The domestic origins of India’s economic problems lie in that clash.
Over the last few months, India has been going through an experience well known to the historically inclined students of political economy: namely, a clash between democracy and capitalism. Most wealthy democracies have had this experience at a certain stage of development, and one might even argue that the clash has not yet fully disappeared. By looking at the matter comparatively, we can perhaps get a surer perspective on India’s current economic malaise.
Let us begin with a deceptively simple question: what produces the clash between democracy and capitalism? Fundamentally, the building blocks of the two systems — democracy and capitalism — are different. Democracy is premised on the idea of political equality. Capitalism is not about equality, political or economic. It is fundamentally about economic freedoms: freedom to buy and sell, freedom to invest and make a profit, freedom to invent, freedom to reap the rewards of one’s work, capacity or luck. It does not matter whether one is rich or poor; each person has only one vote in a democracy. A person ten times richer than his neighbour would still have one vote, but in the marketplace, the same person would undoubtedly have greater clout. The rich matter more in the economic market; the poor, especially if they are numerous, count for more in the market for votes. Even if the rich finance election campaigns, the vote of the poor must be won.
By giving the right to vote to the subaltern, democracy inevitably tends to put restrictions on economic freedoms. When such restrictions are viewed as excessive, capitalism often punishes democracy. The term “investment strike” best expresses this phenomenon. Faced with a government going supposedly too far in the direction of the poor, the capitalist can simply refuse to invest.
This has well-known consequences for democracy. Without investment, the democratic project of welfare or redistribution begins to falter. One must, therefore, enlarge the cake in order to split it. Where the balance between the democratic desire to provide mass welfare and the capitalist impulse towards economic freedom lies has been a concern for all democracies.
Let us now turn to India. The external origins of India’s macroeconomic fragility are undeniable: as capital leaves emerging markets, the economic recovery of the US is a problem for them to begin with, and a blessing only later. But the domestic