Opinion Some dismal signals

It could be argued,with some merit,that ungovernability varies across states. Gujarat is clocking breath-taking growth. Bihar and Orissa,admittedly from a low base,have been doing well. But the overall picture is not as rosy as it should be. The ability of the state in three powerhouse states,Karnataka,Andhra Pradesh and Maharashtra,now hangs in the balance. Bihar has restored basic governance. But its growth is largely due to public expenditure. It is,to put it mildly,by no means clear that the state has the negotiation capacity to create an urban or industrial powerhouse. Gujarat,Tamil Nadu and Haryana cannot sustain growth momentum. And they may also face crucial governability challenges. In Gujarat,it is likely to be environment-related issues,in Haryana labour. It would be foolish to assume that the states will have the wherewithal to negotiate challenges to their purposes.

The second and subtler sign of ungovernability is this. An economy is governable where there is a common set of signs whose meaning most of the actors can agree upon. There is always a degree of uncertainty in the basic workings of an economy. But sometimes the information base of an economy and interpretation of signals breaks down immeasurably. It is almost like a breakdown in language,where a speaker intends a compliment but it is heard as an insult. The disarray in economic policy reflects a breakdown of any common canons of interpreting signals. If consumer spending does not slow down as expected when interest rates rise,what does this reflect? Raising interest rates is supposed to temper inflation. But can it,under some circumstances,contribute to a self-fulfilling spiral of expectations about inflation? Most economic relationships are premised on the “ceteris paribus” clause. What if you don’t know what the ceteris paribus is? Unclarity over a common frame of interpretation is probably exacerbated in rapidly transitioning economies.

Take just two examples. Is it the case,as some have alleged,that India now has two new rigidities that make cost adjustments of the kind we were used to more difficult? The first is greater school enrolment which has an impact on labour prices. The second is,increasing regulatory requirements of all sorts are making it more difficult for different actors to enter the economy at lower price points. Both these outcomes may be desirable. But tackling inflation in an economy where you did not have these rigidities,versus one in which you do,might be a different cup of tea. The point is that there is no common understanding of the scale or significance of these rigidities. Economic actors act on causal beliefs. Often these causal beliefs are self-fulfilling: things happen because we think they will happen. But there are moments in an economy when these causal beliefs unravel. If you talk to a wide range of actors,you will get the impression that India is in this limbo. But when a sense of causality becomes even more tenuous,an economy can become ungovernable. The government has not realised that it needs credible structures of negotiation. But it has also not realised that effective,clear and consistent communication is a central element in restoring a sense of common meaning.

The third sign of ungovernability is the increasing salience of the exit option. It is no secret that India’s major companies are looking overseas,not simply as strategic investments or enhancing technological capabilities. They are now self-consciously hedging against political risk. In fact,medium and small business in India has exactly this legitimate complaint against government. Big business is shielded by its ability to exit: it is hedged against currency fluctuations because it can diversify,it can generate captive power and is hedged against energy crisis,and it can even tap into cheap credit abroad. But when the sum total of a government’s efforts for creating an enabling environment is focused on big business,it is a sign that it does not quite know how to govern an economy that can create a level playing field for all actors.

These signs of ungovernability do not suggest an impending implosion. Far from it. At least two of these signs can be a source of hope. In the short run,social mobilisation will induce paralysis. But in the medium run it will put more pressure on the state to be trustworthy. The uncertainty in interpreting economic signals is a consequence of the fact that there is a multifaceted transition underway. We are not grasping these complex relationships. But the greatest risk in both these cases is presumptuousness: the state cannot wish away new forms of social resistance. It will have to learn new strategies for negotiating genuine concerns. But the state should also not presume that old platitudes about how the economy works still hold. Old platitudes can do harm.

This current moment can be an opportunity. It allows a conversation from new premises. But politics is increasingly distracted by its own theatrics. India is at a great historical moment. But the most disquieting sign of ungovernability is that there is little political discussion of what this moment means or the urgency it should represent.

The writer is president,Centre for Policy Research,Delhi,express@expressindia.com