Anand V. Swamy and Tirthankar Roy on Law and the Economy

In this episode, Shruti speaks with Anand V. Swamy and Tirthankar Roy about their new book, “Law and the Economy in a Young Democracy: India 1947 and Beyond.” They discuss India’s colonial legacy, forest laws, problems with eminent domain, the messiness of Indian legislation and much more. Swamy is the Willmott Family Third Century Professor of Economics at Williams College. His research interests are the economics of institutions and land, labor and credit markets in developing countries and South Asia. Roy is a professor at the London School of Economics, teaching South Asian and global history. His research focuses on Indian capitalism, specifically whether the country’s history reveals patterns that can help understand how Indian capitalism works today.

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, a podcast where we examine academic ideas that can propel India forward. My name is Shruti Rajagopalan. Today my guests are economic historians Tirthankar Roy and Anand V. Swamy, speaking about their latest book, “Law and the Economy in a Young Democracy: India 1947 and Beyond.” Tirthankar Roy is a professor in economic history at the London School of Economics, and Anand V. Swamy is the Willmott Family Third Century Professor of Economics at Williams College.

We spoke about the long shadow cast by colonial laws and institutions in India, the mindset of paternalism hampering freedom of contract, the fear of markets and its impact on economic policy, land reforms and eminent domain, labor law and much more.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Anand. Hi, Tirthankar. Welcome to the show.

TIRTHANKAR ROY: Hi.

ANAND SWAMY: Hi, Shruti. Lovely to be here.

ROY: Same here.

The Long Shadow of History

RAJAGOPALAN: One of the things I’ve learned from both of your work is that history casts a really long shadow. In this book, I feel like the additional element is it’s not just what the old institutions are leaving behind. It is that they’re getting entangled with the new political economy in such a way that there are a lot of frictions, and it’s not a very smooth transition.

There are some incompatible institutions that are left over; there is some zombie legislation which is left over, which no one really follows. There’s a lot of new norm-setting, which is trying to replace these old institutions, and it just simply doesn’t work the way it’s meant to work. Is that a good way to think about the two volumes [“Law and the Economy in Colonial India” and “Law and the Economy in a Young Democracy: India 1947 and Beyond”]?

ROY: I think that’s a very handy way of describing what we wanted to do here. I think in the long run, law and politics overlap a lot, and that’s one of the messages that is coming through in both projects. It doesn’t necessarily overlap in the same way in different fields of law, and there are other influences as well. For example, the expectation or the desire to connect India with the world economy, the globalization impulse, which was quite strong in the colonial times—because Britain was a free trader, of course, but even other than that, it was a major capital exporter. British Empire was founded on this idea of economic exchange and transactions.

Something quite similar has come back in the last 25, 30 years. In both times, the desire to achieve some degree of parity between global law and Indian law was also an impulse. Politics matters, globalization matters. These are the lens through which we wanted to describe the evolution of economic laws, property, corporate and commercial contracts over the long run. 1947 comes as a break, of course. It’s a very significant break, but you can also see some continuity in the project before and after.

SWAMY: Because we worked on both these books for so long, each of us, I think, you look at books themselves through a different lens at different times. This morning when I was thinking about it, I was thinking about really maybe there are two big questions that we follow through the two books: “Where did it come from?” The origins question. Then the question that anybody who’s lived in India or worked in India will understand: “Why is it so cumbersome?”

I remember, a long time ago, being struck that we were reading this literature about how having a common-law inheritance was a wonderful thing. It just jarred with the sense that I had growing up in India that law is something terrifying, and the last place you want to be is in court. At some level, I was already asking those two questions, which is, like I said, “Where did it come from and why?” The answers to those question then are traced through both books, I think.

RAJAGOPALAN: We talk about a lot of this “ease of doing business” and where is India on the rankings. It’s about moving up a couple of steps or moving down a couple of steps. Now, what you point out is that a lot of the current lack of ease of doing business, if I can use that phrasing, it comes initially from a colonial culture which is extractive. A lot of the laws at that time are from the point of view of an extractive state. Whether they’re extracting revenue, which is the initial point of contention, or later they’re extracting natural resources, then they’re extracting for the war effort—that, of course, keeps changing. The fact that the colonial government is developing a particular kind of institution and state capacity for an extractive state very much remains.

Then you bring us on to the next stage, which is this dirigiste development mindset. That is the next 30, 40 years. Once again, there’s some continuity from war controls and things like that, but now you get a different kind of state, which is not intending to be an extractive state but a development state, but still a very high level of state control, relatively low state capacity.

How would you describe the modern Indian state, post-liberalization Indian state? It was supposed to move from control economy to a regulatory economy. I don’t know how successful we’ve been. If you were writing this book three decades from now, what would your perception be of what’s happening now?

SWAMY: I think a short version of it might be—just going back to your earlier point about continuity and change—in some sense, the problem of land and credit, in some ways there’s a lot of continuity. I grew up learning Indian economic history and thinking about the British Raj being largely laissez-faire. I think it’s true if you think about the firm and trade and so on.

Actually, intervention in the land market goes back to the late 19th century. There’s a set of intuitions that come in there, in particular the idea that land transactions are risky for poor people and harmful to poor people, and that actually stays through the colonial period. If anything, it intensifies, and it’s still very much part of the way we approach the economy, I think. In that dimension, you have continuity.

When it comes to corporation and trade and so on, then I think there really is a difference, where the statist approach after independence is really quite sharply different from what preceded it. After 1991, it seems like we are struggling with both those inheritances, that you’re pulling back from SICA and MRTP and all the rest of it, but that process is a little bit slow. It might even be slower when it comes to the land dimension, where change is harder and is resisted more, and probably because it’s more associated with the daily lives of lots of people.

ROY: Let me extend this idea of colonial inheritance or legacy. You are absolutely right that the revenue or the fiscal drive or the attempt to raise more revenue—that was quite paramount in deciding state policy, including legislation. There was something else. We now understand how the colonial states worked worldwide much better than before. And one of the things that many colonial states were trying to do was also to create a broad legitimacy and finding out the sections of population where that legitimacy could stand. The impulse in British India was—because the peasants paid a lot of the taxes—to give something back to the peasants.

Also, from the East India Company’s rule in the 18th century, there was a general idea that if we rule India by some basic Indian precepts, then we’re better off; people will accept that rule. Now, the way that was implemented was to incorporate a lot of religious injunctions and ideas into lawmaking, into legislation. And you see the legacy of that in women’s property rights, for example, or adoption rights, or inheritance, succession, testamentary rights, which were quite peculiar in India, sometimes weaker historically.

Now, that has been a legacy passed on from colonial times to the independent times, but the independent state has been struggling to deal with it. It’s very hard to say that religious references will be completely invalid from now on. You cannot do that, and you cannot do that also because the constitution guarantees some space to personal law. It’s been a struggle. It’s a legacy which probably needed a reform a long time ago, but that reform has been very slow and very piecemeal in coming.

SWAMY: Also, I just wanted to add to that about the issue of the extractive state in relation to land and law. It is an uneven story. I think if you start with the permanent settlement in 1793 or you look at early ryotwari, it’s certainly true that the tax rate is really high. That’s sensible to talk about an extractive state. I think after the Mutiny and into the early 20th century, the proportion of agricultural output that’s being taken as tax in the Bengali area is really very low. By the end of the colonial period, it’s really quite small.

I think post-Mutiny—I think David Washbrook made this point so well—it’s not necessarily that much about extraction as it is about simply preserving British rule and not rocking the boat. If you look at that single number, which is what proportion of output was the state taking as tax, I think it’s very different between 1795 and 1940.

India’s Forest Laws

RAJAGOPALAN: Yes. I think that’s a point well taken. The nature of the extraction also changes. I think of, for instance, something like the Forest Act, which nationalizes forests and any land which is not falling under your very classic Anglo-Saxon property rights regime, just nationalizes or derecognizes it overnight. That is a particular kind of extraction. It’s not exactly the same as revenue extraction, which (you’re absolutely right) keeps coming down in part because the Permanent Settlement Act has fixed a rate. Then between inflation and everything else, it keeps getting chipped away.

The kinds of resources, the way timber was used for railways, the way railways were used for directing raw material and actually finished material for the war effort—both the wars—I still think there is that tinge of an extractive economy. I don’t know what percentage of the GDP that might end up at, in a way that is very easy to calculate revenue as a percentage of GDP. In my mind, that never quite goes away. Though, you’re right. The post moving from the company to the crown, there are some tendencies to think a little bit more about the people of India and preserve the rule and not have riots in rebellion.

ROY: You are absolutely right in raising this huge open question about legislating the commons. It’s a major subject in understanding the evolution of law in the developing world, especially the tropical world, partly because a much larger proportion of the population depend on the commons in these parts than in the Western or temperate zone world—whether it’s the southerner land for pasture or forests or water. Water is much scarcer here in India. In a variety of ways, that’s a huge field where you needed regulatory law either to conserve, regularly use or allow, permit some kind of sustainable use. Much of that legislation has been a work-in-progress.

Most colonial powers didn’t have a very clear understanding of how important the commons were for livelihoods. It’s a worldwide colonial topic that they underlegislated the commons, sometimes took it over, nationalized it, as you said, thinking that this is an economic resource which can be exploited, and it will give us more taxable money. Then realizing very quickly that if they really do this, then the commons will disappear very quickly. There were both these impulses, conservation and economic exploitation, working behind regulation of the commons.

Fundamentally, the kind of laws that economists or activists would want, which will make for a sustainable long-term use, were a process. It started in a very small way, very patchy way in the colonial times. We are still working on it. Water law, for example, is a completely open field.

RAJAGOPALAN: Yes. As is forest law. In fact, even the legislation is quite sparse. Most of it is through judicial pronouncements and future orders, like a lot of these continuing mandamus orders that keep coming from the courts. That’s really how we have shaped how we think about commons versus either community-owned or even individually owned forest rights.

SWAMY: Can I just make one intervention on that point? In relation to common property and forests and so on, you’re absolutely right, there’s the extraction aspect of it. But there’s the other piece of it, and we know obviously had to do with the fact that the British were ruling India for British interests ultimately. There was no getting away from that, whatever you were looking at.

It’s quite striking that when India does become independent, the forest law, as it exists then, is basically considered adequate. There’s a National Forest Policy of 1952, which basically says that, “The fact that you’re living in this village, and there’s a common property area there, and it’s of use to the nation—don’t think you’re special because you live next to it.”

The relationship between the state and the local community, that’s where a lot of the negotiation in change is happening. I’m thinking if it’s 1965, and I’m losing access to the forest, it doesn’t matter very much to me which state is taking it away, right?

RAJAGOPALAN: Absolutely.

SWAMY: It’s only now, the Forest Rights Act and so on, that you’re really getting some muscle into this idea that local community should have rights over local resources.

Governing the Commons

RAJAGOPALAN: Yes. I think that’s a lovely point, that it hardly matters whether the resources are being directed toward a central plan by the Indian Planning Commission or whether the resources are being directed toward the British war effort or something else. The fact of the matter is that the local community doesn’t quite have access to it.

In the process, what has happened, as you point out beautifully in the book—both in your land chapter and in the chapters on the environment—that this has affected both those areas. We don’t have a sensible way of governing the commons. That’s problem one. If you’re thinking about it from the point of view of economic efficiency, a lot of the new court rulings have come up in such a way that they’re almost like anti-commons. There are too many veto points. You can’t get much done, and there’s isn’t a single holdout. It’s become like a gridlock economy.

On the other hand, if you don’t have sufficient veto points—if the state is the only authority, or ministry is the only point of clearance—then you get a lot of this mining activity a little too quickly. In fact, in a lot of cases, you have the leader of a particular tribe or the pradhan of a particular village, who’s basically the person whose name is on the ledger and has signed off the entire community’s rights to a particular firm or in some cases, even government of India firm. The whole thing is a little bit bizarre.

I understand that there’s no way of doing this from scratch today. If there were an attempt to rewrite this, what is a sensible way to think about land law, forest law and environmental law—the intersection of the three? What are the first principles one must keep in mind before putting this in place?

SWAMY: That’s a big question, several of them. One observation that comes off the top of my head, which is if you go to this issue of land acquisition and eminent domain, the weird thing about the notorious 1894 act was, in fact, if a land is put to a better use, then it’s going to produce more.

To an economist, the most natural way to think about facilitating that transfer is to share the benefits of the new increased productivity with the original owner. The 1894 law actually forbade that. It didn’t just not have it. It actually said you could not take this value. I think some of what’s interesting right now, to me at least, of getting past this quagmire really is ways of going past that and sharing the profits.

RAJAGOPALAN: The surplus. Yes.

SWAMY: Yes. I think in the 2013 law on non-acquisition, there is a provision that if the new owner resells—

RAJAGOPALAN: 40%.

SWAMY: Yes, 40% has to go. Then I think with the minerals there’s not legislation about sharing royalties with local communities and so on. There’s only one way out of this tangle.

ROY: Yes. I’ll echo Anand that this is a really big question. I don’t think we can have a very quick answer to it. Also, I think the answer will depend on what kind of resource we are looking at and how acute the drive is to make that resource more exploitable commercially. My sense is that, with land or forest land, the agricultural use or industrial use, that impulse is a little weaker now than, say, 40 years before precisely because the economic structure has changed. The livelihood composition has changed, and a lot of people would, if not give up on industry—they’re not so fixated on industrialization as the road ahead.

There is going to be a fierce and more intense battle ahead on water. That’s one of the trickiest things to legislate because water is like a mine. You have rights on surface. Sometimes the water comes from underground. You own a well, which is a private property, but the well is drawing water from a common property and no one knows the exact qualities of that water body. That’s a global problem. It’s not just a colonial inheritance problem. It’s a fundamental environmental problem that we do not have the perfect solution for.

The other comment I had was that this process of moving ahead on legislating the commons in a sustainable way—and it is becoming more provincial. It’s not a federal thing anymore. You can see that also in the level of activism among local communities in protecting their livelihoods or their dignity or their dependence on the commons. The fact being that in Kerala, these popular protest movements are much more frequent, much more successful, more intense, more long-lasting to the extent that some people would think that these communities have extracted a significant political autonomy where some of these movements appeared.

Something that you cannot foresee in Narmada Bachao or Chipko. It is a very regional, cultural thing as well. India’s own ecology is very diverse. You are going to get quite different types of movements and different types of solutions regionally.

SWAMY: I think there’s two types of distrust at work in terms of arriving at solutions. As economists that are trained in thinking about markets and stuff, we tend to think of it as state versus market. I wouldn’t necessarily call it a problem, but part of the issue is that actually there’s distrust of both. When it comes to eminent domain, for instance, I think we argue in the book that one of the reasons why the 2013 law was written in that kind of blunt way, where you say, “Four times the price has to be paid for—” We quote one of the people who was behind the legislation essentially saying, “I wanted to take discretion out of the hands of the government.”

Of course, we all know for all those evictions and so on that if you are going to lose your land, you had good reason to worry that you wouldn’t get compensated. That I think has do with the credibility of the state. That I can actually see concrete ways of addressing via, like I said, profit-sharing and so on. There’s a deeper sense—like I said, it goes back a very long way—which is really about intuition, which is that putting poor people into market transactions in this legal system is intrinsically dangerous. As you know, many of the land reform acts actually forbid land lease.

There are so many other restrictions. There’s been a Model Tenancy Act now out for God knows how long. People are not biting on it because I think their intuitions are very deep. It may have something to do, I think, with the fact that in a country that’s been as poor as ours, insurance is a very big deal. As economists, we tend to think about growth and what will actually expand the economy, expand the pie and so on. I think a lot of what people are worrying about is, “How do we stay out of starvation? How do we stay out of destitution?” That, I think, is a trickier thing to legislate away or negotiate away.

Freedom of Contract

RAJAGOPALAN: I think one of the most fascinating things is this problem India has with freedom of contract. Of course, it’s worst in land matters, as you’ve pointed out over and over again, but it’s also pretty bad in labor.

Is this coming from an imperial culture? “Oh, these poor indigenous people, they don’t understand law and they can’t be trusted to trade with one another,” even though it’s one of the oldest trading civilizations. Then comes the socialist regime, which is, “Oh, they got conned by the East India Company and then by the British Raj. These poor people don’t know how to trade with each other.” Now, it’s a paternalistic socialism, but really paternalism coming in.

Post-liberalization, they’re like, “Oh, there’s all this crony capitalism, and all these big mining firms are going to take Adivasi—they really can’t be trusted.” It’s, of course, worst with farmers, poor people, Adivasis, women. It’s so difficult for me to wrap my head around this. Because Adam Smith tells us human beings have the proclivity to truck, barter and trade. [chuckles] Everything we’ve seen in 250 years of law is to not trust people to truck, barter and trade. First question is, where is this coming from, and why is this intuition so deep in India?

ROY: [chuckles] It’s a wonderful question. First of all, one of the harshest labor laws was a colonial product, one of the early labor contracts, which made escaping a contract a criminal act. And that came into being in the 1850s in the plantations, and it remained in force for quite a long time. Anand has written about this. Then if you look at the origin of this law, it’s not exactly colonialism. It’s coming from a British tradition where, again, labor contracts were covered by a criminal law or penal law for a long time. Breaking a contract is a sin, not just a civil offense.

That sentiment was carried over into many parts of the British Empire. The employers of, say, plantation tea estate workers liked it because they thought that these people, unless they are forced to stay on, they will escape back into their villages and never turn up again. That’s bad for business. They quite liked this law. In the 1910s, ’20s, by that time, the factory workforce was quite large, and many of these employers were not British anymore; they were Indian employers. At that time, there was a different kind of drive working toward labor legislation. That came from the nationalistic politics.

Both capital and labor were organized under different trade unions, which were led by political parties. The legacy of that is something that post-1947 India has been living with, which is that the organized workforce is very politically organized and politically connected. The parties or the political campaigner speak for them, which is something that connects to what Anand was talking about, which is that the poor people, if they are left to the market forces, are likely to get shortchanged or exploited. That sentiment works in labor law, and we all know that a lot of new clauses were added to that to protect that interest.

The problem we now see, however, is the other side of that kind of protection. If a worker or an artisan or, say, a street vendor is always represented by somebody, then an honest deal doesn’t go through. I may be fully aware—I’m politically weak, but I may be fully aware of what I’m doing. I have full information. But I don’t have the capacity to carry out a sale because either a law or a powerful councilor or somebody else can come in the way. That’s a different kind of risk. It’s also, again, an exploitative situation. A lot of that we see in our everyday life all around us.

RAJAGOPALAN: No, I think that’s a great point about the middleman problem. This is also, again, many hundred years’ worth of legacy. At different points, it’s a different middleman. You’re right that there has never been anything resembling that laissez-faire freedom of contract, where there’s genuine meeting of minds and genuine consent that is given. Then everyone is now suddenly very, very worried about, “If there isn’t genuine consent, can we have any kind of contract at all?” and all sorts of impositions on it.

SWAMY: One thing, Shruti, in connection with this—one thing that you just reminded me was that as we’ve been writing these two books, we’re always looking for the big picture. You’re diving into the detail, and you’re trying to find the big picture. One of the things that always struck me is that the story does vary depending on which part of the economy you’re talking about.

In the labor market, on the one hand, we are used to focusing on the industrial worker, and the protections and all these complaints about excessive protections and so on. In fact, huge swaths of the Indian workers have been essentially unprotected for a very long period of time. There’s some change. I think T.S. Papola has a nice paper in 2010. He makes the point that really all this discussion on a tiny fraction of the labor force—and rest of the situation is really quite different.

The other end of it really is there’s, again, NREGA and the right to work—it’s interesting that in a world where the minimum wage law is largely ornamental—

RAJAGOPALAN: It’s an insurance scheme or a safety net, right?

SWAMY: Yes.

RAJAGOPALAN: It’s the downside risk that you were talking about. This is one way of protecting the downside risk.

SWAMY: Right. The other thing I just wanted to mention in relation to this persistence of skepticism of the market—the labor laws have been changed, as you know—the last one, was it a year ago? Less than a year ago. It’s a big reform. There’s so much talk about how did it get resistance, and it didn’t, and it went through and so on. If you look at the clause that has attracted the most academic attention, at least, which is letting a worker go after you’re a size 100. That’s the one people want to change. It has changed, but it’s only changed to 300.

RAJAGOPALAN: 300. Exactly. We still don’t like scale in India. We have a problem with scale.

SWAMY: What’s true, I think, is the law allows each state to make a different choice. Certainly, the state can. It’s still interesting that in an era when there’s so much talk of the market, what you have really done is go back from Indira Gandhi 1982 to Indira Gandhi 1976.

The Relevant Regulatory Constraint 

RAJAGOPALAN: Yes. [chuckles] That’s a great way of putting it. I always thought that for scale, the binding constraint was labor. We have this nonsense law, which—is it 100 people, is it 300 people? This is fundamentally the reason India never became a manufacturing hub like Taiwan or even like Bangladesh right now. I thought that was the relevant constraint that we need to relax.

Now I’m not so sure anymore, after reading your book, because is the relevant constraint for scale MRTP and SICA-type laws? Is it difficulty in assembling large parcels of land? Is it labor? Is it environmental clearance? Is it something completely different? That even if we manage to relax all of this, because we have this terrible tax regime, there are going to be a lot of firms that prefer to be in the shadows in the informal economy. Because if they genuinely paid that kind of tax, there’s no way they could be competitive in the market. What is a good way to think about or investigate what is the relevant constraint in this kind of thicket of regulation?

ROY: I don’t think that there is a magic bullet or magic solution to generating more investments, but the theme that is common to all the examples that I’ve cited is that the more regulation you have—the more procedures you have to follow, and the more boxes you have to tick for a private investor—the more you do that, the more exposed you are to political interference, if not outright rent-seeking, implicit pressure to create jobs or create jobs for our people, that sort of thing. That goes on all the time in a sizable investment almost anywhere.

Part of that, I think, is a procedural problem. If you can make this process more transparent and more mediated by electronics rather than human beings, probably things will get a bit better. At least investors will understand the system much better than otherwise.

SWAMY: Shruti, I think the problem really is a tricky one. I think if you put it into economist jargon, you’re essentially saying that in an optimization exercise, if you’ve got multiple potential constraints, how do you figure out which is the one that is binding? I think economists and econometricians really had a go at it. There’s a lot of very different results.

My sense, actually, is that the labor law probably matters. First of all, it’s not necessarily the one that everybody focuses on, which is this 100 and 300. But it’s what I think Manish Sabharwal has called regulatory cholesterol. It’s like a hundred different things.

It’s also the case that with the fixed-term employment being allowed and contract and casual workers, maybe this is not the one that’s really binding. If your readers, if your listeners were technically oriented, there’s a very nice paper by Achyuta Adhvaryu and some others in Review of Economics and Statistics, where they actually look at when you get a demand shock, how much are you able to adjust your number of workers. And they look at places where labor laws favor the employer versus the worker.

They find, in fact, some differences in employment. It’s interesting that they don’t find any difference in profits. They don’t need to find any differences in output. Eventually, the paper speculates that people are working around labor law by using contract labor. Then there’s a labor paper in the Journal of Development Economics which seems to support that.

I think there’s a very clear theoretical case for it for labor law of this particular type around retrenchment being a constraint. My sense is that this is not such a big deal. In the book, we mentioned that there was some relaxation of this retrenchment rule in Rajasthan some years ago. You’re not seeing any big bang for your buck.

ROY: This anxiety about labor law is a kind of legacy of a time when economists across the board thought that industrialization is the way to go. Many of these laws were tuned to the manufacturing workforce, the manufacturing worksite, the kind of work that happened in a large factory. Things like metals, machines, chemical factories, which were the priority in the 1960s and the ’70s. The labor laws attempted to protect people working in there. That’s the kind of legacy we are living with. That doesn’t mean that if you reform labor laws, there’ll be more of that kind of factories.

India is not moving in that direction at all. It’s moved away from that direction. The huge service-sector employment is a completely different game altogether. This anxiety about 100 and 300 and the magic bullet is an archaic discussion. We need to think of labor law in a completely different way.

RAJAGOPALAN: I think the additional problem, which also you point out in the book in many different ways, is if you’re moving away from a labor inspection control economy—which used to be, there will be labor inspector would show up to the factory site and check if the capital-labor relationship is smooth and functional. If you’re moving away from that, now the 100 and 300, it’s a matter of detail, but we need to move toward some kind of contract enforcement.

The biggest problem in sensible labor relations between the employer and the employee is that the courts take just too long. There is no way to enforce a contract. All your contracts are taking place in the shadow of the law. The moment you go from within the law to the shadow of the law, you’re now relying on networks and caste and power structure and middlemen. Now you’ve just gone from what Doug North and Weingast would call an open-access order to a limited-access order.

We’ve pushed people into that because the contract enforcement is completely broken. There seems to be an even bigger failure, which is not just the detail of the 100 versus 300 and the rest of the labor regulation. Even if we have the most perfect labor regulation that economists who work on the market can agree on, who’s going to enforce this stuff?

SWAMY: The enforcement problem, again, it just seems like something that started in the colonial period and just steadily got worse. At some level, it’s baffling. I think we began the second book by pointing out—I think we have some figures on how many judges we have per Indian people.

RAJAGOPALAN: The number is supposed to be 50 per million. I believe you show that it’s one per million. That’s the allocated number. About half of them are vacant. I think the number might be even lower than you think they are.

SWAMY: The best guess, I think, we have in the book really is that, at least for the current day, there’s no electoral payoff. There’s no big investment in changing the law. It’s not going to yield return in two years or three years. You can’t put it on an election poster. You really need a long-term horizon for that.

I suppose the other piece of it—I think Tirthankar knows this and has written about this much better—is that the parts of the economy where people had really needed this, there is quick contract enforcement. It seems so difficult to work with the reform of the existing system due to what in the U.S. would call an end-run around it, and set up these tribunals. You’ve got this different—legal dualism is, I think, what people call it.

RAJAGOPALAN: Absolutely.

ROY: This is a great question about enforcement. Part of it is very macro and very long historical thing, as Anand mentioned, the judiciary infrastructure falling constantly behind population growth or economic change. It’s not a post-1947—it’s not something that happened in the last 20 years. It happened over the last 150 years. It’s the same problem that is underinvestment in the infrastructure. It’s not just labor law, but all forms of disputes. If it is a civil dispute, it will take an enormous amount of time to the extent that I hear from gossips that it makes more sense, if you have a dispute, to file a criminal case.

RAJAGOPALAN: Absolutely.

ROY: [chuckles] That’s just harassment, of course, but a lot of people are taking that road because civil cases are so hard to settle easily. This is quite evident in, say, the biggest use in corporate law reform like insolvency, bankruptcy. Part of the problem also is that there is a regulatory overlap and that the Companies Act gives you a way to file for insolvency, but then other types of laws or regulations will prevent you from doing that, or make it subject to some kind of licensing procedure. A judge often has her hands tied about how to settle certain cases. You would have examples of that almost everywhere, in tenancy contract, labor contracts—everywhere that you can settle a case by referring to different types of law.

RAJAGOPALAN: This is also why our legislation is getting messier and messier. This is why you get four times the market price and 40% of the profits and those sorts of things that are now entering legislation, because you know you’ve messed up contract law to such an extent, and its enforcement is so unreliable, that the only way to protect large groups of people who especially have some kind of political traction is now to write this stuff into legislation, making legislation itself more complex and messy.

Land and Eminent Domain

RAJAGOPALAN: I want to come to land law. I want to start right at the beginning, and I’ve learned some of this from your past work, Tirthankar, this is “The Economic History of India,” where you take us back to 1790 and the Permanent Settlement Act. The Permanent Settlement Act, as you point out, it’s this way for the East India Company to quickly generate and manage land revenue at scale when they have maybe 200, 300 company officers, who obviously can’t go around collecting revenue in the entire diwani of Bengal, which they had won at the time.

One of the consequences of the Permanent Settlement Act is that it brings in or creates new rights in property. This is one area which has never been clear to me. Was the right that was created in favor of zamindars a right to ownership of property, or was the right that was created the right to collect revenue? Because I know that the right to collect revenue itself was an alienable right that, when they fail to collect and pay sufficient revenue per the Permanent Settlement Act, their right could be auctioned away. It did happen with many people.

At some point in 1947, we seem to have conflated the two. Zamindars become the de facto owners of land, as opposed to actually just being revenue collectors of land. That, of course, leads us to all the eminent domain problems that you cover on the second book, which is post-1950 with the new constitution. Now we need to do land reform because the zamindars have high concentration. Can you take us back to the origin point and help untangle this mess?

ROY: It’s exactly as you described. When we talk about property rights, historically, there are different types of rights embedded in that phrase: right to use an asset for income, right to collect taxes on somebody’s behalf or the right to own—which means I’m able to mortgage that asset, or I’m able to sell it or I’m able to pass it on to the next generation or anybody I please. Now, the general point of emphasis of all colonial land reforms in the 18th century—later in Asia and Africa, in Southeast Asia—was to recognize just one of these rights, and that’s ownership, exactly as we said, and derecognize all other forms of right.

Now, of course, they were doing it with the understanding that the person who gets this very strong unencumbered ownership right will then be incentivized to pay more taxes or pay taxes regularly. There was a revenue angle, but the general understanding was that if you make land free of all other types of rights and make it a pure ownership asset, it will be used more productively or it will be sold to the potentially most productive user.

There was a utilitarian, market-oriented logic behind it, but there was also a political calculation that the people who are getting it are—in 1790s Bengal, the people who are getting this right are the big shots in the countryside. If you give this unencumbered right, they will probably feel happier, and they’ll need to employ fewer soldiers to be able to collect taxes. That’ll be politically wise as well.

In this way, the politics centered this calculation. Fundamentally, the direction of the reform was just this, ownership and nothing else. You see it worldwide in the colonial land reforms. The problem, of course, is that when you create strong ownership right, then the commons are a big open question because you cannot have ownership of the commons, certainly not private ownership. The only right that works there is right to use. The more you are obsessed with ownership, the less you are able to deal with the commons problem.

SWAMY: On the problem segment, I just wanted to jump in that the text itself actually built in long-term trouble. Because essentially, what it says explicitly is, “We recognize this person’s right to do this,” which is collect taxes and keep a share and so on. There’s also some very explicit language that says, “This does not deny other rights that exist,” of the type that Tirthankar referred to.

I think Peter Robb has a very nice analysis of this. This is really a weak state that can’t do much. It does what it can and everything else, and again, I would say it punts. It’s like, “We’ll deal with it later.” Then the other rights get fought over, what, 200 years—Bengal Tenancy Act 1859 and 1885, and then all the way to Operation Barga. All those rights beneath the zamindar are being fought over for the next 200 years.

RAJAGOPALAN: What I find fascinating is I’ve been tracking eminent domain cases. I went back to 1790 because of both of you. [chuckles]

The other thing I recently learned while tracking cases from that time, when we think about eminent domain, what is the compensable harm, when property is taken, starts becoming quite clear? Normally, you would think that if the presidency of Bengal wants to put in some bridge or canal or some irrigation work, then it’s going to compensate the zamindar, and he’ll hopefully pass it on to the par-zamindar or one of the tenants, because that area got flooded or a bridge went over their piece of land or something like that.

When you actually read the cases, what they start pointing out is the harm that has been caused is, now the tenant won’t be able to pay the zamindar revenue, and the zamindar has agreed to pay a fixed amount of revenue to the company and eventually to the crown. That is the right which is being infringed upon, or the harm.

The reason I keep going back to this is because I’m trying to solve this in my own head. In 1950, would it have made sense to say, “Look, that was the right to collect taxes, and now there is a new stationary bandit in town called the government of India. That’s no longer a compensable harm. The only compensable harm is if we put in an additional land ceiling act and redistribute land to occupying tenants or even the landless tenants.”

Do you think that logic holds together? That’s not the way India went. Could this have been an option to avoid a lot of the zamindari land reform that India did in 1950?

SWAMY: I’ll take a stab at that. I was with you, Shruti, till the very last question that you posed. I think zamindari land reform was really a political necessity. I think it wasn’t so much about laws, about politics. I think we’ve discussed this earlier in private conversations. If the Raja of Darbhanga had more than a million acres of land, in some sense that was politically untenable, and that had to be changed.

RAJAGOPALAN: Oh, I agree with you. I think my question is the other way. We could have avoided the problem by not having to compensate him, because the Maharajah of Darbhanga, his rights have been taken away as tax collector. His actual landholding itself is not that big. Whereas we virtually rewrote Indian constitutional law just to ensure that we can take away Raja of Darbhanga’s 2,400 square miles.

SWAMY: I don’t know, Shruti. I think it’s simpler in that case. At least the ethics of it are simpler in that case. There were zamindars and there were zamindars. You could think of expropriating the Raja of Darbhanga without compensation. Someone who would call a zamindar might have 10 acres of land. I also beat my head against this quite a bit, about is this a tax or is it ownership? I think for de facto purposes, actually, it was ownership. Sure, it was constrained by tenancy law and so on.

If you have a piece of property, and you have use rights over it, you have eviction rights over it, you can borrow against it—like Tirthankar said, ownership is a bundle of rights—you’re getting pretty close to having a large part of that bundle. I do view it as ownership. Then you had to compensate, of course, as you know, because you’d written the right to property in the constitution.

ROY: A couple of things in response to your question. First, the eminent domain problem in India. If you are tracking the history of it, probably the first large-scale use of something like it would be the railway land acquisition. I’m no expert on that particular history. My impression is that there was no central federal policy about this when the first railways came out.

The other thing to remember is that in 1860s and 1870s, it still had a lot of surplus land, a huge quantity of it. The people who controlled it, whether they’re princely states or zamindars or the local collector, they were parts in some way. They were allies of the colonial state. There was no prospect of a significant backlash or protest about land acquisition. There was still a legal angle to it. I think that needs more research. Maybe somebody’s researching it now.

What happened after 1947—there were, of course, urban construction, bridge building, as you said, and quite a few other types of land acquisition—what happened after 1947 was completely different in scale. The fact that there were 2,000 river valley projects that came up, some of them in terrain where many people were already settled or land was very scarce, very valuable—that was a completely different kind of political problem.

We all know what happened. There were, of course, legal ways of doing this, but they also created such massive displacement and political issues that practically the entire movement became politically infeasible. There are very few dams that have been constructed since. There are probably none. The eminent domain issue quite changed in scale between colonial and the postcolonial times.

What Is Public Purpose?

SWAMY: One thing, as someone who lives in the U.S. and then thinks of eminent domain, I’m sure you’ve noticed, Shruti, which is that—I was looking back. In that book we make a reference to this 2005 Kelo decision in the U.S. I went back and looked at that judgment, and one of the things that jumped out again at me was, can the land be seized for a public use or for a public purpose?

The U.S. law says “use,” which is much narrower, and then there’s debates about whether you can—is this going into public purpose? But the 1894 law explicitly says “purpose.” The state has actually given itself enormous power right off the bat. That just persists past independence until you get this big pushback, as Tirthankar mentioned.

RAJAGOPALAN: Yes. I think two additional points, which is you’re absolutely right. There’s public use versus public purpose. They even debated in the Constituent Assembly what the wording should be, and then at some point the framers of the constitution explicitly said, “Whatever way we phrase it, land reform is included because we got to do that.”

If I wear my economist hat, what do I think of when I think of public use? It is something very, very close to public goods or quasi-public goods. It has to be non-excludable, non-rival. There has to be a collective action problem; otherwise the good is not going to be produced in the first place. Therefore, we must have eminent domain to avoid the holdout.

That’s the economic logic of it, which means if you’re just assembling pieces of land for a hotel or a bakery, it’s not going to qualify for public use or public purpose. Having said that, what is public use or not public use when you are in a socialist state? In my living memory, the government has owned Modern Bakery. In our living memory, now the government is trying to privatize Ashoka Hotel.

In a political economy where the government owns everything from textile manufacturers to bakeries to hotels to everything, now it’s not clear to me anymore if this public use/public purpose distinction even matters in India. When they left it to the courts, the courts essentially used doctrine of legislative deference. They say whatever the government says, whatever the legislation says is public use or public purpose, or eventually became public interest, qualifies.

The courts are never going to get into the point of, is this good public use or doesn’t quite match up to public use? I think the American construct just simply doesn’t compute. We use the same words, but they have just such an enormously different or huge gap in meaning.

SWAMY: I guess the other thing that—I’ve been thinking about this. I expected actually to chat with you about this. I knew this was a shared interest. I worry a little bit actually that the eminent domain law, especially when lawyers talk about it, and you talk about it at a high level of abstraction. It really matters at what stage of economic development you are and who are the winners and losers and so on, if you think of it as an economist.

Just going back to our discussion a little while ago of what is holding back industrialization—at an abstract level I’m a strong believer in the private property right, and maybe for a narrow description of public use and so on. But if we talk about like politics and economics today, the jobs problem in India is immense. Now, if you think about—certainly acquisition of land seems to be playing a part in that. It is well over $200 billion worth held-up projects.

There’s a lawyer’s way of thinking about the property right, and then there’s me thinking that if you could set up a factory that it is going to create 5,000 jobs or 2,000 jobs, maybe the kind of property right we need here, the kind of eminent domain law we need here is different from what you might need in the United States in 2020.

RAJAGOPALAN: I think you also make this point very well in the book. In India, they’re using eminent domain for a bunch of other very perverse reasons. We have bad land titles, and you’re worried about contestation at a later point. The best way to get a clean title is have the government acquire land and then assemble it and give a clean parcel of land to whichever company wants to create the special economic zone, as the case may be.

Bad land titling now has this unintended consequence of eminent domain. I was talking to some farmer groups in Gurgaon. This was a while ago, more than a decade ago. I learned that farmers in India, in a lot of these urbanizing areas—Gurgaon is a particularly dire example because it’s a very arid area; it’s not great for farming. Farmers are dying to sell their land. They really want to get out of it. Developers are dying to buy land, they really want to get into it, but they’re not able to contract with each other.

As economists, to us this is baffling. There are people who really want to sell land, the people who really want to buy land. Now, where are the frictions? We start looking at where are the frictions in the economy or transaction costs in the economy. The pain point is the “change of land use” certificate. This goes back to your previous discussion on how we are protecting farmers and workers to a point where they can’t sell their land, they can’t alienate. The few groups who can alienate, you can’t change the kind of land use, you can’t alienate to a non-farmer, or you can’t alienate to a non-Adivasi.

If you do, the family which will buy your land has to have below X number of hectares of land; otherwise they go over the limit. Now, basically, I figure what we’ve done in India is we’ve created a dual land market: one if you have all the relevant permits and another if you don’t have all the relevant permits. The price in these two different land markets is quite different. That’s probably where this 4X market rate and 40X of the profit-sharing and all that is coming from.

When you have two different land markets and you have two different prices, of course, people can’t agree on buying and selling parcels of land and putting it together. But it doesn’t seem to have occurred to them that we need to simplify that whole process. The result is, “Oh, it’s very difficult to assemble land in India. We need eminent domain to have development for jobs and so forth.” Which I don’t disagree with, but it’s putting a Band-Aid on the problem. It’s not really solving the root of the problem, which is why can’t people transact on land in India?

Market Skepticism

ROY: I think it goes back to what Anand was talking about before, the fear of the market. The fear of the market is very palpable, very strong, very intense. When there is a case of—well, assuming you are losing your last bit of asset, which is a little land holding that you had inherited from your grandparents.

As I said before, it’s often a case of an imagined situation. The imagined world is full of exploiters rather than free contracting people. That’s a mental block. It’s a mindset that has been with us for a long time. It partly comes from fear of the colonial history or partly from fear of the state, partly from real life situations as well. You are absolutely right. I think the legal way of responding to this situation, this impasse has not been completely satisfactory. And what you have in land market almost everywhere is that there will be some political agency that comes into play.

The problem that you mentioned in Gurgaon, I’m sure it is going to get solved. If both parties are willing, it will be solved, but it will be solved not by the courtroom, not by law. It will be solved by converting maybe land into—as happens quite often in western India—converting agricultural land first into pasture, then into waste and then into urban land. You have ways of doing it, and there are many experts working on it, but it does get resolved. It’s just that it involves massive transaction costs.

RAJAGOPALAN: Yes, and it involves politics. They finally, I think, resolve these matters by bringing in local political authority or politically powerful people to bring all the relevant groups and negotiate. I think it’s that negotiation—whether it happens in court, whether it happens in the market—in India it’s happening through politics.

SWAMY: In fairness, a lot of the emphasis—I’ve said several times already in this conversation about this being a mindset, market skepticism being a mindset—but I guess I want not to oversimplify. There’s actually also a real problem there. One distinction that I think worth noting is that—I remember reading a report that came out, I think in 2014, which was actually advocating for liberalization of land markets with one big exception, which is for Adivasis.

There’s different parts of the Indian farming, peasant community, if you like, and the vulnerability of Adivasis in particular is a theme that lasts. I think the concern that participation in land markets can be risky for them is not something that I’m willing to reject given how much I know. It’s very deep.

I think we shouldn’t think of this as just a problem in the way we think. It may actually also be related to the fact that our legal system is so corruptible. Those fears have some foundation in the legal system as it currently stands.

Records, State Capacity and Digitizing India

RAJAGOPALAN: Absolutely, and I think the biggest problem is the paperwork required, right? We’ve imported a very colonial legal system to negotiate matters which are not coming from a colonial mindset and not coming from colonial property relations. And most people don’t have paperwork, the relevant paperwork. This again goes back to state capacity.

We know now in modern day, we know based on Alexander Lee’s work, how the old zamindari versus ryotwari system and how many officers set up revenue collection units affects modern-day state capacity in India. That’s another way to think about the long shadow. Even today we don’t have good land records. During COVID, we’re realizing we’re not good at recording births; we’re not good at recording deaths.

All the things that we think that a country that has biometric identification and things like that, we just take it for granted, but that simply doesn’t work. I think in the absence of good land titling and very well-vetted local ledgers, it’s going to be very difficult. Adivasi is a particularly powerless group when it comes to negotiating the legal system, but depending on which state you’re talking about, it could be a different group.

I think the issue that you point out is very thoughtful, that I don’t think we can just move from this completely paternalistic world to a completely freedom-of-contract world without additional changes which are brought to bear.

SWAMY: In the book, the person whose work is very interesting in this regard is Wadhwa, who’s been the big push for Torrens system of land titling. I think that was really important work, and it’s had a big impact. And in some sense that is the direction in which we are going, and all this digitization and so on is helping. The problem, of course, is that when you can digitize, the question is, what is it that you should digitize?

I think the problem that goes back a long way, really, is the something we lead to in the book, which is that when you talk about taxation—so, there’s a question of who owes the tax on this piece of land? The other is, can you buy it and sell it? And the registry office which records the sales doesn’t necessarily coordinate with the folks who are collecting the property tax.

This is true for property that the people in my family own. I know that the owner who owes the property tax, that name is different from the owner as in the sale deed. That’s a laborious process to get to the bottom of each of those and then document them carefully. Of course, in places like Delhi is even worse, in urban India it’s even worse than that. To avoid the stamp duties, you would sell power of attorney rather than the property right itself.

I remember one of my friends telling me years ago about Delhi: “poori Dilli power of attorney mein bik rahi hai” (that is, “all of Delhi is being sold on power of attorney”). You get really bizarre situations where someone owns a piece of property, but he has this third power of attorney.

RAJAGOPALAN: Yes. That’s why they say 4X the market price, because the market price that they’re relying on is what the registration office is giving them. And that’s a depressed price because that’s the amount that is given in white, as we call it in India. You have a piece of property: If it costs 100 INR, you say it only costs 40 INR and you pay tax only on 40 INR. And on the additional 60 INR you exchange it privately like a briefcase full of cash, using this power of attorney and other means.

The whole thing is a little bit messy. The circle rates or the market rates have no bearing in reality. A couple of zeros are missing in each of those cases. Yes, I think you’re right. The more I read what you’re saying, the more I have an appreciation for just the complexity of this, not just each area of regulation, but each piece of regulation itself, it’s so messy.

Private Takings

RAJAGOPALAN: You talked about Kelo. Kelo is 2005, 2006. This problem has been there in the U.S. even before that, but this problem of taking land from Peter and giving to Paul—it’s like a private takings where the government acts as a broker. This is an absolute no-no in United States jurisprudence, and Kelo was like this point where it became so stark. But in India, we have clauses for the government taking land and giving it to a private company in 1894.

SWAMY: Yes, that’s right on.

RAJAGOPALAN: We have a situation where the government is a private company. Now, this idea of taking from Peter and giving to Paul, can it be applied directly to Kameshwar Singh and taking his land and giving it to all his landless tenants? Or can it be applied now directly to cases like Singur where you’re taking from the land from peasants and giving it to Tata? It’s just becoming very confusing. There is no sensible Indian jurisprudence you can apply to the principle of, can you take land and give it to a private company?

SWAMY: Again, being amateur lawyer here, but I think public use versus public purpose . . . Public use is very clear that Sita or Arvind or Anand should be able to walk on that property, drink on it, literally use the property. That’s a clear criterion, however restrictive we find it. Once it’s a public purpose, then really all bets are off, right? The land goes to a private employer whose factory is going to hire 5,000 people. Does it satisfy a public purpose? Yes.

RAJAGOPALAN: Yes. [chuckles]

ROY: Yes, this is something that Anand was talking about before. What we understand by public purpose is colored by developmental ideas. Development is a public purpose, and then it depends on how you precisely define development, what its contents are. If it is industrialization, well, acquiring land for a factory very centrally fits that idea. We have been living with that kind of language, that sentiment that development is public purpose.

We have also lived with the idea that development is a state responsibility. State intervention is a very accepted idea. Of course, it will never be accepted to the people whose land is taken away. Yes, legally and juridically, it’s an accepted idea, but it’s not going to be politically acceptable.

RAJAGOPALAN: In Kelo, Sandra Day O’Connor was one of the justices who dissented. At one point, she says, “There’s nothing to stop the government and the courts from taking a Motel 5 and making it a Ritz-Carlton,” if the only way we think about public purpose is tax revenue and number of jobs and bottom line. She points out the moral conundrum. As an economist, I struggle with this all the time. How can we build a liberalized, globalized market economy that wants to attract foreign investment and all these wonderful things, if our mindset is still that development is state-led and development is whoever employs more people or whoever brings in more revenue?

The global order is, resources need to go to the highest-valued use. You can’t be plugged into the global order at the same time and have this local politics, which says, “The highest-valued use is what works for this kind of politics or this party’s manifesto or that kind of development goal.” That I think is a tension that can’t be easily resolved. This is a good question to ask you. Is it possible to have this kind of liberalized economy that one hopes India will get to that seems to be the big dream, without serious curbs and restrictions on the government’s power to take property or eminent domain?

ROY: Well, I think part of the answer will be in making markets, especially asset markets, work more freely without government intervention and without the government doing things with it, joining it as a super powerful party. I completely agree. I don’t want to predict a trajectory, but certainly, some good things have happened. I’m now a digitization optimist. Although I see from personal experience, like Anand’s, that some of the wrong data get transferred into the digitized records, and there is really no way of getting rid of that. It’s going to be a messy process, but it’s certainly moving toward a more transparent process in most states.

I think the bigger question about how do you create a more liberal market order is very political. It has more to do with shedding some of India’s very deep-rooted xenophobic nationalism, and the political body language that displays to the rest of the world what you stand for. That’s involved here. Now, that is not a matter of legal reform.

SWAMY: The other thing, Shruti—taking us away a little bit from what Tirthankar just said, which I think is a great point—the whole issue with the property right is that while you can define it in the abstract, when it comes to a specific case, you’re really concerned about whose property right is being taken away. I think other people have made this point—Namita Wahi has made this point very nicely—that during the land reform period, the left wants a weak property right because the property is being taken away from zamindars.

More recently, I think the left actually wants a strong property right. Even for the sort of a global investor, a big multinational may actually prefer India having a weak property right and the Indian government being very strong because—it’s not that they fear they will be expropriated. But they even facilitate them getting the land that they need or something like that. What I’m saying is, secure property rights are not always good for capital.

RAJAGOPALAN: [laughs] I think, in this, things change too quickly. We’re not that far off; we just had crazy retroactive taxation. We’ve had firms be expropriated during Indira Gandhi’s regime, both domestic and foreign firms. We’ve had overnight bank nationalization. You’re absolutely right that it depends on whose property, but I think it’s very difficult to build that kind of global market order if property can be expropriated at any time. I agree with you that it’s less likely to be expropriated from a modern-day Kameshwar Singh than a modern-day not-so-powerful farmer. I do think once you weaken property rights, you weaken them for everyone.

I remember when Singur happened, I’d written that this is reversed Robin Hood land reform because that’s exactly what they were doing. They were taking from the farmer and they were giving it to Tata. They also did that in the late 19th century, early 20th century. Tisco was built on taking land from peasants and Adivasis and clearing it for the iron and steel mill. This has happened before. It’s just really hard for me to imagine a world where the nationalization hammer is not going to be arbitrary.

SWAMY: It’s a tricky question. My sense, actually, is that, again, even with property rights, we’re talking what sort of property rights in what? It seems to me that property rights of land are a special category of these issues.

RAJAGOPALAN: It is a special category.

SWAMY: I think I agree with you that foreign capital is not going to come in if you think that your shares or your profits or whatever are going to be retroactively taxed. On the other hand, I think, like I said, a weak eminent domain law that allows the government of India to run roughshod over someone’s property right to get them land to build something is not going to discourage foreign capital.

RAJAGOPALAN: In fact, in the very short run, it might even encourage it. That’s the tradeoff people are trying to make with these new special economic zones and places like that—that in the short run, we should be able to attract the capital, and hopefully, that will give us gains in the longer run.

I know you have to teach soon. I want to ask you one last big question. I know we spent a lot of time on land, and that’s many chapters in the book. But there’s also discussion on corporate law, there’s also discussion on insolvency, there’s discussion on the environment and so on.

Is Law the Binding Constraint?

RAJAGOPALAN: One of the big questions I left with, is law itself the binding constraint? You raise this at the beginning of the book. At some point, it seems like law is the binding constraint, and at other points, it seems like that’s not the relevant constraint that’s holding a particular sector or a group or the market back. Again, what is a good way to think about identifying this?

ROY: If we are to rephrase the question, if it is a binding constraint on private investment, my instinct is that it is not. If there are other conditions that make investment possible and profitable, parties will usually find a way to bypass legal obstacles. They are not that great in India, despite all the bad scores on ease of doing business. It’s not one of the really difficult business environments.

However, I think the ways of doing it will need some engagement with a kind of politics that especially a small or medium-scale investor may find quite daunting. That’s where the problem comes in. As we are discussing, if you have a really big firm doing bilateral negotiation with the state government, there is no problem. But anything below that scale could be quite problematical.

SWAMY: In the period when the Indian economy was growing slowly, I think the messiness of especially land law and so on didn’t matter that much. It could be that actually, with liberalization, you’ve got the low-hanging fruit, you grow really fast. Now the sting may be beginning to bite.

Tirthankar and I were talking the other day about, well, if we were really talking about the corporate chapters and said, “Look if things are so messy, how come we’re getting so much foreign investment?” One way to think about law is that it is not much of a constraint, but the counterfactual is not clear. I was talking to someone else who was suggesting that look—I think Tirthankar made this point in our recent conversation as well—that the foreign investment is coming into 200 companies or something. In a different environment, you could have 10 times that much, and it wouldn’t come into 200; it would come into 2,000.

Thick and Qualitative Economic History

RAJAGOPALAN: I think that that point is really well taken. As economic historians, I have a broader question just about the way you research both the books and also a lot of your past work. This is going back to the head of the conversation. We were talking about, in India, the colonial state was an extractive state as opposed to a settler state. A lot of modern-day economic history, like if you look at the Acemoglu, Johnson, Robinson paper, if you’re extractive or you’re a settler economy and then accordingly, you will be coded. The same thing with the La Porta and Shleifer, that kind of civil law/common law binary.

Now, you, on the other hand, do very thick, qualitative economic history. I find it very difficult to identify if India was the victim of an extractive state or a settler state. How do you think about this problem, and how do you think about the way modern economic historians categorize India one way or another when you’re doing this thick economic history?

ROY: Well, the works that you mentioned are of a very different kind. They’re not really about colonialism at all; they’re about comparative economic growth using a model which figures colonialism. They are a test of a causal model. Now, there is a great advantage in doing that kind of work. You identify a singular mechanism which is creating inequality, and that makes it easier to compare countries, whether that mechanism exists or not, or how powerful it is. But it’s not really history of colonialism.

You have another bunch of people who would build this story based on what data they find the historical processes study. Our books are more of that kind, but, of course, we are driven to this by that other literature. We would probably not write these books without that comparative history literature. When I teach this subject in the classroom, I have to tell the students that, look, there are different types of uses of these histories, and you have to keep in mind that they are doing quite different things. They’re not doing the same thing. Going back to your question, if you apply this extractive state idea, take it too literally, then you will be a rather a poor historian and understand the states in an oversimplified way.

SWAMY: Just to reinforce what Tirthankar said, the famous Acemoglu, Johnson, Robinson paper, though it has colonialism in the title, it’s not a paper about colonialism. It’s a paper about the role of institutions. Colonialism just gives them their instrument for the two-stage least squares method. I think more generally, I think this work is really useful—Acemoglu, Johnson, Robinson and La Porta—because they set agendas and they opened up the debate.

We were at a conference—Tirthankar and I—15 years ago, where these papers were really hot off the press and everybody was talking about them. Each person would be asked, “What do you think of the AJR paper?”—the paper by Acemoglu, Johnson and Robinson. And almost everybody said, “This is really great work, but it doesn’t apply very well to my country.”

RAJAGOPALAN: I can actually imagine that for each and every country that they have looked at, it’s an excellent simplification.

The other question is on economic history. First of all, there is not that much economic history done on India relative to many of the other countries. I think this might just be a more general problem of India being understudied maybe even in macro or labor or other areas, but I can quite clearly see it in economic history. The other part of it is a lot of the economic history for especially Europe is deeply interlinked with the religious history and the religious institutions, and that doesn’t seem to be the case for India.

Now, is it just that this is such a nascent field, and that hasn’t cracked open yet, and we don’t have more division of labor and specialization, for instance, like Sriya Iyer? Is it that we don’t have good records, or we don’t know the language of that time to disentangle this stuff? What’s the problem in this kind of work coming more to India?

ROY: You’re right. I think much of Indian economic history in the 1970s, ’80s, when I was a student, was being done by historians rather than economists as the case is now. The historians did economic history but then left this field to do more cultural studies, and that created a very sharp division between the kind of things you talk about in religion and economic history, the interface or the intersection between the two.

That doesn’t mean that the intersection doesn’t exist. Just like church organizations have been a very important part of organizing social life or economic life in Western Europe, you have temples and mosques that are also very prominent. It’s just that we haven’t thought of studying the intersection, and the mixed expertise that you need to study that thing hasn’t really developed. But as you said, there’s a lot of such open areas which are waiting to be explored.

SWAMY: I completely agree. Just a little anecdote. I’m visiting family back in Bangalore and saw this room on the side, but there’s a photocopy, and I said, “What are you doing?” These were temple records from 600, 700, 800 years ago from the mathas of the traditions my family is part of—and this is parchment. They’re in a residential home being scanned, and they’re fortunately being done professionally and being made publicly available. I think there’s just a whole lot of that stuff available. It’s a matter of throwing the resources and the time and energy into exploring them and using them.

RAJAGOPALAN: What advice would you give Indian students who are listening in on what are the big economic history questions in India up for grabs, or what skills they should develop? Economic history requires a very different set of skills than the rest of economics. It would be great if they are bilingual or trilingual, it would be great if they know how to read the ancient script, it would be great if they know how to do thick archival work. It’s quite different from learning R and Python, which is the current modern-day prescription of getting into a Ph.D. program.

SWAMY: I think that actually advice is difficult to give because there are some structural things that need to be in place. For instance, I think there is a real bifurcation now between economic history of the type that’s being done in economics departments in the United States—which really is statistical and is actually quite almost indistinguishable from what we would call development economics.

RAJAGOPALAN: Yes, cliometrics.

SWAMY: That’s quite interesting. There’s a different kind of the social historians than the traditional social historians were. I’m not sure what I would tell a student. I think you do have to be prudent about choices you make. What I’m looking forward is a time in India also when we stop thinking about India. You want to start thinking about top-quality research institutions in Andhra and Telangana and so on that are investing. You need a world which will actually reward you for spending time learning a language that is now no longer used and so on.

I certainly have intellectual fascination for this, but will I tell the students today, spend five or 10 years of your life doing this? I think it’s really important, but there has to be the institutional and structural backing for it.

ROY: I have a very positive message in response to that question. There are two parts to my response. First, it’s extremely easy to enter this field because a lot of the documents are available in English. For good reason or bad, the British colonial state loved paperwork. They produced loads of it. It’s all extremely well-preserved, very easily accessible in some of the world’s best archives. The entry costs are very little. You can just jump in and start reading sources.

The second thing I want to say is that we make the common error of first reading, say, a Journal of Economic History article and then seeing whether we can write a similar paper for India. That’s probably not the right way to go. It sometimes works, it sometimes doesn’t. Or to think about history as a kind of everything around the colonial state, or the developmental state, in a very statist way because a lot of these archives are actually state papers.

If you get rid of these two biases, that the core of economic history is in the Western world and we are just testing hypotheses using India data, if you shed that bias and shed the statist bias, you will find lots of questions. The way to go would be to log into the British parliamentary papers, maybe fish out an obscure document, start reading it. Even if you do not end up with a research question, it will be an entertaining afternoon.

RAJAGOPALAN: It is, yes. Any time spent in archives is an enormously fun day or a fun afternoon. Anand, you’re smiling.

SWAMY: That’s exactly right. Tirthankar and I have talked about how it’s a privilege to be paid to be doing this.

RAJAGOPALAN: Yes, absolutely. It’s such a joy. I think there’s a smell that archives have. I always say that the way you used to wake up when you smell coffee, it’s like some part of your brain wakes up when you go and smell really dusty parchment in the deep recesses of an archive.

Writing Process

RAJAGOPALAN: How did you both write this book? What’s the writing process?

SWAMY: It was pretty simple. We talked about the big picture, and then the actual writing, we pretty much wrote separate chapters. Originally, the worry was that our writing styles might be so different that the books may become a little bit jagged. I think one reviewer explicitly said that he couldn’t tell where one person’s writing ended and the other one started. Of course, we’ve read each other’s work and edited it and so on. There are a couple of chapters I think that we worked on both, but I think allowing each other to write one chapter each just allowed a coherence. Each of us was the other person’s referee.

ROY: I think the teamwork element worked extremely well, but that’s a key to all collaborations. Besides that, I think we shared an interest in telling a story, and we were not burdened with what story we are going to tell. There was a spirit of discovery that I think we both shared, and that made it a lot of it quite interesting.

SWAMY: Again, two things that run through both our books are where did this law come from, and why is it so cumbersome in India when so many other things aren’t? I think that those were the questions, but then the answers, we didn’t know them going in. The answer turned out to be complicated—vary across time, vary across land, corporate, et cetera, et cetera. It was a process of discovery, I think.

RAJAGOPALAN: What’s your individual writing process? Do you write every day? Do you sit in the same spot? Do you listen to music? How do you write?

ROY: I do my best work in a coffee shop.

RAJAGOPALAN: This, I assume. is in London, somewhere near where you live. And you just go every day to a coffee shop?

ROY: Well, the pandemic made it difficult, but I find a public place with some bustle going on around me and good coffee accessible, very helpful.

RAJAGOPALAN: That’s wonderful.

SWAMY: For me, actually, this has been a transition. My first half of my career, at least, I’ve done a fair bit of microeconometric work and a little bit game theoretic modeling and so on. This book writing business is only something I started after I turned 50. I feel like a novice after learning how to do it. It’s been fun, and I actually enjoyed the freedom that it gives you. The fun of the model and the fun of the econometrics was that it forces you to think clearly in certain ways. It was always frustrating that you had to leave out big parts of what was fun and interesting.

I’ve enjoyed the flexibility of a book which—you don’t have to be straight and narrow. You can actually mention something that you find interesting that’s not exactly on point. How I do it? I don’t know. I’m still figuring it out.

RAJAGOPALAN: Now, the most important question. During the pandemic, what have you been binge-watching?

ROY: Well, my wife and I are addicted to Netflix. We have watched so many.

RAJAGOPALAN: I’m so happy to hear that.

ROY: We like slightly—well, not slightly, but quite a lot—thrilling, violent content. We have watched so many that we mix them up. One episode gets added to another serial, and we are now completely confused, but we’re still doing it.

RAJAGOPALAN: What was the last thing you really enjoyed watching? Do you remember?

ROY: Yes, “The Tourist.” It’s set in Australia.

SWAMY: I also watched a lot of stuff over the pandemic. Right now, I’m hooked actually on something that’s quite kind of low-key. It’s called “Ozark.”

RAJAGOPALAN: Oh, yes. It’s amazing. It gets crazy. Just watch out.

SWAMY: It’s been really interesting. It’s quite more nuanced than many of the other things that you get on Netflix.

RAJAGOPALAN: Thank you so much for doing this. This was such a pleasure. It was really such a joy to read the book. It gave me an opportunity to go back and read the first volume. This is a hugely, a very important input to my own work.

SWAMY: Thank you for inviting us, Shruti. It is a great pleasure. I should also say that I know some of your work, and it’s really interesting, including your work on property rights, in particular, which I’ve read. I think this is a great series that you’re putting together, and I’m learning a lot from all the guests. Thank you for calling us.

ROY: Thank you.

RAJAGOPALAN: Thanks for listening to Ideas of India. If you enjoy this podcast, please help us grow by sharing with like-minded friends. You can connect with me on Twitter @srajagopalan.

In the next episode of Ideas of India, I speak with Barkha Dutt about her new book, “To Hell and Back: Humans of Covid.”