From Financial Express, September 19, 2012

Creating virtuous growth in India

In my last column, I introduced the concept of virtuous growth, which subsumes the idea of inclusive growth. Virtuous growth includes promoting fairness, but it also means avoiding societal change that corrupts and degrades positive human values. In this column, I want to spell out how India might create virtuous growth in practice. Virtue and inclusion, as characteristics of growth, may be the keys to sustaining that growth, besides having intrinsic societal value. However, it is important not to make the pursuit of virtue a pursuit of an unattainable utopia.

Michael Sandel, writing on the “Moral Limits of Markets,” sharply defines the conceptual issue for dealing with virtue. He quotes prominent American economist and policymaker Lawrence Summers: “We all have only so much altruism in us. Economists like me think of altruism as a valuable and rare good that needs conserving. Far better to conserve it by designing a system in which people’s wants will be satisfied by individuals being selfish, and saving that altruism for our families, our friends, and the many social problems in this world that markets cannot solve.” Instead, Sandel argues, virtuous attitudes are like muscles that grow stronger with exercise. In his view, altruism and similar virtues need to be pushed beyond family and friends, to the wider public sphere.
This gets to the heart of the Indian paradox. India’s leaders and its elite promoted a flawed implementation of virtuous growth after independence. Virtues such as fairness were sought to be achieved through legislation, in a society dominated by vertical and horizontal social cleavages. But India’s structures of governance became unintended arenas for the play of market forces, with government favours being bought and sold. Affirmative action made small inroads into lessening social divisions, but India’s masses have been seen as perennial children, to be managed without ever growing into well-functioning adults.

Like Lawrence Summers, India’s policymakers thought of virtues such as altruism to be in fixed supply. They thought of themselves as possessing most of this supply, so unlike Summers, they favoured paternalism rather than market allocation. Parallel manifestations of this attitude have been a high degree of government centralisation and extreme government control of the market.

The last point needs emphasising. Unlike the United States, where Michael Sandel can rightly bemoan the overreach of the market, India’s market system remains grossly underdeveloped. Economic reform in India has to correct that underdevelopment. India’s Dalits have perhaps been helped as much by market-oriented reform that has created more economic opportunities for them as by affirmative action. At the same time, the point of seeking virtuous growth is to avoid moving too much in the direction of a society where everything in life is bought and sold.

What can government properly do? Much of the inculcation of virtue is done through family and religion. But Sandel’s idea of promoting “reasoning about the common good” can be implemented in a couple of obvious spheres of action. One is civil society. India possesses a reasonably strong set of civil society institutions. These should be allowed to flourish, free of political interference and manipulation. These institutions, too, have a responsibility to seek change through reasoned debate and action, rather than agitation and knee-jerk reactions to the role of markets.

The largest arena for sowing the seeds of virtuous growth is at the level of local government. This is an ongoing process in India. Evidence is emerging that decentralisation in India has not only improved the allocation of some public goods, but has also led to more engagement, more public debate, and more transparency. The gains are still small, but they do suggest that the old fear that public virtue is limited at the local level no longer holds. If anything, problems continue to be witnessed with schemes that are decided in far-away Delhi, and trickle down to the village. It would be far better to give local governments more fiscal capacity and with it, more real decision-making power. The common good will be promoted by debates at the local level on the best means of doing so, when the debaters know that they control the outcomes.

This does not mean that virtue will emerge spontaneously. Frameworks of participation have to be structured to be fair and inclusive—the reservations for women at the local government level are a good example. Just as when James Madison wrote, while debating the formation of structures of governance for the US, “men are not angels.” And neither are women. Monitoring, accountability and checks and balances are still needed.

My conclusion, then, is a modest one. A start to implementing virtuous growth can be made by decentralising more fiscal capacity to the local level. To do this in a politically feasible way will also require fiscal decentralisation to the states, of revenue as well as expenditure authority. The Centre has to structure this decentralisation to protect horizontal equity. The current system of intergovernmental transfers does that in a very imperfect and limited way. Fixing this system will require a strong effort, so even this modest goal will not be easy. But exercising virtue often is not the easy thing to do.