Dialogue October-December, 2011, Volume 13 No. 2

Issues in Government Intervention, Black Economy and Governance in India.

Arun Kumar*

I. Introduction

     In the present times, the quality of life of citizens depends crucially (not solely) on the role of government and the quality of its governance. This is even more true in the case of developing countries, like, India where a large number of people are marginal to the market and its processes. In India, the larger picture is deeply vitiated with vast numbers living in fairly primitive conditions, reflected in its low ranking in some key social sectors. There are any number of things that are wrong with our society and the nation so one can ask whether they all have a common cause or are they all different phenomenon that have to be separately understood and remedied? For instance:

   1.  Conditions of existence for a vast majority of the people are deplorable.

   2.  Poverty remains at high and unacceptable levels and disparity is increasing.

   3.  Corruption is rampant.

   4.  Institutions of democracy are under severe stress.

   5.  Environmental degradation is getting worse, and,

   6.  Criminalization is increasing and terrorist/Maoist movements are spreading.

     There is something drastically wrong for so much to be wrong 60 years after independence, so, focusing on the smaller or individual aspects of the problem seems to be pointless — that may only result in non-solutions and non-viable policy options. Hence, in this paper, the focus is on the lager picture to identify the common cause underlying all this.

    When thinking about government and governance, crucial to society’s well being, we need to ask ourselves, what is the meaning of a Law or a Policy? Should it be seen as it is formulated on paper or as it functions in society? Clearly, in India, there is a substantial gap between the two. This gap represents society’s and the state’s inability to implement its will. This gap needs to be understood but this is not possible in purely economic terms.

      Most economic models trying to capture such complex phenomenon, like, the black economy are not very relevant because non-economic factors are perhaps more important (like, honesty) but are ignored in most economic analysis. There is a methodological problem which needs to be resolved.

      This paper looks at the larger issues involved in the understanding of the efficacy of economic interventions by the government in the shape of regulations and controls for social functioning. The problem is situated in the context of the state and the failure of policy so as to provide an analysis of the poor governance and the tremendous waste and inefficiency in the country. It will help understand issues related to the retreat of the state and the likelihood of the success of New Economic Policies. It is clear that today these issues cannot be understood without taking the black economy into account so this issue will be centrally located in the article.

     The issues listed above, having a historical background, are rooted in the current politics and have an institutional setting. But, usually, the analysis of the black economy, governance and illegality is ahistorical and apolitical (Allingham and Sandmo, 1972 or NIPFP, 1985). The paper tries to rectify this failing. Finally, it presents an outline of possible solutions to the problem.

II. Need for Government Intervention in the Economy – the Political Economy.

A. The Political Economy of Government Intervention

    Why is the government held responsible for the mess that exists? Implicitly it is accepted that a) government intervention is essential in an economy and b) Individuals cannot obtain many of the essentials of a civilized existence on their own enterprise and initiative. The direction of a modern day economy is set by the macroeconomic parameters and what the individual can achieve depends on that so any failure can be laid at the doors of the government. At the macro level the government is inescapable. Government intervention in the economy may take many forms, like, investment, development, controls and regulation. In economics there are two overarching views regarding the need for government intervention in an economy – a macro and a micro view.

1. The Macro View: Resource Creation.

      A nation has a given resource base at any time. For optimum growth these resources have to be mobilized and utilized optimally and this can not be done by individuals in isolation. The government is needed for achieving the optimum. This is the macro view.

   The world economy went through a deep depression in the late Twenties and the early Thirties. To get out of it, after trying various traditional approaches, it was realized that government intervention was essential to take the economy out of a depression. Roosvelt introduced the New Deal in the USA in 1934. He initiated massive public expenditure on infrastructure to boost demand. At the same time, Keynes in England and Kalecki proposed their theories of boosting demand through government intervention. All this gave a fillip to the idea of the welfare state.

     The government was given an active role in boosting the growth rate of the economy and the building up of the social and physical infrastructure (like, health care, highways and railways). This led to a liberal view of the state and it got involved in affirmative action and mitigating economic hardships, like, unemployment, both through creation of jobs and through payment of dole when there was unemployment.

2. The Micro View: Market Failure

     The micro view, is based on the neo-classical understanding that an economy faces market failure and the government is required to take the economy to its optimum level (Pareto optimum frontier). When there is market failure, the economy when left ‘free’ gets stuck at a sub-optimal level. Only government intervention can take the economy to the optimal point. Further, the markets by themselves fail to achieve the socially desired level of equity so the government has to intervene for this reason as well.

      In brief, both the micro and the macro views suggest that to achieve optimality, there is need for government intervention in the economy. In India, given the level of poverty that prevails, most are by and large not able to take care of their economic needs in a market situation so that government intervention becomes necessary. Not just in India, following this kind of understanding, the world over, government intervention has increased right through the twentieth century (Kumar, 1999: 294).

3. Notion of ‘Free’ Markets

    The traditional neo-classical theory does not suggest that markets be left ‘free’. In fact, in the construct of the market there is nothing like a ‘free’ market.

     A market is an institution for the exchange of goods and services. Exchange is via an explicit or an implicit contract. There has to be an agency to enforce the contract when there is a dispute amongst the parties to the contract. This is the role the government has played. In brief, there cannot be a market without a government so that there is nothing like a ‘free’ market; free of the government.

     Where does the notion of ‘free’ market emerge from? In the neo-classical tradition a distinction is made between the ‘first best’ and the ‘second best’ theories. In the first best theory the government only need intervene where the markets fail and the rest can be left to the device of the market to achieve optimality. But this is a hypothetical situation since the world is not first best but second best. In the second best when one market fails then all the markets tend to fail so that they need to be taken over to achieve efficiency. Thus, in a more realistic situation, the world is much more complex and ‘free’ markets do not work by themselves to achieve optimality.

   Governance is the broader aspect of societal functioning and administration is the instrument society uses to carry out governance and is controlled by the state. However, often governance is used more narrowly as signifying the conduct of policy and the affairs of the state. State intervention has gone through different phases. There was the time from just before the World War II with Roosevelt’s New Deal when government intervention started being positively viewed and the Welfare state emerged. Then in the next phase, from the late Seventies, Reaganism and Thacherism became the ruling ideology with the understanding that the state should retreat and the markets should dominate.

B. Globalization and the Strategic Retreat of the State

      The neo-classical understanding was supplemented by another neo-liberal philosophy in the late Seventies that policy also fails to deliver so the government should intervene little and the markets should be left alone. This has led to the idea of the strategic retreat of the state, namely, the government should do everything to help the market function (this form of intervention is legitimate) but retreat from all other forms of economic interventions.

      The advent of Reaganism and Thacherism in the USA and UK in the early Eighties marks the beginning of the phase of strategic retreat of the state. The decline of the Soviet system in the early Eighties and the weakening of the Third World because of a loss of an alternative at the global level added to the world wide pressures to move in the same direction. Economic Globalization has meant adjusting to the structures in the dominant economies and the deeper penetration of markets into social relations. The pressures from the IMF, the World Bank and the WTO are all in the same direction.

      Global capital desires to have the freedom for itself and does not like those forms of government intervention in the economy that limit its scope. It is using globalization to capture markets and expand itself. Where the state comes in the way of that, it must retreat. IMF’s requirement of a reduction in the fiscal Deficit while cutting taxes for the well off is a recipe for reducing the role of government in the economy (Kumar, 1994 a). Not that public sector units cannot be efficient but the principal problem for capital is that if the public sector operates in some areas, it creates difficulties for the entry of the private sector in that area. The size of the market decreases and the chance of making super profits declines (Kalecki, 1971). Hence the moves for the privatization of the public sector. The markets in India always respond positively to the news of privatization of PSUs. Often these units are obtained at throwaway prices, like in Russia in the Nineties and yield large profits to the buyers.

     For instance, if there are first class public hospitals (like, AIIMS in Delhi) then the private hospitals find it difficult to charge higher prices. When public hospitals deteriorate in quality, the demand for private hospitals rises. If there are first class Universities and IITs, a cutback in their funding threatens their quality so that they either come under private sector influence or private institutions can come up.

     Under globalization, nation states are competing with each other to attract global capital. For this they are competitively offering concessions and losing control over their resources. In India, this led to the fall of the tax-GDP ratio after 1991 so that the government’s capacity to intervene in the economy is dented (Kumar, 1994a). In the process the States have less control over their resources and the government has to retreat from the economy (Kumar, et. al., 2005).

      In spite of the strategic retreat of the state, the world over since the late Seventies, the most important actor in any economy remains the state. In spite of the growing domination of the MNCs and the impression that they represent supra-national entities, the nation state is a reality. Its sovereignty may have been dented but most of its elements remain intact. For instance, in WTO dispute settlement mechanism, it is the nation state that can appeal and not an MNC. The MNC has to be rooted in a nation to protect its interest. Mr. Lakshmi Mittal appealed to Indian government in the Arcelor merger case and Enron fraud detection and prosecution took place in the USA. In the literature, the idea of the retreat of the state is supplemented by the notion of the minimalist state.

C.  Notion of the Minimalist State

     The quality of government intervention depends on its capacity to govern which in turn requires an instrumentality, the administration. The effectiveness of a state depends on the quality of its governance. A state may attempt a lot but if governance is wanting, it will achieve little.

     It has become fashionable to propagate the idea that ‘that government is the best which governs the least’. This is taken to mean that the government should intervene in as few areas of social activity as possible and have as few rules as possible. It is taken to imply strategic retreat of the state.

     The above mentioned phrase can be interpreted rather differently. It goes without saying that government should be where it is needed and not (unnecessarily) where not required. The question is who decides where it is needed? If a builder is asked she/he would argue that there be no zoning or building bylaw. However, no sane citizen would want unplanned cities (like, Indian cities have become) and buildings of poor quality (such as those which collapsed easily in Kutch and Ahmedabad in the earthquake of 2001). There has to be a social consensus on these matters. It cannot be decided by a ruling clique alone.

   However, the important thing is that whatever be the rules and regulations in a society they be voluntarily followed. This minimizes the need for administrative action. A policeman cannot be posted along with every citizen to see that no illegality is committed. The larger the number of citizens who voluntarily follow the law, the fewer the number of regulators required and more efficient the administration. It is in this sense that least governance should be used in that phrase: In the sense of voluntary compliance and the need for least government action. It does not mean that even where government is needed it should abdicate its responsibility to the citizen, like, in education and health or poverty removal. It should not be an excuse for the retreat of the state.

     There is no doubt that for the effective functioning of a society, most things in a citizen’s life should be self-regulated. For this, society needs norms which should be widely acceptable to the citizens. For good governance, the citizen needs to be committed to the rules and policies and to the tasks set by the government. This requires a consensus over policies, otherwise violations occur. For voluntary compliance with rules, citizens need to believe in society and should not be alienated from it. Thus, existing alienation of the citizens needs to be countered. When there is alienation and the citizen behaves like an automaton, incentives are the motive for action/work. Under the circumstances, if breaking rules gets greater gains then that would become the ruling norm, like, in India (See, Alingham and Sandmo, 1972 in the context of tax evasion). Thus, a vicious cycle of crime and punishment builds up. Voluntary compliance through commitment to society is the only solution. This is what Gandhi believed in.

      For voluntary commitment to society, citizens should feel that there is social justice. Thus, norms of public action and functioning have to be very high. Not only should justice be done but also seen to be done. Social justice requires the system to be transparent and accountable so that it appears to be fair and the citizen can trust it. The political and bureaucratic classes in India have used the classic British ruling class technique of divide and rule and opaqueness.

    With weak transparency, accountability and social justice, commitment to society is suspect and therefore governance tends to be weak. The government apparatus continuously expands and even then policies tend to fail. This brings about a sub-optimal state of society. Retreat of the state to cater to the idea of the minimalist state can then only be in favour of capital which gets the freedom to do what it likes and at the expense of the rest in the society.

D. One Way Globalization and Administration in India

     The present phase of globalization may be characterised as one way globalization since India has little influence on its direction. India is adjusting to the economic influences as emanating from the advanced economies. In the process, there is loss of control over policies (Kumar, 1996). Policies have to be adjusted to what is required by the global markets even if that goes against the interest of a vast majority of Indians (Kumar, 1994a). This is hardly the recipe for getting social commitment of the citizens. Policies are increasingly being determined by external factors. Government has become less responsive to the needs of the citizen on the ground that it has to fulfill international obligations or attract capital. Our administration has come under increasing influence of foreign agencies. This phenomenon has markedly increased after 1991.

      With the weakening of the idea of the nation, setting of the national agenda by outside forces and atomization of the individual under the growing influence of the markets, the individual’s commitment to the nation has also weakened. This is also true of the individuals in administration. Thus, many in administration are today serving the interest of the private sector or of foreign agencies. Many of the children of senior bureaucrats and politicians are working for MNCs and foreign agencies and a quid pro quo is suspected. Bureaucrats and personnel of defense forces after retiring (or taking early retirement) serve the private sector and other agencies. For enabling this to happen, a nexus is developed before retirement.

      Such a shift in the agenda of those in administration has wakened acceptability to people and society and therefore affected governance and administration. For the alienated ruling elite, progress does not mean one more primary school in Bastar but it stands for, say, the next trip abroad or sending their child for education abroad. The elite’s emotional attachment with the nation has weakened and with that the commitment to nation building. This underlies policy failure.

III. The Cause of Black Income Generation: Illegality Around Laws.

     The black economy represents the size of illegality in society and is the principle cause of the failure of policies and the inability of society to deliver to the citizens (Kumar, 1999). Since the black economy is significant and has serious macro economic consequences for society, it follows that action is needed to curb it. To act, the cause(s) of the problem needs to be identified. As with other aspects of the black economy, there is confusion here too. Often, if black incomes are found to be generated in some activity then this activity (source) itself is taken to be the cause and the solution suggested is to eliminate it (source) (NIPFP, 1985 and Gupta, 1992). Say, if a tax is evaded to generate black incomes, that tax is taken to be the cause of black income generation. Obviously, if that tax is eliminated, it cannot be evaded. Can this be a solution? The existence of laws cannot be the cause of their being violated? (Kumar, 1999). The cause lies elsewhere.

     Clearly, when those responsible for maintaining rules violate them or are indifferent to them, there is a feeling of injustice leading to increased conflicts and difficulties in social functioning. This is also the case with the black economy. Rules or having too many of them are not the cause of their violation. By eliminating roads or rules or the police, the problem is not resolved, society becomes worse off.

      Scams and corruption cases are hardly ever resolved. In the Bofors case, it is clear that money was made but years after it was unearthed, formally it is not known to this day who made the money. Businessmen, politicians, bureaucrats and the investigation agencies all know that havala channels are active in India. But, the Jain case (1991) has ended without prosecution even though at least one politician admitted to having received money and a colleague of another admitted that he received funds for the party. Evidence was found that it was also used to channel funds to terrorists. The state seems unconcerned about its own rot and the ruling group incapable of action in their own self interest. The cause of the existence of the black economy is at once both simple and complex, involving the entire system.

    In brief, existence of laws is not the cause of their being violated. The cause lies in the growing sense of social injustice in people, poorly designed rules and indifference amongst the law makers to the implementation of the laws so that they can themselves get away with their violation for their own ends.

1.  Laws, Social Needs and Black Economy

     It is widely believed that controls and regulations are responsible for the generation of black incomes (NIPFP, 1985). It is popularised by the terms ‘license quota permit’ raj or the inspector raj. Kabra (1982) saw the issue as a part of the wider drive to ‘remove controls reduce taxation’. He has stated that “controls and taxation are necessary to curb certain activities in the economy. They themselves by no means create or help black economy. It is illogical to hold the laws governing economic activities themselves as constituting the reasons why people violate or evade the laws” (p. 162).

      While the distinction between controls and regulations are not sharp, one may distinguish controls as economic laws that limit an economic activity while regulations may be thought of as laws that define the way an economic activity is to be carried out. Even though in the literature a distinction is drawn between controls and regulations, here no such distinction is drawn. They are treated as economic laws.

    That controls have a history needs to be stressed. Uncontrolled speculation or price fixing by industry and trade has often resulted in public pressure on policy to institute controls. For instance, there have been demands for controls on the functioning of the share market or the prices of onions. With the growth of the black economy and opening up of the economy, the potential for unscrupulous manipulation of the markets has grown. Controls and regulation in many instances have been demanded even by industry and/or trade. George Soros, the high priest of international finance, has been demanding controls on international capital flows.

      In India regulations and controls need to be understood in the wider perspective of the nature of the state. Policies designed to achieve wider national goals (like, equity) have not met with national consensus (more so amongst the ruling classes). Consequently, sectional interests have viewed policies either as so many impediments to be overcome or as tools of economic gain. The black economy emerges as the natural corollary of this process of subversion of national policies and the state connives in this process.

    Further, it cannot be denied that vested interests have developed around controls and that they can be under cut by removing controls (See Dagli Committee Report (GOI, 1979)). However, the critics of controls need to recognise that mere removal of controls not only does not eliminate the need of sectional interests to maximise their incomes but also helps them do so openly and legitimately. One cannot make a general case for or against controls. The concept of social accountability must not be thrown to the winds, specially when it may lead to greater inequity in a very poor society like India.

     In fact, if there is a law, its violation results in illegality and incomes associated with this activity are generated as black incomes. Corruption is a part of this phenomenon. Illegality can end if the rule of law is either followed or abolished. But, the latter amounts to eliminating society itself and there is little left to discuss. Laws define the parameters of social functioning and need to be based on what is socially desirable.

2. Subversion of Laws: Roots in the Political Process

      Proliferation of controls and regulations result in complexity in laws and difficulty in administration specially if they are violated all around. They become something other than what they are on paper. They become ill defined and dependent on the whims and fancies of the administrators and the rulers. Flouting of controls and regulations in the economy to generate black incomes is not a random process but involves developing specific mechanisms.

       The difficulty of establishing any link between the degree of controls and regulations in the economy and the size of the black economy lies in the inability to represent the former as a composite. It is far easier to see the link in the case of an individual activity which may be subject to ‘controls and regulation’. In the case of the sugar industry, various degrees of controls have been imposed on its production and distribution for a long time. Yet, an analysis of the data did not show a link between the degree of control and the size of black incomes generated. (see NIPFP, 1985)

      Real estate has also been subject to various controls, like, the Urban Land Ceilings Act, 1976. It has been argued that it led to an acceleration of price rise in urban landed properties because of freezing of excess land. It is well known that a rapid rise in land prices leads to an increase in black income generation. However, an analysis of data for Delhi shows that from the mid 1960s to mid 1970s, the average price of land increased from around Rs 15 to Rs 250 per square yard while the rise in the next decade took it to around Rs 3,000 per square yard and then to around Rs. 35,000 per square yard. Thus, the rate of price increase in land cannot be said to have accelerated after the imposition of the Urban Land Ceilings Act, 1976. The problem of dramatic land price increase is linked to weak governance and policy failure. It is a result of corruption, rampant speculation unchecked by government policies, inadequate property and wealth taxation and improper policies with regard to employment generation and creation of infrastructure in rural areas resulting in concentrated urbanization due to huge migration of people from deprived areas to a few urban areas (Kumar, 1987).

    Controls and regulations are supposed to give powers to the politicians and the bureaucrats which can be, and are, misused to extract a rent. For instance, anyone who has honestly tried to construct a house in India knows how much harassment they face. Delays are used to extract a bribe. Usually, flouting of a rule is associated with an economic gain and the advice for this may even be given by the concerned official. However, even when rules are not flouted, a bribe may be given simply to save time and trouble  ‘speed money’.

       The administration extracts a rent by agreeing to ignore the violation of the law or for using its discretion to grant favour. To extract a rent, a surplus must be generated in the activity from which the rent is extracted. In other words, the bribe paid, is typically a fraction of the benefit accruing or likely to accrue from the twisting of the law. The experience of businessmen and the police ‘hafta’ narrated in Kumar (1999) bear out this conclusion.

    The discussion, therefore, raises three questions. First, why have laws become complex? Secondly, why has administration become ineffective and demoralised? And finally, how can the flouting of rules persist over a period of time in spite of the checks and balances in a democracy?

      No law can be perfect since it cannot cover all contingencies. Thus, a law has to be administered both in letter and spirit. A corrupt and inefficient administration either implements the law rigidly or not at all. The flexibility or the initiative required to deal with a dynamic situation does not exist. Thus, a large number of loopholes are evolved by the ruling groups bent on taking advantage of the law. In response to this situation, legislatures go on modifying laws one after the other, in an ad hoc manner, to plug the loopholes and in the process make them more complex.

     The other two questions will be taken up later since they relate to the prevailing political process.

3. 1991: Reduction in Controls

   The experience of the post 1991 period calls into question the hypothesis of a link between controls and the black economy. Gupta (1992) argues on pp 80, 83 and pp 93, 94 that growth of black incomes will be curbed by the new policy measures since controls are being relaxed or reduced. But, later he argues to the contrary when he says that NEP may not succeed because ‘... we may say that the reasons for persistent policy failures (including the new policies) to curb black income generation and unearth black money must be sought in the rampant ... corruption in the country ...’ (p 174).

    When controls are removed an illegal activity may become legal. Does the tag ‘legal’ or ‘illegal’ matter? Take the case of gold imports. It is not so important that now gold can be brought in legally whereas it was earlier illegal to do so and was called smuggling. Gold was put on the banned list of imports since in a poor and capital short country it constituted a drain of resources. Gold import, ceteris paribus, still creates BOP problems since it constitutes a drain on the official reserves. The economic impact of the activity through the BOP, drain of savings and lowering of productive investments in the economy continues; only illegality is reduced as compared to earlier. In fact, ceteris paribus, the economic problems have increased since now five times more gold is flowing in than in 1992 so the loss of precious savings for a poor country has only increased. The rapid build up of foreign exchange reserves in the recent period in spite of this outflow is due to other reasons. In fact but for this increased activity, the build up would have been larger. 

     Suppose various laws are eliminated. By definition, incomes would become white and illegality and corruption would be less. What difference would it make? Tomorrow, due to inability to curb theft, suppose it is legalized, would it generate security for the citizens because illegality has declined. Can laundering of drug money and its use for criminal activities be legalized? Hence, what matters is the nature of economic activity and not the tag white or black. If certain laws ae needed for social functioning then their elimination can only disrupt social functioning.

     Lower customs duties across the board may mean less smuggling but even greater importation of the same goods, loss of foreign exchange and setback to indigenous producers of those goods. Lower direct tax rates will mean continuing adverse movements in income and wealth inequalities and shrinkage of the market size in the medium run. Also, under the present regime it would mean lower rate of growth of public investment and social sector expenditures   redefining state’s responsibility to society. Is all this based on a new consensus in society about tolerating greater inequity? Has this followed a change in society’s priorities? There is little evidence for this but the elite is pushing for it in its own narrow interest. Controls are only the means of generating black incomes. They are the means and not the cause (which is illegality) (Kumar, 1994b).

     The stock market (regulated or unregulated) has been a major conduit of black incomes. Illegal construction is proliferating in Metropolitan India even though it is unrelated to control of land. Zoning laws, essential for the efficient functioning of cities, are being flouted by the builders and the rulers leading to a breakdown of Indian cities. The crux of the matter is additional profits, over and above that which can be legally generated. This has not changed post 1991.

      After 1991, controls and regulations have been greatly diluted. MRTP and FERA have gone and small scale reservations have been greatly diluted, imports have been liberalized, etc. Whatever was on the wish list of Indian businesses and MNCs has been implemented. Yet, the size of the black economy continues to increase (Kumar, 1999) thus substantially negating this hypothesis.

     Controls and regulations are not the basic causes of black income generation and only represent the necessary condition for the generation of black incomes. In other words, if a tax or a law did not exist there would be no question of its evasion but it does not follow that if a law exists its violation is automatic. Hence having a tax or a high tax rate does not mean that evasion would follow. Similarly, it is not that controls necessarily result in black income generation; they are only a source for making black incomes.

4. Triad as the Cause of Black Income Generation

    Lack of commitment to society has led at one level to individualization – retreat of the individual into her/his shell - and at another level to conflicts amongst groups. Individuals have strengthened their traditional ties to their region, caste, community, etc. and they hope to derive benefits from the system through these kinship ties. All this has led to growing conflict in society and lack of consensus over social functioning. There are no stable long term interests to act on. In economic terms, this has led to the fostering of the black economy to making gains over and above what can be made legally. The size of the black economy has grown and it has become the cause of much systemic inefficiency (Kumar, 1999).

      Indian politics governed by conflict is playing havoc with institutions. It is conflict which has weakened commitment to society and made illegality acceptable to the propertied. The black economy as the means of making additional economic gains by cheating the system and the subversion of democracy is a natural corollary of this. Today, in India, many of those in power violate any law they can. Whether it is a building bye law, rent control regulation, industrial licensing, tax laws, child marriage, child labour and minimum wages laws, traffic rules, environmental and industrial safety regulations and so on. Courts are overflowing with pending cases and full of corruption. Sense of justice in society is missing. It needs to be explained why is there this state of anarchy? Conflicts among the propertied, illegality, black economy, subversion of democracy and poverty are mutually interlinked and feed on each other. This path which India is traversing needs to be understood.

     Any law can be violated and result in black income generation. More specifically, controls and regulations can be violated and cause black incomes to be generated. Thus, illegality is the cause of black income generation. The source can be the violation of any specific law (Kumar, 1999). Where there is lack of consensus and there is conflict or a feeling of lack of social justice, laws are violated more. Like, in the case of taxation. Countries with high rates of taxes may have lower amount of evasion while those countries, like, India, where the rates earlier were much higher, evasion remains rampant in spite of much lower rates. In fact, tax rates have declined but the size of the black economy has only increased (Kumar, 1999).

      Complexity of laws may make it easier to violate them but this is not in itself the cause of illegality. Actually, India is mostly under-regulated, like, in the case of industrial regulation, pollution control, environmental regulation and urban zoning but whatever laws exist are violated. In effect, Indian Elite is lawless and bends/breaks most laws. Policy makers and those in the executive are involved in it and tolerate it all around. It is systematic and systemic.

     The system for the generation of large amounts of black incomes is based on the existence of a Triad. It is not that black incomes are generated some days and not on others. It is not accidental but is based on a system in place, laws have to be violated systematically so that all those involved in the preservation of the system have to be involved in its breaking. This requires the involvement of the political class, the business class and the executive class (consisting of the bureaucracy, judiciary and the police). Criminal elements in society have entered this nexus and often control it. Once this is in place pretty much any law can be violated. Too many, too few, simple or complex is immaterial.

IV.  Possible Solution.

      Policy failure, poor governance and uncivilized living conditions of the citizens is linked to the growing black economy and illegality. This paper has tried to establish that this is not a consequence of government intervention in the economy (whether in the shape of controls or regulations). The cause of the growing illegality is in the political process and the weakening of democracy in the country.

1. Not a Narrow Technical Problem

    To improve governance, the credibility of administration has to be restored and the causes of alienation of the individual addressed. The sense of social justice has to be revived. The problems of governance and administration are a) second order problems to the attitudinal changes needed and b) not merely technical ones. Mere setting up of commissions to suggest technical changes, like downsize government, increase salaries or hire people on contract or go in for Citizen’s charters or for greater use of IT, etc., would not help since the issues are not merely technical.

      For instance, many committees have gone into the issues pertaining to the growth of the black economy and have made large numbers of suggestions to curb it. These have been usually incremental in nature and have not addressed the integrated nature of the problem so have not been a part of the basic reform required so that their suggestions have remained ad hoc in character and failed even when implemented.

    Specific technical suggestions are unlikely to succeed because of the widespread failure of governance. If most things were functioning in the routine way the few things that were not working could be taken care of by fine tuning. Generalized causes have to be sought and remedies to these systemic failures sought and implemented. It is in this spirit that some suggestions are made below based on the analysis of the systemic failures.

2. Need to Strengthen Democracy

    Indian elite’s basic attitudes were shaped during the British rule. These need conscious reassessment. They have to analyse themselves critically to discover their weaknesses and boldly reformulate their priorities and be willing to take risks. The idea that accelerated economic development means jumping on to the path set by the West has proved to be an erroneous one for India. The task of governance and administration cannot be just to place India on that illusory path. We have been trying that for long but without success. Society is unlike an individual getting on a bus at a later stop. A society is a historically conditioned entity and cannot just transform itself by waving a wand.

     Indian ruling elite has to be receptive to ideas even when they go against its short run interests. Today, the rulers react to criticism with defensiveness and act to marginalize their critics. Ideas should not be treated as subversive and dissent is not a malaise to be suppressed. Ideas must be encouraged rather than seen as a challenge to society since they are the principal source of dynamism in society.

     Divide and rule and offers of inducements (like, positions, projects and committee memberships) are held out to those who are critical. The attempt is to coopt or marginalize the critics but this blunts the nation’s creativity. What the rulers have to realize is that the threat to them is a global one and to face it they need a strong and dynamic nation not a weak one which is not able to deliver because of weak governance.

     Alienation of the individual has to be addressed so that the citizens may be able to contribute their maximum to social development. This is possible if the individual feels that the system is responsive and that there is social justice. Government and the administration should be responsive to the needs of the people and should be seen to be fair. This is possible if democracy is strengthened at every level and decentralization and centralization are dovetailed so that the micro and the macro do not stand in contradiction to each other.

     There needs to be genuine grass roots consensus over policies. This is a prerequisite to good governance and administration. There can be transparency and accountability only when there is consensus over policies.

     There is need to implement the Right to Information at all levels of administration. The newly introduced format for this is inadequate. The implementing agency is to be headed by some bureaucrat who would typically have spent a lifetime evading rules and keeping information away from public gaze. Now he would be expected to do the opposite. Basically, unless the mind set of the rulers changes, little would be achieved and it is possible that this right will be accessible to only a few determined people.

      Very few things need to be kept secret. Currently, secrecy is grossly misused to subvert policies and generate black incomes. Decision making has to be decentralized and rules simplified so that they are easily accessible and understandable by even the lay person. Finally, Gandhi’s principle ‘last person first’ must be followed all down the line in administration.

    In a poor country the administration has to be non-elitist in functioning. The example has to be set at the highest levels by cutting down on the huge amount of waste. Gandhi remains relevant even today. The functioning of the bureaucracy should be such as not to awe the people with their power but to make them feel comfortable and they should be able to feel they can have a relationship of trust. These changes would be painful for the administration used to functioning as an elite body but it would lead to good governance over a period of time. The British habit of thought of an elite administration as an instrument of control has to be given up. Did not the leaders of the independent movement identify with the people and was that not the cause of the success of the movement? How simply Gandhi lived and how effective he was.

   The task of administration in India should be to enable equal opportunity to all citizens. This would bring about a sense of social justice in society and reduce the individual’s alienation from society. If a sense of social justice prevails in society, an incomes policy would be feasible (otherwise not).

    The conflict between the specialist and the generalist has to be settled once for all. As issues become more and more complex in a globalizing world, the role of specialists becomes more critical. They must be the formulators of policy while the generalists should be the ones who ought to be the implementers. Appointments by contract would undermine the capacity of the administration to take a stand against violations of the policy.

      Administrative rules need to be simplified and made transparent so that everyone can understand them. The government should intervene effectively where needed. The question is not more or less of government intervention but the right amount as dictated by a national agenda based on consensus. India’s problem is not that there is too much of government intervention in the economy but that whatever rules exist are violated. There is considerable lawlessness in the country that adversely affects governance.

     There is an urgent need to break the Triad. This would strengthen democracy. An independent national agenda would give a mooring to administration and to the national leadership which is missing today. The Right to information, transparency and accountability would go a long way in weakening the functioning of the triad. Accountability means fixing responsibility and setting time limits for tasks.

V.  Conclusion

     A nation is defined by the set of the rules it agrees to govern itself by and the milieu in which the citizens operate/work in. When these change or are violated (due to illegality and the black economy) the nation itself changes. The gap between what ‘is’ and ‘should be’ grows and the capacity to achieve goals is circumscribed.

     Failure of governance and public administration is largely the result of a growing black economy and lack of a national perspective on its current problems. It is not that the written down constitution is inadequate or that the rules are flawed and the two are in need of drastic changes. The implementation is flawed and the intentions are suspect. The roots of the crisis lie in the societal processes which have led to a narrowing of horizons and a loss of value for ideas. In a nutshell, democracy has to be strengthened through adopting Gandhi’s principle ‘Last person first’.

      Note: Sections of this paper are based on Kumar (1999) and Kumar (2001)

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