by Percy Mistry. This appeared in Business Standard today.
Reading India's pink papers suggests incontrovertibly that the country is paying a high price for pervasive ignorance: i.e. the innate beliefs/prejudices of: (a) its political and administrative class; as well as (b) an uninformed public brought up on a diet of propagandised falsehoods for over six decades. Those beliefs are a deadweight drag on continuing with reform. What are these beliefs? What are their practical implications? There are far too many of both to adumbrate exhaustively here. But lets stick to the topical and illustrative.
Typical False Beliefs: A mixed economy with large-scale state intervention is in the interests (for growth and equity) of as ethnically diverse, poor and inequitable a country as India. Nehruvian socialism rather than a free-market economy is the right model to follow. Prices are guided better by bureaucrats than by markets. Price subsidies are quintessential to make basic commodities affordable for the common man. Government has a natural duty to control prices because markets get them wrong. Consumers in India have a basic right to be protected against the laws of global supply/demand and against droughts/floods and climate change. State intervention in the economy works in the interests of the dispossessed; it ensures greater access, equality and opportunity. [If so, why has it not delivered for 60 years?]
Markets (proven to work better than any other model all over the world) are suspect for India. They work to private not public advantage and that of the rich. Sophisticated market instruments are also suspect. They increase systemic risk. Sarcastically condemning bright young people, who know far more than former CEAs do, averts systemic risk!! Closing the capital account will enable us to deal with India's openness and integration with the world economy! STT and CTT will make securities and commodities markets less volatile, work better and more fairly. Manipulating exchange rates through RBI fiat will help us control better our internal and external account imbalances. It will enable us to grow our exports, contain imports and manage inflation more efficiently than letting markets work!
Price subsidies and controls in a distorted domestic market will relieve global food/oil commodity shortages. It will enable better management of demand, supply and market equilibration. State intervention is the answer to questions no has asked, and to market failure. State failure -- which we now have over 60 rich years experience of -- is not worth examining forensically. Politicians are the right self-appointed guardians of our culture and morality (though we did not elect them to do that; instead we elected them to do things that they are busy avoiding -- like governing properly!)
Their Implications: Too large an embedded role for the state in the economy as an enterprise owner and manager, as well as regulator/referee. This leads to profound conflicts of interest, structural inbuilt inefficiencies, and an economy riddled with perverse incentives. The result: chronic and endemic fiscal incontinence at every level of government. Yet central and state governments are unable to undertake basic asset/liability management (i.e. sell public assets and reduce public liabilities) appropriately in the public interest. The present government acts like the proverbial rat trapped in a maze of its own construction from which it cannot exit by application of reason! Bureaucrats (like former chief economic advisers) have thus become prescient, omniscient and totally knowledge proof. Obviously, they managed the past so well that no one else is capable of managing the present and future; they are particularly allergic to analysts who strip their arguments bare and show them to be absurd.
Too large a public debt and debt-servicing burden at all levels of government. That pre-empts government from acting in the interests of the poor. A runaway price subsidy budget (for energy, food, fertiliser etc.) which is financed off-budget (through things like oil bonds) that favours the rich and middle classes but penalises the poor. A GoI-RBI dominated financial system pivoting around state-owned banks (ostensibly to protect the deposits of the poor) that is deliberately retarded and kept primitive. Apparently, primitivism protects India from financial crises. Hence proper insurance, risk management, and derivatives markets are not allowed to develop. Banning futures markets is believed to reduce commodity prices! That is like the Aztec belief that daily blood sacrifice is necessary for the sun to rise every morning! Banning P-Notes and closing the capital account will safeguard India's financial integrity!!
The perverse reasoning applied by our `leaders' has prevented India from having: proper overall economic and financial management, proper internal and external account management, public debt and asset/liability management, proper sovereign, sub-sovereign and corporate debt markets, derivative markets, micro-finance markets, commodity markets as well as simple instruments like interest rate and currency futures for the last 20 years! Instead we have a continuing legacy of belief in state ownership that palpably does not work (and we use terms like navratnas to justify it) when we have more than enough post-1992 reform evidence to confirm that what the state really ought to do is get out of the way, and stick to improving competition through more privatisation and better regulation.
The belief prevails that attempting to manage risk will exacerbate it because the tools involved are double-edged. To be sure a sharp knife can be used to murder people. So should it be banned? We could always cut onions with our fingers, toes or teeth! That is the practical equivalent of what we are doing now in the world of Indian finance. If the thermometer gives you a reading you don't like (like prices being signalled by futures markets) then break or discard it! Adhering to counterproductive beliefs in pervasive state ownership and intervention, as we try to transit to a market-based economy, is like shooting ourselves in both feet as we prepare to run the middle third of our national marathon toward developed economy status. But our leaders and former functionnaires think otherwise.
They believe in a unique Indian heterodoxy for its own sake, confident in the knowledge that India is so different from any other country that general principles that apply everywhere else do not apply in India. Everywhere (including China) is different! Our policy-makers believe that using the prefix `development' converts bad economics into good. They cannot see that the post-independence formula of `meddle-and-muddle' -- e.g. with fiscal, monetary, inflation and exchange rate mismanagement -- is disabling India from progressing further, faster. They cannot see that India will not achieve its aspirations nor cross the thresholds it confronts -- from mediocrity to greatness, from low to middle-income, from backward to progressive, from poverty-ridden to poverty-free, etc. -- if it keeps indulging in the contradictions of the past.
The dilemma boils down to a chronic inability on the part of India's leaders, indoctrinated in socialism, to understand the contours of the present, accept markets, and gird for the future. Goaded by commentaries of retired CEAs and RBI executives also living in the past, but unfamiliar with the problems of today (or of how similar problems are addressed elsewhere) the counterproductive beliefs of our ignorant leaders is bolstered. There seems to be a fundamental reluctance to accept a self-evident (inconvenient?) truth in 21st century India: i.e. that the socialist mixed-economy paradigm they have grown up with is bankrupt. It does not work. It never did; not at macro, meso or micro levels. It was rooted in bad theory and good intention -- the same combination and dynamic that paved the road to hell.
With India's inexorable move to a market economy, that old paradigm is dysfunctional. Its inherent intellectual contradictions need to be openly recognised and decisively discarded. It does nothing for the poor except impoverish them more. It does little for the middle class but block it from making faster progress. It may do something for the very rich. They can still buy and manipulate the political class to serve their own ends and share the ill-gotten gains of unfairly achieved mutual enrichment; as is now happening in India's property markets. What the present system does is empower those who should be disempowered; i.e. leaders who control large swathes of the economy through public ownership. That arabesque makes it possible for damaging opacity and economic inefficiency/malpractice to continue unabated.
The agenda that India confronts for continued reform is so deep, so wide and so urgent that we cannot afford to keep going round in lazy circles wasting time with useless argument that gets us nowhere. We cannot keep using the excuse that our democracy perforce requires us to waste time in this fashion. India needs much deeper structural reform of: its economy, its financial system, its political system (which respects democracy more in form than in substance) and its judicial system (which has no respect for the concept of justice at all). Indeed the latter two systems are now acutely embarrassing to a country of India's growing stature. Six months before the next elections it should be obvious to everyone that we need to cut through the crap and get on with reality. That's what elections should be about. But we are unlikely to focus on reality or on a proper agenda for elections unless we discard our false beliefs, relieve our self-inflicted ignorance, take our blinkers off, and realise that we have to run a race in competition with the rest of the world -- much of which is not handicapped by the same dangerously dysfunctional ignorance that we seem to so enjoy revelling in.