The Hindu Business Line : Is India's an exclusively elitist democracy?

It is now admitted that the economic policy of the government is leading to the development and growth of an exclusively elitist system. Corrections are required and this can be done only by enabling the government to play a more proactive role.

There are about 7.1 lakh Indians with liquid wealth of $1,00,000 or more. The number of millionaires in India is growing at 12.8 per cent annually and their wealth will be around $322 billion by 2009, according to American Express Bank. The Indian economy is growing at 8-9 per cent. The stock market is at an all-time high, there is a bulging urban middle-class and Indian companies are on an acquistion binge abroad. There is a consumer boom, real-estate prices are on a gallop. What more does the country need on the 60th anniversary of Independence?

And yet, there are nagging questions waiting to be answered. Prof Aneel Kamani of the University of Michigan contrasts the above situation with the other India where 80 per cent of the people are carrying on with just a little over $1 per day; 39 per cent of adults are illiterate; 10 per cent of the boys and 25 per cent of the girls do not attend even primary schools; 49 per cent of the children are under-weight and suffer from mall nutrition; 33 per cent of the rural households do not have access to safe drinking water, and 81 per cent do not have access to toilets.

Cause of divergence

What accounts for this divergence between the two Indias? Ever since globalisation became the mantra of fiscal and monetary policy, the accent has been on all types of incentives for promoting the private sector and boosting the capital market. Thanks to the abolition of the tax on dividends received, tax-free incomes of corporate households have touched seven/eight figures annually. A strong, significant minority receives tax-free dividends running into crores of rupees. The abolition of the long-term capital gains tax on listed securities has enticed large investments to the capital market and the real value of shares and securities came to be revealed because of such abolition of LTCG.

Mauritius Route

The Mauritius Route for availing oneself of capital gains tax exemption is now applicable only to unlisted securities. Fiscal policy is focused on encouraging established industries as can be seen from the tax sops extended to Special Economic Zones, Export Processing Zones, IT Parks, etc. The rich are growing richer though the poor are not getting poorer. Michael Spence, an Economics Nobel laureate, referred to 11 economies that have seen rapid growth since the end of the Second World War and opined that all these countries have not failed to achieve significant poverty reduction (address at ICRIER in New Delhi in September 2006).

Even "Socialist" China has now realised how serious economic disparities can affect welfare. While India talks of "inclusive growth" China is planning for a "harmonious society" in its latest five-year plan. Policy framers will have to recognise that the present economic stance of the Government is only helping the growth of cartels and monopolies. It is not as if monopolies come about only through the hand out of licences or quotas.

A report in The Economist of London points out that as the demand threshold increases and firms expand through mergers and acquisitions to enjoy economies of scale and dominate global markets, the monopolisation of markets is obvious. Indeed, the real test for 21st century capitalism will be what to do with the global phenomenon of giant corporations with vast profits, higher executive compensation and the ever-increasing unequal distribution of income.

Role of Government

In this regard, there will be a role for the government. Economist Nobel Laureate Edmund S. Phelps refers to two sets of economies in the West, one comprising the US, the UK and Canada, and the other the Western Continental Europe. Though both are based on private ownership, the system in Continental Europe has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners".

The system's institutions include big employer confederations, big unions and monopolistic banks. Since the Second World War, a great deal of liberalisation has taken place. But new corporatist institutions have sprung up: Co-determination (cogestion, or Mitbestimmung) has brought "worker councils" (Betriebsrat); and in Germany, a union representative sits on the investment committee of corporations. The system operates to discourage changes such as relocations and the entry of new firms and its performance depends on established companies in cooperation with local and national banks.

What it lacks in flexibility, it tries to compensate with technological sophistication. So different is this system that it has its own name — the "social market economy" in Germany, "social democracy" in France and "concertazione" in Italy.

Prof Phelps also observes that the American and Continental systems are not operationally equivalent, contrary to some neo-classical views.

Capitalism admittedly is reviled in Western Continental Europe and some of its elements are seen, in the words of Prof Phelps, by some in Europe as morally wrong in the same way that birth control or nuclear power or sweat-shops are seen by some as simply wrong despite the consequences of barring them.

Privileges of old wealth

Giving greater latitude to businesses would increase the privileges of old wealth. To quote Prof Phelps again, "Actual capitalism departs from well-functioning capitalism — monopolies too big to break up, undetected cartels, regulatory failures and political corruption. Capitalism in its innovation plants the seeds of its own encrustation with entrenched power.

These departures weigh heavily on the rewards earned, particularly the wages of the least advantaged, and give a bad name to capitalism" (Wall Street Journal, October 2006). Western political scientists are now increasingly stressing the importance of caring for the needs of "stake-holders" society, meaning a society in which not merely the corporate shareholders with their share in the capital but the labour, landowner and the consumer all have interests in the business or in the making of government policy.

All have to be effectively represented in the making of the policy. The less well defined the interest, the harder it is to see how the stake is to be claimed or protected.

Elitist system

It is now admitted that the economic policy of the present government in New Delhi is leading to the development and growth of an exclusively elitist system. Corrections are required and this can be done only by enabling the government to play a more proactive role.

The size of the government in the national economy remains a mere 15 per cent, as measured by the ratio of Central government expenditure to GDP. The US government has grown as fast as its economy since 1989. The expenditure of the state is about 36.6 per centof GDP. This is also true of Britain, France, Germany and the OECD as a whole. The size of the government is not being reduced in any of the Western countries.

Those who talk of the need to reduce the size of government expenditure should remember that such a reduction can only be at the cost of the welfare of the vast masses of the poor and the downtrodden whose needs can be met only by more and more public expenditure.

(The author is a former Chief Commissioner of Income-Tax.)