The Culture of Non-Payment

I recently read a newspaper report about various ministers not paying their telephone, electricity and rental bills. It was a small news item, not deemed to be of much importance. So many Ministers have failed to pay such bills for so many years that non-payment has ceased to be news, and become part of the unwritten code of politics.

No ministers electricity or telephone gets cut off for non-payment.

In five decades of independence, we have moved from the trappings of a modern state to neo-feudalism. This is not the feudalism of old, where rulers could chop off the head of anybody. The new rulers have to fight elections and observe at least some basic rules. But they increasingly believe that they can ignore what they regard as minor laws and rules, such as paying bills.

In feudal times, the whole point of being a noble was that you did not have to follow rules made for the masses. Extortion by the ruler was the very purpose of power, not a distortion of it. The ability to line your pockets and ignore bills was what distinguished nobles from the masses.

British rule brought new notions of the rule of law, which were continued at independence by the new elite, which was westernised and included many lawyers keen on the rule of law. But they constituted a thin upper crust, beneath which rural India remained feudal. Democracy has now triumphed. The westernised upper crust has been replaced by politicians from the rural heartland, and they have brought their feudal values with them.

One consequence is the growing culture of non-payment. Today state governments fail to pay salaries, pensions and suppliers of all kinds. Their overdues in the power sector alone total Rs 40,000 crore.

Now, this problem is generally described by economists as a fiscal one. They say the state governments lack enough revenue to pay their bills. This arid economic description fails to describe the full reality. The problem is not just inability to pay, but the steady extension of the neo-feudal notion that rulers need not pay.

Just think about it. If a politician believes that he need not pay his telephone, electricity or rental bills, how long will he really think it necessary to pay Enron or any other supplier? The western notion of contract assumes equality before the law, and enforcement of the law. But neo-feudalism assumes that rulers are more equal than others, and can violate contractual obligations as a matter of feudal right. This, I think, is an important explanation for growing defaults by state governments.

However, this then leads to a major puzzle. If politicians have turned neo- feudal, why does the central government behave so much more responsibly than the states? The Centre religiously pays all its financial dues to domestic and foreign creditors. Central public sector undertakings produce audited accounts on time, whereas state public sector units do not finalise their accounts for years. Maharashtra has twice reneged on its Dabhol obligations, whereas the Centre has always stood by its counter- guarantee to the project.

Now, the politicians in New Delhi are not a different species from those in the states. The same bunch of rascals that habitually default in state capitals suddenly become rule-conscious when they move to New Delhi. Why?

One explanation is that the displacement of the westernised lawyer-oriented upper-crust by neo-feudal bosses is far more marked in the states than in New Delhi. There is something to this argument, but it cannot be the whole answer.

The main explanation, I think, is cultural. When we won independence, we were anxious to demonstrate to the world that we were as good as the white man, and as capable of maintaining India’s creditworthiness. Besides, violating domestic rules had few adverse consequences since lengthy legal delays meant that penalties for misbehaviour would take ages. But violating rules in global financial or commercial markets brought immediate penalties and sanctions. Defaulting on external obligations had horrendous consequences, like having to beg the IMF and World Bank for money and accept a long string of homilies and loan conditions. So, external non-payment of dues came to be seen as a badge of shame, as a humiliation to be avoided at all costs. This inculcated a culture of payment in New Delhi. There was no similar pressure on the states.

Not all will agree with this analysis. If it is true, some will ask, why don’t central politicians pay foreign debts but default on domestic ones? Mainly because payment is as much a matter of cultural attitudes as fiscal imperatives. Once a ministry has got used to the idea that unpaid bills are a national shame, a culture of payment is created which affects domestic payments no less than foreign.

By contrast, non-payment is not seen as a matter of shame at all in state governments. There, it is seen as the prerogative of the ruler. As in feudal times, there are no adverse consequences. Creditors cannot do very much when the state government fails to pay up and the courts offer no quick remedy. Some creditors pay kickbacks to collect what is legally due to them, and this viewed by the rulers as no more than feudal seignorage.

Note that politicians do not reform entirely when they come to New Delhi. They continue to default on telephone, electricity and rental bills. But those are personal bills. New Delhi’s political culture glosses over personal default but frowns on default by the central government.

What lessons follow? The main one is that greater engagement with the outside world is likely to induce a more rule-based culture in the states. The central government is more globalised than the state governments, and hence more interested in following global norms. This may seem a novel concept but is undoubtedly true. The unnoticed consequence is that the whole country benefits from a greater adherence by New Delhi to rules and contracts.

So, we must encourage more interaction between the states and the outer world. This will lead to occasional fiascoes like Dabhol. But ultimately it will give local politicians a better understanding of costs of default, and the need for a rule-based society. The more state governments deal with the outside the world, the faster they will shed neo-feudalism.

What do you think?