JR: Yes. It is not only an example
of arbitrage, but it also illustrates a fundamental maxim of parliamentary
democracy which is that where you stands depends on where you sit. If
you sit in the Opposition then you stand destructive and obstructionist,
if you are in power then you are much more pragmatic and constructive.
Congress governments in the states are in fact implementing so many
of the policies that the Congress opposes in the Center. Similarly the
BJP wherever it is in opposition – in Rajasthan for example – it is
opposing the very same reforms that it is pursuing in Uttar Pradesh.
I am afraid that this split-level personality exists in all political
parties and it is a divide between those who in power and those who
are out of power – that is the fundamental divide which cuts across
most political parties.

RS: What then
drives this intra-party divide? Surely it cannot be a concern for ideology
or consequences of reform since each party – when in power – actually
furthers the reform process.

JR: Different people come to this
position with a different angle. There are people, the Kerala Congress
for example, who believe that subsidies are good, public sector is good
and private sector is bad – so they have an ideological stance. Others
view the de-nationalization of banks as destroying Indira Gandhi’s legacy.
There are also many people who believe that this will hurt electoral
prospects because it will hurt to be seen to be anti-labour, pro-big
business, pro-private sector and so on. There is also the fear that
if you support the government on every issue then you will end up being
a B-Team for the government. Then people will say that there is no difference
between the Congress and the BJP. So different people have different
motivations but the net result is the same. The net result is a divide
which is sometimes based on ideology but more often than not is based
on hypocrisy.

RS: Let’s
consider the relationship between federalism and reforms. Does federalism
assist or stymie the reform process? A number of theorists hold that
increasing federalism could assist liberalization because it weakens
unionized opposition that has traditionally petitioned the Center, while
other theorists make the point that local elites are more capable of
blocking State-level initiatives?

JR: The former argument is entirely
correct. The dominant political paradigm in India has been that decentralization
leads to the Balkanization of India. Remember that this was the heritage
of our freedom movement. Our freedom movement was animated by the idea
that there was unity in diversity. Our constitution is a unitary constitution
with federal characteristics. Now, our founding father, quite rightly
I think, were obsessed with the idea of the political unity of India.
But as the decades went past we were running a highly centralized polity
and economy as a result of which we had neither growth nor equity. In
contrast, one of the things about the 1990s has been that as the economy
liberalized, the policy space for the States increased as a result of
which we had Chief Ministers such as S.M. Krishna, a Chandrababu Naidu
and a Digvijay Singh who became champions of reform. So economic reform
and political decentralization have together created new product champions
– to use the language of marketing – for liberalization. So if the Prime
Minister today, for example, were to build a coalition of Chief Ministers
then he would probably have greater support for many reform measures
than if he would if he were to depend on Delhi-based leaders of national
parties.

RS: So do
you foresee a greater role for the Conference of Chief Ministers in
the reform process?

JR: One of the greatest failures
of Mr Vajpayee has been his inability to network with Chief Ministers
or to build a coalition of Chief Ministers. If he were to do so then
he would find that most of these Chief Ministers would not go along
party ideological lines because they are pragmatic as they have to deliver
jobs, growth, investment – they have to be held accountable. So therefore
you will even find the Chief Minister of West Bengal to be far more
pragmatic than some of his Delhi based counterparts who do not have
any responsibility for administration.

RS: How would
you respond to the criticism that after fifty years of centralized control,
the bureaucracies and political cultures of State governments are quite
inadequate to deal with the complexities of the reform process? Take,
for example, the burgeoning state fiscal deficits. In these circumstances
can ‘the economy globalize while society localizes’?

JS: There is a governance deficit
problem. I think, by and large, peninsular India (ranging from Gujarat
to Andhra) is delivering both on governance and on development. The
problem really lies in the Hindi heartland, though Rajasthan and Madhya
Pradesh have turned the corner in the last decade. Moreover, the politics
of North India has become the politics of caste and religion, whereas
the politics of peninsular India is about development. That is why I
say that in peninsular India you have a lot of development in politics,
whereas in North India you have a lot of politics in development. So
governments come and go but Tamil Nadu goes on; Chief Ministers come
and go but Maharashtra and Gujarat go on. But unfortunately in Northern
India, the social revolution – the localization of society that I talk
about – is what is really driving the entire process and therefore also
destabilizing policy processes.

RS: So is
increasing federalization including the creation of new states an important
administrative advantage?

JS: One
option is certainly to consider that our focus should be on intra-state
disparities rather than inter-state disparities. So we need to look
at Telangana or parts of northern Karnataka, which compare with Bihar
and Uttar Pradesh on account of female disparity. So this intra-state
disparity is what really counts and one of the consequent demands has
been for smaller states. It is interesting that state reorganization
in India has taken three distinct steps. The first wave of state reorganization
was linguistic and the second in the 60s or 70s was ethnic. This third
wave is based on administrative and economic considerations that smaller
states will be more efficient and responsive to the needs of the people.
One could then say that India should not be 28 states as it is today
but could be 40 states: there is a lot of merit in this argument.

RS: I want
to go back to your analysis of peninsular politics. Why did Karunanidhi
lose despite having delivered on development while Chandrababu Naidu
won?

JS: No, Naidu would have lost if
he had fought on his own. Naidu only won because he had an alliance
with the BJP. If he had not then Naidu would have also gone the Karunanidhi
way. Elections in India are not about performance, they are about emotive
issues and they are ultimately about local, social coalitions. Karunanidhi
lost because he just allowed his coalition partners to leave his coalition!
So I think we should not focus too much on economic performance as a
determinant of electoral success. If you do well on economic performance,
there is no guarantee that you will be rewarded, but if you do badly
then there is every chance that you will be punished. For example, in
the 1998 Assembly elections, the rise in onion prices from Rs 5 to Rs
60 per kilogram destroyed the BJP in Delhi, Madhya Pradesh and Rajasthan.
That is an important example of how an economic issue can destroy a
party. Economic issues never make a party, but economic issues can unmake
a party – the positive is false while the negative is true.

RS: Now we
have talked about intra-state disparities, but I would also like you
to consider the broader problem of inter-state disparities. If the thesis
of cultural disparity between North and South holds true, then what
happens to State-State relations in the future?

JR: The last ten years one can certainly
take the view that Bihar and U.P have retrogressed from an economic
point of view. But as a social scientist one can say that what U.P and
Bihar are undergoing is what peninsular India has already been through,
including social empowerment via the transfer of power from narrow elite
groups to broader, more numerous contenders. Now unfortunately while
it is easy to romanticize this process, one should also understand that
this process could lead to immerization (because that is what is happening
today). In the South in contrast, the social reform process moved along
parallel to economic development and political power. So the challenge
really is not to abort the social empowerment process but to re-ignite
the developmental process in U.P, Bihar and Orissa.

RS: Despite
your optimism about peninsular Politics, I would argue that recent years
have seen at least a partial junking of Periyar’s incredible legacy.
The Southern states, especially Tamil Nadu, are once again revisiting
the prejudices of caste, religion and superstition.

JR: What you are seeing and what
you ask is attributable to the electoral system that encourages a search
for diversities. Sure, caste sentiment is strong in Tamil Nadu and Karnataka
but this is against the backdrop of a development dynamic. But the caste
sentiment itself assumes a different dimension in the South where it
is used for education, professionalisation, etc while in the North the
focus is upon reservations in government jobs.

RS: Let me
put this question differently: what distinguishes a Jayalalithaa from
a Laloo Yadav?

JR: Jayalalithaa represents both
politics and development. Laloo is all politics and that too all caste
politics…

RS: How do
liberalization and decentralization affect the very basic principles
of political federalism, i.e. how should the Center’s economic relations
with the States be organized? The most important example here is the
fiscal redistribution process – the source of much heartburn (especially
for the Andhra Pradesh government). Should federal redistribution be
premised on providing failing state governments with a safety net or
should it be focused on rewarding ambitious state governments? If you
choose the latter then aren’t you almost certainly creating a moral
hazard problem and weakening the incentive for reform?

JR: Today about 75% of the total
weight given to distribution claims is based on population, which automatically
means that Bihar and U.P dominate. Between 8-10% depends upon performance
parameters whether it is on tax policy or fiscal performance. One can
take the view that the incentives must increase and the weight given
to population must come down. On the other hand, it also raises a larger
question: what is the role of Center in a decentralized federation?
Isn’t this role supposed to include being a mediating mechanism of transferring
resources from rich areas to poor areas? One argument that could be
given against such fiscal federalism is that our fiscal federalism has
been excessively preoccupied with the objective of equity and has not
been overly concerned with the objective of efficiency. So perhaps the
tradeoff between efficiency and equity must be made much more explicit.
These arguments were raised in the context of the 11th Finance Commission
and I do believe that there is a lot of merit to them. Nevertheless,
it does not mean that the level of financing for Bihar or U.P must come
down, but there must be an element of performance conditionality in
these transfers. Whether they are eventually given to rich or poor states
does not matter.

RS: An additional
question relates the policy-making potential of multi-party coalitions.
Mr. Chidambaram has suggested that dismantling the APM and reforming
the PDS system was very difficult within the United Front government.
Do multiple parties mean multiple hurdles to jump, or fewer opposition
voices? How does the mechanics work in this case?

JR: I think there are a few general
principles of coalition politics that we have learnt from practice.
Every coalition must be a pre-poll alliance rather than a post-poll
alliance, which tends to be much more loose and opportunistic. You must
also have some degree of ideological coherence or programmatic unity
that all coalition members subscribe to. The second factor is a dominant
party in the coalition without which there would be a cacophony – Coalition
politics is like a symphony orchestra that requires a conductor who
controls the rhythm. In the coalition, I found, the process is frustrating
but the product is more satisfying because more people are part of he
consultative process and the consensus comes to the fore. Coalitions
are much more faithful to the Cabinet style of governance rather than
the Executive style of prime ministerial governance. Against that, you
must have enforcement machinery to ensure that there is discipline.
For example, the coalition in which I worked, the CPM who was party
to the coalition but supported it from the outside wanted to have their
cake and eat it too. It destroyed us because they criticized us from
the outside – it was the height of irresponsibility because it was ultimately
their own coalition. So I think you need to some rules of the game that
disallow extra-constitutional authorities from eroding normal decision-making
processes in a coalition.

RS: In that
case, what has gone wrong with the NDA – it seems to fit your model
for coalition politics but has failed to deliver?

JR: The single most important reason
has been the failure of the Prime Minister to assert his prime ministerial
authority.

RS:
Over his colleagues?

JR: Over his political colleagues
and over the administration. The NDA had everything going for it: it
had a pre-poll agenda, it had a disciplined dominant party in the BJP
and it had a charismatic leader in Mr. Vajpayee. But Mr. Vajpayee failed
to explore the extent of prime ministerial power – he has failed to
communicate and has become a prisoner of the system. He just did not
use the powers of his office – the Indian system gives to the Indian
Prime Minister far more executive power than even the American President
does (whom the legislature and the judiciary in contrast hem in). The
Indian PM can cock a hoop at the judiciary and the legislature though
unfortunately Mr Vajpayee has chosen to be an absentee landlord rather
than an active PM.

RS: What do
you make of Dani Rodrik’s theory that an economic reform process suffers
from asymmetric information since no one knows quite what the post-reform
universe would look like? So even though everyone knows that reforms
would raise total economic welfare, well-organized vested interests
such as unions lack confidence in being able to better their circumstances.
Is this the source of India’s bias toward the status quo?

JR: All my studies have shown that
there is a clear divide between trade union leadership and labour itself.
Labour would like to participate in growing industries that are dynamic
and buoyant. But I am afraid that trade union leaders have a vested
interest in maintaining the status quo. Moreover, the way our trade
unions are structured, most of our trade union leaders have nothing
to do with the concerned industry – they are externally imposed because
there is a very close nexus between trade unions and political parties
in our system. Now for example one of the biggest impediments to reform
in the banking industry are not blue-collar labour but white-collar
labour. This is similarly the case in attempts to reform even Delhi
University! So whether you are blue or white collar – the general point
is that vested interests are threatened when the system is thrown open
and made more accountable.

RS: What do
you make of the argument put forward by Ashutosh Varshney that thus
far only the easy reforms have been undertaken, hence explaining the
low salience of economic issues in elections?

JR: Well identity politics has dominated
politics in North India rather than peninsular India. Nevertheless,
there are very real limits to what can be done without serious political
limits. For example if you want to increase fertilizer prices or reduce
food subsidies then you have very serious problems of resistance. There
is no question about it: the politics of it are just as important as
the economics of it. In 1991, Dr Manmohan Singh raised the prices of
fertilizers by 40% then he had to back down and restrict the price increase
to large farmers. Similarly, every time we have had to raise the prices
of diesel for example, we have had to rollback it back. So what governments
have learnt is that the initial hike should be much more than is required
and hen you should roll it back! In fact I argued with Mr Chidambaram
in 1997 that he should hike diesel prices by Rs. 4. He asked why and
I replied “so that you can roll it back to Rs. 1.” He then asked me:
“wouldn’t I look foolish doing that?” I said no: “you go on television
and say that you increased it by Rs. 4 because you are a responsible
Finance Minister and you have reduced it to Rs. 1 because you are a
responsive Finance Minister and that is the essence of political management!”

RS: I would
like to draw your attention toward a controversial new theory put forward
by the analyst Rob Jenkins, who argues that the Indian reform process
is actually being driven by ambiguity and obfuscation. The government
frequently engages in ‘doublespeak’ and ‘double think’ – it sprouts
populist rhetoric to camouflage the inevitable. Is this description
accurate?

JR: I think that Jenkins has got
it partially wrong. To be sure, compulsion rather than conviction drive
much of the reforms at the Center and State level. There may be a few
exceptions like Naidu, Krishna or Singh who think out of conviction,
but it is true by and large that things are done out of compulsion.
This does not just refer to reforms – all policy changes in open pluralistic
democracies are incremental. Unfortunately in India, our political economy
is such that nothing happens unless there is a crisis. Even our defense
modernization was driven only after a battering by the Chinese! The
fact of the matter is that it is crisis – and not stealth – which drives
the reform process. I don’t think that you can do anything by the backdoor
in a democracy, of saying one thing and doing another – I don’t think
that is possible in the Indian system with an active free press, an
active civil society and ready opposition parties. So I think that compulsion
and conviction is a better framework to consider the reform process.

RS: What then
do you think of the theory put forth by Myron Wiener that the absence
of excessive misery makes any radical change in the economic rhetoric
rather difficult? Do you believe, as he does, that India’s slow deterioration
has failed to focus attention in the same way that complete failure
might have?

JR: It comes back to the argument
that crisis is the determinant of response, that without a crisis there
is no response. The Indian system is great when there is a crisis, a
famine, or a disaster. Whereas during normal times no one tends to do
anything because, to be frank, most people are comfortable with the
system. So why would you want to do anything that upsets the apple cart?
If it ain’t broke then don’t fix it – that is the policy.

RS: Ok. Then
consider the excellent set of arguments provided by T.N. Srinivasan
and Sumit Ganguly who warn us against gloating that we escaped the East
Asian crisis. They point toward internal indebtedness as an example
of how this economy might not die overnight but is slowly and surely
choking itself to death?

JR: An external crisis is much more
visible and immediate – it extracts a more short-term price. An internal
crisis in contrast is slow, grinding and spread over a period of time.
You can live through an internal crisis while an external crisis – such
as the East Asian crisis – can kill you. To that extent, India is well
insulated from an external crisis but is already in the midst of an
internal crisis – the full effects of which are not visible whereas
the effects of an external crisis is visible.

RS: So then
aren’t we in a particularly dangerous situation: we are sitting on a
bomb that we can’t see and so unlike the East Asian crisis that yielded
an enormous regulatory reshuffle, our status quo continues with its
legitimacy unchallenged in any dramatic fashion.

JR: Well we are seeing the costs
in terms of not being able to grow at 8% and increase the number of
jobs because we cannot invest. We cannot invest because we are borrowing
for consumption and what we do invest we earn low returns on. Nevertheless,
as long as the elites are secure then why would they be bothered? We
come back to the old argument that the system is good for the people
who run the system – so why would they want to change the system? How
do systems change? They change when people are angry or when there is
a sense of shame that others in the world are doing better than we do.
Is there any such sense of shame or anger in the government? No! The
Indian system has delivered for the political and bureaucratic class
– they have all the goodies. Now why would they want to change the system?
Now take Deng Xiaoping as a contrasting example. His incentive for economic
growth was to divert people’s attention from democracy toward growth
– a pragmatic objective that conveniently fit with China’s desire to
become a leading power. I often try to convince my political colleagues
that socialism has reached its peak in the United States of America.
Why? Because there is equality of opportunity, it is built for the average
citizen and everyone can aspire to the best quality of life. Can you
do that in India? No – it is a system built for the privilegentsia just
like the erstwhile Soviet Union. So I think why would anyone in the
system therefore want to make radical departure – what is the pressure
on him or her to make this radical departure? Now it so happens that
one pressure is fiscal bankruptcy that forces you to do new things.
The other significant stimulus is external pressure that emerges from
the IMF and so on. So I think that it is unfortunately true that the
Indian system has been good for the people who are part of system and
therefore there is no great pressure to change the system and allow
everybody to aspire to higher standards of living. For example, the
big Indian intellectual elite argument is that “oh, if everyone in India
aspires to our standard of living then, you know, there will be ecological
disaster!” They will even quote Gandhi to you and their favourite quotation
is that “there is enough for everybody’s need but not enough for everybody’s
greed.”

RS: I would
like to contrast two statements that you have made. On the one hand
you have suggested that governments are punished for bad economic performance.
However on the other hand you have suggested that governments have little
incentive to reform until a time of crisis. So how do we get governments
to respond to the ‘silent disasters’ that they building slowly in areas
such as banking and electricity?

JR: Let me clarify that I was referring
to economic issues that affect prices through inflation.

RS: Nevertheless,
what do we do on those issues that are invisible to the current generations,
i.e. those issues such as borrowing and indebtedness that penalize future
generations?

JR: Well one option that I have
already written about is to liberalize the external sector more quickly
so that the penalty for non-performance is that much greater. In that
case you can’t get away with sort of rubbish that goes on today because
markets will punish deviations from rationality. Faster external reform
introduces an element of instability and volatility in our system that
might enable faster internal reform. This goes into a point that I made
earlier, namely that we must build into the system, points of crisis
creation, which would make the system more responsive, and in consonance
with what the markets would expect to as being rational. But as long
as we continue to run an insulated economy then the pressure on us to
change will just not be there.

RS: That is
quite a radical and politically sensitive suggestion to make…

JR: But I have said this earlier
– we need to create crisis points by liberalizing faster externally.
Even though fifteen years ago I was a big believer in the Japanese model
of sequenced internal economic reform only thereafter followed by external
liberalization. I came to the conclusion that while the former argument
was economically desirable, from a political economy something else
was needed! So this is a classic example of how what is economically
desirable may not be politically desirable. Take for example the FICCI
argument, which is that you should globalize according to the domestic
pace of reform – which is equivalent to saying that we will never globalize.
Whereas my argument is that faster globalization will create greater
pressure for internal economic reform. It’s just the exact opposite!

RS: But is
this domestically feasible – in the political sense?

JR: Well we have done in the last
ten years, even if it has been with lots of kicking and screaming India
has cuts tariffs and integrated itself into the global economy. Nevertheless,
there have been a lot of shock absorbers and that is why we can pat
ourselves on the back for having escaped East Asia. But we are paying
a heavy price for escaping East Asia!

RS: I would
next like to turn toward the relationship between three variables that
you first identified in a seminal 1994 article entitled ‘The Real M3’,
namely Mandal, Mandir and Market. Do you agree with Dr Manmohan Singh
that the Mandir was responsible for derailing his reform agenda?

JR: I don’t think that Dr. Manmohan
Singh was entirely correct. Yes, Babri Masjid was a major event, but
the real problem was that once the crisis evaporated the stimulus for
reforms also evaporated. Having worked with Mr Narasimha Rao during
that period, I can tell you that the crisis concentrated his mind and
once the clouds lifted he went back to being the old-fashioned socialist
that he was: the middle way, the muddle way. So yes, the Masjid demolition
certainly destabilized the politics of the Congress Party and made Mr
Rao much more vulnerable. But it was not just Babri Masjid, it was the
evaporation of the whole crisis environment of the June and July 1991
period that removed the pressure to reform.

RS: If we
are seeing Mandal and Mandir playing such an important role in electoral
politics, do you see the Market becoming a new source of pro-liberalization
political parties?

JR: If you are asking me whether
the market is a potent enough issue to break parties then the answer
is no. First of all, all the pro-marketwallahs are in a small minority
in all parties, perhaps in single-digits in the Congress and in double-digits
in the BJP. But the debates on market will certainly continue within
parties, as they remain significant issues of political management.

RS: How will
India’s political culture affect attitudes toward deeper economic reform?
The idea put forward first by V.S. Naipaul but also mentioned recently
by Pranab Bardhan is that individuality is alien to the average Indian,
and therefore the liberating role of the market will actually be viewed
with suspicion by a society whose reigning ideas are communitarian.


JR: Indians are very comfortable
in a bazaar economy rather than a market economy. A bazaar economy has
no rules and is based on bilateral transactions. It is based on whom
you know and for what period of time. A market economy is impersonal
and is based on rules and regulation. These are anathema to the Indian
mind. The Indian is certainly an entrepreneur and the trading Indian
thrives in such environment. But the market is a different kettle of
a fish and Indians are not comfortable with institutions or impersonal
laws. Indians are thus very comfortable with rule through law rather
than the rule of law, that is why you can knock a poor chap off with
your BMW and pay him off and the system will let you go. Something like
that would not happen in a capitalist country like the United States
though it certainly happens in this socialist state of ours.

RS: The Mandal
and Market issues cross paths on the issue of reservations in the private
sector. When, or rather if, the Indian State is actually trimmed, do
you foresee the issue of reservations becoming a flashpoint?

JR: Very much so and I myself have
been deeply ambivalent about this issue. As you know there are only
two instruments of social mobility in India – one is politics and the
other is the public sector. These are the only two sectors where you
do not pay a price for the accident of your birth, which in itself is
a very sad reflection on our society. I am very much in sympathy with
this point and I have in fact argued with Mr Arun Shourie that a clause
in all privatization contracts should include a twenty-year continuation
of all affirmative action policies. I argued this on the Balco issue
as well though he did not agree with me. When the new Balco management
came to meet me I said that I would agree to support them if they agreed
to continue with existing affirmation programs. I am very much in sympathy
with this issue because in a highly stratified society you need avenues
for social advancement and if you choke those avenues then you are not
diffusing the benefits of economic growth to larger sections of the
population.

RS: There
has been some interesting re-thinking within the Western policy circles
on the utility of the Washington Consensus. The most significant formulation
has emerged from Joseph Stiglitz who argues for a Post-Washington Consensus
that focuses on institutions, transparency and regulation rather than
untrammeled liberalization. Why has there been such little discussion
of the Post-Washington Consensus in India, what with the enormous regulatory
failures in the telecom, aviation and banking sectors (to name just
three)?

JR: I want to first make a clarification.
It is wrong to suggest that we followed the Washington Consensus. We
in India had already been taking about liberalization in the late 1980s,
well before the themes of the Washington Consensus became popular. It
was just that these ideas became more widely known because the IMF and
so on pushed them. We in India had already been talking about these
ideas for some time, both in papers written by Mr Montek Ahluwalia as
well as myself.

RS: In an
essay in Seminar you suggested (as has Jagdish Bhagwati) that the Washington
Consensus was driven more by Wall Street than by Washington. Are there
any specific instances that you can cite during your tenure when India
came under pressure on capital convertibility prior to the East Asian
crisis?

JR: There was no great pressure
as such but I do recall that in 1996 there were suggestions from the
IMF that India would do well to introduce capital account convertability.
In fact, the appointment of the Tarapore Committee announced in the
Budget of February 1997 was, in some ways, a response to this “pressure”.
The Finance Minister was not averse to capital accout convertability.
The Tarapore Committee was to lay out a roadmap for convertability but
then East Asia struck and all was forgotten!!!

RS: What about
the specific problems of regulation and transparency?