The Gold Standard | Return to Seventies

MINT has an excellent EDIT and that is worth reproducing in full. I do so here. This Edit needs to be read in conjunction with this blog post by Gulzar in ‘Urbanomics’ .

(Disclosure: I am a weekly columnist in MINT on Tuesdays)

Posted: Wed, Jun 22 2011. 9:36 PM IST

Return to rent-seeking

India needs economic reforms as never before. They are unlikely anytime soon

Twenty summers ago, in the middle of a balance of payments crisis, India carried out far-reaching economic changes. Within years of a round of unshackling the economy, growth rapidly shifted to a high gear. Poverty began a climb down, the first time at a fast-enough pace. Today, it is considered to be within running distance of surpassing the growth rate seen in China in recent years. Like all foundational myths, there is a kernel of truth in this story. Economic freedom did lead to growth. It also holds a lie: That these changes were initiated and carried on willingly. That is, at best, a partial truth. It would be more accurate to say that reforms since then have either been executed in the face of a crisis or have been carried out in sectors where there were no special interests or incumbents who blocked them. Two examples— one success and one failure— are illustrative. If telecom is a success story today, it is because there were no incumbents to battle. Today there are many firms in this sector and if anything, cut-throat competition in the sector that has led to consumers enjoying services that are cheapest in the world. In contrast, 20 years ago, consumers had to virtually beg for phone connections and the Jurassic sized state-owned firms couldn’t care less.

The failure, too, is instructive. Agriculture is a good example. The costs of not liberalizing agriculture are there for all to see. As income of individuals has gone up so has the demand for food. Unlike telecom, agricultural commodity markets remain regulated. From farm gate to retailers, the government controls every single step: prices are “advised” by the commission for agricultural costs and prices and “set” by a cabinet committee. There is little scope for price discovery by economic agents. The results are in marked contrast: telecom services are dirt cheap; food is often so expensive that the poor have to go without it.

This story of failure is repeated in sector after sector. Perhaps, the biggest victim is industry where labour laws have ensured that manufacturing remains concentrated in very small firms that employ less than 25 persons. Big industries that can suck out unemployment have, at best, a scattered presence. The government has, now, proposed a solution: a manufacturing policy replete with incentives to be administered by bureaucrats. Were it not for the calendar, one could have mistaken the year as 1948 when the government embarked on a similar misadventure.

This holds a clue on why reforms have seldom been carried out by choice. The fact is that India’s political class as a whole never believed in them. And this includes Prime Minister Manmohan Singh in his new, post-2009 avatar—something intriguing as he was instrumental in undertaking a bout of liberalization earlier. This is not a problem of knowledge. At the highest level of government, decision makers know the benefits of running a market economy. After all the 8%-plus growth for many years now is a result of that. The problem exists at a different level.

It makes much sense, as does politics everywhere, to create vote-fetching schemes. In most democracies, there are institutional mechanisms to limit such schemes. In India there are a few countervailing institutions that impose such limits. In the end, matters boil down to the complexion of the government in power. If anything, an incumbent government can do pretty much what it pleases with markets.

What this does is to keep the balance between free markets and statism quite fluid. The period from 1998 to 2004, by and large, witnessed a tilt in favour of markets. Since 2004, the balance has yanked dramatically on the other side. It is very easy to create a symbiotic relationship between politicians and the electorate. There is, always, demand for “free” stuff. Our system is more than happy to provide it: free power, free food and free travel are there for a large number of citizens.

This trend has accelerated since 2009—almost a return to the 1970s when India was caught in a wave of populism. The bargain, outlined above in crude terms, has now been finessed. Politically, it is acceptable that 1% of the gross domestic product is spent in populist schemes to maintain a favourable political equilibrium.

Were it just a matter of numbers that are replicated constantly, year after year, it would inflict damage, but not of the kind that would mar the country’s fortune. Alas, that is not the case. This equilibrium is unstable as economic data points out: growth is slowing even as inflation remains high. Demands for money in welfare schemes continue to rise.

Many decades earlier, the economist Anne Krueger said something wise about the political effects of such intervention: “If the market mechanism is suspect, the inevitable temptation is to resort to greater and greater intervention, thereby increasing the amount of economic activity devoted to rent-seeking. As such, a political ‘vicious circle’ may develop. People perceive that the market mechanism does not function in a way compatible with socially approved goals because of competitive rent-seeking. A political consensus, therefore, emerges to intervene further in the market, rent-seeking increases, and further intervention results.” India today is well into the vicious circle she described. Under such circumstances, it is wishful to expect meaningful economic reforms. Twenty years after a bout with “reforms”, India is in a rent-seeking mood. Economic reforms in India: a forlorn hope? Tell us at

Copyright © 2007 HT Media All Rights Reserved

DISCLAIMER: This is an archived post from the Indian National Interest blogroll. Views expressed are those of the blogger's and do not represent The Takshashila Institution’s view.