Indias Democratic Challenge Varshney 2007

8/13/2019 Indias Democratic Challenge Varshney 2007

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India's Democratic ChallengeAuthor(s): Ashutosh VarshneySource: Foreign Affairs, Vol. 86, No. 2 (Mar. - Apr., 2007), pp. 93-106Published by: Council on Foreign RelationsStable URL: http://www.jstor.org/stable/20032286.

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India's DemocraticChallenge

Ashutosh Varshney

CHARTINGA NEW PATHINDIAISattemptinga transformationewnationsinmodernhistoryhavesuccessfully anaged: iberalizingheeconomywithin anestablished democratic order. It is hard to escape the impression thatmarketinterests and democratic principles areuneasily aligned in India today.The two arenot inherentlycontradictory, ut thereare tensionsbetween them that India's leaders will have tomanage carefully.Studentsof politicaleconomyknow thatmarket-basedpoliciesmeant to increaseheefficiency f theaggregate conomyfrequentlygenerateshort-termdislocationsand resentment. n a democraticpolity, this resentment often translates at the ballot box into a haltor a reversal of pro-market reforms. In theWest, such tensions haveremainedmoderateforat leastthreereasons: niversal uffrage ametomostWestern democraciesonly after the IndustrialRevolution,which meant that thepoor got the right to vote only after those societieshad become relatively rich; awelfare state has attended to the needsof low-income segments of the population; and the educated and thewealthy have tended to vote more than the poor.The Indian xperiencesdifferent n allthree ounts. ndiaadopteduniversaluffraget the timeof independence,ongbefore hetransitionto amodern industrializedconomybegan.The countrydoesnot have

ASHUTOSH VARSHNEY isProfessorof Political Science at theUniversityofMichigan and the author of Ethnic Conflict and Civic Ljfe:Hindus andMuslims in India and Democracy, Development, and the Countryside:Urban-Rural Struggles inIndia.

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Ashutosh arshneyan extensive welfare system, although it has made a greater effort tocreate one of late.And, defying democratic theory, a great participatoryupsurge has marked Indian politics, a phenomenon that is onlybeginning tobe understood by scholars and observers: since the early1990S,India'splebeianordershave participatednoticeablymore inelections than its upper andmiddle classes. In fact, the recentwisdomaboutIndianelections turns tandard emocratic heoryon itshead:the lower the caste, income, and education of an Indian, the greater theodds thathewill vote.The rulingUnited Progressive lliance (UPA),a coalition with the Indian National Congress at its core, counts onthe lower social orders as itsmost important voting bloc.India'sdevelopmentexperience s also likely to be distinct from

East Asia's. South Korea and Taiwan embraced universal-franchisedemocracy only in the late1980s and themid-9ggos, two decades aftertheir conomicupturnbegan.Other economicallyuccessfulountriesin the region, such asChina and Singapore, have yet to become liberaldemocracies. Periodic renewals of mass mandates through the ballotbox are not necessary in authoritarian countries, but they are in India.Democraticpolitics partly explainswhy, forexample,privatizationhas gone so slowly in India compared to inChina. In India,workershave unions and political parties to protect their interests. InChina,labor leaderswho resist job losses due to privatization are tried andjailedfor treasonand subversion, omethingentirelyinconceivablein India'sdemocracy.So far,the reformprocess of the last 15 ears has had positive results:by most conventional standards, India's economy is booming.After registering a 6 percent average annual growth rate for nearlya quarter century, the Indian economy has picked up even greaterspeed.Over the last threeyears, ithas grown at over 8percent annually,and forecasts for the next few years promise more of the same.Investment as a proportion of GDPhas been steadily climbing, exceeding 30 percent lately and raising hopes of an investment boomlike thatwhich propelled East Asia's economies. Total foreign directinvestment for the current financial year is likely to exceed $lo billion(compared with $100 million in 1ggo-91) and is rising. Exports aregrowing at a fast clip, with India's trade-to-GDP ratio more thandoubling in 2006 from its 1991 levelof iSpercent.The manufacturing

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AshutoshVarshneyHOW IT ALL BEGAN

IN KEEPINGith theprevailing heoriesindevelopmentplanningafterWorld War II, in the 1950SIndia opted for a centrally plannedeconomy with a closed trade regime, heavy state intervention, and anindustrialolicythatemphasized mport ubstitution.his pro-stateandtrade-pessimisticevelopmentmodelwas characterizedy threesetsof controls: internal, external, and those relating to the special roleof thepublicsector. he internal egulatoryegimeheavilyemployedinvestment nd productioncontrolsthroughan infamous ndustriallicensing ystemthatregulated spectsof economicactivityasvariedas plant capacity, output prices, the quantity of capital, the quantityand type of inputs, technology, and the sectors or industries that

were required to be reserved for small-scale investors.A host of tariffand quantitative controls were created to protect infant domesticproducers romexternalcompetition.And thepublicsectorwas allowedextraordinaryuthorityover thecommandingheightsof theeconomy, ncluding hesteel,power,telecommunications,ndheavymachinery industries.It was within this thicket of protectionist policies that, in July1991,reformers in the Congress-led government began topush hardfor economic transformationunder the looming prospect of abalanceof-payments crisis. Some reforms had already been put in place byPrime Minister Rajiv Gandhi in themid-198os, but the big thrustcame in 1991-92 as a result of that looming crisis.The financeministerat the time,Manmohan Singh (currentlyIndia'sprimeminister), arguedthat themacroeconomic stabilization necessary to stave off a crisiswas not enough; ithad to be reinforcedby reforms tomake thedecision

making and operational environment of firmsmore market-based.Thus began a seriesof incremental reforms,which the BJP(BharatiyaJanata Party) continued after it came to power at the head of theNational Democratic Alliance (NDA)coalition in 1998.

In some areas of economic policy, progress has been dramatic;in others, little or no progress has been made. India's investmentregime has undergone themost extensive reform. The industriallicensing system has been almost completely abolished. Firms arefree tomake decisions about investment, pricing, and technology.

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India'sDemocratic ChallengeOnly three industries-rail transport,military aircraftand ships,and atomic energy generation-are now reserved for the publicsector (instead of 18 in the past), and these, too, are beginning towelcome collaboration with private industry on some activities.The rules governing foreign investmenthave been substantiallyliberalized.Complete foreignprivateownershipin a largenumberof industries, ndmajority privateownershipinmost industries, sallowed, excluding airlines, insurance companies, and themajor retailtrade.And since 1992, foreign institutions have been allowed to buyand sell stocks in Indian firms. Indian companies, in turn, are nowfree to issue equity in foreign markets.

A great deal of progress has also been made in reforming India'strade and exchange-rate regimes. India now has a flexible exchangerate system. The average tariff on imports has come down from overloo percent to just under 25 percent today, and all quota restrictionson trade have been lifted.

Progress has been limited, however, in five areas: fiscal policy,privatization, mall-scale ndustry, griculture, nd labor aw.India'sfiscaldeficitscontinue to be high. Large agricultural ubsidiesforinputs, grain, and power are some ofthe maincontributorsto these deficits, and almostevery attempt at lowering the subsidies hasbeen met by political protests on behalf offarmers.A start toward privatization was

made in 2001, but unions and some politicalparties have vigorously resisted it.To helpmillions of small producers, many manufactured roductscontinue tobe reserved or small-scalenvestors(astatus that caps investment at $250,000 per industrialunit), althoughin2001, garments, toys, shoes, and auto componentswere finallyremovedfrom the reserved list.No proposal for a complete dereservation of allindustries has yet been seriously entertained, hampering the ability ofmany Indian companies to compete with their counterparts in otherdeveloping countries, notably China. And labor laws have not beenreformed, eaning thatno company peratingnIndia mploying orethan loo workers can fire anywithout government permission-andpermission s almostnevergranted.

]FOREIGN AFFAIRS March/April2007 [97]

How longwill theboom last?Thatdepends on India'sdemocraticpolitics.



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AshutoshVarshneyWHAT S IN IT FOR ME?

WHO HAS really reaped the benefits of the reforms? India has alwayshad a small number of affluent individuals, symbolized by itsmaharajahsand business tycoons. Now the proportion of the population that isrich has undoubtedly increased, and a substantial middle class hasemerged,numbering nywhere etween200million and250million,depending on themeasure used. Inwhat is fast becoming an emblemof the rising Indian middle class, sixmillion cell phones are boughteverymonth,makingIndiathe fastest-growing arket forcellphonesin theworld. Businesses in the cities arebooming, five-star hotels arefullybooked,airports reclogged,and flightsare regularly versold.

At the same time, the begging bowls and emaciated faces ofmalnourished children,historically themost visible signs of massdeprivation on the streets of Indian cities, have not appreciably receded. Poverty has clearly decreased since the reforms began, whenroughly a third of the country was below the poverty line, but closeto a fourthof the population still liveson less than $1a day,much to thedisappointment of many reformerswho had expected a fasterdecline.The nation'sgrowth on thewhole has not been employment-intensive.

Where inequality is concerned, two issues are hotly debated:urban-rural imbalances and the interpersonal income distribution.Over the last ten years, India's economy as awhole may have grownatmore than 6 percent per annum, but agriculture,which still supports,fully or in part, around 6o percent of the country's population, hasgrown at amere 2.2 percent annually.To be sure,growth rates in agriculture are rarely as high as those inmanufacturing and services, butthe gap in India has become noticeably large. It is nowwidely acceptedthroughout India that urban-rural inequalities have grown since thereforms egan.

The statisticson interpersonalincome distribution are lessconclusive,partly because such data tend to be highly unreliable for developingcountries. But opinion polls make it quite clear that avery largeproportion of the population believes the reforms havemostly benefited

the rich, which in the public's eye includes themiddle class in India.The largest-ever sample drawn for election analysis in India, by theNational Election Study (NES) n2004, showed that thosewho believed[98] FOREIGN AFFAIRS Volume6No.2



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India'sDemocraticChallengethe reforms had benefited only the affluent outnumbered thosewhothought the reformshad benefited thewhole nation; themore one climbsdown the social ladder, the greater the former belief Upper-casterespondents were nearly split on the question, but awide marginof respondents loweron the socioeconomicscale-especially exuntouchables, uslims, andotherunderprivilegedroups-believedthe reforms had mainly benefited the rich. The survey results alsoshowed that thosewho believed the reformshad benefited thewholecountry otedinlarge umbersortheBJP-ledDA,hereas thosewhothoughttherichwere theonlybeneficiaries oteddisproportionatelyforCongress and its allies.These perceptions may not necessarilymatch reality.It isparticularlyunclear how themasses interpret the term reforms. The NESpollsfocused on only one side of the economic reforms by asking questionssuch aswhether the number of employees in government serviceshouldbe reduced, hetherpublic-sector usinesses houldbeprivatized, andwhether foreign companies should be allowed to freelyenterthe Indian economy. But other questions, reflecting a fullerview,werenot asked:Should import tariffsbe dropped further so as to allow forthe greater availability of cheap consumer goods? Should the rulesregulating how banks and post offices function be made easier andmore transparent?Should big companies continue tobe protected bythe government, or should new and smaller companies be allowed toemergeand competewith them?Should thegovernmentinterfereless in regard towhere and atwhat price to sell grain? Should loss

making government firms be privatized if a substantial proportionof their proceeds could be reserved for public health and education?It is unclear how themasses would respond to a complete pictureof reforms nd,accordingly,hether theunderprivilegedegments fsocietywould supportdeeperreforms.Whatever better statistics may finally prove, mass perceptionsmatter in politics. And the overall picture that emerges from currentperceptions of the reform process is one of two Indias: an India ofbooming businesses, growing cities, and avibrantmiddle class and anIndia of struggling agriculture, poor villages, and a large lower class.The rising tideproducedby economicliberalization ppears o haveliftedmany boats, but not all.Too large a segment of the population

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Ashutosh Varshneyfeels ignoredby thenew economicpolicies.The current ndiangovernmenthas thusunsurprisinglyade twoobjectives learregardingtheeconomy:keepgrowthstrong, utmake itmore inclusive hroughpublicpolicy.Leavingmarketsentirely o themselvessnotpoliticallyfeasible in a low-income democracy such as India.

THE DEMOCRATIC CONSTRAINTTHEREAREtwo aspects o thechallenge eformersacewithin India'sdemocraticontext:erceptionsfthe reformsodateand theshort-termpain likely to accompany the deeper reforms to come. The economicreforms undertaken thus farhave not been those that would directlyaffect the livesof India'spoormasses, and this has fed their resentmentagainst the reforms,which they believe have only benefited the upperandmiddle classes.The employmenteffect of the reforms-whilesignificant in skill- and capital-intensive sectors-has not been substantialnoughthroughoutheeconomy oamelioratehisresentment.Furtherpro-market eforms-the large-scale rivatizationf publicsector irms, he implementationf ahire-and-fire mployment olicy,changes nagriculturalolicy,radicalhanges nsmall-industryectors,and the drastic reduction of fiscal deficits-will undoubtedly have adirect effect on the livesof themasses, but the long-term benefits ofthese reforms for India's lower classes are likely to be accompanied byconsiderablehort-term ain.The electoral onsequencef thislikelihood hasmeant that Indianpoliticians haveproceeded gingerly on thesedeep reforms, embracing instead those that directly affect the elite.It is therefore helpfil to think of India's reformpolitics as followingtwo tracks:what may be termed elite politics andmass politics. Thisdistinction isabsolutely crucial inunderstanding India'sreformdynamics.In India, the elite consistsmainly of English-speaking upper-casteand urban citizens. Elite politics in India typically takes place in theupper realmsof thepublic sphere: in the interactions between businessand government and in the dealings between New Delhi and foreigngovernments and international financial institutions. Outside government, the upper end of the public sphere includes English-languagenewspapers and televisionand the Internet.To the elite, India'seconomicfuturehas never looked brighter.




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Indias DemocraticChallengeBut India's mass politics is dancing to a different tune. It is the

plebeian social orders thatmake up thispolitical constituency. Streetsand the ballot box are theprimary sites of themass politics, and voting,demonstrations, and riots itsmajor manifestations. Economic reformsare viewed by the poor masses as a revolution primarily for everyonebut them. Economists may recommend amore passionate embraceof neoliberalism as a solution to India's poverty, but the poor appearto have plenty of reservations bout economic reforms-and theyhavevoting clout in India's emocracy.One canthereforeeewhy elite-orientedeformsmakingnvestmentin realestate easier,deregulating he stockmarket, liberalizing ivilaviation)have continuedunder the currentgovernment in India,

whereas more radical reforms (changlng labor laws,privatizing publicenterprises,liminating griculturalubsidies)have stalled. The latter have run into whatmight be called amass-politics constraint.Asa result, it isnow customary to argue thatIndiahas a strong consensus onweak reforms.

Three factors retypicallyritical ndeterminingwhether anyparticularolicy entersthe arena of mass politics: the number ofpeople affected by the policy, how organizedthose people are, and whether the effect is direct and immediateor indirect and over a long timehorizon. The more people affectedby apolicy choice, themore organized they are,and themore direct thepolicy'seffects, themore likely it is that apolicy will generatemass concern.

By this logic, some economic issues aremore likely to arousemassopposition than others. Inflation,for example,quicklybecomes acontentious matter inmass politics because it affectsmost segmentsof the population. A financialmeltdown has a similar effect, becausea largenumber of banks and firms collapse andmillions of people losetheirobs.Incomparison,tockmarketsdirectly oncernmainlyshareholders,whose numbers arenot likely to be largeor very organized inapoor country such as India.As a result, short of a financial collapse,stock-market issues rarely,if ever,enter the frayofmass politics in lessdeveloped ountries.Ethnocommunal onflicts,noteconomic issues,have until now drivenmass politics in India.The consequences of ethnic

FOREIGN AFFAIRS March/April2007 [lmo]

What isof greatconsequence tomanyeconomists isofsecondaryimportanceto Indianpoliticians.



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Ashutosh Varshneycleavages and ethnically based policies tend to be obvious tomost people,and ethnic groups areeither already organized or can organize quickly.Unlike the economic reformsalready mplemented, he deeperchanges thatmany economists argue India needs for long-term growthare,by directlyaffecting themasses-and affectingthemnegativelyto begin with-likely to arouse the passions of the lower class. InIndia's ighly adversarialemocracy, olitical leaders ill continue tofinditextremely ifficult o stake heirpoliticalfortunes n economicreforms hatareexpected o causesubstantial hort-term islocationsand are likely to produce rewards only in the long term.Meanwhile,identity olitics-especiallycaste-based ffirmativectionandHindu

Muslim relations-continue to occupy the center of thepolitical stage,consumingsubstantial oliticalattentionanddeterminingelectoralfortunes. As a result,what is of great consequence tomainstreameconomists is of secondary importance to politicians, who preferpredictabilitynandcontrolover theirpoliticaluniverse.

THE SOURCES OF CONGRESS CONDUCTNONETHELESS, ECONOMICreformhas been growing in importancein India's electoral politics over the last decade. In a survey of masspolitical attitudes in India conducted in 1996, only 19 percent of theelectorate reported any knowledge of the economic reforms that hadbeen implemented, even though the reforms had been in existencesince 1991.In the countryside,where more than 70 percent of Indiansthen lived, only about 14 percent had heard of the reforms (compared

with 32 percent of voters in cities). Nearly 66 percent of college graduateswere awareof the dramatic changes in economic policy, comparedwith only 7 percent of the illiteratepoor. (In contrast, close to 75percentofthe electorate-urban and rural,literate and illiterate,rich andpoorreported knowing of the demolition of themosque inAyodhya in1992,and 87percent took a standon caste-based affirmativeaction.)Economicreformswere a nonissue in the 1996 and 1998parliamentary elections. Inthe 1999 elections, thebiggest reformerseither lostor did not campaignon pro-market platforms.The 2004 parliamentary elections that returnedCongress topower,however, hinted at the rising importanceof economic reforms to India's




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Indias Democratic Challengemass politics. In dramatic contrast to 1996,when amere 19 percent ofvoters even knew of the reforms implemented up to that point, in2004, according to the NESelection survey,over 85percent expressedclear judgments of them-and themain verdict was that the reformswere primarily lite-serving.

To be sure, economic issueswere still not themain reason for theNDA's election defeat in 2004. Its loss had more to do with regionalpolitics and party alliances. Coalition partners in India tend to be regional parties that are strong only in one or two states (India ismadeup of 28 states), and national parliamentary elections consequentlydepend heavily on how regional parties in the large states perform. Intwo significant states,Andhra Pradesh andTamil Nadu, the regionalallies of the BJPdid disastrously. The key issues in these and otherstateswere more regional innature, rather than related to national oreconomic ssues.hewaycoalition rithmeticranslatesoparliamentaryseats further undermined the NDA. In a first-past-the-post parlia

mentary system such as India's, parliamentary seats are not allocatedinstrictproportionalityoballotswon. In the2004 election,althoughtheBJP-led DA railed heCongress-centeredUPA y amere o.6 percent of the overall popular vote, the latterwon a 33-seat advantage(222seats as opposed to 189 for the NDA).Nevertheless, the 2004 electoral results suggest that the pressureon politicians tomake reforms relevant to themasses is rising, evenif it has not yet reached a critical threshold. Resentment of reforms

may well prove decisive in the next election, due by 2009. The increasing mass disaffection with the economic reforms helps explain theeconomicpoliciesof thecurrent overnment. he 2004 election ledCongress' strategists to the conclusion that the party needed to focusitsprogram on the lower andmiddle echelons of society,which havebecome theparty'smain constituency. he Indiangovernment odayhas some of the ace reformers of post-1991 India, including PrimeMinister Singh,FinanceMinister Palaniappan hidambaram, ndthe economic planning czar,Montek Singh Ahluwalia. But two ofitsbiggest initiativeshave been distinctlyantimarket: heNationalRuralEmploymentGuaranteeAct and the extensionof affirmativeaction in higher education. The firstmeasure, passed by ParliamentinAugust 2005,guarantees veryunemployedruralhousehold that

FOREIGN AFFAIRS March/April 2007 [103]



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Ashutosh Varshneyeach year at least one of itsmembers will get loo days of work. (Thescheme, urrentlynoperation n200districts, s slated obe extendedto the entire country over thenext twoyears.)The second reformreserves27 percent of the spaces in government-aided institutions of highereducation, including the Indian Institutes of Technology and theIndian Institutes ofManagement, for the other backward castes.

The UPAisdependent on the left for itsparliamentary majority, butthis is only part of the story that explains these antimarketmeasures.More germane is the character of the constituency thatnow forms themain pillar of Congress' support. Until themid-198os, Congress wasan umbrella party drawing substantial support from all segments ofsociety, ut theBJPnd itscoalitionhave sincecome to represent he socially rivileged, heeducated, ndhigh-income roups. he uppersegments f societyconstituteno more than

25-30 percent of India'spopulation. Given thekind of support they have given the BJPand itsallies over the last ten years, getting themback under the Congress umbrella is not aselectorallyromising sconsolidating ainsin

themuch largermiddle and lowersegments-especially given the latter'shigher rates of voter turnout. It is therefore no surprise that targetedantimarket interventions on behalf of the lower social orders form thecenterpiecefCongress'newpoliticalstrategy.The BJP, lthough essconstrained hanCongress,cannotentirelyescape these pressureseither. If theBJP s to regainand hold on to power,itwill have to resolutely move down the socioeconomic ladder forsupport, something it has alreadybegun doing. Even a BJP-ledgovern

ment would therefore be expected to push a program of targetedstateinterventions.nless theupper egmentsf Indian ociety egroupand begin toparticipate in electionsmore, theywill dwindle as apowerin electoral politics, in spite of their control of the press.And until the

middle class becomes amajority of thepopulation and starts toparticipatemore vigorously in elections, the plebeian pressureswi]l remain inpolitics and India'seconomic reformswiUlcontinue to have an ostrichlike character:moving ahead on policies directly affecting the elite butlagging behind on policies that directly, and negatively, hit themasses.


Antimarketinterventions ormthecenterpieceof

Congress' newpolitical strategy.



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India'sDemocraticChallengeA TORTOISE TO CHINA S HARE?

ALTHOUGH HEmass-politics onstraintn India'sconomic eformsisnow beginning to emerge, itneed not be a reason for alarm. India'sdemocracy is a short-term constraint but a long-term asset for promarket reformers.The stabilityof Indian democracy isnot inquestion.Whichever coalition of parties comes topower, reforms on thewholewill continue. Since 1991, four coalitions have ruled India, and nonehas departed from the path of reforms.The differences have beenthose of degree and pace, not direction. There is no going back to theold statist economic regime.A middle classwith rising incomes thatboasts 2oomillion to 250million peoplewill continue to attract investorattention. The nation's remarkable human capital at themiddle-classlevel will also draw investors.Moreover, there will continue to beeconomic eformsargelymperviousotheconstraintsfmass politics:changes to the financial sector, greater rationalization of taxstructures,furthersimplification f investmentrules,the liberalization f realestatedevelopment, nd themodernizationof airports.

The mass-politicsconstraintdoesmean, however, hatreformersin Indiawill have to juggle two separate tasks in the short tomediumterm: ontinuingreformsn theelite-oriented ectorsandrespondingtomass needs through urther ntimarkettateinterventions.nd ifmarket-oriented economic reforms are tobe embraced in areasdirectlyrelevant to themasses, politicians will have to answer the followingquestions: ow will theprivatization f publicenterprises,hereformof laborlaws,and the liftingof agricultural subsidiesbenefit themasses?And how longwill thebenefits take to trickledown?All ofthese reformsare likely to enhance mass welfare in the long run.Therefore, fordemocratic politicians, thisproblemwill effectivelymean takingmeasures such as reserving a substantial proportion of the proceeds fromprivatization orpublic health andprimaryeducation,constructingsafety nets forworkers as labor laws are reformed, and coming upwithaplan for a second green revolution in agriculture in return fordrawingdown the currenthuge agriculturalsubsidies.The lastone, inparticular,will requireboth opening up agriculture tomarket forces and greaterpublic investment in irrigation, agricultural research, and rural infrastructurendeducation.

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Indias Democratic Challenge Varshney 2007