Consumer Rights

The consumer protection act 2019 gives a more important place to the interests of consumers in the world of commerce. It brings online commerce under the purview of the act. It also provides for establishment of a central consumer protection authority whose job is to prevent violation of consumer rights, unfair trade practices and false or misleading advertisements.

 

The new act also introduces a generic product liability clause under which compensation claims may be raised for harm caused by a defective product or defective service. It has provisions to help avoid frivolous claims and vexatious litigation.

 

When an individual or a celebrity endorses a product or a service, they would be advertising it. If such advertisement is false or misleading and is prejudicial to the interest of any consumer, such advertisements maybe directed to be discontinued or modified. Over and above this, penalty by way of fine up to INR 10 lakhs can be levied. The celebrity endorser could also be barred from advertising the product for a period of one year. The safeguard for the endorser is that there would be no penalty if he she has exercised due diligence to verify the veracity of the claims being made.

 

In a related development the Ministry of Health and Family Welfare has finalized an amendment that will ban advertisements promoting fairness creams, health drinks claiming improvement to the height of children and products promoting anti-ageing remedies – with potential jail time as well as stiff fines for or offenders. The country has a long-standing obsession with fair skin and according to a Market Research report, the fairness cream industry is likely to have revenues of more than INR 5,000 crores by 2023.

 

It appear that consumer rights are being brought into focus and better social values are also being promoted.

 

Why is everyone unhappy with Crop Insurance

Agricultural crop insurance schemes in India suffer from various infirmities and as a result farmers do not willingly opt for it. Farmers find the claims process to be cumbersome and time consuming. They also do not like the fact that decisions on allowing a claim and quantum of compensation take place too far from where they can approach and make out a case for themselves as well as exert pressure. After getting used to liberal payouts in state government schemes they are also unhappy with the low payouts of Crop Insurance schemes. As a result only loanee farmers are participants in the program due to compulsion by banks. This, in spite of the fact that, the premium payable by the farmer is nominal – 1.5% of the sum assured for Rabi crops, 2% for kharif crops and 5% for commercial and horticultural crops.

 

Previously, the balance of the premium was shared equally by the state and central governments. Recently the government of India has reduced its own share in the premium subsidy to 30% for rain fed crops and 25% for irrigated crops. The entire premium subsidy would now have to be paid by the state governments from their budgets. States are already groaning under a heavy budgetary out go with limited capacity to enhance revenues. Due to lack of public demand for the insurance scheme, many states have opted out of the scheme.

 

Insurance companies find it very difficult to estimate the crop yield for each farmer. They use secondary data collected by the state governments. The crop cutting experiments conducted by the state government are inadequate to meet insurance requirements. They are performed for estimating the crop yield in the entire country and hence suffice for that purpose. They however do not provide the granular information for an insurance company to act upon.

 

The microclimate and circumstances even in a reasonable sized district are huge in number and hence there is need to conduct more crop cutting experiments to be closer to truth. In the absence of the same, the insurance companies do not trust the government data fully. They apply much greater rigour in a evaluating claims and spend time collecting secondary data which not only delays the process but also leaves the farmers highly dissatisfied. They also tend to increase the premium over years due to large number of claims they need to service.

 

It appears that none of the stakeholders are happy with the way the scheme is administered, but all of them are going through the motions to keep up appearances.

 

The difficulty with this scheme also lies in the fact that the exceptions for which a payout is required is often equal to the entire population resulting in losses. This naturally leads to steep increases in premia in the following years.

Economic recovery

This is a good article by Rajesh Kumar in business standard dated July 31, 2020. He speaks of three issues that would need to be addressed to ensure sustained economic recovery.

 

The first is the poor state of government finances. Budget deficits of all Governments will increase more than a normal progression would allow for. The poor state of the economy as the result of the covid pandemic shows no fixed progression making assessments less reliable. The State bank of India has released a note which showed that public debt increased from 67.4% of GDP in 20 1112 to 72.2% in 2000 1920.

 

The projected debt of governments is only part of the story and all governments have taken to the practice of shifting liabilities to the books of state owned enterprises, some with government guarantee and some without government guarantee. In all such cases PSUs borrow money for a specific purpose and governments take over the amount to use for other purposes, clearly a diversion of funds with an intention to make books look better.

 

In the current year over 43% of the union government’s budgeted net tax collection was set aside for interest payments. This is only a debt trap which governments are getting into, with fresh borrowing going to service old debt. In some states the annual borrowings just about equal the debt servicing obligations and in worse managed states the annual borrowings are not enough to meet debt obligations. Governments are therefore forced to cut back developmental and welfare expenditure.

 

The second weakness pointed out is the fragility of the financial system with increase in non-performing assets in the banking system is already affecting their ability to lend and also affecting their willingness to lend. Bankers seem to be getting into the trap of wanting to lend only to governments as such action would prevent civil and criminal action against them. The banking regulator is just not able to provide the leadership or the oversight required to keep banks running on sound lines.

 

They need to improve ease of doing business further cannot be understated. Even though governments have taken conscious efforts, the spirit has not percolated to the last mile functionaries. In a large system, this would take more time and needs continued attention by governments over extended periods of time.

Informal relationships

Ajay Shah writes about the value of informal traditional business relationships (landlord and tenant, lender and borrower, large firm and suppliers etc) in times of crises like the Covid 19. He says that enforceable legal contracts are central and essential to creating the complex edifice of advanced capitalism and prosperity. This would help firms to not have to limit their search for partners/suppliers to friends and family. The limited point he makes is that contracts-based capitalism handles a novel shock-like Covid-19 poorly. In contrast, there is greater room for negotiation and accommodation in the Indian arrangements of contracting with friends and family.

 

I am reminded of one’s informal relationships that once existed between landowners and landless poor class in Indian villages. Informal relationships also existed between the tenants and landlords of agricultural land. Government of Andhra Pradesh had, as a reform measure, brought in the Andhra Pradesh (Andhra Area) Tenancy Act, 1956 to formalize the tenancy arrangements and protect tenants from eviction. The Act shifts the balance towards the tenants and made it near impossible for landlords to repossess land. The act had a feature that presumed tenancy to be permanent and the entire burden of proof was totally on the landowner to prove his need for possession of land.

 

The question that arises is, whether the legislation was able to meet the objectives that it set forth to achieve. The present crop of tenancy acts does not provide any protection to the rights of the landowner.

 

As a result, landowners are on willing to register the name of the tenant either in a bank document or on any revenue records. All tenancy is informal and it has been continuing so for several years based on informal relations. The very same situation that was prevailing even before the tenancy act came into force. They act only sensitized the landowners into preventing any kind of recording of tenancies. This has worked against the interests of the cultivators, as they are unable to access credit from banks as well as any kind of subsidized inputs provided by the government. It has also failed to protect the tenure of tenancy or from their eviction at the desire of the landlord. I feel that on one hand it has failed to meet its objectives, while on the other hand, has created mistrust between the landowner and the tenant.

 

The Government of AP has tried to bring in greater balance between the rights of the landowner and the tenant. The Andhra Pradesh Legislative Assembly passed a Bill to aid tenant farmers and to recognize their rights as cultivators. Tenant farmers are those who own little or no land and take up agricultural land on lease. The Andhra Pradesh Corp Cultivator Rights Bill, 2019, which was passed by a voice vote, seeks to provide all amenities, including banking and insurance benefits, to the tenant farmer without affecting the rights of the landowner. Tenant farmers will be issued Crop Cultivator Rights Card, which will ensure they receive all benefits prescribed in the Bill.

 

The Act balances the rights of the cultivators and landowners. Section 4 of the act provides that the land shall be reverted back to the landowner on expiry of the agreement period without any encumbrances. Section 5D of the act provides that the cultivator shall vacate the agricultural land immediately at the end of the term of the agreement without any encumbrances. These provisions override the provisions of the AP Tenancy Act 1956 and remove any presumption about permanency of tenancy. Tenancy is limited to the period of the agreement entered between the landowner and tenant which is in the form of crop cultivator rights card.

 

Section 4(b) of the act requires the landowner to put the cultivator in possession of the agricultural land on the first day of the agreement and he shall not interfere with his possession as long as the cultivator complies with the agreement. The cultivator is entitled for undisturbed possession irrespective of change in ownership during period of agreement. Tenant shall also be entitled to crop loans, crop insurance, crop damage compensation or any other facilities provided to cultivators by the government. These new facilities were not available in the previous Act as landowners worked actively against the same. The new Act creates a situation where such facilities can be availed by the tenant without the landowner being uncooperative or working against it.

 

 

Support to Covid hit companies by way of Equity infusion

International Monetary Fund Chief Economist Gita Gopinath urged governments to shift to "equity-like" support from one focused on loans as the coronavirus pandemic inflicts prolonged damage on companies. She said that the massive scale of the shock meant more firms would become insolvent as they suffer lower revenues for many months. Government support in the form of loans would saddle such companies with huge debt which would make it difficult for them to recover post the pandemic. She says that if the lending takes form more like equity, it will make it easier for firms to recover from the crisis.

 

A similar effort at equity infusion is the Fannie Mae and Freddie Mac bailout that occurred September 6, 2008. The U.S. Treasury Department was authorized to purchase up to $100 billion in preferred stock of the organizations and buy mortgage-backed securities. As a result, the Federal Housing Finance Agency (FHFA) put Fannie and Freddie into conservatorship. Keeping the two agencies afloat cost taxpayers US$187 billion over time as the Treasury paid $116 billion for Fannie and $71 billion for Freddie. The Treasury decided to send all Fannie and Freddie profits into the general fund. Since then, the bailout has been paid back with an additional $58 billion in profit. Fannie remitted $147 billion, and Freddie paid $98 billion.

 

The bailout kept Fannie, Freddie, and the American housing market functioning. It was supposed to be a temporary situation, but the government did not get around to selling the shares it owned and return Fannie and Freddie to private ownership.

 

State Public Sector Undertakings

Most State PSUs in the country are in a financial mess and a range of reasons is responsible for their bad performance. Not all reasons apply to all PSUs. The reasons for underperformance vary depending on the product/service area of operation, the regulatory and political environment in which they operate, inability of management to strategically respond to changing scenario in the sector, subordination of organizational objectives to labour and public welfare.

 

A summary of CAG report on performance of West Bengal PSUs is given here.

As on 31 March 2017, there were 92 State Public Sector Undertakings (PSUs) in West Bengal which comprised of 73 working PSUs and 19 non-working PSUs. During 2016-17, the working PSUs registered a turnover of    INR 35,271.91 crore which was equal to 2.82 per cent of Gross State Domestic Product (GSDP). Further, the total turnover was 89.42 per cent of the aggregate investment (` 39,443.37 crore) in these working PSUs. They had employed 0.47 lakh employees as of March 2017. The return on equity of the working PSUs stood negative at 1.77 per cent. (Paragraph 1.1) Investments in PSUs as on 31 March 2017, total investment of the Government in 92 PSUs was ` 40,611.43 crores. Power sector accounted for 72.40 per cent of total investment in 2016-17.

 

During 2016-17, 21 PSUs earned profit of INR 621.59 crores, 11 PSUs incurred loss of INR 665.34 crores and one PSU incurred nominal loss. The total accumulated losses of 30 out of 73 working PSUs was INR   9,026.60 crores that exceeded their paid-up capital of INR 1,717.68 Crores.

 

 

CAG Audit of Government Companies of Andhra Pradesh submitted by CAG in 2018 shows that as on 31 March 2017, the State of Andhra Pradesh had 64 working Public Sector Undertakings (61 Companies and 3 Statutory Corporations) and 22 Nonworking Public Sector Undertakings (all       Companies), of which working Public Sector Undertakings employed 0.94 lakh employees. Working Public Sector Undertakings registered a turnover of INR 61,972.50 crores against investment of 61,345.31 crores in these companies. The Return on Equity of 60 Working PSUs exclusive to State and formed due to demerger was (-) 48.84 per cent based on latest finalized accounts as on 30 September 2017.

 

Of the 37 who had prepared their annual reports, se, 15 working PSUs earned a profit of INR 1,164.23 crores and 20 PSUs incurred a loss of INR 3,240.49 Crores. Nine out of 64 PSUs had accumulated losses of INR 25,367.89 crores. The huge accumulation of losses by these PSUs was             eroding public wealth, which is a cause of serious concern.

 

 

 

As per CAG report on Uttar Pradesh PSUs as on 31 March 2017, there are 103 PSUs in Uttar Pradesh, of which only 51 Government companies and six statutory corporations are working. The remaining 46 non-working PSUs are all Government companies. Out of 103 PSUs, only 40 PSUs finalised their accounts in the last three years, and 95 PSUs had arrears in accounts ranging from 1981-82 onwards. Delays/non-preparation of accounts are fraught with risk of misrepresentation of facts, fraud and misappropriation.

 

As per the latest finalized accounts of these 40 PSUs, 22 PSUs had earned a profit of INR 963.97 crores, 17 PSUs had incurred loss of INR 19,299.56 crores and the remaining one PSU had reported no profit or loss. The loss, if any, incurred by the remaining 63 PSUs (103-40) who have not finalized their accounts could not be assessed. These PSUs registered a turnover of   88,036.52 crores as per their latest finalized accounts as of 31 December 2017.

 

The 22 PSUs (PSUs in which the State Government has made investments) generated an average negative Return on Investment of 19 per cent on the investments made by the State Government. This remained well below the average cost of borrowings of 6.52 per cent during 2014-15 to 2016-17. Thus, the loss to the public exchequer as a result of the investment in the 22 PSUs as per their latest finalized accounts in the past three years (as on 31 December 2017) amounted to INR 11,920.32 crores.

Benefitting from Population Dynamics

The Institute of health metrics and evaluation at the University of Washington in Seattle, a leading institution for population studies, has conducted a study of Fertility, mortality, migration, and population scenarios for 195 countries and territories from 2017 to 2100.

 

India’s population in 2017 was 1.4 billion and its fertility rate 2.1. The educational attainment of the country is seven years per capita. The following life expectancy graphs are very educative and we see that the actual observed life expectancy is very close to Expected life expectancy.

 

                                                Source: http://www.healthdata.org/india

Understanding future population dynamics is very important for planning growth and development in the country as well as for preparing for various needs, even though such estimates are surrounded by a degree of uncertainty. Future fertility patterns are a key input to estimation of future population size and age structure that have profound economic, social, and geopolitical impacts. The dominant discourse in the socio-political situation of the country determines fertility rates as well as future population and whose present value as well its progression determine the age structure of the population. The age distribution of the population as well as the total population significantly impact the economy, geopolitical aspects as well as social group dynamics within a geography.

Migration has potential to impact all these dynamics significantly. Existing social groups often resist migration when they sense a threat to their dominance. They work actively against movement of people and such behavior is commonly seen in all countries at different points of time. The push against migrants by the present US Administration is only an example case. Due to the uncertainties involved, we can just do with a rider that migration is likely to impact any population prediction.

 

FINDINGS OF THE STUDY

The study found that in the reference scenario, the projections in 2100 for India were India 1·09 billion [0·72–1·71]. An alternative scenario describes population dynamics when Sustainable Development Goals (SDG) for education and contraceptive met need would result in a global population of 6·29 billion (4·82–8·73) in 2100 and a population of 0.929 billion for India.

                                        INDIA POPULATION: SOURCE: In the graphic above

Findings also suggest a shifting age structure in many parts of the world, with 2·37 billion (1·91–2·87) individuals older than 65 years and 1·70 billion (1·11–2·81) individuals younger than 20 years, forecasted globally in 2100.

By 2050, 151 countries were forecasted to have a TFR lower than the replacement level (TFR <2·1), and 183 were forecasted to have a TFR lower than replacement by 2100. India now has a TFR of 2.0 and the same would be 1.42 by 2040 and would almost level off thereafter.

 23 countries in the reference scenario, including Japan, Thailand, and Spain, were forecasted to have population declines greater than 50% from 2017 to 2100; China's population was forecasted to decline by 48·0% (−6·1 to 68·4). India’s current population is 141 billion and the same is likely to peak at 161 billion by 2047 and reduce to 1.09 billion by 2100 in the reference scenario. Under the condition that SDG parameters are met the population would peak at 1.55 billion by 2040 thereafter reduce to 0.929 billion by 2100.

 

INDIA AND THE DEMOGRAPHIC DIVIDEND

 

India has more than 50% of its population below the age of 25 and more than 65% below the age of 35. The average age of an Indian is 29 years and India's dependency ratio is just over 0.4. The number of children in India peaked more than a decade ago and is now falling. UNFPA stated that, “A country with both increasing numbers of young people and declining fertility has the potential to reap a demographic dividend. With fewer younger dependents, due to declining fertility, and fewer older dependents, due to the older generations having shorter life expectancies, and the largest segment of the population of productive working age, the dependency ratio has declined dramatically in India leading to the demographic dividend.

 

However, this realization comes with challenges.

 

In absolute terms we would keep adding a large number of young people to the working-age population each year. Creating conditions for decent livelihoods will be an enormous task, especially given that, currently, a significant number of people in the working age are unemployed, underemployed or irregularly employed. Additionally, the shortage of financial resources will make it difficult to maintain, let alone increase, spending on health, education and nutrition.”

 

During the course of the demographic dividend there are four mechanisms through which the benefits are delivered.

1. The first is the increased labor supply. However, the magnitude of this benefit will depend on the ability of the economy to absorb and productively employ the extra workers rather than be a pure demographic gift.
2. The second mechanism is the increase in savings. As the number of dependents decreases individuals can save more. This increase in national savings rates increases the stock of capital and leads to higher productivity as the accumulated capital is invested.
3. The third mechanism is human capital. Decreases in fertility rates result in healthier women and fewer economic pressures at home. This also allows parents to invest more resources per child, leading to better health and educational outcomes.
4. The fourth mechanism for growth is the increasing domestic demand brought about by the increasing GDP per capita and the decreasing dependency ratio.

 

There is a strategic urgency to put in place policies which take advantage of the demographic dividend and this urgency stems from the relatively small window of opportunity countries have to plan for the demographic dividend when many in their population are still young, prior to entering the work force. During this short opportunity, we should help the young people be more productive during their working years. Failure on this count will result in rising unemployment and an increased risk of social upheaval.

Public Private Partnerships in Infrastructure

In his excellent piece on the aviation sector and infrastructure contracting in India, Gulzar has discussed the roadblocks that have appeared in public private partnerships (PPP) in the airport sector.

 

Even under the best of circumstances, PPPs in infrastructure projects are not easily successful for a variety of reasons. For example, NHAI conducts traffic surveys on its highways for a limited period of time and projects future traffic based on assumptions regarding rate of traffic growth. When bids are called based on these projections, the PPP partner has no additional information other than the survey to base the bid upon. It has been seen that in a significant number of cases the projections are way off mark. Since bidders offer a revenue share to NHAI based on survey conducted by it, inadequate future traffic causes financial stress for the concessionaire and they are not in a position to service their debt obligation. This usually results in non-payment of revenue share and poor maintenance of the assets. There have been many cases of assets being sold at low prices resulting in difficulties not only to the concessionaire, but also to the lending institutions and investors.

 

Given the excessive oversight and environment of suspicion that prevails in the country, the management of NHAI is willing to renegotiate the concession agreements based on present reality. The dispute continues till the partner is unable to run the show anymore. Even when a renegotiation clause is introduced into the concession agreement, officials are usually unwilling to take reality into account, probably due to the fact that the concessionaire provides factual information required for re-negotiation. And in all cases NHAI stops traffic monitoring once the project is handed over to the concessionaire.

 

In view of increasing litigation, some governmental organisations have taken to the practice of stating that the survey conducted by them may not be relied upon to offer a bid. This appears perverse, as the owner of the asset is unwilling to do thorough homework and desires that in the short period provided to offer bids, the concessionaire would conduct a survey and offer a bid. Such practices skew the possibility of a placing workable bid. It raises a deeper question about the intellectual integrity of the bid process as the owner is unwilling to even venture to project traffic. The process gives a go-bye to the basic principle of assigning risk that is, the agency which is best placed to handle risk should be assigned the task of handling it.

 

The Adani Group has cited the force majeure arising from Covid 19 to inform the Airports Authority of India (AAI) that it cannot take over three (Lucknow, Mangalore, and Ahmedabad) of the six airports it had won in February 2019. The Group has not taken over the remaining three airports at Jaipur, Trivandrum, and Mangalore since they are already stuck in litigation. In simple terms, we have now come the full circle on airport bids. Gulzar had blogged earlier cautioning about the wisdom of handing over all projects to one developer and had suggested, to limit optimistic and excessively aggressive bids by developers. There can be nothing said against this argument. As a method of spreading risk, AAI should have taken necessary precautions to ensure that one player did not corner all bids by aggressive bidding.

 

There is a point of view that the company's decision to step back from the airports appears to have little to do with the merits of the original bid but a devilish strategy to grab a large chunk of the business space and then plan actual investments, renegotiating as required. The covid pandemic has resulted in huge business losses and layoffs in the airline sector as well as in established airports. I feel that a new player facing difficulties of this magnitude would be certainly put to ruination. One would expect a bidder to absorb losses but not to the extent of leading to closure.

 

There are things to be said on both sides of the argument. As owner of the assets, the Airports authority of India had a purpose in calling for private partners to run the airports. Having set out, AAI should be willing to deal with circumstances along the way. Bureaucratic inertia and fear of being incriminated at a later date (when circumstances are different) usually prevents any relook or examination, whatever may be. I feel that the issue should be looked at from business/financial perspective without moralistic issues clouding judgment.

 

 

Gulzar has rightly stated as below:

            Much as we may loath admitting, it cannot be denied that there may be           a need to exercise caution and discretion while pursuing white-collar    crimes of a large company in an important market segment and with      deep financial market exposures. Its collateral damage consequences           need to be weighed appropriately. In a context where none of the major        stakeholders are immune from these allegations, a high-profile      investigation can end up spooking the system and freezing them up.

 

 No individual or company should be allowed to make super profits or collect rents. However, we should be ready to re-examine issues, if assumptions made before the bid have gone wrong.

 

Rule of Law

Rule of law is not very easy to define as it means many things at once and not the same to all people. It is even further difficult to quantify. In the absence of a reliable metric, the state of of rule of law in countries cannot be compared. Most often, comparison of countries are likely to be based on perceptions as well as value systems of the judging individual or group of individuals.

 

Some of the commonly accepted ingredients of Rule of Law are: a government bound by and ruled by law, equality before the law, effective law and order, efficient and consistent application of justice and the protection of human rights. Each of these ingredients has a very wide scope composed of many sub-concepts.

 

A word of caution here is that we need to understand the circumstances and people by whom laws are made. In many countries we have seen that interest groups disproportionately influence legislatures and laws enacted tend to favour the proponents more. If the law making process is subverted, the foundations of rule of law gets administered iniquitously leading to eroded credibility of the Law and Judicial system. The capture of the different institutions of the law enforcement mechanism by narrow interest groups not only causes trust deficit but also is likely to lead to breach of Human rights.

 

Selective application of laws leads to severe trust deficit. In some cases we see archaic laws being used to punish people inimical or critical of the system. At the same time, similar action acts by people in favour are usually ignored.

 

Rule of Law and equality before law is very often subverted by the cost of the legal process. In many cases inability to engage the best advocates leads to losing of cases by individuals. It is a common refrain in many countries that the rich get away with crimes that the poor would not be able to escape from.

 

Delay in disposal of cases also subverts rule of law. All levels of courts in India are hugely overloaded with work and oftentimes it takes around a decade to dispose civil litigation. Even criminal trials take a very long time if we account for the time taken in the appeals process. The rich and influential use the loopholes in law and the caseload of courts to their advantage and obtain undue benefit. This evident miscarriage of justice reduces faith in rule of law and people look at extra judicial solutions.

 

Correction in any system is possible only when it is an open to discussion and criticism and where Government shares information, empowers people with tools to hold the government accountable, and fosters citizen participation in public policy deliberations. Requests for information should not be deflected even if the machinery at large tries to mask happenings.

 

An active civil society plays a vey important role in enforcing transparency and rule of law. Hence, as a society we should create the framework for protection of freedom of speech, assembly and association.

The State

Fukuyama spoke on the importance of the three pillars of the modern state: the state, Rule of Law and Democratic Accountability. He argues for a fine balance between the three institutions, as they need to counterbalance one another and prevent any institution from going overboard.

 In an ideal system, a powerful and efficient state is kept in check by the people, and by the law so that it does not become despotic. The State needs to be efficient to deliver on its mandate, maintain peace and order in society and create the framework for economic and social well being of people.  The state in India has not been effective in effective delivery of these objectives. They have met some of them to some extent, but service delivery remains far from satisfactory.

There is a widely prevalent feeling that “too much” democracy has been one of the major contributors of this inefficiency. Democracy has come to be synonymous with street level justice and not adherence to law and procedure and the opportunity to question state actions in prescribed fora. The legal system, judiciary, civil society, the press, political parties, need for transparency in democracy all act as pressure points against the state. All of them look at the same issue from their narrow perspectives and the objective that the state needs to be achieve gets watered down in an effort to meet the requirement of all these institutional and informal pressure groups.

This situation of excessive checks and balances leads to small interest groups blocking measures beneficial to the public at large. Dysfunctional political divides results in small networks capturing political outcomes. Special interest groups excessively influence the legislative process, steer public spending and taxes in narrow directions, introduce self-conflicting mandates to bureaucracies, and use the judicial process to challenge and delay actions in costly proceedings. These weaken the state and erode its effectiveness. Colonial era state was primarily concerned with protecting British business interests and the welfare state was marginal at best. The democratically elected governments of the time were limited to action that did not impact the British interests and looked at local and provincial issues including welfare. Post independence governments in the country faced an active democratic process while dealing with welfare and public good which is delivered by state governments and local bodies.

Most of the democratic processes and institutional mechanisms even today have very little impact on “Central List” issues, as grass roots democracy gets limited in its reach and understanding of wider issues. Civil society, for example, has little ability to influence the Income Tax law and Company Law, but focus their attention on the distributive aspects of Governance. As in colonial era, the influence of democratic and people institutions on trade, industry and commerce remains little, even today. In aspects of distribution of national income and wealth the actors are too many and simultaneously warring for the same pie. The state hence has become weak in delivering public welfare while is better off in the area of Trade, Industry and Commerce.

Francis Fukuyama:Political order

Francis Fukuyama, an American political scientist, has written “The origins of political order” in 2011 and “Political order and political Decay: From the industrial revolution to the present day, both describing political institutions, their development and role and importance in different countries. A good description of his political theory is available here and here.

He traces the development of these institutions over time and relative to one another in different countries. Fukuyama stresses the importance of the three pillars of the modern state: the state (executive capability to exercise power), Rule of Law and Democratic Accountability. He argues that the strength of these three institutions need to be finely balanced in liberal democracies. In an ideal system, a powerful and efficient state is kept in check by the people, and by the law so that it does not become despotic.

He says that different regions and countries developed these three institutions, at different times. China, for example, developed a strong state early on, but never fully developed the rule of law or political accountability. India developed institutions akin to the rule of law early in its history, but not strong states.

He traces the development of these institutions in China, Japan, Prussia, Latin America and the United States, before warning against the decay of institutions. Fukuyama describes the early U.S. having a weak state, with goods and offices handed out based on corruption and patrimony, partially because democracy entrenched itself without a strong state with capacity to rule effectively. However, the Progressive Movement and the New Deal transformed the American state and made it much stronger and more effective.

Today, The system of excessive checks and balances leads to small interest groups blocking measures beneficial to the public at large. Dysfunctional political divides results in small networks capturing political outcomes. Special interest groups capture Congress, excessively influence the legislative process, distort taxes and spending, introduce self-conflicting mandates to bureaucracies, and use the judicial process to challenge and delay actions in costly proceedings.

This results in a vicious cycle where a poorly performing state, reinforces distrust and lessens investments in the state, leading to even poorer performances. 

Political Economy: What is it

Political economy is the study of production and trade and their relation with law, custom and government; and with the distribution of national income and wealth. The term “economics” usually refers to the study of the economy without factoring political and social considerations, while the term “political economy” represents an approach which is more practical on account of its ‘people centered’ approach.

In common parlance, “political economy” may refer to the advice given by economists to the government, which is not strictly based on maximising utility of Individuals, but also considering political factors that need to be addressed. Naturally, such policy choices would not be an economist’s first choice, but are more likely to find acceptance in governments in modern democracies.