The traditional constraints faced by developing countries -- savings and foreign exchange -- are now gone. They have been replaced by a new constraint, namely, determining the optimal trade-off between efficiency and equity.

For the last 35 years, India has been trying to reconcile interests (which call for the pursuit of efficiency) with values (which champion equity).

Where the economy is concerned, the management problem has been about promoting the interests of capital while protecting the interests of labour/people. It is still not over and, if anything, it has intensified as a result of liberalisation and globalisation.

The political class, thanks to democracy, has not been able to ignore labour, even though it relies heavily on capital. But it has also been compelled to realise that unless it champions capital as well, it will not be able to deliver what the voters want.

This is what has led to reform; and this is what has contributed to their slowness.

The voters, while taking what they can get in the short run, have, nevertheless, rejected incumbent governments for not delivering public goods like health, education, justice, etc. Nowhere was this more visible than in the general election of 2004. Jobs were not an issue.

Governments would like to do something about this but are helpless. It is not just that they tie themselves in knots. The actions of their predecessors also leave them flailing.

Thus, the government's consumption expenditure leaves little for new investment -- interest on past debt, subsides, and wage bills now exhaust almost all of annual revenue -- and it has become difficult for the state to sustain high levels of public investment.

With the state expressing its inability -- as indeed the private sector did 50 years ago -- to undertake the new round of investments, attention has naturally turned to private finance.

This hope has been bolstered by the experience of China and East Asia, which between them have seen almost $1,000 billion of private capital inflows since 1986.

But this mantra has a downside, which is neither adequately nor explicitly recognised. Nor, as mentioned earlier, is allowance made for the problems that arise in managing the transition from the politics of values to the imperatives of efficiency.

At its core, the governing imperative in a democracy is that people cannot be excluded from consuming something because they cannot afford it. This holds true for everything except the obvious luxuries.

The Indian paradox is that while the so-called luxuries require relatively small investment, the public goods, which now include electricity and transport, require massive investments.

This means that the eventual responsibility to arrange relative prices in a manner that is fair to all, consumers as well as producers, falls on the government.

In purely financial terms, this boils down to deciding whether costs should be fully reflected at all levels of the service or product, or only partially. This lies at the heart of the debate between economic interest and social values.

Globalisation and the consequent immensity of flows of capital accompanied by labour-displacing technologies induce greater uncertainties about citizens' future incomes.

Against this they reasonably seek insurance. This has made the problem even more complex in a system characterised by universal franchise -- even when the provision of goods and services is in the hands of private providers.

The complexity does not end here. It goes on to eddy into pricing strategies that are used for improving the distribution of income through extensive cross-subsidisation.

The experience of India suggests that although pricing can indeed be used to achieve greater equity, it is also very easy to err on the side of excess.

Here, once again, we run into the Interests vs Values problem, which is bolstered by the uncomfortable -- and dangerous -- question which the Indian middle class is beginning to ask: is democracy incompatible with rapid and orderly economic progress?

The East Asian and Chinese models certainly suggest that it is. But now that we have opted for full democracy, suffice it to say that just as markets take time to deepen and widen, democracy also takes time to mature.

Manmohan Singh and P Chidambaram have a historic opportunity to hasten the process by increasing supply and by allowing regulators greater freedom.

It is also important to recognise and acknowledge that unlike many others who made their economic choices first, we made our political ones first. It is irrelevant now that that decision was rooted in the history of our freedom movement. What is relevant is that we are now living with its economic consequences.

Our choice has entailed a cost, expressed by the need to exclude as few as possible from the consumption basket. Necessarily, this has meant a premium on equity over efficiency as defined by economics.

Politics, therefore, has played a dominant role and economics is still as much a hostage to political whimsy as it was in 1991. That, indeed, is why only politically costless reforms have been (and are) carried out.

The key political economy issue in the short term is the redistribution of income and the measures that are needed to ensure that the burden of redistribution is shared in equal measure by everyone. Only good politics can ensure this in the long term. We have been short of that, admittedly.

Two types of dangers are, therefore, ever present. As Mansur Dailami of the World Bank memorably wrote: "The deadweight costs of the bureaucracy charged with administering the task of redistribution and the chance that, as incomes from investment are arbitrarily re-allocated, investment will be insufficient to lead to higher growth." India has had to live with both experiences.

A related problem for governments is the macro-economic policy that they choose to follow. The presence of large amounts of foreign investment requires, at the very least, a stable exchange rate.

This, in turn, depends on a host of other macro-economic variables, of which the most important are the domestic interest rate and the "safe" rate of inflation.

In turn, these depend on the levels of budget or fiscal deficit that a country may regard as being "safe". The experience of India during the last ten years shows that the Indian economy is able to absorb fairly high levels of deficit of around 7 per cent of GDP because in spite of it, the exchange rates, the interest rates and inflation have remained stable.

This suggests that equity achieved through extensive cross-subsidisation does not always result in the sort of disasters that are commonly predicted.

True, there is some damage to efficiency but to the extent that governments cannot -- indeed must not -- go purely by the financial yardsticks of efficiency, there is something to be said for such policies because the provision of adequate employment opportunities is not just a welfare measure.

It is also a way of ensuring that the haves are left in peace by the have-nots.

This is an abridged and modified version of a talk delivered at the National University of Singapore