Constitutional Economics And Its Relevance For Contemporary India

Pranav Tanwar & Saurabh Pandey

4 Jan 2020 4:24 AM GMT

  • Constitutional Economics And Its Relevance For Contemporary India

    ….How can we live together in peace, prosperity, and harmony, while retaining our liberties as autonomous individuals who can, and must, create our own values?- James M. Buchanan Jr., 1986 Nobel Prize winner in Economics for theory of "The Constitution of Economic Policy" The last month Chilean protest over its Constitutionally mandated norm of neoliberalism even in social services...

    ….How can we live together in peace, prosperity, and harmony, while retaining our liberties as autonomous individuals who can, and must, create our own values?

    - James M. Buchanan Jr., 1986 Nobel Prize winner in Economics for theory of "The Constitution of Economic Policy"
    The last month Chilean protest over its Constitutionally mandated norm of neoliberalism even in social services like Education reignited the debate over the two sides of the Constitution of Economic Policy: balance of "Rules" and "Discretion" in economic policy. While the Chilean economy has been dominated by rules, the Indian economic policy has been dominated by discretion. Though the extreme of either of them can cause instability in the long run as policy making requires flexibility, a fine balance preferably constitutionally mandated can help fix the unpredictability and limit political populism attested to economic policy.

    Indian government through its decisions in the past and at the present has shown grave concerns about mentioned discretionary stance. The sudden disinvestment plan from PSUs and Air India is creating a sense of insecurity with the promise of "socialism" in the preamble so much so that the RSS itself has criticized the move as "anti-national". The fault line in constitutional change over the federal structure through GST is appearing slowly with the Centre making a save on close call for failure to pay compensation.

    The present article doesn't focus on economic analysis of government decisions through time but rather attempts to study how these decision jolt down to absence of long term fixed policy goal or sometimes didn't comply with basic norms and ultimately contravened the constitutionally guaranteed basic structure (in broad and non-technical sense). Is it time that we focus as much on rules of decision making as we do on decisions themselves? Is it the time to introspect and introduce transparent and permanent institutional mechanism or atleast guaranteed norms for economy to safeguard constitutional/legal rights associated with these decisions? Or vice-versa, as Judge Richard Posner of US Court of Appeal for the seventh circuit argued for inter-relation between constitution and economic growth in the sense that the role of the latter is to help "identify the consequences of alternative interpretations" of the constitution or "provide insight into questions that bear on the proper legal protection of basic economic rights promotes economic growth."


    The Constituent Assembly had wide discussions on the distribution of power and tax structure to be imbibed in the constitution. There were detailed deliberations on the right to trade and profession, financial emergency and federal structure but these all were focused on the ends of economic policy but the assembly missed on the rules or the very means which the governments of the future may require for certainty. The final draft of the Constitution which was adopted had only two chapters relevant to macro-economics: Part XII (FINANCE, PROPERTY, CONTRACTS AND SUITS) and Part XIII (TRADE, COMMERCE AND INTERCOURSE WITHIN THE TERRITORY OF INDIA). Though both these chapters elaborate about some macroeconomic issues and their distribution, none among these provisions deal with norms of overall economic decisions. With the coming of GST and respective amendment in the Constitution, there is better constitutional outlay on at least one tax regime.

    To enforce the aim of "Economic and Social Planning" and National Planning Committee Report, 1949, an extra-constitutional and non-statutory body, Planning Commission was established by first Nehru government through a Cabinet Resolution. To overcome the lack of federal vibrancy, another cabinet resolution was passed to establish National Development Council (NDC) in 1952. NDC was formed to include all the Chief Ministers of State and members of the Commission. It was again revamped in light of the Administrative Reforms Commission Report in 1967 to include all Union Cabinet Ministers and heads of Union Territories.

    As much as executive discretion couldn't have been less on the formation, the functioning and outcomes had much more unchecked executive variances/discretions:-

    1. The Annual Plans: Owing to circumstances of the time, the governments decided to not constitute the commission formally but rather skip the five year period with discretionary annual plans. For instance, the war with China in 1966 caused a Cabinet decision of annual plan in 1966-67 but suddenly for the same reason the government of the time decided to extend it from 1967-69. Different economists and opposition parties called this period as a period of "Plan Holiday" i.e., planning was on a holiday. As Fukuyama in Origins of Political Order has said, the way aggregative democratic order provides an incentive structure for the political class (through re-elections), there is a tendency for making legislations against the long term 'will of the nation' for short-term gains. Same can be said for two Annual plans under the government of Mr. V.P. Singh fromm 1990-92.

      2. Populism: Populist economic policies are not new and certainly inevitable. The question arises when they become part of comprehensive decisions and done in name of legal institutions. Starting from fourth five-year plan, the capital diversion into populist moves created financial crunch for other economic needs. For instance, nationalisation in the aforementioned plan. Similarly the trend continued with 21 point plan (TPP) in fifth plan under Ms. Indira Gandhi which included the slogan of "Garibi Hatao" and other goals of inflation and fiscal stability got sidelined.

      3. Politicisation: It created two main issues. Firstly, the succeeding plans commenced without the full evaluation of the preceding Plan. The additional reason for this problem was lack of any data collection or absence of nodal agency for data collection. Secondly, whether it was coalition politics or populism, as the Economic Survey 2014-15 rightly blamed, tardy decisions in subsidies, retail and agricultural goods movement caused policy paralysis.

      4. Conflict with existing constitutional body: One may call it insufficient elaboration of Finance Commission's function under the Constitution or high handedness of governments through time but the Planning Commission ended up encroaching roles which the former should have been given. The discretionary allocation of functions and composition of members created confusion in one Constitutionally mandated provision of federal financial division. Mr. P.J. Rajamannar who headed the Finance Commission (1966-69) suggested to clearly define the two bodies by amending the Constitution, and the Planning Commission was advised to be made a statutory body independent of the government. It was only by 2002 that the then Finance Minister announced that in future the Planning Commission will act as a collaborator to the Finance Commission. How effectively was that implemented will need a different assessment.

    As Buchanan has argued that to advance 'public interest' by the politicians, the best way is to have a constitutional framework that restricts differential treatment, which often led to rent seeking behavior. Thus, the economic environment needed change. To advance the cause, the Indian government on January 1, 2015 formally abolished the Planning Commission by replacing it with the newly created body - the NITI Aayog. It is basically a think tank with experts as members empowered to put forward ideas in the field of cooperative federalism. But when it replaced a discretionary model of economic planning, the NITI Aayog seems to be the same discretionary body sugar coated with experts. It was formed without much consultation and through same executive means. Its exposition to political inclinations has created more doubts on its credibility. Thus, economics of constitutional design or of the constitutive rules of a political system has remained unchanged through time.

    This perspective of looking at economic policy making from sine qua non rules of constitution is not new and many other countries or their academicians have inculcated the model for uniform and law abiding policy making. In socialism oriented country like Russia, constitutional economics allows for a combined economic and constitutional analysis in the legislative (especially budgetary) process, thus helping to overcome arbitrariness in the economic and financial decision-making. For instance, when military expenses (and the like) dwarf the budget spending on education and culture. It holds quite a relevance for India where budgetary allocation for defense is nearly five times higher than health. Even in China, the demand for constitutional economics is based to harness the rampant market disorder, an effective competition regime and dilute long standing monopolies.


    Certain contemporary instances has created an essential need for this idea. The government's plan to disinvest from profit making Navratna, accusation(s) of hiding data, though not first time but the proposals for huge statues funded from the exchequer, apprehensions of risking federal economic structure, increasing income gaps and coercive measures for transferring surplus conflicts with constitutional aims of equal distribution of resources, transparency, equality of law and separation of power. Can in such circumstances economic policies be absolved of constitutional responsibilities? They should not be and this brings back to the core proposed idea of having certain basic constitutional norms to guide such policies or atleast a shift in policy makers idea of drafting economic policies in light of constitutional ideals.

    Economics as a discipline may have basic norm of distribution of limited resources among competing interests but when it gets projected as governance tool it has to be attached with the soul of the nation, the constitution. Too much of discretion or trust over the ruling government's wisdom can create an environment of unaccountability and coercion. Having such an idea will not only give legitimacy and legality but also longevity and credibility to economic decisions. When global regimes are engaged in populism, perception, post-truth and ideological warfare, constitutional values could be the hidden treasures that could help withstand the adversities.

    The authors are Advocates practicing at Delhi. Views Are Personal Only.

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