Why did economic growth collapse from 9.3% in 2010-11 to just five per cent last year? Because, says Chief Economic Advisor Raghuram Rajan, India's institutions have been unable to cope with the consequences of fast growth.
Land acquisition, forest clearance and environmental clearance were manageable when the economy was smaller and growth was slower. But then growth skyrocketed to 8.5% in the last decade, and the economy doubled in size. The amount of land to be acquired, and the impact of projects on forests, tribals and the environment became far greater. This evoked much more resistance from small farmers and tribals. NGOs and Opposition politicians encouraged such resistance.
Besides, fast growth accelerated the allotment of natural resources and spectrum to business cronies, with brazen kickbacks. This fueled public outrage. The courts, CAG and activists using the Right to Information unveiled quantities of dirty linen. In response, the bureaucracy and political class froze decision-making.
This caused a big investment slowdown that reduced the supply of goods and fueled inflation. The solution, says Rajan, is to boost investment, create a transparent and honest system of clearances, and slash the thicket of controls that hamper business. This will take India back to eight per cent growth.
There is much truth in Rajan's hypothesis. Yet it is too optimistic, and glosses over the structural political difficulties.
Far from being a neo-liberal economy, as alleged by Leftist critics, India is terribly illiberal, and becoming more so. No doubt some areas have been liberalized - industrial licensing, import licensing, import duties, foreign exchange. These helped greatly in accelerating economic growth. But there remains a jungle of controls, designed in the holy name of socialism, tribal welfare, environmental welfare and other sacred cows. In practice these controls have been used to extract enormous sums from those needing clearances.
Cynics say politics is a costly business in any democracy. Jesse Unruh in the USA once said that money was mother's milk to politics. Other countries have devised legal ways of businesses and other lobbies making large contributions to parties and politicians. India, however, has devised extralegal extortion. Some reformers think the answer is to allow business to donate openly and transparently to politicians. This has been allowed, but legal donations have not replaced illegal extortions, just supplemented them.
Navin Jindal once said that only 1% of political extortion went to finance political activity, and the rest was simply pocketed. He is both an MP and industrialist, and should know. Political extortion is a huge business in its own right, not just a device to finance political activity.
The problem extends from the very top to the panchayat level. In some district panchayats, every elected member is a contractor. Columnist Pratap Bhanu Mehta has called Indian democracy a system of contractors, by contractors and for contractors.
Economic reforms in 1991 ended the notion of the state controlling the commanding heights of the economy. The private sector was encouraged to enter new areas and expand rapidly. The very success of this strategy created scope for evergreater extraction of money. Reforms enabled many business sectors to thrive, but none thrived more than politics-as-business. Extortion became massive. This then led to the backlash, which means that even after pay-offs, clearances are uncertain.
There was for years an old "social contract" between politicians and business. This provided for complex rules and regulations that made it impossible to do business honestly in many fields. But it was possible to do business dishonestly, through pay-offs. Some called this "efficient corruption": politicians took money and delivered clearances.
However, the anti-corruption mood of the courts, and new fears of getting caught (like Pawan Bansal) have ended "efficient corruption". Politicians may still take money but not deliver on clearances, what some call "inefficient corruption" that freezes investment and growth. The old social contract has broken down.
Realpolitik will push India into a new social contract. This will not be achieved by moral lectures to politicians. Rather, a new equilibrium will evolve that enables business to be done honestly in many more areas, while devising alternative ways for politicians to still make big money. This equilibrium cannot be created by any one party or power centre. It will evolve government by government and state by state, just as the old contract did.
This will take time. Central initiatives, like the proposed legislation to create a Lokpal, and another to give the CBI statutory autonomy, can help the evolution, but it will still take many years. That transitional period will necessarily be one of slower growth. So, forget about 8% growth for the foreseeable future.