India’s economic model is broken. The dominant, liberal, economic philosophy fails to answer our defining question: how do we develop democratically? The cookie cutter, laundry list reform agenda is a distraction. We can look nowhere for intellectual bailouts via off-the-shelf solutions. We need our own answers to rescue our system from its lurching stimulus-response.
It now seems clear that the sum total of forces at play, intellectual as well as political, have led our system to an equilibrium that simply cannot hold. The private-sector oligarchs have attempted to carry a load that is beyond them, and the state has been reduced to limply ameliorating the model’s intrinsic harshness. It’s time for a serious rethink.
Much like 1991, our present crisis is the result of the overheating of an internal debt engine and a perilous turn to foreign borrowing at the margin. In the 1980s, the government’s domestic source of borrowing overheated as the nationalised banking system became saturated with government debt, forcing the government to borrow in foreign currencies at short maturities. Staking on thin ice, things duly fell apart with the fall of the Berlin Wall.
This time, it's the private sector that is overleveraged, saturating the capacity of the ill-equipped commercial banking system to lend to large, long-term projects and again resulting in a turn to foreign debt. In the context of a widening current account deficit, this could spill over into a banking crisis as firms buckle, and therefore fiscal strife as bailouts are required.
Insiders rule
Our reality is of course far from liberal. Insiders rule. Yet, by rendering government as merely a fetter, the dominant philosophy unwittingly serves to naturalise oligarchy. There is, it need hardly be said, much government bungling. But if the common sense desires a nightwatchman state, it is not only utopian but functionally undemocratic. This common sense might be leavened with calls for inclusion, but this view blends a noble, ameliorative sentiment with the bad faith of barely-disguised patronage, neither of which have transformative energy.
Stuck between the short-termism of a patronage-fuelled polity and the utopianism of economic liberalism, our system lurched towards a solution: pair the nationalised banking system with the balance sheets of the oligarchs to do heavy-lifting of development. Commercial banks were drafted in to do the work of long-term funding for large projects in infrastructure. When these banks inevitably proved too small, foreign debt filled the gap.
It might well have come off, but the odds were heavily against it. The mushrooming of corruption scandals was a sign that the balance of power between the state, its banks, and the oligarchs was malfunctional for development.
Balance of power
In most cases of rapid growth, substantially large banks have invariably driven heavy industrial or infrastructural projects; take German universal banks of the 19th century or the East Asian development banks of the mid-20th. The key was a balance of power between the lender and borrower that enabled discipline and scale. Yet in India, oligarchical power blunts banks' discipline on investment even as banks’ resources were limited by unproductive pre-emption through compulsory government debt purchases.
So the oligarchs came to be overleveraged on two fronts, economic and political. Connections secured projects, and substantial financial leverage was deployed to execute them. But their political bets were far from hedged. Just as central planning failed to insulate economics from politics, the nexus between the oligarchs and the ruling combine — corruption — failed to insulate investment from accountability. The exposure of excessive self-dealing on all sides further slowed things down as the polity raged.
Our economic model now stands exposed. With balance sheets too small to weather the nation’s stormy politics, the leviathans of the private sector have been shown up as having shoulders too narrow to bear the load of development. This of course is the old saw of development planning, now seemingly proved right. Under Indian political conditions, it appears that only the Leviathan of the state has the risk-bearing capacity to do the job.
For us
We have come full circle. There are no short cuts through public-private partnerships or other contrivances to insulate economics from politics. Democracy demands getting politics and economics pulling in the same direction. Anachronistic as it may sound, we need to reinvent development banking, and get it right by setting it on the firm ground of popular consensus. We need more than a mere regulatory state; we need a developmental state running a sound development bank.
Our model of development depends on a degree of insider capture that is not only undemocratic but exposes us to the fissile material of global capital. Ironically, even the giants of the private sector are too small to deal with political risk, while the banking system doesn’t have the scale thanks to the debt dynamics of our politics. So we turn outward, and again pay the price. But the people are the real bankers of our government. Now let’s get the government banking for the people.
(Dr. Anush Kapadia is a lecturer in international politics at City University, London.)
