The Real Debate over Economic Reforms in India

Dipankar Basu

The debate over economic “reforms” in India has been going on for quite a long time now. This long and heated debate has been centred around the effects of what has been called “economic reforms”, a sharp change in the policy regime governing the Indian economy. It might be useful to recall that the policy regime in India gradually started changing right after Rajiv Gandhi came to power towards the end of 1984; of course the change was considerably accelerated after Manmohan Singh, the current prime minister, became the finance minister in the Congress government in 1991. Since then there has been no looking back; whether it is a coalition government led by the centrist Congress or led by the right-wing Bharatiya Janata Party (BJP), economic reforms have continued apace. In fact, consensus about the necessity and desirability of reforms is evident across the whole political spectrum, ranging from the right-wing BJP to the social democratic communist parties, CPI and CPI(M). Of course there are subtle differences in emphasis and speed of implementation, with the social democrats trying to play an oppositional role at the federal level while adopting those same policies in the states under their rule, notably West Bengal. It is as an attempt to forcefully impose this policy regime on the people of West Bengal, where a broad coalition of social democratic forces has been in power for the last three decades, that we must try to understand the recent brutalities of the State in Singur and Nandigram.

The main thrust of the policy change comprising “economic reforms” was a move towards according greater role to market forces in the economy and came in many guises. For instance it meant the lowering most tariff and non-tariff barriers to promote the trade of goods and services across Indian borders; it meant liberalizing many legal procedures related to investment, corporate taxation, trade, commercial banking, stock market activity and most importantly the hiring and firing of labour; it meant the disinvestment of public assets like public sector units, which in most cases meant selling off public assets built with tax receipts over the years at below-market prices to private capital; it meant an uncritical adoption of “fiscal fundamentalism”, i.e., paying especial attention to the balancing of the budget or at least making some serious efforts at reducing the government budget deficit; it meant the gradual entry of foreign capital into the Indian economy (both as FDI and as portfolio investment); it meant a gradual retreat of the State from the provision of social services like health and education and also meant the simultaneous encouragement of private capital to enter into these areas and many more similar changes. Compared to even the pseudo-socialist policy framework that had been established after the British departed in 1947, the new policy regime meant a massive swing in the direction of unfettered capitalism. And this could not but generate debate, vigorous and heated debate.

The debate centred around the effects of such changes; and since the effects of these policy changes would become clear only after some years, the debate almost wholly concerned itself with predictions, with the future. The crucial question was whether this new set of policies would benefit the economy as the proponents asserted or would lead to disaster as the critics pointed out. Ranged on both sides were the who’s who of the Indian economics and policymaking community. Arguing for the reforms were noted economists Jagdish Bhagwati, T N Srinivasan, Montek Ahluwalia, Manmohan Singh, Arvind Panagariya, Bibek Debroy, Surjit Bhalla, Shubhashish Ganguli and many others; on the other side of the table were equally distinguished economists like Prabhat Patnaik, C P Chandrashekhar, Jayati Ghosh, Praful Bidwai, Ashok Mitra, Amiya Bagchi and others.

Most critics of the economic “reforms” had argued that the adoption of the above set of policies would be disastrous for the Indian economy. They had argued that opening up the Indian economy to trade would lead to “deindustrialisation”, i.e., foreign goods would flood our markets and displace locally produced goods leading to closing down of local industries and thus increasing unemployment in the Indian economy. This, they had argued, would lead to a fall in the growth rate of the Indian economy (once the pent-up consumption expenditure boom was over) and lead to a fall in the economy’s overall productivity. They had argued that the poverty rate as measured by the head count ratio (the proportion of the people whose annual consumption expenditure fall below the poverty line) would increase and that income and wealth inequality would also increase dramatically. They had argued that the investment rate in the Indian economy would drop and lead to a shrinking of the capital goods sector. The proponents had, on the other hand, argued exactly the opposite; they had argued that the new policy regime would lead to growth in the economy and reduction of poverty.

Fifteen (or twenty if we start from the mid 1980s) years down the line, the evidence is at best mixed; if anything the empirical evidence seems to bear out the proponents’ claims more than the critics’. The growth rate in the Indian economy (as measured by the growth rate of the per capita income) has certainly increased over the last two decades; opening up the economy has not led to deindustrialisation (in fact our exports have increased as also our imports). The Indian economy does not have a large current account deficit which means that we have not been flooded with foreign capital. In fact, over the last few years, outward FDI from India has increased rapidly and in 2006, the Indian economy was a net outward FDI originator. Savings and investment rates have also dramatically increased. And probably most importantly, the poverty rate has consistently declined over the last twenty years; the rate of decline had itself declined in the nineties before picking up again in the last six years. But along with this we also have increasing income inequality, acute rural distress, a degrading environment and most importantly a stagnation in some of the most important indicators of well-being (like the infant mortality rate, the maternal mortality rate, the life expectancy at birth, the primary and secondary enrolment rates and many others).

The process of economic growth and development is more complex than either the well-known proponents or the critics would have us believe; both present only half-truths. When proponents of “reforms” ask us to look at the facts, they want us only to see that the poverty rate (as measured by the head count ratio) has declined; they do not want us to see that this decline has not been accompanied by an improvement in the measures of social well-being, they do not want us to understand the reasons behind the acute rural distress that has led to farmer suicides on such a large scale. The overemphasis on economic growth and the head count ratio by the proponents tries to discount years of research that has drawn our attention to the inherent limitations of this rather narrow measure of development and poverty.

Equally dishonest, I feel, are the intellectuals associated with the official, social democratic left. Faced with evidence that goes against their earlier pronouncements, they continually shift their stands without as much as acknowledging possible problems in their formulations. Notice how they have shifted their discourse on poverty: from poverty decline they have gradually moved onto the rate of poverty decline. Recall that most of them had started the debate by asserting that poverty would increase; once empirical evidence shows that it has not, they have started talking about how the rate of decline has itself declined! Recall also that they used to never focus attention on the indicators of social well-being that they find so important now; issues like education and health were looked at with little more than derision, matters for the “development economists” and not for radicals. Radicals indeed.

To put the whole debate in proper perspective it is important to realize that at bottom, the process of economic development is broadly a matter of increasing the productivity of social labour; and this, we know since Adam Smith and the classical political economists, can be best achieved by increasing the division of labour. Institutions which can support an extended division of labour will lead to increasing labour productivity and thus create grounds for general prosperity in the economy. I think there is much of relevance in classical political economy that can shed light on current debates and let me make a small digression into the writings of Adam Smith. Duncan Foley’s recent book, “Adam’s Fallacy: A Guide to economic Theology”, contains an extremely lucid, well-informed and critical introduction to classical political economy and I will borrow briefly from Foley’s account to motivate the point that I want to highlight.

What makes a nation prosperous, asked Adam Smith at the beginning of his inquiry into the causes of the wealth of nations. His answer is profound because of its stark simplicity: the extent of the division of labour. Not the abundance of natural resources, not the amount of precious metals like gold and silver, but the extent of the division of labour within a country determines the potential prosperity that it can offer its citizens. Behind this assertion lies the understanding – shared by all classical political economists – that the ultimate source of wealth is the labour that goes into the process of social production. The extent of the division of labour, by determining the productivity of that labour, ultimately determines the potential wealth of any nation.

In Smith’s account, the division of labour refers to “the breaking down of useful production into a series of separate tasks, each of which can be accomplished separately from the other”. It is important to realize that Smith sees the division of labour occurring at two very different levels, one at the level of the enterprise and the other at the level of society as a whole. The first, which Smith calls the detail division of labour, refers to the process by which production within a firm is broken up into separate tasks; it is the detail division of labour that finally creates the conditions for the introduction of machinery into the production process. But the division of labour also occurs at the aggregate or societal level; this is what Smith refers to as the social division of labour, which is the process by which “parts of a complex production process can be separated into different points of production, which may be located in different firms, or even different geographic regions”.

Smith’s account of the causes of the wealth of nations is completed by positing a positive feedback loop between the division of labour, labour productivity and the extent of the market; this link, when and where it can take hold, operates as a positive feedback loop. Widening extent of the market (i.e., growth in effective demand) supports an increasing division of labour, which increases the productivity of labour, leading to falling prices and rising real incomes. Growth in real income increases the extent of the market in turn, completing the virtuous spiral.

Notice how, in narrating this story of economic development, Smith the political economist has almost imperceptibly melted into Smith the theologian of capitalist social relations; this is the critical point that Foley helps us understand. For hidden within his “objective” description of the workings of a capitalist economy are two implicit value-laden propositions. First, that the process of technological progress and economic growth – the virtuous spiral of economic development – is beneficial for all members of society, i.e., it is autonomous and class-neutral: how else could it be morally justified? And second, that the defining institutions of capitalism – private ownership of the means of production, and markets – are the only ways to support a society-wide, complex division of labour with its attendant benefits in terms of high labour productivity.

To my mind, this is where the critique of economic “reforms” should really be located, not where the social democratic left has placed it. If India manages to establish the institutions of capitalism properly, then there is no doubt that this can lead to technological progress and economic growth. This growth will also lead to a decline in the poverty rates, much like that has happened in Korea and is currently happening in Vietnam or China. If this is true then why oppose economic reforms? This is a legitimate question which the social democratic left does not even attempt to answer. To my mind, the opposition to economic reforms lies in opposing the claim that capitalism is the only way to support an economy-wide complex division of labour. It is to take account of the cost of economic development alongside the benefits. It is to assess the class-nature of these costs and benefits in an already class-divided society. We must ask ourselves: will we oppose a development path that reduces poverty rates but only at the cost of increasing inequality? Economic development through capitalist industrialization (whose logic is, what Marx famously called, “Accumulate, accumulate! That is Moses and the prophets!”) will lead to dislocations of millions of lives in the medium and short run, though in the long run, the economy-wide poverty rate might go down. The question really before us is this: are we ready to ignore these medium and short-run costs for the long-run benefits which might materialize only in decades or even longer? Are we ready to accept a dispensation where the costs of economic development are disproportionately borne by those who will rarely, if ever, get to enjoy the benefits of that development?

The author is associated with Sanhati (, a solidarity forum for resistance to neo-liberalism in West Bengal, India.

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