Pranay Kotasthane and Raghu S. Jaitley on Individuals and the Indian State

In this episode, Shruti speaks with Pranay Kotasthane and Raghu S. Jaitley about the intersections of markets, society and the state. They discuss the importance of individual decision-making, self-governance versus good governance, why economic growth is a moral imperative, the persuasive power of Indian cinema and much more. Kotasthane is the deputy director of the Takshashila Institution and chairs the High Tech Geopolitics Programme. Jaitley is a public policy and political economy enthusiast. They co-write Anticipating the Unintended, a newsletter on public policy ideas and frameworks. Their book, “Missing in Action: Why You Should Care About Public Policy,” examines Indian public policy through the lens of the state.

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University. Today my guests are Pranay Kothastane and Raghu Sanjaylal Jaitley, the authors of the new book “Missing in Action.”

Pranay is deputy director at the Takshashila Institution, where he teaches public policy, geopolitics and public finance. His current area of research is semiconductor geopolitics. Pranay also co-hosts Puliyabaazi, a popular Hindi podcast on policy and politics. Raghu is a political economy and public policy enthusiast. He and Pranay also write Anticipating the Unintended, the excellent weekly newsletter on Indian public policy.

We spoke about the intersection of markets, society and the state; the difference between the state producing, provisioning and financing goods; the importance of rhetoric; the conflation between misrule and alien rule; why economic growth is not a major political demand and the role of Bollywood in public policy education.

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, Pranay. Hi, Raghu. Welcome to the show. It’s so good to finally have a chance to speak with you about your book.

RAGHU S. JAITLEY: Humaare aho Bhaagya.

PRANAY KOTASTHANE: Thank you. Mogambo Khush Hua.

Individuals in Markets vs. Government

RAJAGOPALAN: In the very early part of the book, you talk about this clear distinction between different ideas or visions of the state, and you use the Buchanan and Musgrave distinction. This is basically a very public choice sort of thinking: Do individuals fundamentally change when they exit the market and enter government? Therefore, either we think of government as a favorable institution with good incentives, or we are suspicious about government and government failure in the Buchanan sense because we think that individuals have good or perverse incentives even in government.

How do you guys think about this problem? I wanted to start more fundamentally at the individual level. Do you also think of individuals where, depending on whether they enter market or politics, they fundamentally are the same or they fundamentally change? Or do you have an even broader conception of individuals, sort of Thomas Sowell and the constrained versus unconstrained vision of man, as they say, but about any individual? The entire book has an underlying public choice theme running through it, but I want to clarify this at the very beginning.

JAITLEY: These are tough questions, for normally Pranay takes it.

KOTASTHANE: Let me begin. I think our version of how we think about the individual is that individuals are same whether they’re in the government or not. From a very public choice point of view, individuals will respond to incentives, and of course, the incentives in the government and incentives outside will be very different. That, I think, is broadly similar to the public choice view.

One thing we try to be different about is, we locate the individual at the center of this triangle where the state, the society and the market are the three vertices. That’s where we think all these three elements have a very different role for the individual. The state provides the security, the sense of freedom, governed by the law and order, et cetera, so that the individual can do whatever she wants.

Similarly, the market provides the freedom to the individual to express themselves and to do great things, to do different things, try out different things. Whereas, the society finally is an important element, because it also provides a sense of belonging. You can call it a small nation; the nation is the biggest group of the collective in that sense. You will also have the smaller groups which provide that sense of belonging, the sense that you are bigger than the atomic self. Those are three elements, and we think that each of these three vertices has their strengths and has their weaknesses, but it’s for the individual—all three have a critical role to play in any individual’s life.

I think this idea has been explored in many other ways. Raghuram Rajan talks about it in his book “The Third Pillar,” and Rohini Nilekani’s book also talks about the “Samaaj, Sarkaar, Bazaar.” We have looked at it from an element of, what is the relationship of all those three vertices with respect to each other, not just the individual as well? How does the state interact with the society, and how does the state also interact with the market? That’s how I would look at it.

RAJAGOPALAN: Raghu.

JAITLEY: Yes. See, the core distinction between Buchanan and Musgrave was, as Buchanan put it, Musgrave trusts politicians and we don’t. In a way, I think Musgrave had the famous formulation that there is a triumvirate for the government to work on. That it should provide public goods that the private sector can’t provide. It should redistribute so that there is equity in the society and there is justice. There was always this fear that unbridled capitalism is something that needs control, and therefore there is a role for the government.

Buchanan’s view as, like Pranay just said, individuals are individual. They respond to incentives, and therefore, you need to be careful about what powers you are giving them because they will then accordingly tilt the balance in their favor depending on what their incentives are, other than what might be the larger purpose for the government. In that sense, this enlightened idea of what the state can do is all good, but it might not really work.

Now, this is an ongoing debate. There is enough and more in the 20th century that we have seen where governments do make a difference in the lives of individuals, which goes sometimes beyond just making sure that individual public choice constructs are met, because they sometimes take a larger view. I think we tend to be somewhere between a Musgrave and a Hayek: There are places where government should be doing the right thing. Our argument is that an individual is constantly interfacing with the government, with the market and with the society.

The answers are somewhere within, but what we want people to do is just understand the first principles of what is happening here. A lot of our focus is also on making sure people understand implementation is very important, and how to go about implementing things by anticipating the unintended consequences as well. If all of these are done well, there is some harmony that one can seek to achieve for what we believe is the welfare, yogakshema.

It’s not that we have an answer. Our book is in some sense our own desire to know the answers. Move around, try to read more. Try to connect the dots. Try to find somewhere for ordinary—by ordinary, I mean someone who’s not steeped in some of these conversations—to be able to access this information, this knowledge, to the extent that we have understood it.

Individual Decision-Making

RAJAGOPALAN: As you can imagine, I am in agreement with almost everything that you say. The point of view is quite similar to the way I would approach a similar question. The reason I was asking about the individual is, given your view of the individual, this has never been the view of the individual that pretty much anyone in the Indian state has ever had, even post-liberalization.

Now, whether we’re talking about East India Company, whether we’re talking about the colonial government, whether we’re talking about post-colonial India, it is not clear to me that anyone ever had an explicit sense that the decision-making unit is the individual and one needs to think or worry about the individual’s incentives. It’s always the group of some sort. Sometimes the group is linguistic. Sometimes the group is caste. Sometimes it’s religion. Sometimes it’s gender and tribes, of course. Largely, it is also decision-making groups in the sense of these are manufacturers, like the blanket clause. The subgroup is, these are manufacturers of steel products. That’s it.

Beyond that, there’s never much about what are the incentives of an individual, a firm or an entrepreneur or someone who’s working. Even labor is mostly thought of from the group dynamics of unionization, vis-a-vis the capitalist or something like that.

On the one hand, your critique is extremely important, and it’s holding a great mirror to what’s happening in India today. On the other hand, it’s almost as if you are talking about this situation from the point of view of an individual, where no government or society in India ever imagined it to be from the point of the individual.

KOTASTHANE: I would say no, in the sense that at least from—you know the constitution and Constituent Assembly debates better than I do—in the sense that in the constitution, still the unit imagined, at least normatively, is the core is the individual. Yes, there are other elements of looking at it as groups as well, but the core thing is that there is an individual, that we the people are making something. There is this individual who is creating something bigger, and hence the fundamental rights, et cetera. There was, at least normatively, that sense that we have to do something for the individual.

In practice, you can say that there are differences. I would say we’ve deviated from where we started, but there is a sense of individualism, and not just in the constitution. Even if you go in Indian philosophy, et cetera, there is a very strong sense of the person, the being and the individual. Those strands are still there somewhere. Maybe government actions don’t always reflect that.

JAITLEY: One frame often people use is this idea of individual liberty, et cetera, or Western Enlightenment concepts. They do not necessarily, should not be transplanted into India. We have a very different society; we have very different ethos and things of that kind. Some of these are loosely used words. What is ethos? What’s the imagination of the society about itself? Philosophers have thought about it in different ways and forms.

On the flip side, we often believe that Western society is a very individualistic society. We don’t use that often in the most complimentary manner. There is a certain pejorative sense to that expression. I think both are, in some sense, not accurate. Like Pranay just mentioned, we have a history of individualism as much as we are a communitarian society.

Whatever you might call as West, there is nothing in the history when you go through it which suggests that there was some historically and very individualistic society. Everything that they have done in terms of progress, every single piece of art and every single piece of literature that has come out of this, including during the Enlightenment, is not because there are some individuals doing things.

The number of wars they fought are way more than us. There is just so much of a belief in ethnicity, in clans, in certain sense of identity that you cannot say that they’re an individual society. Because if they were, they may not have been killing each other so many times and so many different centuries. We should not carry that baggage. We should use the first principle that eventually, there is an actor in that sense who acts, and the aggregation of these acts often tend to produce results, which sometimes are emergent, which are not sometimes fully understood by people.

It’s best for us to examine things from that unit, see how the units come together, and there are frameworks that people have given us. Therefore, whenever I put something like this, I’m very aware that people will immediately say, this is just transplanting or some Enlightenment value. That’s not true.

My sense is, the reason why we don’t use individual as a unit in our society, in public policy discussions, et cetera, has nothing to do with our history or something. It’s just how, over the last 70 years, the state has enclosed too much. It has made people believe that the individual is not as important. All of this can be reversed. There is nothing special about us. There is nothing different about our history, et cetera, for us to say that these are things that we should junk because we are different.

Policies That Don’t Consider Individuals

RAJAGOPALAN: No, I think that’s fair. For me, it wasn’t so much about whether these societies are actually based on individual action. Of course they are. It is more that, does it make sense? Now I’m asking more as all of us who are professionals who critique policy for a living, does it make sense to critique policy from a point of view that was never the basis of that policy to begin with? Is that why we always keep talking past each other?

For rent control or price controls, you beautifully described how individuals are going to have incentives. They’re going to act upon those incentives, and the emergent order that you get is going to be something very different from what they imagined. What if what they imagined was never keeping the individual in mind in the first place? Does any of this actually add up as a policy critique in the Indian context? That is more my question. It is an existential question, as you can see, for all of us.

KOTASTHANE: I was just thinking, at one level we also know that we are struggling with this idea of India itself. That, what is the bigger group that we are talking about? There also—there are many differences. At the other extreme, we are also contending with this fact that individual is not a well-thought-of unit when we are thinking of government action. Where are we? You know, it’s really confusing. I would say even in government action, we do think of individuals.

It’s not so much about that axis of individual and groups on government action, but I think it’s our failure to understand what government action entails and involves and leads to. These are all counterintuitive ideas. Pretty much a lot of economic reasoning is counterintuitive. It requires us to put in that effort to understand that.

Given that our starting point itself was this idea that the constitution will bring a social revolution, that the governments will do great things, I think we’ve delegated that thinking to the government too much. That’s why we don’t necessarily think in terms of what does the government action—what are the unintended consequences of that? I think that is the element, not so much the individual versus the group.

JAITLEY: You raise an interesting point. Should we be critiquing something where the underlying basis of that entire edifice is completely different from what we want to be talking about? Therefore, you are of course talking past one another because you don’t have a common premise on which you will base your argument. Our limited point is, sab cricket khelne hi aaye the [everyone’s come to play cricket]. Now you want to play gilli danda there, and you say that “Boss, this is a good ground for playing gilli danda.” Sure, go ahead, khel lo [you can play it], but you’ll not put runs on the board because you’re playing gilli danda.

Sometimes it can be entertaining, and you’ll get some results out of it, some pleasure, but it won’t be cricket. Then if we come back and tell you that “Boss, that is a cricket turf, and everybody has paid ticket to watch cricket, and you are playing gilli danda,” you can’t argue because you have started now playing gilli danda, “Please comment on this game as players who are playing gilli danda.” Some people would be willing to go out and critique you, commenting on gilli danda, but our view is pehele cricket khel lete hain, let’s first play cricket rather than playing this.

RAJAGOPALAN: No, I think that’s quite well put. The reason I ask also is, I struggle with this constantly. I used to think that a lot of the policy problems in India are because they’ve missed the fundamental Adam Smith insight. Depending on the institutions and the social institutions, not just on-paper institutions, you can either have self-interest aligned with social interest, or there can be situations where self-interest doesn’t align with social interest. My perception of Indian policy was always, oh, they missed this insight. They didn’t show up in class that day, and because they missed this insight, everything else goes downhill from there.

But it’s not like I see that outside the market either. It’s not like I see the state respecting collective action or group action when it comes to tribals conserving forests, or local community groups trying to preserve a water resource or something like that. It’s not just that they don’t believe private, individual self-interest can be aligned with social interest in any context. I just used to think it’s a failure in the market sense that they didn’t get it. That’s why they went to socialism. But I keep thinking about this. I haven’t come up with any answers. I thought you guys are a good group to test this out with, because in so many of the questions in the book and the lovely examples in the book, these things keep popping up.

JAITLEY: Yes. I think, see, one argument on this is, obviously there are lots of people, and we should always have that humility that everyone before us who has come in has read everything and therefore knew everything, yet they didn’t go out and do things that we believe should have been quite natural in terms of if they were to be thinking about it the way we are thinking about it. Which brings me to the point that I often think that often Indian state is just absolutely atheist in nature. It has no theism, there is no belief in anything. It is—

RAJAGOPALAN: It just is.

JAITLEY: Yes. It just is. It just moves around depending on where something is working, and let’s go down that path, and then somebody else comes and maaros danda [reprimands/punishes], asks you to go to a different path. And you go there because there is something which is missing, which is an underlying coherence of what principles of philosophy will possibly work on. There is some argument around that that you can—there was coherence and a certain degree of thing for about 10 years, where everything was planned that way. After that, that started going away, and everything else that replaced it is a bit of a motely mix of beliefs, ideas or possibly no beliefs.

It’s better that we start having some coherence around it. That coherence can come by—the broader point that we make is, we want to try to bring that coherence by addressing the demand side of the story. By talking to citizens and by telling them that this is how you should possibly demand coherence among your elected people or among the policymakers that make policies for you.

Government Receding

RAJAGOPALAN: I think that is quite clear, and very much appreciated. The book comes from a “first principles” point of view, trying to explain the first principles of government, the first principles of the market, and then how one should navigate that, either as a citizen or as an expert or a policymaker, whichever realm you enter into, which is some form of collective action. This is the way you think about it. That is crystal clear in the book.

In terms of the examples, you start with—once again, the book is in three parts. You start with government or sarkaar, and then you move on to markets or bazaar. The one thread through the book is that the government is overwhelming markets and overwhelming society. If it recedes from markets and society in a meaningful way, then markets would do the job that they do quite well. We have good empirical evidence on this. Society can do its job quite well, given better institutions and better state capacity, and then the government can actually do what it needs to do to execute.

What is the way to think about the government receding from these areas? The way I think about it is, you have to chip away at it one by one, step-by-step reforms. If the government is in telecom, you slowly bring the government out of telecom. Same thing with something else like capital controls; then that’s the next thing that you target. What is the bigger-picture view? Because you have taken a big-picture view of the state. How does the state expand or recede in that sense?

KOTASTHANE: I was thinking of it in terms of the types of things governments do. If you say produce, finance, regulate, if these are the three major functions that governments do, I would say you have to do, first of all, very less of production by yourself. That is the first goal: Only public goods, probably, you need to produce, but all the other things you can either finance or regulate. And then think about when there are positive externalities, you would finance the beneficiaries. If there are negative externalities, you would probably then focus on just regulation.

I think that is the way I would think of it, because this is one thing: In India, there is a perception that the U.S., for example, is some place where capitalists run amok and there is no law and order; it’s free-for-all everywhere. We know that the U.S. government, as a percentage of GDP, is around 35%, 36%, almost 40% of the GDP. How can you say that the government is missing? Government is spending almost 30%-45% of your GDP. Similarly—whereas that in India is a quarter of GDP.

All across from public finance, at least we know after the World War II, at least, that states have increased their spending in the market, overall in the economy, as a percentage of GDP. As countries become richer, the government’s role actually increases in terms of spending, but governments then do lesser things and do them well. And the things that they do are mostly related to regulating well and increasing regulatory state capacity, rather than trying to do everything.

I think that is the fundamental thing that we still have to reconcile. 1,500, state-run companies are there in India. Why are we having those? Why do we have a sandalwood soap factory run by a state government still, when Bangalore’s public infrastructure is so poor, right? Just those elements are required, that we shift our focus from producing. By default, we should think government production is not the way to go about it. We should be proving the otherwise, whereas our default still is that governments are a starting point or a solution locus, rather than the others. I think that is the way I would think of it.

RAJAGOPALAN: You have that very clean distinction, and you’re basically saying that, in a developing country, you can have provisioning and financing, but you should definitely not enter production. Like no Sandalwood, no Modern Bakery, no Lodhi hotel. Like all these things are out of the—.

JAITLEY: No Latex Limited.

RAJAGOPALAN: Of course, we can find so many examples. I think all three of us have grown for some part of our lives—we’ve been in socialism, so we will consume these goods. We know how terrible these things are, and we have good experience with government-owned PSUs [public-sector undertakings]. We may even have friends and family who worked at these institutions.

JAITLEY: One of the great pleasures of watching “Chitrahaar” in the late ’80s was, Hindustan Latex Limited used to have this incredible product called Nirodh.

RAJAGOPALAN: It’s a condom.

JAITLEY: All of a sudden, while you are watching, they decided that, “Listen, this is when most people in India are watching television. Let’s put a Nirodh ad.” And to the 11-year-old me, I’m like, “Okay, what is this about?” What it was, to confuse people further, befuddle people further.

RAJAGOPALAN: I think Nirodh and Hindustan Latex is a great example of the conception of the state, because the way the Indian government thought about the problem is, they said, “We need population control, and now how do we get population control? We should start manufacturing condoms.” First of all, I think “we need population control” itself is a problematic goal. That’s a separate question altogether. But their solution to the problem was not economic growth, not other things. It was, “Oh, we should have a few educational programs for people, and we should actually produce our own birth control.”

There was something like this for women. There were actually birth control pills. Again, the ads used to come in the middle of “Krishi Darshan” and “Chitrahaar” on the state channel. Then there is of course Hindustan Latex, which is actually showing condom ads in the middle of basic primetime entertainment—and not condom ads which are talking about sexual pleasure of any sort. It’s all condom ads in the sense of population control.

The State’s Proper Role

RAJAGOPALAN: Coming back to the question of PSU, you were talking in the book—you have a lot of detail on when it comes to markets versus government. We know that the market is very, very good at producing and allocating resources. So, the argument is the government shouldn’t produce anything; we know the government is terrible at producing things.

The moment the government enters the market, then it’s a special player, which means the standard market competition and contestability doesn’t quite apply to the government institutions in the same way. We see this with public-sector banks, for instance. Finally, there is no profit and loss constraint. These are government-owned; they can endlessly be making losses. The taxpayer will pay for it. The products tend to be quite poor in quality, and they usually tend to be monopolistic in nature. That point is very well taken.

On the question of provisioning and financing, this is where you have the comparison with the more developed countries, how the United States is spending about a third of GDP in terms of government spending, India’s less than a quarter and so on. Does that make sense in a stand-alone basis, or are there various other steps that need to be figured out before we can compare the size of government in terms of spending or regulation apple to apple, because there are lots of individual stylized facts comparing the two?

KOTASTHANE: I absolutely agree. It’s not as if we can compare them apple to apple; you’ve [with Alex Tabarrok] written that paper on isomorphic mimicry and things to explain that in an excellent way. The idea to understand that is just to keep in mind that they—we have this fear that the state recedes and the state recedes, and if we have a society in which the markets are given a big role, that there will be no state. That is what we are trying to counter: that no, it’s not as if the state just disappears, and the state just gives away its responsibility to some people who will take away your money and run out. That’s not the idea.

In fact, the state invests more in regulatory architecture, in becoming better at state capacity, and that is something that we need to think of. Now, we need to put more effort in strengthening that regulatory capacity. I’ll just give an example which is not related to the market, but you can think of the intersection of the state and society. Take the example of Bihar. We know that economic growth, et cetera, a lot of work needs to be done. We also know law and order is a constrained problem there, but we have something called the prohibition thing which is going on.

RAJAGOPALAN: Yes.

KOTASTHANE: The state thinks it is the role of the government there to stop alcohol, and though it is leading to people dying on a regular basis. Forget that that is happening, and somehow the government continues. How do you enforce this? You need to have policing capacity. Literally, Bihar government has put many ads in the last two years, and it is hiring the additional police personnel to actually enforce this prohibition, whereas we know law and order needs improvement in Bihar in so many other ways.

RAJAGOPALAN: Kidnapping and assault and extortion is a more fundamental problem than bootlegging, right?

KOTASTHANE: Yes. This idea that we are expending precious state capacity in something which, first of all, shouldn’t be in the domain of the state is itself that we need to think. That’s how we need to think of that law and order: How do we improve the basic things about law and order, judiciary, et cetera? Why aren’t we putting more strength and capacity in that element, rather than getting the state to do everything else?

Adding a broader theme also is, in our common conversations, state capacity is thought to be as an infinite thing; there is no limit to it. That is something we, again, want to question. And through this book, we are again, bringing in examples just to make that point again.

Tolerating Government vs. Market Failure

RAJAGOPALAN: I have a broader question on this that I’ve, again, been thinking about for a long time. Why do you think that Indians, as a people, we are willing to tolerate enormous amount of failure from the government? And at the slightest failure in the marketplace—you can have some—you can have fraud, you can have scams, you can have some bad incentives leading to bad outcomes in the market, you can have pollution—the slightest problem in the market, the sense is we want to completely clamp down on it?

We have this very bizarre, almost schizophrenic relationship, like sau khoon maaf [a hundred murders pardoned] when it comes to the state, and if the market does something, then absolutely not. Where does that come from? Do you have a sense of this? Because it does go to the state capacity question. We’re just willing to live with the government taking on more and more by delivering virtually nothing. Do you have any thoughts on this at all?

JAITLEY: One view of this is, we do not consider (and nor have we been taught in the civic class quite well) that, in many ways, the government should be accountable. The government gets funded by our money. We have a very, very good sense of when we are paying for something, if somebody takes us for a ride—which is how we look at the market really, that, “Oh, first we paid for it; you took us for a ride”—we immediately jump on it.

In fact, there are a lot of private market failures where we think—where individual money might not have been lost, but it might be government money. There we think that the government money is our money, so the 2G supposed scam is a good example of that. Arrey yeh toh humara paisa hai [oh, these public funds are our money].

But when the government is profligate and corrupt, for some reason, it immediately doesn’t register to a lot of people that that is your money. For some reason, it is some kind of a thing that, oh, these guys are playing some game at a very high level and there is some corruption there. Therefore, you can ask, what is the genesis for this particular malady that we suffer from? There could be multiple.

One of the things is, it’s an easy thing in India to blame everything on colonialism, but the idea that there is somebody sitting there who’s in some sense an overlord, the mai-baap [mother-father, referring to a paternalistic system or state], is there. The mai-baap might do the equivalent of the Hindi movie “Zamindaar” of the ’60s, where he will have the nautch girls and he will have a son who’s absolutely a wicked, cruel guy, and all of that. We have learned to live with that idea that that guy is there, but whatever benevolence he gives us is great. Heavens will fall if my neighbor takes me for a ride; then I will fight tooth and nail with him or whoever else is taking me for a ride.

This connection—that all of these folks are accountable to us, they are using our money, the sources of government funds, the way that our government runs it, that we have actually given them the legitimate authority to use power and to use violence on us—all of this, this is a fundamental knowledge or things that have not been taught to us. These are not very difficult concepts to teach, but it’s not there.

Both Pranay and I, including you—and you went possibly abroad and studied—we are all representatives of the best that Indian education system had to offer. There was not one course ever, all the way to B school program, where somebody told us that, let’s now teach you about how public financing is done, what are the fundamentals of public financing.

I can do Black-Scholes and explain good M&A transactions or ESOP valuation. I can’t explain public financing, or public finances in the way that I should be able to explain, because either it’s not taught and then nobody ever tells us to get interested in it. I think that there is a fundamental dislocation there in public discourse.

Effects of Colonialism

RAJAGOPALAN: Do you think it’s because we are transitioning? We used to be subjects, and then we became citizens, but that’s not a switch that you can flip, and that takes a certain amount of learning and learning by doing to get there. We still think of ourselves largely as subjects in most contexts. The citizen in us, it’s like an infant citizen. It pops up not as easily and pops up only in times of extreme distress, so to say, like Emergency or something.

JAITLEY: There’s two lines before Pranay jumps in, you’re absolutely right. When I say all of this, I’m not judging us. I’m not judging Indian people. I’m not separate from that.

RAJAGOPALAN: Yes, of course.

JAITLEY: I’m not judging them. As Ogilvy famously said, “The customer is not a moron. She’s your wife.” I don’t know why he used that gender, but let’s keep that aside. It’s the same thing. The citizen is not a moron. He’s your father. I’m, in that sense, hopeful that this takes time, and one needs to continue to work at it.

One needs to hope that the natural progress of knowledge, of information being available, of enlightenment—not enlightenment, but of citizenry getting more enlightened—will make them go down that path because that’s the obvious path, if you continue to raise levels of education, awareness and so on. I’m hopeful that we are maybe going down that path. Maybe the progress is glacial, but it’ll catch steam. It’ll go faster as we go forward. That’s the hope.

KOTASTHANE: I was just thinking of different frames of this, and there are so many ideas on this. No definite answer, but one thing, one stream of reasoning is colonialism. We suspect the market because of our colonial experience, and that leads to an inherent distrust of markets as the go-to mechanism for solution.

The question then is why state versus society, if we think of those two as elements, then why the state? Now to that, I wonder if this is the case for most of the economies which came through this colonial experience, and then there was this freedom movement where the people who fought for freedom eventually formed the new state. Inherently, they had the legitimacy. Inherently, they had the trust of the people.

The state then, which began—and it’s not just true about India, probably true of Bangladesh and Pakistan, et cetera, also—that the state starts with this high ground, that it is the primary driver of any social change. And that makes people see the state in a different way as the primary troubleshooter to whatever happens in society.

The third element of that is something like Devesh Kapur has written about. I always recommend that as the first paper, if anyone wants to study public policy: “Why Does the Indian State Both Fail and Succeed?” In that, again, it discusses this idea that Arvind Subramanian talks about precocious democracy.

I think there is something to that as well, where we don’t necessarily have this idea of public goods being the core element that the state should provide. The public goods provision is so poor, but it’s okay for us. We still want the state to do 30 other things really seriously, and now we’ve made our peace by providing our own substitutes for the public goods. At least those who can afford have done that. That is very different.

Again, our demands from the state are also for private gains or at max for some communitarian gains, but not for public goods which will help everyone else. I think that is also an element. Well, maybe with time it’ll change. Again, it’s not particularistic about India; it’s just path dependence of India and many other states, but we are at that point.

Self-Governance vs. Good Governance

RAJAGOPALAN: I’ve been reading some of the literature and the ideas of the independence movement. And the very early part of the independence movement—the way I, again, always conceptualized this was that Dadabhai Naoroji, Gokhale and that generation—they were really informed by Enlightenment principles, largely because a lot of their school teachers were English and Irish and Scottish. They got those values. Then the next generation, especially those who were exposed to the LSE and the Fabians, they started thinking in a slightly different direction. I thought that was the distinction.

Now, the more I think about it, I think there’s a second fault line, which is when you think about the Dadabhai Naoroji generation, for them, they were two separate problems. The first is there is misrule, which is caused by terrible incentives, bad tax policy and so on. The second aspect of misrule is, these are aliens, and they are never quite going to settle in as Indian. They can never quite have the bottom-up perspective that they need of an Indian to formulate good policy.

Then at some point, these two are aligned with each other. They are aliens, and that’s why the incentives are perverse. But at some point, it just became, they’re aliens, and that’s the problem. All the focus on—the incentives are terrible. We need better incentives, which is not just about voting and selection, whether it’s like provincial elections or something like that. We actually need reforming taxes. We actually need investment in public goods and services.

That agitation just completely disappeared, I think, after, say, 1925 or so, when the Motilal Nehru, Gokhale generation goes away. Then it’s only us versus them. At this point, the narrative—I don’t think anyone intended it that way, but the narrative is, “As long as we govern ourselves, we’re fine. We don’t need any other good incentives, any informed public policy, any good tax reform, nothing of that sort.” What’s your opinion on this? Of course, I’m making a very broad generalization. I’m trying to simplify the narrative, but do you think there’s any merit to this?

JAITLEY: Listen, this is an area of tremendous interest to me, and there is a certain value in discussing this because we might not get anything, but this is a very nice conversation topic. I had a great professor at a certain place where I studied who insisted that we read “Poverty and Un-British Rule in India,” which is the famous Naoroji book.

His point was, read it because that’s the other strand. He had written a book that the way you are running this is un-British. That was the term, that you wouldn’t rule this way if you were ruling your own country. That book is quite a good book because it points out, in some sense, public policy and economic failures. Not by casting them as aliens—there is some amount of that as well—but it’s just that you are just being greedy or there are wrong incentives, et cetera. And that his idea was that having the book, going and representing one of those constituencies, that I will go and make this point.

I think that was a good strand. That strand got lost because there was some amount of passion replaced with it. And there is a certain element of Gandhi, who comes in with a force of nature, where he said that I can’t possibly fight on both fronts, and maybe his ideas around some of these reasons for our failures were very different.

Therefore, he takes us all down the path of, “This is alien. Fight. Once they quit, we’ll be fine.” I think that’s a very, very good point to consider. It’s a point that I have often thought of: If that was there an alternative pathway, there had somebody who would’ve equally possibly weighed in on both.

Ambedkar was possibly in that vein, but Ambedkar had even more odds to fight. The poor guy. How many things would you fight? You can’t be writing papers on rupee devaluation and also about annihilation of caste, and there’s only that much of a mental bandwidth one can have.

JAITLEY: But the other interesting thing, Shruti, was I’ve been reading about this pan-Africanism. One of the things to me was that we’re not alone; others also got independence. Some people got independence 15, 20 years, the early ’60s. All of these guys got their independence. Therefore, the question was, what is this pan-African movement, this African socialism? Because were they also talking about the same thing?

It turns out that if you take Nyerere, you take Nkrumah—so Tanzania, Ghana—see, I studied in Hindi geography up to a certain level, toh mere mooh se Tanzania kikalta hai [the Hindi pronunciation of Tanzania].

RAJAGOPALAN: That’s fine.

JAITLEY: No, of course, it is fine.

RAJAGOPALAN: I’m sure the way we say Tanzania is also not exactly the right way, and they probably pronounce it differently and so on.

JAITLEY: 100%, I think it’s Tanzania because I realize—sorry, digression; this is becoming a bit of a long podcast. But the digression is this. All original Hindi terms for many of these countries is exactly, I realized much later, is exactly how these countries call themselves. In Hindi, we read it as Rus; Russians call themselves Rus. Egypt, we call Misr; there is a Misr thing. Turkey, we used to say Turkey, and they call themselves Turkey, so on and so forth. I’m hoping that Tanzania is also the same.

Anyway, whether it is Nyerere, whether it is Nkrumah of Ghana, Keita, all these guys, they had a similar question. Their view was, there is an African identity, and this African identity needs to be protected. We had a tribal society; it understood things. We can go back to that, but going back to that is a pain. We can’t go back and make a leap backwards in terms of all the other civilization stuff that we have learned. Let’s take socialism and also let’s fight against these foreigners, and let’s work on both tracks.

Actually, the initial set of these guys were somewhat—I would say argued the Naoroji way. They had a point of view on both: a point of view on socialism and a point of view on the fact that these are aliens. We need to own our own destiny. Whether it is Senghor in Senegal—they all did that. But no, there might be other reasons, but it was a disaster because they fully didn’t appreciate this. Of course, the roots of democracy were not too deep, and they struggled.

Sometimes, I think this identity point that we took and fought and over-indexed on possibly helped us keep ourselves united rather than ride two different horses, which could have led to problems, is one theory that I later have. To just go back, after reading those, I said, maybe we chose this. Maybe that was somewhat wrong, but look at the people who chose to ride two of them, two of those horses, and they had disaster both ways. I do not know. That’s really my do paisa [my two cents].

Resisting Alien Rule

KOTASTHANE: I was just thinking also, it was not hating the aliens as much as it was hating the alien rule, right? In fact, a lot of Gandhi’s magic was to say that you can’t just hate the Britishers. There’s a problem with British rule. To even contain that identitarian contest was a big feat. We became successful in that, but we couldn’t bring in another strand. There were just too many things to grapple with, and we managed some of them, at least.

JAITLEY: There is this lovely, not a paper, but some pamphlet or something I read, which showed the clear change in how the British policies around budgeting public work, education changed in the ’60s or 1860s. Obviously, the obvious reason is the—

RAJAGOPALAN: The [East India] Company rule ends.

KOTASTHANE: No, the first war of independence, because of which they realize that, listen, we just need to be extractive, exploitative and keep them under our thumb. Trying anything else is all very quite dangerous. Just produce these bunch of clerks who will support, et cetera. That paper argues that that was less of an issue.

The bigger problem was opening up of the Suez Canal, which reduced the time and therefore made India less permanent in the minds of those who came. This guy, I forget where, actually compares how many of the English, the Scots came in before the opening of Suez Canal and married in India to Indian women. Post the opening of the Suez Canal, you could start having the supply of—supply is the wrong word—but you could have this, women coming over to India looking for a husband and all of that.

Actually, they then started finding India more of a temporary place, rather than the earlier set of people who were looking at it as a permanent place. It goes back to stationary bandit, roving bandit thing. That change, again, the incentives on how they were looking at India, which I think is somewhat of an interesting point. I don’t know whether it can be any way empirically proved or not, but there is some correlation around that.

RAJAGOPALAN: No, there is, and actually this goes back even before the opening of the Suez Canal. There’s a debate, and I think this is there in the archives that Cornwallis gets into. Cornwallis fought in the American war before he came to India, and that loss—

JAITLEY: Surrendered.

RAJAGOPALAN: Surrendered, and that loss was a very big loss for him personally, and it really informed how he thought of Indian policy. Actually, when he comes, of course, he’s part of the company rule. He’s not part of the crown rule by then, but as a representative of the company. One of the things that he doesn’t want is, he says there will be no special privileges given to children of those who are company managers or company public servants. Their children will not get special jobs within the company.

He was also very much against company workers marrying local agents or localizing and settling down because in his mind, that was part of the reason that the American experience misfired so much. The British went there, and they took all their governance and state capacity and military knowledge and prowess, and then they settled down there, and then they became American. They weren’t British anymore, and then they turned against.

This actually goes back even farther, that we need to come here and not become one of these people, because then they might enable some backfiring against company or crown. I found that quite interesting. Warren Hastings may have lots of flaws, and he does, but this was one area where he disagreed with Cornwallis, that we need to be like the Mughals in some sense. You need to become part of the people that you are governing.

Of course, there is racism in all of this. It’s of a particular time period. Leaving all of that aside, but this is an important distinction between the two that you pointed out, and I’m sure the Suez Canal, this whole thing pops up again. In fact, the exodus of the Anglo-Indians and of the European-Indians after World War II, and even during World War II, that’s a big exodus. There were a lot of people who actually settled down in India and thought they would live as Indians.

JAITLEY: If you just go down the Wiki rabbit hole of many actors and actresses and things of that kind, you suddenly realize how many of them actually were—either they were born in India, or their parents were born in India, and all of them moved back in between ’30s to ’50s. For instance, Tom Stoppard—he was in Darjeeling. His mother was an English lady, and so on and so forth. Vivien Leigh—there’s so many of these very famous people who moved back.

RAJAGOPALAN: This question of identity is interesting. The other thing that’s odd is the very early part of the freedom struggle both in South Africa—where Gandhi was agitating in South Africa, and also what was going on in India with the early part of the moderate Congress, as we like to call it—it was mostly about Indians should have the same rights and privileges as other British subjects, that we should not be Indian subjects of colonial rule. The initial agitation was for dominion status. It was never for self-rule.

Then somewhere, the self-rule kicks in. And not that I think there’s anything bad about that or I’m against that in any way. It’s just the focus became self-rule as opposed to good rule, which need not always align. I think that’s the simpler point.

JAITLEY: We can go on and on about this. The other reason for self-rule was the Irish self-rule movement.

RAJAGOPALAN: Oh, yes.

JAITLEY: Then, therefore, the trauma that Ireland went through during the ’40s, 1840s and ’50s, and their self-rule movement.

Roving vs. Stationary Bandits

RAJAGOPALAN: The other thing—you brought this up even now, on the roving versus the stationary bandit. There are discussions about that in the book. This is, of course, Olson’s idea of what is—of course you start with Paan Singh Tomar, and that’s lovely, where the bandits are in parliament, here we have rebels.

But, more generally, Olson’s point of the ruling versus the stationary bandit in terms of a situation where you have multiple people vying for a particular power. That means that there is no one person, no single individual or single group of people who are able to actually quell all the competing interests warring for power. The stationary bandit actually manages to do that, and in exchange, the stationary bandit must promise certain number of things, which includes good rule or basic public services in exchange for taxation and so on. That’s the general idea.

Now, in the book, you talk about how democracies are run by stationary bandits and autocracies are run by roving bandits because autocrats die, and then who comes next? Nowadays we have autocracies a little bit more like, say, the Emirati kingdom, where it’s like a family where there’s a very clear line of who comes next. Or you have autocracies like the Communist Party which is like a company: It just goes on in perpetuity. It has no beginning, no end, no life, no rebirth.

Sometimes I wonder if this is actually flipped on its head in certain instances, where the roving bandit is the democratically elected MP who’s there for a very short time, four or five years, can’t get very much done, has weak accountability depending on the kind of democracy you’re in. Actually, sometimes the stationary bandit, which is these city-states which are ruled by autocrats, are the stationary bandit because there is a residual claimant which is a family or a party or a company. What do you think about that? Sometimes the incentives do align in that sense.

KOTASTHANE: I agree. Actually, I think so. I agree with what you say, Shruti, in the sense that you have this situation where the roles have been reversed. Broadly, I don’t think it is so simple that in democracy they were stationary bandits. In fact, within democracies, you can have roving bandits—

RAJAGOPALAN: Roving and stationary.

KOTASTHANE: —and stationary bandits. It’s more from that angle, rather than being able to explain various regime types through this framework. Here, I actually agree with you. Even in China, a lot of the authoritarian streak is also there with a clear mandate for economic development that flows from top down. The local incentives align for that. It’s not as if there’s no politics. There’s a lot of politics, but within the rubric of the party-state—and that happens, and it has its benefits and a lot of costs as well.

The stationary versus roving bandit might not necessarily explain the difference between regime types, but it helps understand which kind of architecture works well within the democracy and in which conditions you have roving bandits and how can you avoid being—just having more stake. If you look at it from a very utilitarian or very instrumental sense, if you just look at it, if there is more stake of the people in the way things are governed around them, then you have a stationary bandit model.

For example, our current local government architecture, for example, is not about that. We don’t know where our taxes go, and most of the local governments are governments which are dependent on grants from either the state or the union government, so effectively you are having a roving bandit. You are ending up with a roving bandit. You don’t have a stationary bandit which has the state in your day-to-day life. I think that is where the value of that framework comes in today’s context.

RAJAGOPALAN: Also, I think the autocrat—the existence of the autocrat already assumes that someone has enough capacity and authority to quell all the competing interests, which is another way of saying there is a lot of state capacity. That is another important difference between the roving and the stationary bandit.

Normally, sometimes we think, “Oh, the autocratic government seems to be doing better.” Not that I’m in favor of autocracies at all, but just as a comparative static exercise, sometimes they end up getting these better outcomes. But it misses the point that sometimes the very fact that they’re autocratic, they build up the state capacity, and then because of the residual claimant, they may choose to use that state capacity in a sensible way because they will hold the profits at the end of whatever the term is that they’re thinking of. That also ends up playing into this sometimes.

China, I think, is fascinating because they manage to do it at scale while decentralizing. I can understand how the reforms worked out at the village level, and then they had the mayor as the CEO, that model where it worked very well. The incentives were well aligned that the political authority at the local level would actually invite business, grow business, encourage economic growth, grow the size of the pie, basically.

How they managed to do that, not with one mayor or 20 mayors, but across a country that size with the Communist Party controlling everything—it’s just fascinating how they did it and they got away with it. Of course, that must have had a very authoritarian streak that none of us would like politically, but they managed to get a very different version of this roving and stationary bandit altogether.

KOTASTHANE: I think of it as a car with no brakes. You can have the accelerator and drive it in a direction very fast, but there will not be brakes. Once the state has enough power, it can do things like zero-COVID policies, and you just have to face those consequences as a citizen. That’s how it is. I think Yuen Yuen Ang’s book is great on this story.

RAJAGOPALAN: Yes. Fantastic book on this.

Economic Growth

RAJAGOPALAN: This also brings me to economic growth, which is another important theme in the book. Let me ask a more basic question: Why isn’t economic growth a popular demand in India? It’s a very odd thing, especially now that we know that growth has worked out well. Most people living in India, they’re now used to, whatever, 2,000 or 2,200 GDP per capita U.S. dollars versus 200, which was their grandparents’ generation or at least my grandparents’ generation. It seems quite clear that economic growth has been a good thing.

Is it that they just take it for granted, that, “Oh, we’re just going to grow 5% a year in perpetuity. We don’t have to really think about it, worry about it or do anything to keep it going”? Is it something else? I feel like it’s almost part of the government lip service now, the way Garibi Hatao [poverty elimination] used to be in the ’70s. This is what every government is supposed to come and say. They’re supposed to say, “We want economic growth.”

Is there any serious buy-in? Do people really care? If not, why not? What is going on in the Indian psyche? It seems so bizarre to me. As an economist, it’s baffling that this is not a serious universal citizen demand because they will get the benefits of it so clearly.

KOTASTHANE: I’ll try to answer that. First of all, if we’ll compare it with, say, ’60s, ’70s, ’80s, there is a difference. At least, even if the state agents like the governments are paying lip service to it, the fact that they are regurgitating that economic growth is important is itself a change. It indicates that there is a focus on that. I think the angle to this is that it’s not that people don’t realize economic growth is important, but always we find a new thing which we equate with giving the same importance to economic growth.

For example, we will think of inequality, something which is being talked about in the U.S. or in U.K., because we are now in a globally connected ecosystem and our ideas are flowing. I think it’s a result of isomorphic mimicry—Shruti, which you have written about—more than anything else, that we want to be in this ecosystem of ideas. We want to be there where the world is. Whereas our challenges might be different, but we derive our strength and our challenges from elsewhere.

That’s why economic growth becomes that, why should we prioritize economic growth when there is inequality? Those discussions confuse this idea that economic growth is still required, that most global inequality is still across countries, not within them, and things like that. That’s where I would put it.

RAJAGOPALAN: I agree with you on the policy community, but for instance, Indian voters will punish governments for inflation. That is crystal clear to them. Onion prices go up, or your basic bundle of consumer goods—the prices go up, voters will punish. We used to call that anti-incumbency. It was just fiscal profligacy which turned into anti-incumbency of some sort.

Once you started getting that under check, you started even getting state governments that go on for a long time. We don’t see any punishment from citizens in terms of whether there is alignment over economic growth or not. Is it that inflation so obviously affects them? It affects their day-to-day expenditure. We’ve not managed to make economic growth in India inclusive enough that everyone’s affected by it, that everyone actually feels the pinch when you don’t have high levels of growth. That could be one possibility.

The second could be it’s simply that their fortunes, they don’t link with overall economic growth of the country. They think of it as something they did themselves. I must have worked really hard at work, so I’m doing much better. Or my family has sacrificed a lot, so we are doing much better. It actually has very little to do with what’s happening more broadly in the economy of the country.

These are the two thoughts I have on why economic growth is not as salient, or lack of economic growth is not as salient as, say, something like inflation, but citizens tend to demand things. They’re demanding clean water, they’re demanding all these welfare transfers, but they’re not demanding economic growth. Which is very strange, given just the impact it has had on day-to-day lives.

Politicizing Growth

JAITLEY: This is a conundrum. One of the things—and I’ll possibly go down the proverbial path of saying that I speak to a lot of taxi drivers and other people, and that’s where I gain my insights from. It is true that one of the things that I often do, not the taxi driver conversation, is that anybody who comes back from outside of India and especially if they have gone the first time—and this includes a lot of my first-generation cousins, and first-generation cousins is the first-generation travelers abroad who happen to be my uncles and my cousins—I asked this question: “You went and saw what happened there, how those countries are. Why aren’t we like this?”

One of the conclusions I have drawn is, economic growth is important for us, but it often morphs politically into what is stopping economic growth. This diagnosis of this problem politically is of the kind that allows political parties to let the electorate debate kill each other over what is the reason why we are not growing. Either we talk about the things that will actually unleash growth and the usual things—this is the easier thing to do. If you work in a corporate—this is a classic thing on how to distract.

The classic electorate distraction in India typically has been threefold. One, for a particular period of time it was that we need to bring equality. There are just too many people who are rich and the kings and everything. We just need to bring Garibi Hatao, where socialism will lead to everybody’s growth.

Wrong diagnosis of problem, and every election was fought on the basis that there are these seths and punjipatis [merchants and capitalists], the usual. We’ve made many movies out of this. Later, this diagnosis went down to that there is a particular community that has always been benefiting, and therefore we need to cut the pie in a manner that we get it for ourselves. It’s not that economic growth is not happening. Some other people are getting it and we are not getting it. Let’s then keep fighting for who should be getting it.

This happened the moment we started getting some economic growth. And therefore the corresponding demand for reservations, et cetera, happened only when we started seeing that there was some growth, that more number of engineering colleges are being open and seats are there, and so on and so forth.

Of late now again I see that, at least in the last 10 years—and this is where the insight has come from multiple taxi drivers—their general thing is we have gone back to, at least in their minds, population is a problem and which is a surrogate for saying that a particular community grows their population much faster than others. Therefore, we will have this particular problem which plays nicely into the narrative. This is very strong, especially in the northern belt, in the “Hindi heartland” as you speak.

I don’t think we are unique in a way that we don’t care about economic growth. I think it’s clear that everybody wants it. It quickly morphs itself into, what is therefore stopping us? We have the smartest people. Microsoft CEO, Indian; Google CEO, Indian; World Bank CEO, Indian. What is stopping us? Essentially what is stopping us is, 20 years back it was something else; now it is something else. nd then enormous amount of time and effort and public discourse and electoral fortunes are actually built, destroyed on that particular plank rather than going back and solving for it.

That in my mind is a wonderful thing, wonderful gift that politicians have in India because they can continue to keep doing this rather than focusing on the real issues. Because the real issues also, in a way one should appreciate, is the politician is worried that the benefit—especially when you are trying to solve for structural issues which are immediately the concerns in India—the benefits of them might come much later. Had we done something of this kind much earlier, those kinds of structural issues, who wants to solve them? If you try and solve them, the benefits might be 10, 15 years later. The pain will be immediate, and that’s another problem. Every passing year makes it worse.

KOTASTHANE: I was coming to the same point. Just the fact that economic growth and what you need to do to get economic growth—there’s a temporal difference between them. That might not necessarily translate into votes per se. That is one. Whereas inflation, like you said, the effect will be felt then and there. By the way, we have 7-8% inflation over the last few months in India. I don’t think that is going to change electoral things, but let’s see how that goes.

Anyways, and the last point in that was like what Raghu was saying. Broadly, if you think of a place where the state is powerful, then the causal stories that it can tell people will also be very different. If you think of a framework, all of history or all of things is about causes. There are narratives about causes, and those get internalized by people differently. Now, if the state is very powerful, then the causes it can tell people about different types of things, why certain things happen, certain things don’t happen, that narrative also becomes very powerful.

If you think from the Indian state’s perspective, they can always say that when growth doesn’t happen, that reason is unguided or unintended or due to you. You are the problem, not me. Whereas if there is a success—

RAJAGOPALAN: There are too many of you.

KOTASTHANE: If there’s a success, it is because of me. Because those causal stories are powerful, just because the state itself is powerful, those stories travel and they travel far, then the path of economic growth gets derailed by many distractions.

RAJAGOPALAN: Yes, I think that’s one thing where if we could find a way by which the electoral success would depend on economic growth success, I think India will solve a bulk of its problems. China managed to do that to some extent. Because for the longest time the Chinese narrative was that the deal that the Chinese people have made with this Communist Party is, as long as their material well-being increases, they’re willing to put up with a lot of restrictions and follow the rules.

Which is also why last year, when the zero-COVID restrictions happened and there were people who were starving and they couldn’t leave their house and they couldn’t meet their parents—elderly people were starving—suddenly the narrative changed, and they said, “Oh, maybe this could be the first crack in Communist Party rule.” Because the deals that the citizen/subject in China made was, “You promised us we will never starve, and we will materially do very well.”

I’m not saying that’s because deal we need to make with our government. Though democratically elected, I think we are plenty authoritarian as is. In some ways, if there was a way to align the economic growth or success outcomes with political outcomes, I think you get a lot of rapid change. Which is also why in large parts of the book you guys are recommending a large degree of decentralization, fiscal federalism, you need hard budget constraints. You actually need local governments to be able to earn their money, earn their revenue, spend their money and so on. There are some of those hints in the book, but I think the larger conundrum we have to solve.

Growth as a Moral Imperative

JAITLEY: I think one of the things that I keep getting in many of my private conversations is, just keep bringing back the point, the fact that growth is a moral imperative. Just keep bringing back the point. Isse kya hoga? Will we grow? Will we become a $10,000 economy? If it is not, then it’s a faaltu [pointless] distraction. Let’s become a $10,000 economy, then start talking about many of these things. Till then, we have only one thing to do. I think that, if there is a mass mobilization of that, someone like an Arnab every day at nine o’clock, if somebody just keeps screaming isse ho jayega kya, $10,000 GDP per capita economy? [will this particular policy take India from $2,200 to $10,000 per capita?], maybe we’ll get somewhere.

Because otherwise there are many people very happy talking about everything else, then forgetting about this particular imperative. I think our thing is that growth as a moral imperative is the most important thing. All other niceties can wait, including distribution, equality and all of those, equity and all of those. Pehele pohonch jao wahaan [let’s first reach that point of prosperity], then we’ll see, and then we’ll solve for those problems. I include environmentalism into that, which doesn’t make me popular in many places, but I’m like, who kar lenge [we can figure out equity and environmentalism]. We should do something minimum, but let’s not overdo that stuff. Let’s get to a good place before we start talking about situations.

RAJAGOPALAN: It’s funny on the environmentalism and many of these other things, I think the tradeoff is almost a false tradeoff in the sense that even with environmentalism, as people get richer, they do care more about the environment, and they’re willing to part with more of their individual money or collective money as taxpayers to deal with environmental problems. Even there, you are more likely to fix environmental problems, climate change, everything with better state capacity and economic growth. So the tradeoff sometimes feels a little false to me in one sense.

JAITLEY: I know. I absolutely agree. I think the immediate response that I give is that actually poverty is the biggest damage that environment takes because of everything that happens because of that. The moment you get richer, you’ll actually start caring more for environment. It might be better for environment as well.

KOTASTHANE: I think of it this way, that many times we think normally that the problems of a $64,000-per-capita-income country are—they also have problems. Our problems are okay, but qualitatively I would rather have the problems of a $64,000 per capita income, or even half that, rather than thinking of what you can do in this $2,500 per capita. Everything requires money. Environmentalism requires money. How will the government raise revenue when you have this kind of market? I think that is one element that we have to, again, internalize.

Problems of a country which is richer will be very different and less problematic than what we have now. The problems don’t go away, but they’ll be of a different nature. The second thing, what, Shruti, you mentioned related to that, I think this idea of that Wicksellian connection which we study in public finances. One way to think about aligning economic growth and political outcomes: If you think of a Venn diagram with three circles, the more there’s an overlap between those who decide, those who benefit and those who pay, then there will be alignment. Decentralization is one way to get the Wicksellian connection, but there might be other mechanisms. These three circles we need to think of and see how we can get them to overlap more than they are currently.

RAJAGOPALAN: Yes. Actually I think the one great damage, of course, socialism did in India is, it distorts markets. It completely shrinks the size of the pie. There are all kinds of shortages, and we all know those arguments. They’re made wonderfully in the book. The other part is there is a very high degree of centralization. What that ends up doing is, it completely breaks the link in India between the taxpayer and the citizen. We’re all citizens and we’re all taxpayers, but the same citizen is not the same taxpayer for the same services.

In fact, in India we have a very regressive tax system because it’s so much based on consumption. If your GST [goods and services tax] is one of the largest pools of taxes as opposed to income tax or property tax, then the poor guy who is begging in the corner of the street is paying 18% GST on a Parle-G biscuit, and it’s regressive in the sense a very large proportion of his income is going to tax.

We’ve completely broken that link on who pays tax for what, and we have no specific taxes which are targeted towards public goods, which can only be done at a local level. I feel like the remnants of socialism and central planning—the biggest flaw in that is the loss of fiscal federalism. We just completely killed that because it’s not compatible with any central planning model. I have no sense of how we reintroduce that. We’ve done some constitutional amendments and all that stuff, but at some point, we eventually need to get to a very, very high degree of autonomy at the urban local body, Panchayati Raj, that level.

Films as a Pedagogical Tool?

RAJAGOPALAN: There are so many great themes in the book. We’ve talked about Wicksell and Olson. You guys talk about in such detail, not just social movements, but also political parties, what they mean, anti-defection. Instead of discussing those very important and serious themes, I feel like we should come to the Bollywood in the book because one is, Raghu and I are crazy Bollywood buffs, and Pranay is there somewhere with us. I think we both are a little bit excessive. And Raghu, of course, is encyclopedic in his knowledge, especially niche, bad Bollywood movies and also good Bollywood movies.

Every chapter either begins with a couplet or a dialogue or a Bollywood movie song, or it’s there somewhere in the subsections. It’s definitely there in the narrative. One is, other than just interest, what is this doing in the book? It’s obviously a rhetorical device, but what does this tell us about India and Indian policy more broadly? That’s my first question. The overwhelming presence of Bollywood in the book, just the way we have the overwhelming presence of state or something else.

JAITLEY: Yes, I take that. It’s a particular interest of mine. There are two ways of looking at this. One is, if I were to be sitting in my living room and talking to my friends, I would’ve spoken like this, by interspersing all these conversations with some couplet or a Bollywood reference. That’s because I like to believe that you can hold somebody’s attention only for that long. We have written the book in a manner of speaking as if we are talking to someone. It’s very conversational in its approach and tone, and therefore, that helps us.

The second is, I’m a strong popular culture—I don’t know what’s the right word—savant seems to be too highbrow for lowbrow popular culture. I’m like, I like my popular—

RAJAGOPALAN: No, you’re savant.

JAITLEY: Yes, I’m a savant. I always believe that the way people who are producing popular culture, who are deeply steeped in it, they capture a certain thing about us which often the best of theorists, scholars sometimes do not. That’s very useful as a lens to see how—what is the shifting sand of what is popular today and what was popular yesterday, what is turning out to be popular, because in some ways it’s that old thing, politics is downstream of culture. Everything is downstream of culture. Because culture catches a thing faster, and then everything else evolves from there.

A few days back I was just—don’t ask me the reason why I was doing this—I was just trying to see what is the timeline of Pepsi ads in India and what were their slogans. This is a digression, but just to make the point—and at this point you could write a paper on it, or you could just put four Pepsi ads to ask yourself what was happening in India over a period of time. Pepsi comes, and then in early ’90s, just about ’91, ’92, right after some initial reform in ’92, they come out with the first ad.

The first ad, this is Pepsi really making its mark. There was an ad for the ad, if you remember, in Doordarshan. The ad was a 45-second ad, which all of us sat—it was like an event, I remember. Then there was Remo Fernandez, and there was Juhi, and then she turned and she throws her cap, and you see like her in a Michael Jackson kind of costume. The ad starts by saying, “Are you ready for the magic? Are you ready for the magic?” That was the ad. It is almost like saying, “Boss, Khul Gaya [the economy has opened up]. Dr. Singh has done things. Are you ready for the magic?”

Then from there, within five years we moved to “Yeh dil mange more.” Actually, from there we moved to another one in ’96, ’97, which, “Yehi hain. Right choice, baby.” Which is like a strengthening of the resolve that despite having Deve Gowda or, you know, IK Gujral, this is the right thing to do; continue with it. Then in late ’90s, early 2000, we go down “Yehi hain. Right choice, baby,” and we have that.

In mid-2000 it is “Oye bubbly.” This is like real India shining happening in 2004-’05 and stuff like that. By ’10 or ’11 it is “Hindustan ka WOW.” They’ve not got many memorable ones in the last 10 years. It suggests that it’s India’s lost decade. Theme kya hai? [We are lost, what’s the theme?] We don’t know, but if you just see over a 20-year period, it captures something. I mean, there is a progression when things were very much—in “go, go” years of 2004-’05, it is “Oye bubbly,” “Hindustan ka WOW.”

Then it fizzles out after that. The “Hindustan ka WOW” was I think 2010 or ’11, nobody felt that there was a “Hindustan ka WOW,” and everything went down a particular path. That’s it. I can tell the story of the 20 years from ’91 to 2011 through all kinds of framework. Or I can narrate it with a decent theoretical framework by having these as milestones. It’s up to people to tell me which is a more memorable way of making the point.

None of these things happen by design. It’s me retrofitting a certain thing. It’s a good retrofit. Sometimes things don’t happen because somebody’s planning it that way; somebody’s just capturing a certain a sense of what is there in the air and putting it out there. That’s why it succeeds, because they’re capturing that moment and people respond to that moment. It’s for some pop culture historians to go back and say, “Well, there is something here, which is putting a thread across all of this.”

I love doing that. Once you are in that mood, you get into that frame, and a lot of things appear to you as in some sense a continuation of things, in some sense a representation of something, and it’s fun. Even those people who actually write them, who create them might not realize it. Well, but it is for the jobs of people like us to sometimes make this somewhat coherent and appealing to people who then read it and possibly make sense of it.

KOTASTHANE: Most of the Bollywood thing is Raghu’s work. One angle that we always wanted to come up with is not write a public policy textbook. The idea is to write a book which will reach people who generally don’t care about public policy or are thinking of it at the margins. It’s not their main aim. It’s not meant for academics. The idea was how do we make it more interesting? Our aim was to write a halki phulki par geheri book—a light yet deep book. Deep from, at least introduce people to core concepts, but write it in a way which doesn’t come across as being very textbookish. That’s why these rhetorical devices help.

Getting Problems Right but Solutions Wrong

KOTASTHANE: The other interesting angle about all this is how many of these pop culture references get the problem definition right, but almost always get the solution wrong. There is, I guess, a lesson in that as well. That, again, becomes a nice way to tell that problem definition that happens not just in pop culture, it happens in the way we talk and give causality to events as well. Problems are always there; solutions are totally wacky. So that was the idea.

RAJAGOPALAN: No, actually I got that too. I think I hit that realization when you are talking about “Mohan Joshi Hazir Ho!” I think that’s where you mentioned that Saeed Mirza got the problem on rent control and what goes on right, but he’s got the villains all wrong. The reason that’s when the Bollywood thing really struck me is—I don’t know if you’ve read this .This is Deirdre McCloskey’s “Rhetoric of Economics.” This is actually one of her famous works.

“Rhetoric” almost has not a serious framing because economics is a science. It’s supposed to be scientific. When we are scientific, then how can we use rhetoric? Basically McCloskey—like all the things she does, this is counterintuitive, but it’s just so skillfully written—that the business we’re in at the end of the day, though scientific, is persuasion. And for that, we have to bring the humans back in, whatever is the appropriate persuasive device.

In your case, it might be particular mass-consumed Bollywood movies, at least most of them. It could be something else. It could be stories, it could be legal cases, it could be song, folklore, whatever it might be. One of your colleagues, Nitin Pai, has written lovely public policy insights or economics insights, but written in the style of old-world Hindu, Buddhist, Greek tales like Aesop’s fables or Jataka tales or something like that.

The reason the McCloskey thing hit me, it’s weird, is because of exactly what you said, which is we need to have some form of persuasion. The culture seems to have gotten the problem statement right, but economics at the end of the day is still a science. We have to understand first principles. Where are we starting from? What are the incentives? What is the emergent order from those incentives? We have rules, we have the law of demand, like the law of gravity. This is not just something we made up. That is where I place the Bollywood in it. The realization hit me when you have the rent control chapter. I don’t know if there were other hidden messages that I might have missed.

KOTASTHANE: McCloskey’s work and then narrative economics, Shiller’s work as well, that talks about how important stories and narratives are to everything that we teach—Dr. Shiller’s public policy courses as well—that “narratives” now has a very pejorative meaning currently, that narrative means policy.

RAJAGOPALAN: Manufactured.

KOTASTHANE: Yes, and political narratives people get. Narratives are important in policymaking as well. Unless you’re able to tell a good story, you can present the best evidence and the great charts that you have, but unless you have a good story, no one’s going to buy that. I think it’s important to understand narratives, to be able to, if nothing else, to use it as a defense against the dark arts. Like someone else is definitely using narrative. Maybe you need to at least be equipped to resist falling for a good narrative if nothing else.

Persuasive Power of Indian Cinema

RAJAGOPALAN: Now, let me ask you part two of the question, which is, why does Bollywood make for such great narrative and persuasion device? Is it simply because it’s popular? Lots of people know it, so you’re almost using it as a coordinating device. We all know we’re talking about the same thing when you say “Mogambo khush Hua” or when you talk about one of the famous movie dialogues or movie songs from “Aandhi.”

Or, alternatively, is there something about Indian cinema, especially Hindi cinema, which manages to capture Indian society so perfectly and distill its essence that it works so well as a rhetorical device in the book?

JAITLEY: Since I love it so much—and it’s not just Bollywood or Hindi cinema; I love all Indian cinema (actually all cinema, but let’s restrict ourselves to Indian cinema)—I will tend to favor the second argument that even in the most pulpy, overwrought manifestation, it still captures something about us. It’s important for us to recognize that. Why did “Jai Santoshi Maa” become the No. 1 hit of 1975? I have a reason for that. There is something.

Second part is that mostly, and I hope it continues, if you sit back at the end of a Hindi film, and you look at the credits roll, just look at the names. There is no other endeavor in India where the cross-section of society is so widely represented. Indian boardrooms are not representative of India.

RAJAGOPALAN: Yes. Maybe Indian Railways. That’s the only other thing I can think about.

JAITLEY: Possibly. Even there, the leadership might still be somewhat skewed. In Bollywood, when you look at that final list of people who’ve contributed to make that movie, without anyone trying to, it is the most diverse, it is the most representative of what we have. I think that should mean, and therefore it means, that whatever product comes out is one of those products that is as pure as you can get to what a typical Indian product is. People are trying to change that also, but you will find that if you try and not have it, you will fail in making a successful Bollywood product.

At least so far, that experience has been really true. You might win in one or two of them, but you try to think that you’ve sorted this out, and you will have a certain kind of people make a certain kind of story because you think that’s going to work. That doesn’t work. I think both of these are important points. It’s the most representative, has always been. Because it is that, it captures everything. There’s a Shah Rukh Khan average grosser film called “Phir Bhi Dil Hai Hindustani [Despite All of This, My Heart Is Indian].”

RAJAGOPALAN: Oh, yes. I think it’s an underrated film, but that might be love for Shah Rukh, but still.

JAITLEY: Yes, it’s an underrated film. I completely agree with you. Firstly, that “Phir Bhi Dil Hai Hindustani”—this is a Shailendra line from “Shree 420.” It is such a line, “Phir Bhi Dil Hai Hindustani.” There is no equivalent of any other country saying that “Despite all of this, my heart is Indian.” Nobody would use that. In some sense there is a certain degree of saying that, “I fully appreciate what kind of a country or what kind of a people we are. Despite that, ‘Dil Hai Hindustani.’” Shailendra caught it there.

That Shah Rukh movie has many different aspects. Many of them are ahead of its time. It’s like “The Truman Show.” Javed Akhtar updates that song with “Phir Bhi Dil Hai Hindustani.” You listen to those lines of Javed Akhtar, it is so accurate in describing all our contradictions, yet in a manner that is quite joyous. Therefore, to cut all of this short, I agree with your second thesis that Bollywood does capture something quintessential about us. It’s very difficult. No other medium captures it as well.

RAJAGOPALAN: Do you think in 20 years we’ll feel like Bollywood is not that medium? It’s actually television because a revolution took place, and there was a TV in every single household, and Bollywood never quite managed the penetration—beyond music, which of course has very, very wide penetration. But actually, Bollywood movies are not seen by as many people anymore as television is, whereas we didn’t have that from ’50s to almost the ’90s.

JAITLEY: Yes. See, my worry on television is—see, it could come true. You are right. My worry about television is that television is very, very fragmented. Because of its whatever-long series and multiple episodes, et cetera, it can do many things and therefore—

RAJAGOPALAN: Can drift.

JAITLEY: —it can drift, and it can be niche, it can be in certain areas and not in other areas. It doesn’t give you the full thali experience, which is a worry. I’m hoping that it doesn’t happen because Bollywood gives teen ghanta mein poora thali [in three hours the full smorgasbord].

RAJAGOPALAN: No, I think I agree with you. Hopefully, the movies also improve. It’s been a while. We’ve had a bit of a drought for a while. We’re still also hoping for that. Thank you so much for doing this. This was so much fun. I hope this was fun for you and it’s always a pleasure talking to both of you.

KOTASTHANE: Thank you.

JAITLEY: This was great fun.