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Meet the culprits behind India's current economic mess

August 27, 2013 11:13 IST

Meet the culprits behind India's current economic mess

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Somasekhar Sundaresan

In the name of regulation, control has taken over the economy; systemic checks and balances are failing.

It has been just two decades since the nation achieved economic independence. 

The then prime minister firmly threw his cloak of protection around his finance minister, staved off pressures from other politicians and the control-minded bureaucracy and helped break down various controls and limitations that held the economy back.

Two decades later, with the then finance minister as prime minister, things look horrible again. What went wrong?

The Constitution of India, a fine piece of art, created our republic with a well-structured set of checks and balances so that various arms of the state can co-exist and play their respective roles, to keep the system moving.

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Image: Children hold Indian national flags as they sit on a car during a photo-shoot in front of Hari Palace during the Independence Day celebrations in Jammu.
Photographs: Reuters
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Elected politicians in government would place their neck on the line and take vital decisions in government. Elected politicians in the Opposition would question, challenge and test whether colleagues in government are performing the mandate that brought them to power.  

A large cadre of bureaucrats would work on the administration of the government and help the politicians in power to take decisions, putting up options for decisions and measures and then implement the decisions approved. 

The judiciary, with the power of review, could strike down legislation and executive action that is not in line with the Constitution and violative of principles of law. The Comptroller and Auditor General (CAG), a constitutional authority, plays the all-important role of checking the propriety of action by the various arms of government.  

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Image: School children in coloured clothes form India's flag as they participate in a full-dress rehearsal for the country's Independence Day celebrations at the historic Red Fort in Delhi.
Photographs: Reuters
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Added to the mix was the creation of regulatory bodies by law made by Parliament, empowered to function and carry out independently what all of these agencies would do - make law, develop systems, execute policy and enforce law.

They are subject to checks and balances of statutory appeals by the judicial system and propriety audit by the CAG.

Their office-bearers are not elected, hold office at the pleasure of the government and they are, therefore, required to play a nuanced and careful role as a large part of the responsibility of various arms of the Indian state is on them.

Although this system had been validly (legally) functioning, two decades ago, India was at the doors of the International Monetary Fund (IMF) with a begging bowl, with foreign exchange reserves down to a level of paying import bills for just two weeks.

Controls were broken down. Markets were opened up for investment by Indian and foreign investors, licensing was brought to the minimum and regulatory agencies were set up, and the paternalistic approach to governing the economy was abandoned. 

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Image: Indian Parliament.
Photographs: Reuters

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Today, things are messy again. In the name of regulation, control has taken over the economy. Systemic checks and balances are failing and generally in the din and clamour of accountability, no one is really accountable.

The newly re-introduced finance minister has his hands full fighting a new fire each day - he finds that no longer do well-crafted words and promises get taken seriously, merely because he is the one uttering them.

His predecessor in office, who spent three years more focused on getting the jobs he did not have, is now well settled in the office of the President. However, the republic itself is wobbly. The prime minister is seldom seen in public leading and defending his team.

Rumours abound about how when he was informed about brewing problems in any area of government, he would advise the complainants to approach the courts.

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Image: Finance Mnister P Chidambaram
Photographs: Reuters
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Indeed, when two financial sector regulators fought about three years ago in public, the then finance minister asked them to approach a court of law to resolve their disputes.

Unelected bureaucrats in government, with no accountability for wrong decisions, have wrested back in their hands control over the economy.

In the name of “policy” and “regulation”, hard-core control is back under different jargon.

Ranging from whether government should have a say in pricing gas mined in India to whether it is alright for a foreigner to set up a pharmaceutical business but not alright to buy one, government officers are firmly in saddle.  

CAG, which otherwise does a good job, has found the need to be “proactive” to be taken seriously. It has been adopting questionable models to assess financial impact of bad decisions of government and been vocal about its findings.

The inability of the political class to deal with the comments of CAG have exposed bureaucrats and ministers to corruption charges, because the CAG findings on impropriety are adopted as the basis for criminal investigations.

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Image: Bombay Stock Exchange.
Photographs: Reuters
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This is what takes CAG’s adoption of questionable financial assessment models to the realm of being irresponsible. Therefore, the system is too focused on protection from allegation of subverting it than on measuring performance, increasing incentive for inaction.

The courts, too, have played the role of ensuring that the politician bosses do not exercise effective control over unelected bureaucrats, however wrong their policy proposals may be.

Worse, judges, neither trained nor meant to perform an executive function, are busy deciding how to run the executive.

A writ petition challenging the prime minister’s reluctance to sanction prosecution of his telecom minister eventually led to not just telecom spectrum allocation being cancelled but also to saying that any government licensing process should only take the form of auction.

It took a Presidential Reference for a bench led by the chief justice to undo material judicial damage inflicted on sectors outside the telecom industry.

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Photographs: Danish Siddiqui/Reuters
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Regulators and tax authorities have made their contribution to the mess, too. Recent measures are replete with competitive demonstration of how creating predictable clarity for investors in the market is irrelevant.

The only objective is to show how strict, angry and hard they are on private business. In the last five years, the theme in government has been to gloat over the economic crises elsewhere and take pride in how India has done well.

The theme is: “Today capital needs India more than how much India needed capital in 1991.”

Little wonder India is fast moving to the “least favoured market” status for business investments not just with global firms interested in India but also with Indian firms interested in the globe.

The author is a partner of JSA, Advocates & Solicitors. Views expressed are his own. 


Photographs: Reuters

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