Unit 6.

1
Democracy in India has been a subject of admiration and scrutiny for decades. India is the
world's largest democracy, with a population of over 1.3 billion people. Since gaining
independence from British colonial rule in 1947, India has maintained a democratic
government, with periodic elections to choose its leaders. India adopted its Constitution on
January 26, 1950, which established India as a sovereign, socialist, secular, and democratic
republic.
One of the unique features of Indian democracy is its diversity. India is a melting pot of
cultures, religions, languages, and traditions. This diversity is reflected in its political
landscape, with several political parties and ideologies coexisting and competing for power.
India has a federal system of government, which means that power is shared between the
central government and the state governments. India has a parliamentary form of government,
where the Prime Minister is the head of government and the President is the head of state.
India's democratic system allows for the representation of different voices and interests,
providing a platform for marginalized communities to participate in the decision-making
process.
The Indian Constitution provides a framework for democratic governance, guaranteeing the
fundamental rights of its citizens, including freedom of speech, religion, and the press. The
Constitution also establishes a system of checks and balances, with three branches of
government - the executive, legislative, and judiciary - operating independently to ensure
accountability and transparency. India has a bicameral legislature, consisting of the Lok
Sabha (Lower House) and the Rajya Sabha (Upper House). Elections in India are held every
five years for the Lok Sabha, and every six years for the Rajya Sabha. Elections in India are
held every five years for the Lok Sabha, and every six years for the Rajya Sabha. India has an
independent judiciary, with the Supreme Court as the highest court of appeal.
India's electoral system is based on universal suffrage, with all citizens over the age of 18
having the right to vote. Elections are held every five years, with millions of voters casting
their ballots at polling stations across the country. The Election Commission of India oversees
the electoral process, ensuring fairness and impartiality.
Despite these achievements, Indian democracy faces several challenges. Corruption, political
violence, and a lack of political will to implement reforms are among the most significant
concerns. The rise of identity politics, religious fundamentalism, and caste-based
discrimination also pose a threat to the democratic fabric of the country.
Furthermore, the COVID-19 pandemic has exposed the weaknesses in India's healthcare
system and highlighted the need for greater investment in public services. The government's
handling of the pandemic has been criticized for its lack of transparency and accountability.
In conclusion, India's democratic experiment has been successful in many ways, providing a
platform for diverse voices and interests to be heard. However, there are still significant
challenges that need to be addressed to ensure that Indian democracy remains robust and
inclusive. It is essential for the government and civil society to work together to address these
challenges and strengthen India's democratic institutions for the benefit of all its citizens.
INSTITUTES- INTRODUCTION
Institutions are humanly devised structures of rules and norms that shape and constrain
individual behaviour. Institutions are a principal object of study in social sciences such
as political science, anthropology, economics, and sociology. Some examples of institution
include family, religion, legal systems etc.
Political institutions are the organizations in a government that create, enforce, and apply
laws. They often mediate conflict, make (governmental) policy on the economy and social
systems, and otherwise provide representation for the population. Political institutions are
concerned with the distribution of power in society. Authority and power are critical to
understanding political institutions. Power is not held in isolation but they are held in relation
to others. Power is the ability to influence or carry out the will of a group or an individual
even while they face opposition from others.
India has a diverse set of institutions that play a vital role in shaping the country's political,
social, and economic landscape. Some of the key institutions in India are ,the Parliament of
India is the supreme legislative body of the country. It consists of two houses, the Rajya
Sabha (Council of States) and the Lok Sabha (House of the People). The judiciary in India is
an independent branch of the government and is responsible for interpreting the law and
upholding the Constitution. The President of India is the head of state, while the Prime
Minister is the head of government. The executive branch is responsible for implementing
policies and managing day-to-day governance. The Election Commission of India is an
independent body responsible for conducting free and fair elections in the country. The
Reserve Bank of India is the central bank of the country and is responsible for regulating the
monetary policy of India. Other key institutions include National Human Rights Commission,
Central Vigilance Commission, National Commission for Women, there are many other
institutions at the central and state levels that play important roles in governance and
policymaking.
In ancient India, institutions took the form of monarchy. Ancient India had a centralised
government that controlled its citizens. Eventually, the king would become an all-powerful
monarch in the Ancient Society. In India, therefore, the Absolute Monarch had absolute
power over the people, the land, and even the aristocracy and clergy. It has often been found
that absolute monarchs are often restricted in their power by one or more of these groups.  As
a result of the arrival of the British, India’s whole concept of absolute monarchy changed, and
now it is governed by the constitution. With its republican nature, India has become the
world’s largest democracy.

Unit 6.2: DETERMINANTS OF DEMOCRACY

The determinants are as follows –
A) CIVIL SOCIETY –
1) Democratization - When the citizens are not well organized, the system will not be
challenged and transition to democracy will be delayed indefinitely. Similarly, when
 civil society is relatively developed and the majority is organized, repression may be
more difficult. Therefore, some degree of development in civil society is also
necessary for democratization.
2) Consolidation – When civil society is better organized, coups are easier to resist,
more costly to undertake, and less likely to succeed. Hence, democracy is more
likely to be consolidated.

B) SHOCKS AND CRISES –

1) Democratization - In our theory, democratizations occur because of the transitory
nature of de-facto political power. In some situations, the collective-action problem
is easier to solve, opponents to the regime are easier to coordinate, and
revolutions are easier and less costly to carry out. These are typically times of
crises – for example, harvest failures, economic depressions, international financial or
debt crises, and even wars. Such crises and macroeconomic shocks are intrinsically
transitory and lead to short-term fluctuations in de facto political power.
2) Consolidation – Just as opponents of dictatorship can gain temporary de-facto power
when there are political or economic crises, so can opponents of democracy. Our
analysis suggests that, as with democratizations, coups are more likely to arise in
situations of crisis.

C) SOURCES OF INCOME AND COMPOSITION OF WEALTH –

1. Democratization - Another important determinant of the trade-off between
democracy and repression is the source of income for the elites. In some societies,
the elites are heavily invested in land, whereas in others, the elites are those with
investments in physical and human capital. Democratization is more likely in a
more industrialized society where the elite own significant physical and
human capital than a more agricultural society where the elites are mainly
invested in land. Stated differently, democracy is more likely when the elites are
industrialists rather than landowners because of the following three reasons –
land is easier to tax rather than human or physical capital.
b) social and political turbulence may be more damaging to physical and human capital
owners who must rely on cooperation in the workplace and in the trading process, which
makes landowners more willing to use force to preserve the regime they prefer.
c) different sets of economic institutions are feasible in a predominantly agrarian
economy, which influence the relative intensity of elites’ and citizens’ preferences over
different regimes.
2. Consolidation - If the elites are heavily invested in land, then coups may tend to
be less costly. In contrast, when the elites’ wealth is mostly in the form of physical
and human capital, coups are more expensive for them, and democracy is less
threatening. As a result, democracy is less likely to consolidate when the elites
are landowners than when they are capitalists.

D) ROLE OF INTER GROUP INEQUALITY:

1. Democratization - Everything else being equal, greater inter-group inequality makes
revolution more attractive for the citizens: with revolution, they get a chance to share the
entire income of the economy (minus what is destroyed in revolution), whereas in
nondemocracy, they obtain only a small fraction of these resources. Hence it might be valid
to say that an effective threat of revolution is the spark that ignites the democratization
process. However, inter-group inequality may also affect the aversion that the elites have to
democracy. As inequality increases the burden placed on the elites, even at a constant tax
rate, rises. The reason being with greater inequality larger share of total tax revenues will be
raised from the elites, who now command a greater fraction of the resources in the economy.
Therefore, greater inter-group inequality typically increases the burden of democracy on the
elites, even if the tax rate remains constant or changes little. As inequality increases and
democracy becomes more costly for the elites, repression becomes more attractive.
Therefore, greater inter-group inequality may also discourage democratization. In the most
equal societies, revolution and social unrest are not sufficiently attractive for the citizens;
either there are no challenges to nondemocratic systems or any challenges can be met by
temporary measures, such as some limited redistribution. The citizens are already benefiting
from the productive resources of the economy so they do not make further strong demands.
This may be the reason why democracy arrived late in a number of equal and rapidly growing
economies, such as South Korea and Taiwan, and has yet to fully arrive in Singapore

2. Consolidation - Inequality also critically influences the propensity of a democracy to

consolidate. Because the main threat against democracy comes from its redistributive nature,
the greater redistribution away from the elites the more likely they are to find it in
their interest to mount a coup against it. Therefore, greater inequality is likely to
destabilize democracy because, as observed previously, the burden of democracy
on the elites is increasing in the income gap between them and the citizens.

E) GLOBALIZATION:
1. Democratization- Globalization might contribute to democratization in a number of distinct
ways. First, international financial integration means that capital owners, the elites, can
more easily take their money out of a given country. This makes it more difficult to
tax the elites and reduces the extent to which democracy can pursue populist and
highly majoritarian policies. Second, international trade affects factor prices and, via this
channel, modifies redistributive politics. Third, increased international trade also means
that disruption of economic activity may become more costly for many less developed
nations that are now integrated into the world economy and, therefore, repression may now
be much more costly for the elites, again favouring democracy.
Finally, increased political integration and the end of the Cold might imply that countries
that repress their citizens can perhaps expect stronger sanctions and reactions from the
democratic world. This effectively increases the costs of repression, promoting democracy.

2. Consolidation – Just as globalization can induce democratization, so it can aid democratic

consolidation. Indeed, all of the mechanisms listed that link increased globalization to
democratization also imply that coups will be less likely. This is either because coups become
more costly in a more integrated world or because globalization implies that democracy is
less threatening to the elites.

Unit 6.4: STATE OWNERSHIP AND REGULATION

What do you mean by a state?
A state is a definite geographical territory comprising people who are politically organized
and pay obedience to its authority. The modern state has some basic components:- territory,
people, government and sovereignty. But in a deeper sense it also has- legal continuity of the
national society, institutionalized agencies and social changes, law enforcing agencies,
defence against external attacks and internal insurgencies and economic sustenance to its
population.
What functions do the state perform?
General functions of the state can be summed up as follows.
 Providing governance
 Providing security
 Infrastructural development
 Disaster resilience
 Helping in asset management
 Enforcing rule of law
 Public financial management
 Development of human capital by providing health incentives and better working
conditions
Regulation and ownership are deemed complementary forms of control and governance.
State-owned firms are utilized to pursue social objectives, such as to provide universal
service of contributing to stabilization of employment. The state as an owner might be
inclined to grant some form of protection for the mixed firm in return for the pursuit of social
output goals. state-owned firms constitute a unique set of property rights with certain
advantages and disadvantages over fully private and fully public firms.
The effects of mixed ownership can only be understood in the context of the two other
governance mechanisms affecting performance in network utility industries: competition and
regulation. Mixed firms are not a new phenomenon. They were and are present in many
industrial sectors in which the state historically had some ownership stake, such as
transportation, aircraft manufacturing, or electronics. These sectors also have provided rich
case studies illustrating the possible problems but also contributions to efficiency of partial
state ownership in competitive market environments. These include government subsidies,
tax advantages, and interference in management decisions to achieve nonmarket goals.
In network utility industries, state regulation is justified by the prevalence of market
power, which is rooted in the economies of scale as well as dominance of the industry by
monopoly suppliers. The arising competition will be a slow process and needs careful
regulation, at least during the transition to more robust competition, to create a level playing
field.
Ownership, competition, and regulation constitute different incentive mechanisms that
influence the private and social efficiency of firms and markets. “Private”efficiency refers to
the achievement of productive and dynamic efficiency. “Social” efficiency refers to goals at
an aggregate level, such as universality of access to basic infrastructure services. Under
proper regulation and effective competition, private and social efficiency may be achieved
simultaneously through decentralized market decisions.

Unlike private firms, state owned firms are shielded from the pressures of the fluctuations in
capital and the take-over markets. But at the same time, as access to the equity market is
blocked or
limited, they have fewer financing options than private firms. Moreover, managers may be
political appointees and therefore indifferent to the reputation effects of poor performance
which can be regarded as a drawback of state ownership.

State owned firms or mixed firms have certain advantages over fully private or fully public
firms.

 Public owner may use its influence to improve the achievement of social output goals
whereas the private shareholders make sure that their state-owned firm achieves high
productive efficiency.
 The combination of regulation and state ownership could also help overcome
structural limits of regulation.
 Mixed regulated firms could therefore be seen as an institutional arrangement in
which private ownership safeguards efficiency, whereas regulation and partial state
ownership assure social output. In other words, they are mechanisms to negotiate and
pursue potentially conflicting private and social efficiency goals.
However, regulated mixed ownership also entails certain risks.
 The goals of owners and regulators often diverge, hence creating considerable strain.
For example, private shareholders might exert pressure on the regulator to adopt
regulations favourable to the mixed firms but handicapping its competitors. However,
in the case of mixed firms, management may have more effective access, as the state
owner is also the principal of the regulator.
 There might also be pressure from private shareholders to stabilize the share price in
cases of poor market conditions or management decisions.

Thus, in addition to favourable regulation, the state may be inclined to serve as a lender of
last resort,
providing subsidies to the disadvantage of private competitors.
From this discussion, we would expect that with regard to efficiency, mixed enterprise fall
between the public and private cases. Compared to fully private enterprise, we would expect
lower private efficiency but higher levels of social output. Compared to fully public
enterprise,
we would expect higher private efficiency but no clear ranking with regard to social output.
GOVERNMENT FAILURES AND CORRUPTION
The phrase "government failure" emerged as a term of in the early 1960s with the rise of
intellectual and political criticism of government regulations. An early use of "government
failure" was by Ronald Coase (1964) in comparing an actual and ideal system of industrial
regulation. Early development economists recognized the role of government in providing
"social overhead capital" or "infrastructure" to facilitate economic development. However,
most analysis focused on a second role: government should, they believed, undertake
activities that would compensate for market failures. It was therefore concluded that
governments should take a leading role in the allocation of investment, control the
"commanding heights" of the economy, and otherwise intervene to compensate for market
failures.
However, the theoretical justification provided by development economists cannot always be
implemented in practicality. It is expected that government will intervene, take necessary
steps and set things right but it cannot always turn out the same way as expected. The
government can also fail. Thus, Government failure, is an economic inefficiency caused by a
government intervention, if the inefficiency would not exist in a true free market. In other
words, the costs of the government intervention are greater than the benefits provided. As
with a market failure, government failure is not a failure to bring a particular or favoured
solution into existence but is rather a problem that prevents an efficient outcome. Also, some
times, may be intentionally, governments may wrongly act to create inefficiencies even when
an efficient market solution is possible.
There can be many failures, both of omission and commission. Failures of commission
included exceptionally high-cost public sector enterprises, engaged in a variety of
manufacturing and other economic activities not traditionally associated with the public
sector. Notable among these were: state marketing boards, which often serves as a monopoly
distribution network and frequently also provided inputs to farmers often heavily subsidized
thus imposing a burden on government, state ownership of retail shops for the distribution of
foods and other items deemed essential; state operation of mines and manufacturing
activities, state enterprises accorded monopoly rights for importing a variety of commodities;
nationalized banking and insurance operations; even luxury hotels are often found in the
public sector. In addition, government investment programs were highly inefficient and
wasteful; government controls over private sector activity were pervasive and costly; and
government public sector deficits, fuelled by public sector enterprise deficits, excessive
investment programs, and other government expenditures, led to high rates of inflation, with
their attendant consequences for unproductive resource allocation, savings behaviour, and
the allocation of private investment. Complementary to these phenomena were failures of
omission: deterioration of transport and communications facilities, which raised costs for
many private (and public) sector activities; maintenance of fixed nominal exchange rates in
the face of rapid domestic inflation, buttressed by exchange controls and import licensing;
insistence upon nominal rates of interest well below the rate of inflation with credit rationing
so that governments could supervise credit allocation among competing claimants; and
failure to maintain existing infrastructure facilities.
As by-products of these failures, large-scale and visible corruption emerged. Many of the
programs and policies that had been adopted with the stated objective of helping the poor had
in fact disproportionately benefitted the more affluent members of society. All of these
phenomena took place in the context of pervasive government involvement in, and control
over, economic activity.
Political pressures often shaped economic programs in ways that were not consistent with the
ideal resource allocation goals initially envisaged. Pressure groups often exerted strong
disproportionate influence over policy formulation, and policy execution was far from what
had been intended. Favouritism surrounded bureaucratic allocations of investment licenses,
import licenses, and the awarding of government contracts.
The infant industry argument is put forward as a basis for protecting domestic industry from
foreign competition, for example, the scope and height of protection was usually far greater
than required on infant industry grounds. Bhagwati and Srinivasan (1975) found 39 industries
(of a 76-industry classification) with effective rate of protection in excess of 100 percent in
1968–69. Thus, favouritism was very much prevalent. Not only was protection high, but it
was conferred in ways which gave virtual monopoly power to domestic entrepreneurs. Thus,
it seems economic power was getting concentrated in few hands.
Not all civil servants and politicians are selfless, and it may be more realistic to assume that
individual actors within the public sector are as concerned with their self-interest as those in
the private sector. Self-interest may be focussed on survival, on promotion, on re-election, or
on other rewards and thus these group of people exert pressure and badly influence
government policies.
Thus, corruption can take many forms, ranging from direct misappropriation of government
funds to the collection of bribes in exchange for public policies.

What can be the causes of government failure?

Imperfect information
Imperfect information may be a source of not only the market failure, but also of the
government one. While a perfectly informed government might make an effort to reach the
social equilibrium via quality, quantity, price or market structure regulation, it is difficult for
the government to obtain necessary information (such as production costs) to make right
decisions. This absence may then result in flawed quantity regulation when either too much
or too little of the good or service is produced, subsequently creating either excess supply or
excess demand.
Human factor
People working inside the governments are also ordinary humans. It is usual for humans to
strive to reach personal interests and maximize welfare. Thus, if a person places own interests
above common interests, decisions taken by such person can degrade public welfare.
Influence of interest or pressure groups
Not uncommon is also the impact of people or even groups of people, who are able to
manipulate politicians inside a government in order to reach their common goals. These
groups usually have a powerful influence. It is difficult for the society to confront them
because these groups act in a coherent way due to restricted number of members and shared
objective in contrast to the rest of the society.
Political self-interest
When politicians and civil servants seek to pursuit self-interest, it can lead to incorrect
allocation of resources. The pressures of the upcoming elections or the influence of interest
groups can support an environment in which inappropriate spending and tax decisions can be
made, e.g., increasing social expenditure before the elections or presenting the main capital
expenditure items for infrastructure projects without the projects being subjected to a full and
proper cost-benefit analysis to determine the likely social costs and benefits.
Policy myopia
Another cause of the government failure, as many critics of government intervention claim, is
that politicians tend to look for short term fixes with instant and visible results that do not
have to last, to difficult economic problems rather than making thorough analysis for solving
long term solutions.
What can the government do to overcome failures?
When a country gets into this kind of complicated situation it is not possible to reverse it right
away. However, there are some arrangements that the government could do, to try to
overcome it step by step. For example:
 The government could assign itself some future goals, and also try to fulfil them
 Competitive Tendering – making good offers to private and public sector which may
arise on into competition between them, which is good for moving forward
 Public and Private partnership  – involving private professional to make decisions to
cut fewer necessary costs or to help to make some decisions. One of the key steps can
also be to delegate the power and decisions, which may release the pressure from the
government and help it to concentrate on more important cases.