This year’s election is a watershed in Indian history. This editorial discusses possible reasons for the stunning defeat of the previous government. While there is no denying that the previous government could be faulted for many things including creating a leadership vacuum and letting corruption go unchecked, the knockout blow came from its inability to reform the institutions that are responsible for fulfilling legitimate aspirations of the masses. What should the central government do

Kotwal, Ashok

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22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 1/10Authors Ashok KotwalProfessorUniversity of BritishColumbiaPublished on: 15 Jul 2014Countries: India - Bihar, India - CentralResearch themes: Political Economy,State The challenge of fulﬁllingaspirationsThis year’s election is a watershed in Indian history. Thiseditorial discusses possible reasons for the stunning defeat ofthe previous government. While there is no denying that theprevious government could be faulted for many things includingcreating a leadership vacuum and letting corruption gounchecked, the knockout blow came from its inability to reformthe institutions that are responsible for fulfilling legitimateaspirations of the masses. What should the central governmentdo? The recent parliamentary election may turn out to be awatershed moment in Indian history. The previous governmenthas lost by a margin that exceeded even the most optimisticexpectations of its critics. Congress, for so long at the helm ofaffairs, has been decimated to the extent that its revival is inserious doubt.What caused this deluge?Sources of disenchantment  Of course, the sense of disenchantment has been palpable for awhile, and one could easily point at many possible sources of it:slowdown in growth rates over the past three years, a non-communicative Prime Minister indicating a leadership vacuum,and to top it all – corruption scandals. This general sense ofmalaise and disenchantment created an open terrain for punditsto trot out their own pet theories. For example, that theCongress-led United Progressive Alliance (UPA) governmentkilled growth by creating disincentives for investment – bothdomestic and multinational. Or, through a programme ofredistribution, they snuffed out individual initiative and alsocreated unsustainable fiscal deficits. In addition to all this, thegovernment could not hold inflation, especially food priceinflation, at bay.But is this what an average voter cares about? All those whoturned against the previous government were not the readers ofBusiness pages who worried about the investment climate or thedeficits. They felt let down. Why?Which of the above mentioned conjectures are supported byevidence?First, note that investment as a percentage of the GrossDomestic Product (GDP) – Gross Capital Formation (GCF) –rose significantly during the UPA regime.Figure 1. Gross Capital Formation, 1991-201222/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 2/10Figure 1. Gross Capital Formation, 1991-2012And, so did Foreign Direct Investment (FDI) except for thecrisis years of 2007-2008 and the slowdown years of 2011-2013.Figure 2. FDI inflows, 2000-2013Were the voters spooked by the specter of macroeconomicprofligacy? It does not seem so if we take a look at whathappened to fiscal deficit and public debt.  Except for the yearsof financial crisis (2007-2008) when the government had toborrow for the purpose of giving a much-needed stimulus, thefiscal deficit has not been out of control.Figure 3a. Fiscal Deficit, 1994-2013Source: Ghatak, Ghosh and Kotwal (2014); based on RBI dataFigure 3b. Public Debt22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 3/10Source: Ghatak, Ghosh and Kotwal (2014); based on WorldBank data.Most importantly, as Figures 4 and 5 below indicate, for 7 outof 10 years, the average growth rate of GDP has been higherthan ever before (for a comparable span of time) and itcompares favourably with that of the rest of the world duringthe same period. When the financial crisis hit the US andEurope in 2007-08, the growth in India slowed down but madea quick recovery. During the last three years, the growth in thewhole world slowed down but admittedly Indian growth sliddown more precipitously.Figure 4. Annual growth rates, 1991-2012Source: RBIFigure 5. Annual growth rates of India vis-à-vis China and theworld, 1998-2013 Thus, the claims that the electoral disaster for the previous22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 4/10Thus, the claims that the electoral disaster for the previousgovernment was brought about by a weak growth performanceinduced by low rates of investment and fiscal profligacy arethus not supported by the evidence on the actual outcomes ofthe economy. The exception is the last three years during whichthe growth rate fell as it did in the world as a whole. And thegrowth slowdown surely played a role especially because themedia targeted it as a clear manifestation of the failure of thegovernment’s economic policy.In any case, a slowdown of the growth rate can only affect theelectoral behaviour of an average voter provided he or she isdirectly affected by it. Given that a vast majority of Indianvoters are under twice the poverty line, their preferences woulddepend to a significant level by what happened to the headcount ratio. However, poverty was declining somewhat fasterduring the UPA regimes than what they had experienced in thepast (See Figure 6 below). In fact, during the years ofprecipitous growth decline (2010-2012), poverty decline wasthe fastest due to the enormous rise in demand for unskilledworkers in the construction sector despite the growthslowdown.Figure 6. Consumption expenditureNote that ‘Z’ and ‘2Z’ indicate the poverty line and twice thepoverty line and their intersection with the cumulativedistribution lines corresponding to the successive NSS years givethe percentage of the population under the two poverty linesrespectively.However, I believe that the growth slowdown rankled theurban elite much more than the masses that voted against theprevious government. Most voters react to their ownperceptions of how the government policies are affecting theirlives and not to the numbers that appear in the business pagesof newspapers. As mentioned before, the growth slowdownduring the last three years did not slowdown the decline in thepoverty numbers and a majority of voters are poor.What then explains the electoral rout?Inflation certainly has a valid claim. Yet, note that real incomeswere growing during this period and poverty numbers based on(real consumption expenditure) were coming down.22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 5/10(real consumption expenditure) were coming down.Figure 7. Annual Inflation rate for Industrial Workers (IW),1997-2013Source: Ghatak, Ghosh and Kotwal (2014); based on RBI dataDysfunctional institutions as long-run poverty traps Note that growth is invariably accompanied by a decline in thepercentage of population under the poverty line. However, thisdoes not necessarily translate into a developmentaltransformation whereby the next generation gets catapultedonto a more productive activity, and therefore into a moresecure and better life than their parents’. That can only happenif the public institutions that enable such transformationfunction effectively.During a period of sustained growth, as over the last twentyyears in India, people become hopeful. Families that forgenerations had remained in low-productivity activities startdreaming of brighter futures for their children. This is especiallyso when people belonging to the same class are getting breaksand climbing out of poverty, “Why can’t my kids get a salariedjob in the city when his could?” But if the growth inopportunities is not keeping pace with a visible rise in theconsumption levels all around you, such dreams are shatteredand resentment grows. The anger born out of frustration getsdirected towards the government in power and the anger isintensified when corruption scandals break out one afteranother.I believe that this is one of the main reasons for the electoralrout of the last government. The generation that hadexperienced stagnant incomes had begun to hope that at last thecountry was on the move and their children would geteducation and secure salaried jobs. They could witness somepeople reaping such opportunities. But the hopes of many werefrustrated, as the public system of education remaineddysfunctional. Public healthcare fared even worse.  Their hardearned money had to be spent on private schools and tuitionsand private healthcare. The window of opportunity was openfor just a fraction of the aspirants.It was not as if the UPA government was totally unaware of thesimmering resentment. There was a spate of well-intendedlegislation aimed at the poor.  But partly due to bad design andpartly due to poor implementation, the attempt to woo the poor22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 6/10partly due to poor implementation, the attempt to woo the poorflopped. In fact, it may have made matters worse by promisingmuch but delivering little. Right to Education did little toimprove the quality of public education. The PublicDistribution System (PDS), through which the Food SecurityAct is supposed to be implemented, is leaky and corrupt, and sois the Mahatma Gandhi National Rural Employment GuaranteeAct (MNREGA). Public Health Clinics are dysfunctionalbeyond belief. Panchayats have proved to be ineffectual increating local infrastructure that could have enabled the poor torealise their aspirations.Thus, though the poverty declined in absolute terms, theinstitutions that could have enabled the poor to climb out ofpoverty permanently have been ineffective. When a part of thepopulation was experiencing massive increases in their standardof living, a majority of Indians was left to contemplate theprospect of never being able to transform their lives and toclimb out of poverty permanently. The main reason for thislong-run poverty trap was government failure to improve theinstitutions that spur development.How exactly do institutions impinge on the process ofdevelopment?Though India now has the status of an emerging economy, 90%of its labour force still toils in the informal sector that ischaracterised by low level of technology and skills, andtherefore, low level of productivity. It is evident that the highrates of growth achieved by India have been mostly due to theformal sector growth that in turn was based on technologytransfer from developed countries.The process of development proceeds along two channels: (1)by improving the productivity of the informal sector, and (2) bytransferring labour from the informal to the formal sector of theeconomy. Neither of the two channels can work well withoutproperly functioning institutions. Why so?Note that productivity is low in the informal sector because itdoes not have access to good infrastructure (example, goodroads, power, credit and information) as well as to skills. Suchaccess is very much based on institutions of local governancesuch as panchayats. Similarly, the movement of labour from theinformal to the formal sector depends on the skill level ofworkers. Without a minimum skill level, they could not beemployed with a high level of technology, and it is theeducational system that transforms unskilled labour into skilledlabour. That system is clearly failing in its mission, judgingfrom the Annual Status of Education Report (ASER) thatevaluates the quality of education across the country. The ASERdata (Figures 8a and 8b below) shows that the quality ofeducation, measured by the simple metrics of (i) the percentageof children in higher classes who can read a standard II text,and (ii) the percentage of children who can do simple division inclasses 4th through 8th, has deteriorated. The demographicdividend that India is supposed to enjoy will amount to nothinggiven the state of Indian education.Figure 8a. Quality of school education (2009, 2011 and 2013)22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 7/10Source: ASERFigure 8b. Quality of school education (2009, 2011 and 2013)Source: ASER Improving the system of public education, however, is an uphilltask. Education, first of all, is a state subject; the centralgovernment can pass laws but the implementation will alwaysbe in the hands of the states. This is why we see so muchvariation in the quality of education across states. It is theresponsibility of panchayats to build schools and to holdteachers accountable. If the local governance at the Panchayatlevel is not satisfactory, the problem will remain unsolved.What is true of education is equally true of public healthcare,local infrastructure and other things that have the potential ofenabling the poor to escape out of the poverty trap for good.What is needed is an improvement in the institutionalperformance at all levels and that is more easily said than done.Difficulties in improving the institutional performanceWhat we mean by institutional performance is nothing otherthan the behaviour of the officials and workers associated withthe particular institution. For example, schools and clinics willnot function well if teachers and health workers do not show upvery often or do not work diligently. It depends partly on theincentives built into the design of the institution (if suchbehaviour is monitored and used in the determination of their22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 8/10behaviour is monitored and used in the determination of theirincomes), and partly on the social norms prevalent in theculture (whether there is a stigma attached to irresponsiblebehaviour). These social norms in turn are shaped by thehistory and geography of the place. Thus, a significantdeterminant of institutional performance lies outside any quickpolicy fix today. Social norms can change in response to achange in the incentive structure but it takes time. This is whatmakes improving institutional performance a big challenge.Often, even well-designed institutions perform badly. The 73rdamendment in 1992 was intended to devolve power down tolocal levels to make the allocation of government resourcesmore aligned with local preferences, and the government moreaccountable to the people it serves. Officials at all three levels ofthe Panchayat are elected through a democratic process. Onecan hardly find fault with the design of this set of institutions.Even elections take place as ordained and the voter turnout isimpressive.By design and in operation, these institutions – vital fordevelopment – should serve the interests of the majority. But inmany states, they do not, and the reason is that despite thedemocratic design, the local elite can easily manipulate theseinstitutions to their own advantage. Even centrally allocatedfunds do not get used for their intended purpose. The demandfor MNREGA works gets suppressed. Public goods that wouldbenefit the poor do not get built, if any of this would increasethe wages of the local labour at the expense of the local elites(Anderson, Francois and Kotwal 2014).The local elites are in a position to do so because the localpopulation is still dependent on them for warding offconsumption contingencies when other channels such as accessto formal credit are conspicuous by its absence. As long aspeople are living at subsistence with a contingency such as badweather or a family illness lurking around the corner, thisdependence will continue. If the incomes increase sufficiently sothat people can depend on their own savings, the dependencewill go down. Similarly, if the development process createsalternate sources of credit, the dependence will go down. Thecatch-22 here is that, partly, the process of development thatwould break the stranglehold of the elite is itself under theircontrol.Improving the institutional performance, therefore, meansunveiling reforms that would change the ethos of the wholecountry. This is no easy task.But does this mean that the central government can do nothing?Modi has fought and won the election with the slogan of ‘GoodGovernance’. It is a short form for ‘improvement in institutionalperformance’. I have argued above that it is a promise hard tofulfill and yet it is exactly what the electorate wants.  What canthe Modi government do?The ethical standards observed by local government officialscould hardly be independent of those followed by the higher-level officials such as cabinet ministers and the upper echelonsof the Indian Administrative Service (IAS). A code of conduct22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 9/10of the Indian Administrative Service (IAS). A code of conductfor the higher level officials is something the new governmentcan enforce, and in all likelihood, they are likely to do so.One reason for local corruption is that the public at largeknows little about the funds that the local governments have attheir disposal and their intended use. The monopoly ofinformation confers a great deal of power on those who have it. The central government can reduce this power by posting (andpushing the state governments to post) the relevant informationonline. If villagers are unable to access it, Non-GovernmentalOrganisations (NGOs) could do it on their behalf. Right toInformation Act enacted by the previous government is helpfulin this regard.Since local elites are able to use the institutions for their ownbenefit by exploiting the dependence of the local population, itis crucial to reduce this dependence. Technology can be usedjudiciously for this purpose. For example, if the wages ofworkers participating in MNREGA projects are transferreddirectly into their Unique Identity (UID)-linked bank accounts,the local elite can be bypassed to a large extent. This issomething that was already started by the previous governmentand will hopefully continue.Concluding remarksTo sum up, this year’s election is a watershed in Indian history.The stunning defeat of the previous government was most likelya result of the frustration of unprecedentedly high aspirationscreated by sustained growth in the previous three decades.There is no denying that the previous government could befaulted for many things including creating a leadership vacuumand letting corruption go unchecked under its watch. I believehowever that the knockout blow came from its inability toreform the institutions at all levels that are responsible forpreventing legitimate aspirations of the masses from beingrealised. Clearly, the mandate of the new government is toimprove institutional performance. This is a highly difficult taskas institutional performance depends on many factors beyondthe control of the central government. However, there are a fewthings that the central government can do to fulfill the mandategiven to them by the voters. If they fail, the surge of enthusiasmfor them will turn into a tidal wave of resentment.Acknowledgments: This paper draws heavily on Ghatak, Ghoshand Kotwal (2014). The graphs are all reproduced from thatpaper. It also draws on the talk I gave in a symposium onIndian election, held at the University of British Columbia onMay 20, 2014. I am also grateful to Parikshit Ghosh, MaitreeshGhatak and Arka Roy Chaudhuri for helpful comments.Further ReadingGhatak, M, P Ghosh and A Kotwal (2014), “Growth in the Timeof UPA: Myth and Reality”, Economic and PoliticalWeekly,April 19, Vol. XLIX, No. 16, pp 34-42.Anderson, S, P Francois and A Kotwal (2014), ‘One Kind ofDemocracy’, Working Paper, University of British Columbia.22/06/2017 The challenge of fulfilling aspirations - IGChttp://www.theigc.org/blog/the-challenge-of-fulfilling-aspirations/ 10/10

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