and reiterated by Hota. But, will the political

masters, especially in the states, allow officers to complete

a full tenure of three or five years in a post? The lucrativetransfer industry flourishes in most states, and generally

yields two crops annually. What will stability of tenure

do to the pressure groups and vested interests in everydistrict? As governments come and go with regularity at

relatively short intervals, won't the new minister want his

own man? Will he trust a man appointed by his predeces-sor? The other significant suggestion of Hota is that the

corrupt officers should be thrown out and their illegally

obtained properties confiscated. But, who will bell the catwhen the masters themselves are corrupt? And how does

such peremptory action tackle the problem of enquiries

themselves being rigged to persecute honest officers?

The national media has recently high-lighted some ofthe proposed steps towards reform. These include recruit-

ment age, selection process, use of specialists and some

others. Contrary to popular belief, the civil services still

attract talented individuals, some of the best available inthe country. That they become supine, listless, self-centred

and carry a negative attitude is substantially a part of the

baggage that they acquire after entry, and should not belaid at the doors of the recruitment policy. It is a failure

of our system to utilize properly the civil services. Indeed,

there is great demand for the services of retired senior civilservants in the open market, whose services are sought

with great alacrity; which is one index of their quality. The

cynic would say that this is merely due to their 'liaison-role' potential; while this is partly true, the larger reality

is that there is genuine need for their services, largely

stemming from their ability and experience.

However, there is still a strong case for reducing the

maximum age of recruitment to 24, which would im-

prove considerably the quality of intake. I once heard adirector of the IAS training academy at Mussoorie mutter,

"how can I mould the attitude and character of a fresh

recruit, when he is already a grand father!" We shouldnot however swing to the other extreme to try to "catch'em

young", by recruiting potential administrators as they

leave high school. After all, we are not recruiting poten-tial athletes for the Olympic games. Most children leav-

ing high school do not have sufficient maturity to make

up their minds if they wish to be lifelong administrators,to the exclusion of so many other professional opportu-

nities now open to them.

There is the other suggestion, sometimes seen in the

papers, to replace the present selection board for seniorposts with "outside experts". There is no harm, and indeed

there will be benefit if suitable outside expertise is utilizedin personnel management. But to replace the present selec-

tion structure with a brand new process transplanted fromoutside will do more harm than good. If we do not trustour own senior most management echelons, who know

our own senior personnel well, how do we expect strang-ers to the system to do this job better? This is not a taskthat can be outsourced - there will be higher costs andquality will not improve. Here again, we are barking up

the wrong tree. The malaise is not so much in the interpre-tation of the annual character rolls of the personnel, aswith the very process of writing the annual remarks in

respect of each officer, by his own bureaucratic and politi-cal superiors. That is the core of the problem that needsto be addressed.

The specialist vs. generalist debate is perennial; it re-

surfaces periodically. I have seen a chief of the ElectricityBoard, an excellent engineer who managed his power

plants and transmission systems extremely well, totally

clueless in matters relating to power policy. I have seen afirst rate irrigation chief engineer taking over as Secretary

of the irrigation department and floundering from day

one, on administrative issues. On the other hand, I haveseen scientists, long abdicating their scientific work turn

into fine administrators and policy makers. I have alsoseen IAS secretaries, with excellent reputation, unable tofind their feet in alien departments. My own experience is


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that there is no hard and fast rule in such matters. I believe

that at present, roughly half of the jobs at the level ofsecretary in the government of India are held by so called

"specialists" and the other by all-India service officers.

This is not a bad balance really. I have found that thesuitability and background of each officer for a post is

more relevant than his label. Certainly I would hesitate to

place any officer at secretary or additional secretary levelin any department unless he or she has had some previ-

ous exposure to that or an allied department - one gets no

time to learn the basics at that level.

If we have to face the reality of our existing milieu, the

key to quality governance lies rather in concepts like trans-parency, opening up of the economy, fewer regulations

but strict enforcement, larger role for NGO's and less gov-

ernment in general. In any event, if core issues cannot beaddressed for political compulsions, there is no point tink-

ering with the periphery. Reform of the political class will

automatically lead to reform of the civil services.

All recent efforts at administrative reforms I have seenare narrow technical exercises which miss the basic fact

that the civil services are only an instrument, as good ashow the wielder of the same wants it to be. To be only

slightly overly-cynical, most ministers at the center and

the state, want only collaborators to aid their own self-interest - they do not need administrators. Any reform

will have to take this central aspect into account. Tech-

nical reforms through enactment of a Public Service Law

or amendment of the all India Civil Services Rules etc.will have little impact, unless there is a political consen-

sus that a sharply improved and independent civil ser-

vice is essential for good governance; good governanceincidentally is imperative for removal of poverty and

provision of education and public health, and so on. All

of this will be a pipe dream till we reform our politicsand the politicians. Does Anna Hazare portend the be-

ginning of a new dawn?

In the ultimate analysis, it is the quality and moral

fiber of the people who govern us that is the most critical

determinant. In any system, if the top is uncorrupted, clean,public spirited and efficient, that system will furnish good

governance. Merely changing the system is not going to

change anything, unless we prescribe genuine checks andbalances and expect and get highest standards of probity

at senior-most levels. It is not sufficient for a prime min-

ister to be personally honest while his other ministers

make hay at every sunshine. There is no magic formula toproduce men with probity at the top.

Our political class, unless it reforms itself seriously andcomprehensively, is now turning out to be unfit to govern.

Will they take heed, make the necessary course corrections

and at last play the role envisaged for them? Will the publicwake up at some stage and force them to do so. Will the

Anna spirit triumph to clean up the whole system?

vvv


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I. Introduction

In the present times, the quality of life of citizensdepends crucially (not solely) on the role of governmentand the quality of its governance. This is even more truein the case of developing countries, like, India where alarge number of people are marginal to the market and itsprocesses. In India, the larger picture is deeply vitiatedwith vast numbers living in fairly primitive conditions,reflected in its low ranking in some key social sectors.There are any number of things that are wrong with oursociety and the nation so one can ask whether they allhave a common cause or are they all different phenom-enon that have to be separately understood and remedied?For instance:

1. Conditions of existence for a vast majority of thepeople are deplorable.

2. Poverty remains at high and unacceptable levels anddisparity is increasing.

3. Corruption is rampant.

4. Institutions of democracy are under severe stress.

5. Environmental degradation is getting worse, and,

6. Criminalization is increasing and terrorist/Maoistmovements are spreading.

There is something drastically wrong for so much tobe wrong 60 years after independence, so, focusing onthe smaller or individual aspects of the problem seems tobe pointless - that may only result in non-solutions andnon-viable policy options. Hence, in this paper, the focusis on the lager picture to identify the common causeunderlying all this.

When thinking about government and governance,crucial to society's well being, we need to ask ourselves,what is the meaning of a Law or a Policy? Should it beseen as it is formulated on paper or as it functions insociety? Clearly, in India, there is a substantial gap be-

tween the two. This gap represents society's and the state'sinability to implement its will. This gap needs to be under-stood but this is not possible in purely economic terms.

Most economic models trying to capture such com-plex phenomenon, like, the black economy are not veryrelevant because non-economic factors are perhaps moreimportant (like, honesty) but are ignored in most eco-nomic analysis. There is a methodological problem whichneeds to be resolved.

This paper looks at the larger issues involved in theunderstanding of the efficacy of economic interventions bythe government in the shape of regulations and controls

for social functioning. The problem is situated in the con-text of the state and the failure of policy so as to providean analysis of the poor governance and the tremendous

ISSUES IN GOVERNMENT INTERVENTION,BLACK ECONOMY AND GOVERNANCE IN INDIA

ARUN KUMAR

waste and inefficiency in the country. It will help under-stand issues related to the retreat of the state and thelikelihood of the success of New Economic Policies. It isclear that today these issues cannot be understood with-out taking the black economy into account so this issuewill be centrally located in the article.

The issues listed above, having a historical back-ground, are rooted in the current politics and have aninstitutional setting. But, usually, the analysis of the blackeconomy, governance and illegality is ahistorical and apo-litical (Allingham and Sandmo, 1972 or NIPFP, 1985). Thepaper tries to rectify this failing. Finally, it presents an

outline of possible solutions to the problem.

II. Need for Government Intervention in the Economy- the Political Economy.

A. The Political Economy of Government InterventionWhy is the government held responsible for the mess

that exists? Implicitly it is accepted that a) governmentintervention is essential in an economy and b) individualscannot obtain many of the essentials of a civilized exist-ence on their own enterprise and initiative. The directionof a modern day economy is set by the macroeconomicparameters and what the individual can achieve dependson that so any failure can be laid at the doors of the

government. At the macro level the government is inescap-able. Government intervention in the economy may takemany forms, like, investment, development, controls andregulation. In economics there are two overarching viewsregarding the need for government intervention in aneconomy - a macro and a micro view.

1. The Macro View: Resource Creation

A nation has a given resource base at any time. Foroptimum growth these resources have to be mobilized andutilized optimally and this can not be done by individualsin isolation. The government is needed for achieving the

optimum. This is the macro view.The world economy went through a deep depression in

the late Twenties and the early Thirties. To get out of it, aftertrying various traditional approaches, it was realized thatgovernment intervention was essential to take the economyout of a depression. Roosvelt introduced the New Deal inthe USA in 1934. He initiated massive public expenditureon infrastructure to boost demand. At the same time, Keynesin England and Kalecki proposed their theories of boostingdemand through government intervention. All this gave afillip to the idea of the welfare state.

The government was given an active role in boosting

the growth rate of the economy and the building up of thesocial and physical infrastructure (like, health care, high-ways and railways). This led to a liberal view of the state


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and it got involved in affirmative action and mitigatingeconomic hardships, like, unemployment, both throughcreation of jobs and through payment of dole when therewas unemployment.

2. The Micro View: Market Failure

The micro view, is based on the neo-classical under-standing that an economy faces market failure and thegovernment is required to take the economy to its optimumlevel (Pareto optimum frontier). When there is market fail-ure, the economy when left 'free' gets stuck at a sub-opti-mal level. Only government intervention can take theeconomy to the optimal point. Further, the markets bythemselves fail to achieve the socially desired level of equityso the government has to intervene for this reason as well.

In brief, both the micro and the macro views suggestthat to achieve optimality, there is need for governmentintervention in the economy. In India, given the level ofpoverty that prevails, most are by and large not able totake care of their economic needs in a market situation so

that government intervention becomes necessary. Not justin India, following this kind of understanding, the worldover, government intervention has increased right throughthe twentieth century (Kumar, 1999: 294).

3. Notion of 'Free' Markets

The traditional neo-classical theory does not suggestthat markets be left 'free'. In fact, in the construct of themarket there is nothing like a 'free' market.

A market is an institution for the exchange of goodsand services. Exchange is via an explicit or an implicitcontract. There has to be an agency to enforce the contract

when there is a dispute amongst the parties to the con-tract. This is the role the government has played. In brief,there cannot be a market without a government so thatthere is nothing like a 'free' market; free of the government.

Where does the notion of 'free' market emerge from? Inthe neo-classical tradition a distinction is made betweenthe 'first best' and the 'second best' theories. In the firstbest theory the government only need intervene where themarkets fail and the rest can be left to the device of themarket to achieve optimality. But this is a hypotheticalsituation since the world is not first best but second best.In the second best when one market fails then all the

markets tend to fail so that they need to be taken over toachieve efficiency. Thus, in a more realistic situation, theworld is much more complex and 'free' markets do notwork by themselves to achieve optimality.

Governance is the broader aspect of societal function-ing and administration is the instrument society uses tocarry out governance and is controlled by the state. How-ever, often governance is used more narrowly as signify-ing the conduct of policy and the affairs of the state. Stateintervention has gone through different phases. There wasthe time from just before the World War II with Roosevelt'sNew Deal when government intervention started being

positively viewed and the Welfare state emerged. Then inthe next phase, from the late Seventies, Reaganism andThacherism became the ruling ideology with the under-

standing that the state should retreat and the marketsshould dominate.

B. Globalization and the Strategic Retreat of the State

The neo-classical understanding was supplemented byanother neo-liberal philosophy in the late Seventies thatpolicy also fails to deliver so the government should inter-vene little and the markets should be left alone. This hasled to the idea of the strategic retreat of the state, namely,the government should do everything to help the marketfunction (this form of intervention is legitimate) but retreatfrom all other forms of economic interventions.

The advent of Reaganism and Thacherism in the USAand UK in the early Eighties marks the beginning of thephase of strategic retreat of the state. The decline of theSoviet system in the early Eighties and the weakening ofthe Third World because of a loss of an alternative at theglobal level added to the world wide pressures to move inthe same direction. Economic Globalization has meantadjusting to the structures in the dominant economies and

the deeper penetration of markets into social relations. Thepressures from the IMF, the World Bank and the WTO areall in the same direction.

Global capital desires to have the freedom for itselfand does not like those forms of government interventionin the economy that limit its scope. It is using globaliza-tion to capture markets and expand itself. Where thestate comes in the way of that, it must retreat. IMF'srequirement of a reduction in the fiscal Deficit whilecutting taxes for the well off is a recipe for reducing therole of government in the economy (Kumar, 1994 a). Notthat public sector units cannot be efficient but the prin-

cipal problem for capital is that if the public sector op-erates in some areas, it creates difficulties for the entry ofthe private sector in that area. The size of the marketdecreases and the chance of making super profits de-clines (Kalecki, 1971). Hence the moves for theprivatization of the public sector. The markets in Indiaalways respond positively to the news of privatization ofPSUs. Often these units are obtained at throwaway prices,like in Russia in the Nineties and yield large profits tothe buyers.

For instance, if there are first class public hospitals(like, AIIMS in Delhi) then the private hospitals find it

difficult to charge higher prices. When public hospitalsdeteriorate in quality, the demand for private hospitalsrises. If there are first class Universities and IITs, a cutbackin their funding threatens their quality so that they eithercome under private sector influence or private institutionscan come up.

Under globalization, nation states are competing witheach other to attract global capital. For this they are com-petitively offering concessions and losing control overtheir resources. In India, this led to the fall of the tax-GDP ratio after 1991 so that the government's capacity tointervene in the economy is dented (Kumar, 1994a). In

the process the States have less control over their re-sources and the government has to retreat from theeconomy (Kumar, et. al., 2005).


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In spite of the strategic retreat of the state, theworld over since the late Seventies, the most importantactor in any economy remains the state. In spite of thegrowing domination of the MNCs and the impression thatthey represent supra-national entities, the nation state isa reality. Its sovereignty may have been dented but mostof its elements remain intact. For instance, in WTO disputesettlement mechanism, it is the nation state that can ap-

peal and not an MNC. The MNC has to be rooted in anation to protect its interest. Mr. Lakshmi Mittal appealedto Indian government in the Arcelor merger case and Enronfraud detection and prosecution took place in the USA. Inthe literature, the idea of the retreat of the state is supple-mented by the notion of the minimalist state.

C. Notion of the Minimalist State

The quality of government intervention depends on itscapacity to govern which in turn requires an instrumental-ity, the administration. The effectiveness of a state dependson the quality of its governance. A state may attempt a lot

but if governance is wanting, it will achieve little.It has become fashionable to propagate the idea that

'that government is the best which governs the least'.This is taken to mean that the government should inter-vene in as few areas of social activity as possible andhave as few rules as possible. It is taken to imply strate-gic retreat of the state.

The above mentioned phrase can be interpreted ratherdifferently. It goes without saying that government shouldbe where it is needed and not (unnecessarily) where notrequired. The question is who decides where it is needed?If a builder is asked she/he would argue that there be no

zoning or building by law. However, no sane citizen wouldwant unplanned cities (like, Indian cities have become)and buildings of poor quality (such as those which col-lapsed easily in Kutch and Ahmedabad in the earthquakeof 2001). There has to be a social consensus on thesematters. It cannot be decided by a ruling clique alone.

However, the important thing is that whatever be therules and regulations in a society they be voluntarily fol-lowed. This minimizes the need for administrative action.A policeman cannot be posted along with every citizen tosee that no illegality is committed. The larger the numberof citizens who voluntarily follow the law, the fewer the

number of regulators required and more efficient the ad-ministration. It is in this sense that least governance shouldbe used in that phrase. In the sense of voluntary compli-ance and the need for least government action. It does notmean that even where government is needed it shouldabdicate its responsibility to the citizen, like, in educationand health or poverty removal. It should not be an excusefor the retreat of the state.

There is no doubt that for the effective functioning ofa society, most things in a citizen's life should be self-regulated. For this, society needs norms which should bewidely acceptable to the citizens. For good governance, the

citizen needs to be committed to the rules and policies andto the tasks set by the government. This requires a consen-sus over policies, otherwise violations occur. For volun-

tary compliance with rules, citizens need to believe insociety and should not be alienated from it. Thus, existingalienation of the citizens needs to be countered. Whenthere is alienation and the citizen behaves like an automa-ton, incentives are the motive for action/work. Under thecircumstances, if breaking rules gets greater gains thenthat would become the ruling norm, like, in India (See,Alingham and Sandmo, 1972 in the context of tax eva-

sion). Thus, a vicious cycle of crime and punishment buildsup. Voluntary compliance through commitment to societyis the only solution. This is what Gandhi believed in.

For voluntary commitment to society, citizens shouldfeel that there is social justice. Thus, norms of public ac-tion and functioning have to be very high. Not only should

justice be done but also seen to be done. Social justicerequires the system to be transparent and accountable sothat it appears to be fair and the citizen can trust it. Thepolitical and bureaucratic classes in India have used theclassic British ruling class technique of divide and ruleand opaqueness.

With weak transparency, accountability and socialjustice, commitment to society is suspect and thereforegovernance tends to be weak. The government apparatuscontinuously expands and even then policies tend to fail.This brings about a sub-optimal state of society. Retreat ofthe state to cater to the idea of the minimalist state canthen only be in favour of capital which gets the freedomto do what it likes and at the expense of the rest in thesociety.

D. One Way Globalization and Administration in In-

dia

The present phase of globalization may be characterisedas one way globalization since India has little influenceon its direction. India is adjusting to the economic influ-ences as emanating from the advanced economies. In theprocess, there is loss of control over policies (Kumar, 1996).Policies have to be adjusted to what is required by theglobal markets even if that goes against the interest of avast majority of Indians (Kumar, 1994a). This is hardly therecipe for getting social commitment of the citizens. Poli-cies are increasingly being determined by external factors.Government has become less responsive to the needs ofthe citizen on the ground that it has to fulfill international

obligations or attract capital. Our administration has comeunder increasing influence of foreign agencies. This phe-nomenon has markedly increased after 1991.

With the weakening of the idea of the nation, setting ofthe national agenda by outside forces and atomization ofthe individual under the growing influence of the markets,the individual's commitment to the nation has also weak-ened. This is also true of the individuals in administra-tion. Thus, many in administration are today serving theinterest of the private sector or of foreign agencies. Manyof the children of senior bureaucrats and politicians areworking for MNCs and foreign agencies and a quid pro

quo is suspected. Bureaucrats and personnel of defenseforces after retiring (or taking early retirement) serve theprivate sector and other agencies. For enabling this to


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happen, a nexus is developed before retirement.

Such a shift in the agenda of those in administra-tion has wakened acceptability to people and society andtherefore affected governance and administration. For thealienated ruling elite, progress does not mean one moreprimary school in Bastar but it stands for, say, the nexttrip abroad or sending their child for education abroad.The elite's emotional attachment with the nation hasweakened and with that the commitment to nation build-ing. This underlies policy failure.

III. The Cause of Black Income Generation: Illegality

Around Laws

The black economy represents the size of illegality insociety and is the principle cause of the failure of policiesand the inability of society to deliver to the citizens (Kumar,1999). Since the black economy is significant and hasserious macro economic consequences for society, it fol-lows that action is needed to curb it. To act, the cause(s)of the problem needs to be identified. As with other as-

pects of the black economy, there is confusion here too.Often, if black incomes are found to be generated in someactivity then this activity (source) itself is taken to be thecause and the solution suggested is to eliminate it (source)(NIPFP, 1985 and Gupta, 1992). Say, if a tax is evaded togenerate black incomes, that tax is taken to be the causeof black income generation. Obviously, if that tax is elimi-nated, it cannot be evaded. Can this be a solution? Theexistence of laws cannot be the cause of their being vio-lated (Kumar, 1999). The cause lies elsewhere.

Clearly, when those responsible for maintaining rulesviolate them or are indifferent to them, there is a feeling

of injustice leading to increased conflicts and difficultiesin social functioning. This is also the case with the blackeconomy. Rules or having too many of them are not thecause of their violation. By eliminating roads or rules orthe police, the problem is not resolved, society becomesworse off.

Scams and corruption cases are hardly ever resolved.In the Bofors case, it is clear that money was made butyears after it was unearthed, formally it is not known tothis day who made the money. Businessmen, politicians,bureaucrats and the investigation agencies all know thathavala channels are active in India. But, the Jain case

(1991) has ended without prosecution even though at leastone politician admitted to having received money and acolleague of another admitted that he received funds forthe party. Evidence was found that it was also used tochannel funds to terrorists. The state seems unconcernedabout its own rot and the ruling group incapable of actionin their own self interest. The cause of the existence of theblack economy is at once both simple and complex, in-volving the entire system.

In brief, existence of laws is not the cause of their beingviolated. The cause lies in the growing sense of socialinjustice in people, poorly designed rules and indifference

amongst the law makers to the implementation of the lawsso that they can themselves get away with their violationfor their own ends.

1. Laws, Social Needs and Black Economy

It is widely believed that controls and regulations areresponsible for the generation of black incomes (NIPFP,1985). It is popularised by the terms 'license quota permit'raj or the inspector raj. Kabra (1982) saw the issue as apart of the wider drive to 'remove controls reduce taxa-tion'. He has stated that "controls and taxation are neces-

sary to curb certain activities in the economy. They them-selves by no means create or help black economy. It isillogical to hold the laws governing economic activitiesthemselves as constituting the reasons why people violateor evade the laws" (p. 162).

While the distinction between controls and regulationsare not sharp, one may distinguish controls as economiclaws that limit an economic activity while regulationsmay be thought of as laws that define the way an eco-nomic activity is to be carried out. Even though in theliterature a distinction is drawn between controls andregulations, here no such distinction is drawn. They are

treated as economic laws.That controls have a history needs to be stressed.

Uncontrolled speculation or price fixing by industry andtrade has often resulted in public pressure on policy toinstitute controls. For instance, there have been demandsfor controls on the functioning of the share market or theprices of onions. With the growth of the black economyand opening up of the economy, the potential for unscru-pulous manipulation of the markets has grown. Controlsand regulation in many instances have been demandedeven by industry and/or trade. George Soros, the highpriest of international finance, has been demanding con-trols on international capital flows.

In India regulations and controls need to be under-stood in the wider perspective of the nature of the state.Policies designed to achieve wider national goals (like,equity) have not met with national consensus (more soamongst the ruling classes). Consequently, sectional inter-ests have viewed policies either as so many impedimentsto be overcome or as tools of economic gain. The blackeconomy emerges as the natural corollary of this processof subversion of national policies and the state connivesin this process.

Further, it cannot be denied that vested interests havedeveloped around controls and that they can be under cut

by removing controls (See Dagli Committee Report (GOI,1979)). However, the critics of controls need to recognisethat mere removal of controls not only does not eliminatethe need of sectional interests to maximise their incomesbut also helps them do so openly and legitimately. Onecannot make a general case for or against controls. Theconcept of social accountability must not be thrown to thewinds, specially when it may lead to greater inequity ina very poor society like India.

In fact, if there is a law, its violation results in illegalityand incomes associated with this activity are generated asblack incomes. Corruption is a part of this phenomenon.

Illegality can end if the rule of law is either followed orabolished. But, the latter amounts to eliminating societyitself and there is little left to discuss. Laws define the


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parameters of social functioning and need to be based onwhat is socially desirable.

2. Subversion of Laws: Roots in the Political Process

Proliferation of controls and regulations result in com-plexity in laws and difficulty in administration speciallyif they are violated all around. They become somethingother than what they are on paper. They become ill de-fined and dependent on the whims and fancies of theadministrators and the rulers. Flouting of controls andregulations in the economy to generate black incomes isnot a random process but involves developing specificmechanisms.

The difficulty of establishing any link between thedegree of controls and regulations in the economy andthe size of the black economy lies in the inability torepresent the former as a composite. It is far easier to seethe link in the case of an individual activity which maybe subject to 'controls and regulation'. In the case of thesugar industry, various degrees of controls have been

imposed on its production and distribution for a longtime. Yet, an analysis of the data did not show a linkbetween the degree of control and the size of black in-comes generated (see NIPFP, 1985).

Real estate has also been subject to various controls,like, the Urban Land Ceilings Act, 1976. It has been ar-gued that it led to an acceleration of price rise in urbanlanded properties because of freezing of excess land. It iswell known that a rapid rise in land prices leads to anincrease in black income generation. However, an analy-sis of data for Delhi shows that from the mid 1960s tomid 1970s, the average price of land increased from

around Rs 15 to Rs 250 per square yard while the rise inthe next decade took it to around Rs 3,000 per squareyard and then to around Rs. 35,000 per square yard.Thus, the rate of price increase in land cannot be said tohave accelerated after the imposition of the Urban LandCeilings Act, 1976. The problem of dramatic land priceincrease is linked to weak governance and policy failure.It is a result of corruption, rampant speculation uncheckedby government policies, inadequate property and wealthtaxation and improper policies with regard to employ-ment generation and creation of infrastructure in ruralareas resulting in concentrated urbanization due to huge

migration of people from deprived areas to a few urbanareas (Kumar, 1987).

Controls and regulations are supposed to give powersto the politicians and the bureaucrats which can be, andare, misused to extract a rent. For instance, anyone whohas honestly tried to construct a house in India knowshow much harassment they face. Delays are used to ex-tract a bribe. Usually, flouting of a rule is associated withan economic gain and the advice for this may even begiven by the concerned official. However, even when rulesare not flouted, a bribe may be given simply to save timeand trouble 'speed money'.

The administration extracts a rent by agreeing to ig-nore the violation of the law or for using its discretion togrant favour. To extract a rent, a surplus must be gener-

ated in the activity from which the rent is extracted. Inother words, the bribe paid, is typically a fraction of thebenefit accruing or likely to accrue from the twisting of thelaw. The experience of businessmen and the police 'hafta'narrated in Kumar (1999) bear out this conclusion.

The discussion, therefore, raises three questions. First,why have laws become complex? Secondly, why has ad-ministration become ineffective and demoralised? Andfinally, how can the flouting of rules persist over a pe-riod of time in spite of the checks and balances in ademocracy?

No law can be perfect since it cannot cover all contin-gencies. Thus, a law has to be administered both in letterand spirit. A corrupt and inefficient administration ei-ther implements the law rigidly or not at all. The flexibil-ity or the initiative required to deal with a dynamic situ-ation does not exist. Thus, a large number of loopholesare evolved by the ruling groups bent on taking advan-tage of the law. In response to this situation, legislaturesgo on modifying laws one after the other, in an ad hoc

manner, to plug the loopholes and in the process makethem more complex.

The other two questions will be taken up later sincethey relate to the prevailing political process.

3. 1991: Reduction in Controls

The experience of the post 1991 period calls into ques-tion the hypothesis of a link between controls and theblack economy. Gupta (1992) argues on pp 80, 83 and pp93, 94 that growth of black incomes will be curbed by thenew policy measures since controls are being relaxed orreduced. But, later he argues to the contrary when he says

that NEP may not succeed because '... we may say that thereasons for persistent policy failures (including the newpolicies) to curb black income generation and unearthblack money must be sought in the rampant ... corruptionin the country ...' (p 174).

When controls are removed an illegal activity maybecome legal. Does the tag 'legal' or 'illegal' matter? Takethe case of gold imports. It is not so important that nowgold can be brought in legally whereas it was earlier ille-gal to do so and was called smuggling. Gold was put onthe banned list of imports since in a poor and capital shortcountry it constituted a drain of resources. Gold import,

ceteris paribus, still creates BOP problems since it consti-tutes a drain on the official reserves. The economic impactof the activity through the BOP, drain of savings andlowering of productive investments in the economy con-tinues; only illegality is reduced as compared to earlier. Infact, ceteris paribus, the economic problems have increasedsince now five times more gold is flowing in than in 1992so the loss of precious savings for a poor country has onlyincreased. The rapid build up of foreign exchange reservesin the recent period in spite of this outflow is due to otherreasons. In fact but for this increased activity, the build upwould have been larger.

Suppose various laws are eliminated. By definition,incomes would become white and illegality and corrup-tion would be less. What difference would it make? To-


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morrow, due to inability to curb theft, suppose it is legal-ized, would it generate security for the citizens becauseillegality has declined. Can laundering of drug moneyand its use for criminal activities be legalized? Hence,what matters is the nature of economic activity and not thetag white or black. If certain laws ae needed for socialfunctioning then their elimination can only disrupt socialfunctioning.

Lower customs duties across the board may meanless smuggling but even greater importation of the samegoods, loss of foreign exchange and setback to indig-enous producers of those goods. Lower direct tax rateswill mean continuing adverse movements in income andwealth inequalities and shrinkage of the market size inthe medium run. Also, under the present regime it wouldmean lower rate of growth of public investment and socialsector expenditures redefining state's responsibility tosociety. Is all this based on a new consensus in societyabout tolerating greater inequity? Has this followed achange in society's priorities? There is little evidence for

this but the elite is pushing for it in its own narrowinterest. Controls are only the means of generating blackincomes. They are the means and not the cause (whichis illegality) (Kumar, 1994b).

The stock market (regulated or unregulated) has beena major conduit of black incomes. Illegal construction isproliferating in Metropolitan India even though it is un-related to control of land. Zoning laws, essential for theefficient functioning of cities, are being flouted by thebuilders and the rulers leading to a breakdown of Indiancities. The crux of the matter is additional profits, over andabove that which can be legally generated. This has not

changed post 1991.After 1991, controls and regulations have been greatly

diluted. MRTP and FERA have gone and small scale res-ervations have been greatly diluted, imports have beenliberalized, etc. Whatever was on the wish list of Indianbusinesses and MNCs has been implemented. Yet, the sizeof the black economy continues to increase (Kumar, 1999)thus substantially negating this hypothesis.

Controls and regulations are not the basic causes ofblack income generation and only represent the neces-sary condition for the generation of black incomes. Inother words, if a tax or a law did not exist there would

be no question of its evasion but it does not follow thatif a law exists its violation is automatic. Hence having atax or a high tax rate does not mean that evasion wouldfollow. Similarly, it is not that controls necessarily resultin black income generation; they are only a source formaking black incomes.

4. Triad as the Cause of Black Income Generation

Lack of commitment to society has led at one level toindividualization - retreat of the individual into her/hisshell - and at another level to conflicts amongst groups.Individuals have strengthened their traditional ties to their

region, caste, community, etc. and they hope to derivebenefits from the system through these kinship ties. Allthis has led to growing conflict in society and lack of

consensus over social functioning. There are no stablelong term interests to act on. In economic terms, this hasled to the fostering of the black economy to making gainsover and above what can be made legally. The size of theblack economy has grown and it has become the cause ofmuch systemic inefficiency (Kumar, 1999).

Indian politics governed by conflict is playing havocwith institutions. It is conflict which has weakened com-mitment to society and made illegality acceptable to thepropertied. The black economy as the means of makingadditional economic gains by cheating the system and thesubversion of democracy is a natural corollary of this.Today, in India, many of those in power violate any lawthey can. Whether it is a building bye law, rent controlregulation, industrial licensing, tax laws, child marriage,child labour and minimum wages laws, traffic rules, en-vironmental and industrial safety regulations and so on.Courts are overflowing with pending cases and full ofcorruption. Sense of justice in society is missing. It needsto be explained why is there this state of anarchy? Con-

flicts among the propertied, illegality, black economy,subversion of democracy and poverty are mutuallyinterlinked and feed on each other. This path which Indiais traversing needs to be understood.

Any law can be violated and result in black incomegeneration. More specifically, controls and regulations canbe violated and cause black incomes to be generated. Thus,illegality is the cause of black income generation. Thesource can be the violation of any specific law (Kumar,1999). Where there is lack of consensus and there is con-flict or a feeling of lack of social justice, laws are violatedmore. Like, in the case of taxation. Countries with high

rates of taxes may have lower amount of evasion whilethose countries, like, India, where the rates earlier weremuch higher, evasion remains rampant in spite of muchlower rates. In fact, tax rates have declined but the size ofthe black economy has only increased (Kumar, 1999).

Complexity of laws may make it easier to violate thembut this is not in itself the cause of illegality. Actually,India is mostly under-regulated, like, in the case of in-dustrial regulation, pollution control, environmental regu-lation and urban zoning but whatever laws exist areviolated. In effect, Indian Elite is lawless and bends/breaks most laws. Policy makers and those in the execu-

tive are involved in it and tolerate it all around. It issystematic and systemic.

The system for the generation of large amounts ofblack incomes is based on the existence of a Triad. It isnot that black incomes are generated some days and noton others. It is not accidental but is based on a system inplace, laws have to be violated systematically so that allthose involved in the preservation of the system have tobe involved in its breaking. This requires the involvementof the political class, the business class and the executiveclass (consisting of the bureaucracy, judiciary and thepolice). Criminal elements in society have entered this

nexus and often control it. Once this is in place prettymuch any law can be violated. Too many, too few, simpleor complex is immaterial.


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IV. Possible Solution.

Policy failure, poor governance and uncivilized livingconditions of the citizens is linked to the growing blackeconomy and illegality. This paper has tried to establishthat this is not a consequence of government interventionin the economy (whether in the shape of controls or regu-lations). The cause of the growing illegality is in the politi-

cal process and the weakening of democracy in the country.

1. Not a Narrow Technical Problem

To improve governance, the credibility of administra-tion has to be restored and the causes of alienation of theindividual addressed. The sense of social justice has to berevived. The problems of governance and administrationare a) second order problems to the attitudinal changesneeded and b) not merely technical ones. Mere setting upof commissions to suggest technical changes, like downsizegovernment, increase salaries or hire people on contract orgo in for Citizen's charters or for greater use of IT, etc.,would not help since the issues are not merely technical.

For instance, many committees have gone into the is-sues pertaining to the growth of the black economy andhave made large numbers of suggestions to curb it. Thesehave been usually incremental in nature and have notaddressed the integrated nature of the problem so havenot been a part of the basic reform required so that theirsuggestions have remained ad hoc in character and failedeven when implemented.

Specific technical suggestions are unlikely to succeedbecause of the widespread failure of governance. If mostthings were functioning in the routine way the few thingsthat were not working could be taken care of by fine tun-ing. Generalized causes have to be sought and remediesto these systemic failures sought and implemented. It is inthis spirit that some suggestions are made below based onthe analysis of the systemic failures.

2. Need to Strengthen Democracy

Indian elite's basic attitudes were shaped during theBritish rule. These need conscious reassessment. They haveto analyse themselves critically to discover their weak-nesses and boldly reformulate their priorities and be will-ing to take risks. The idea that accelerated economic devel-opment means jumping on to the path set by the West has

proved to be an erroneous one for India. The task of gov-ernance and administration cannot be just to place Indiaon that illusory path. We have been trying that for longbut without success. Society is unlike an individual get-ting on a bus at a later stop. A society is a historicallyconditioned entity and cannot just transform itself bywaving a wand.

Indian ruling elite has to be receptive to ideas evenwhen they go against its short run interests. Today, therulers react to criticism with defensiveness and act tomarginalize their critics. Ideas should not be treated assubversive and dissent is not a malaise to be suppressed.

Ideas must be encouraged rather than seen as a chal-lenge to society since they are the principal source ofdynamism in society.

Divide and rule and offers of inducements (like, posi-tions, projects and committee memberships) are held out tothose who are critical. The attempt is to coopt or marginalizethe critics but this blunts the nation's creativity. What therulers have to realize is that the threat to them is a globalone and to face it they need a strong and dynamic nationnot a weak one which is not able to deliver because ofweak governance.

Alienation of the individual has to be addressed so thatthe citizens may be able to contribute their maximum tosocial development. This is possible if the individual feelsthat the system is responsive and that there is social jus-tice. Government and the administration should be respon-sive to the needs of the people and should be seen to befair. This is possible if democracy is strengthened at everylevel and decentralization and centralization are dovetailedso that the micro and the macro do not stand in contradic-tion to each other.

There needs to be genuine grass roots consensus overpolicies. This is a prerequisite to good governance and ad-

ministration. There can be transparency and accountabilityonly when there is consensus over policies.

There is need to implement the Right to Information at alllevels of administration. The newly introduced format forthis is inadequate. The implementing agency is to be headedby some bureaucrat who would typically have spent a life-time evading rules and keeping information away from publicgaze. Now he would be expected to do the opposite. Basi-cally, unless the mind set of the rulers changes, little wouldbe achieved and it is possible that this right will be acces-sible to only a few determined people.

Very few things need to be kept secret. Currently, se-

crecy is grossly misused to subvert policies and generateblack incomes. Decision making has to be decentralizedand rules simplified so that they are easily accessible andunderstandable by even the lay person. Finally, Gandhi'sprinciple 'last person first' must be followed all down theline in administration.

In a poor country the administration has to be non-elitistin functioning. The example has to be set at the highestlevels by cutting down on the huge amount of waste. Gandhiremains relevant even today. The functioning of the bureau-cracy should be such as not to awe the people with theirpower but to make them feel comfortable and they should be

able to feel they can have a relationship of trust. Thesechanges would be painful for the administration used tofunctioning as an elite body but it would lead to good gov-ernance over a period of time. The British habit of thoughtof an elite administration as an instrument of control has tobe given up. Did not the leaders of the independent move-ment identify with the people and was that not the cause ofthe success of the movement? How simply Gandhi lived andhow effective he was.

The task of administration in India should be to enableequal opportunity to all citizens. This would bring about asense of social justice in society and reduce the individual's

alienation from society. If a sense of social justice prevails insociety, an incomes policy would be feasible (otherwise not).

The conflict between the specialist and the generalist has


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to be settled once for all. As issues become more and morecomplex in a globalizing world, the role of specialistsbecomes more critical. They must be the formulators ofpolicy while the generalists should be the ones who oughtto be the implementers. Appointments by contract wouldundermine the capacity of the administration to take astand against violations of the policy.

Administrative rules need to be simplified and madetransparent so that everyone can understand them. Thegovernment should intervene effectively where needed. Thequestion is not more or less of government interventionbut the right amount as dictated by a national agendabased on consensus. India's problem is not that there istoo much of government intervention in the economy butthat whatever rules exist are violated. There is consider-able lawlessness in the country that adversely affectsgovernance.

There is an urgent need to break the Triad. This wouldstrengthen democracy. An independent national agendawould give a mooring to administration and to the na-

tional leadership which is missing today. The Right toinformation, transparency and accountability would go a

long way in weakening the functioning of the triad. Ac-countability means fixing responsibility and setting timelimits for tasks.

V. Conclusion

A nation is defined by the set of the rules it agrees togovern itself by and the milieu in which the citizens op-erate/work in. When these change or are violated (due toillegality and the black economy) the nation itself changes.The gap between what 'is' and 'should be' grows and thecapacity to achieve goals is circumscribed.

Failure of governance and public administration islargely the result of a growing black economy and lack ofa national perspective on its current problems. It is notthat the written down constitution is inadequate or thatthe rules are flawed and the two are in need of drasticchanges. The implementation is flawed and the intentionsare suspect. The roots of the crisis lie in the societal pro-cesses which have led to a narrowing of horizons and aloss of value for ideas. In a nutshell, democracy has to be

strengthened through adopting Gandhi's principle 'Lastperson first'.

vvv


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The Government of India has been devastated by un-ending scams. In Ranchi (Jharkhand), t

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