Of the four factors, an effective government is the most important criterion. A country can become rich with a big or a small government (France vs USA) but not without an effective one. Since the 1950s, many countries have gone from being poor to either middle-income or rich. These include countries from Taiwan, South Korea, and Thailand to Chile. Indians always like to compare themselves to China considering the proximity and similarity in size. Though China and India were comparable in 1978, in the 40 years since, the difference has become stark. In social indicators like female education and child mortality, Bangladesh has overtaken India and we are compared to Sub-Saharan Africa. In the long run, the feasibility of high economic growth is threatened by the underdevelopment of social and physical infrastructure and the neglect of human capabilities.

 

In India, the state is present in all aspects of people’s lives and the government largely functions with a feudal attitude – in modern parlance, “neopatrimonialism” (Shmuel Eisenstadt, ‘Traditional Patrimonialism and Modern Neopatrimonialism’). The elected representatives use state resources to secure the loyalty of their clients in the general population by promising to solve certain problems or by providing government jobs and other benefits. The system thus supplants the bureaucratic structure and undermines institutions and the rule of law. This has been observed everywhere in new democracies from Asia to Africa and is a problem that is hard to solve.

 

 

Samuel Huntington (‘Political Order in Changing Societies’, 1968) argued that, as societies modernise, they become more complex. The institution of the local chief (“big-man”) which can serve a nomadic tribe or a small village cannot support a kingdom. In most developed countries (except the United States), democracy followed industrialisation. That is to say that as nations industrialised, there arose a middle class; as the middle class grew, it organised itself into a political force demanding representation before universal suffrage was granted (though in order of landowners, followed by all men, and only then women). If the social mobilisation bred by economic growth exceeds the capacity of the political institutions, the result can be a revolution.

 

In countries where the advent of democracy and universal suffrage has preceded industrialisation, the result has been chaos or ineffective governments. In these countries, leaders retain their old feudal and ‘clientalistic’ affiliations which come in handy during elections. Such a patronage network results in governance becoming personality- and cult-based rather than impersonal and rule-based. Weak institutions lead to weak law enforcement and conflict, and conflict leads to poverty. 

 

 

Rule of law means that decisions are taken based on sound legal principles, rather than arbitrary exercise of power. Accountability, transparency, strong judiciary, separation of powers – all of these count towards rule of law. In the last ‘Rule of Law’ index, India ranked 66th among 113 countries. The general structure of Indian law enforcement is sound, however, as we all know redress is hard to come with courts and police overburdened. A large part of the banking NPA problem can also be ascribed to the extremely long time it takes for courts to resolve cases. Enforcement for the rule of law directly depends on state capacity discussed above.

 

 

Taiwan and South Korea developed as authoritarian states, but as the countries grew richer, a new middle class emerged which organised itself politically and demanded representation. The state institutions developed to accommodate these, and the two countries are now counted among developed countries with equally developed democratic institutions (in terms of Huntington, in the correct order). 

 

The Arab Spring was an event where a growing educated middle class demanded democratic accountability, but autocratic regimes maintained by resource revenues did not evolve to accommodate the peoples’ demand of employment or representation. When economic growth failed to produce meaningful employment opportunities, people in the region, particularly the youth with high expectations for their governments, took to the streets. At first, they demanded not the overthrow of their leaders but jobs.

 

China is an authoritarian state which is largely not accountable to its people. But it is stable because it delivers what its citizens demand, i.e., economic growth and rising incomes. As China becomes richer, the Communist Party structure will be tested on how resilient it is and how it manages to deliver what people demand. If growth stalls, the truce between the people and the Party may break. 

 

India does fairly well in terms of democratic accountability with a large number of political parties and largely fair elections. However, ineffective governance makes the government unable to provide what the populace demands. This is a problem as we are now facing a demographic transition with a large number of youth joining the workforce in the near future. Long-term unemployment and weak employment prospects can only fuel social unrest and a tendency toward radicalisation.

 

 

At some point, all governments are expected to deliver on the aspirations of the people. This implies that they have to work towards improving the living conditions and increasing the wealth of the populace. The Indian state has a very patchy record of delivering economic well-being. After twenty-five years of economic liberalisation, the middle class is still non-existent. Estimates by Goldman Sachs and McKinsey Global Institute put India’s middle class at 5 percent of the population while those by Branko Milanovic and Edward and Sumner in separate studies put it at less than 1 percent of the population.

 

Weak government effectiveness also leads to an inability to redistribute the fruits of economic growth. Unlike other countries, the Gini coefficient (which is a measure of inequality) for India increases when transfer payments from the government are included in the calculation. This means that even subsidies and transfer payments in India are captured by the well-off while large masses remain underemployed earning only a subsistence living. This exclusion from economic growth leads to dissatisfaction which can turn violent like the protests by Patidars in Gujarat, Jats in Haryana and the ever-present Maoist movement in central India. What is new here is that the new protests are from hitherto dominant social groups.

 

India fascinates the world and financial markets because it has so much potential. Soon to have the world’s largest population to drive consumption, it is still very poor with per capita GDP below $2,000 per annum. This is less than one fourth of China and less than 20 times that of the USA. Indians quite often claim that China can get things done because it is not a democracy. (This may not be true: Daron Acemoglu, Suresh Naidu, James Robinson and Pascual Restrepo in their 2014 column titled 'Democracy causes economic development?' discuss new evidence showing that democracy has a robust and sizable pro-growth effect.) The excuse allows lessons about China's administrative systems, technological prowess and other capabilities to be ignored. For all the vagaries of growth, India has managed to entrench a democratic ethos. India has the advantage to be able to grow from a very low base and there are many low-hanging fruits in reforming markets for land, labor and capital, cutting red-tape and investment in infrastructure. India scores well in terms of accountability and economic growth, but it will continue to be a developing country till it increases state capacity.