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What India must do to be a functioning social democracy — stop practising state capitalism

India, more an electoral democracy than a system-respecting republic, is moving in the direction of pre-socialist Britain, with powerful billionaires controlling the state.

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Does India practise social democracy, or democratic socialism? That might sound like wordplay, but the two are very different creatures. The first system is democratic and functions broadly within a regulated capitalist framework. Budgets in such a system are instruments for funding universal social security provisions that benefit the poor more than the rich, such as for elderly care, a public school system, state-provided or state-paid medical services, along with provisions for the disadvantaged, like unemployment benefits. Democratic socialism is different: It emphasises state ownership or control of production, but within a democratic polity (therefore different from communist regimes, which typically call themselves “people’s republics”).

France does both. It has a massive public sector because of waves of nationalisation, and liberal social benefits. The system has worked surprisingly well, unlike India’s similar straddling of the two political-economic systems. We have a large public sector that burns taxpayer money, even as we have slowly opened up the second burner — that is the social welfare system: The right to employment in rural areas, cash pay-outs and free medical insurance, quite apart from the longstanding government school and medicare programmes. This package has been steadily expanded, with some now proposing that the government provide a universal basic income. This, when the social democracies of Western Europe have found their welfare packages unaffordable and moved to limit them — even France, under President Emmanuel Macron.

Affordability is not yet a debate here, despite our double-burner problem. Of course, some state enterprises have proved to be systemic strengths as well as profitable: State Bank of India, Indian Oil and Life Insurance Corporation, though even these have struggled against private sector competition. The real problem was Indira Gandhi’s belief that if you couldn’t run a market properly, you should simply take it over (foodgrain procurement, mandatory state trading for imports), and that saving jobs in the tiny organised sector was more important than the efficient use of scarce capital. Hence, the state takeover of hundreds of textile, engineering and other firms. These were mostly unable to perform, despite or even because of the change of ownership, while Air India, the two sick telecom firms and the nationalised banks have continued to burn cash.

Also read: Too little democracy is why India’s reforms and progress are stymied


The choice is clear: If even a modest but a growing social welfare package is to be affordable, the public sector has to perform or be disbanded so that the government can shut down one burner. The test is what economists call a hard budget constraint: Public sector managements in banks or airlines should not get soft bail-outs.

A proper social democracy also needs a high tax-GDP ratio, which for India’s level of per capita income is par for the course (16-17 per cent). But it is stagnant or declining, and in any case, nowhere near enough to fund serious social welfare. The heart of the problem is evasion of both the goods and services tax and income tax. Only a third of the eight million estimated to earn more than a pre-tax income of Rs 1 lakh per month pay the tax due from them.

The last leg of the stool is of course equality. France has a strong sense of it, having beheaded its nobility in the late 18th century. That’s unlike Britain, where even in the late 19th century fewer than 11,000 families owned two-thirds of all land. As D.H. Lawrence noted, if you were wealthier than your neighbour in Britain, you thought yourself better than him, whereas in Australia, you were merely better off. The chief executive officer of a French energy company in India once explained that if you bought a car that stood out from the others on your street in France, someone was likely to use a car key to scratch a long line of paint off a side panel — just to give you the message. India, more an electoral democracy than a system-respecting republic, is moving in the direction of pre-socialist Britain, with powerful billionaires controlling the state.

These present the basic challenges worth dwelling on at Budget-preparation time. If India is to be a functioning social democracy, it has to stop practising state capitalism while creating a disciplined tax system and reining in corporate power.

By Special Arrangement with Business Standard.

Also read: Modi govt must sweat in Parliament to avoid bleeding on street. Farmers’ protest shows why


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  1. 90 percent of wealth in the 2 percent of people? But is this a new phenomenon. Most probably this existed from the 90s itself.

    The author could have written more what happens wealth is in those of a few hands. And when our laws are not sufficient to handle that.

    Already the US wants to break the monopolies of companies like Google and Facebook because of the power they control. But how do you tame the Adanis, Ambanis, Birlas and the Tatas.

    India does not seem to care for now. And the government in power seems happy to give them more business.

    Question is why?

  2. Well written. Not sure if India even qualifies as a true democracy. It seems to be more of a feudal fiefdom where accident of birth is prioritised over merit and capability. Funnily even those who should know better seem to be more inclined towards this feudalistic system.

  3. T N Ninan’s article has a big title but little else inside. It is amateurish, skin deep and directionless. He made a clear choice of perform or perish for the public sector, with a stress on the latter, while forgetting to discuss the stabs from the government that bleeds these companies.
    If public sector recedes, or rather forced to recede to give the billionaires a walkover, how is that going to serve democracy in India? Ninan ends with the last part of the question without dwelling on the first part.

  4. ninanji
    i have seen you time and again coming with so many wonderful suggestions.
    we all know it is going to fall on deaf ears.
    madness is defined as doing the same thing again and again expecting different result each time.
    of course in this case you are not mad the system is!!

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