Economy

Economic Survey 2019-20: A radical deregulation agenda of poor economics and poorer economic history

Efforts to create a Singapore-on-Ganges will simply not work

 
By Kapil Subramanian
Last Updated: Friday 31 January 2020
Economic Survey 2019-20

That the Economic Survey 2019-20 makes a departure, from using Sanskrit quotes alone to include Tamil, reaffirms this establishment’s commitment to India’s linguistic diversity.

The document also looks beyond India, to include a quote each by Margaret Thatcher and Adam Smith. The implication that a radical deregulation agenda is central to the report is confirmed by chapter titles, which include gems such as The Invisible Hand, Pro-business v. pro-crony, When government intervention hurts, Targeting ease of doing business and Privatization and wealth creation

The political heir of Margaret Thatcher intends to use Brexit to create a low regulation jurisdiction at the doorstep of Europe, with the United Kingdom a so-called ‘Singapore-on-Thames’.

While the survey begins with data on historic dominance of the Indian economy, which was ruined by British colonialism, it points India in the same direction as its former colonial masters.

The late Angus Maddison’s painstaking estimate of historic national wealth have become viral; The Economist’s eye-catching infographics based on the same coincided with the resurgence of a narrative about past Indian glories.

It is telling though that the report’s account of economic history jumps from the Thirukural and Arthashastra to the 1991 economic reforms, neglecting not only the impact of colonialism but also the substantial growth achieved in the years since Independence.

Readers may be reminded that the real rate of growth in gross domestic product (GDP) during the Nehruvian years was not only a massive leap from colonial stagnation but regularly compared to France’s “post-war growth miracle”.

Indeed even The Economist’s obituary of Nehru, which severely criticised his foreign policy, had little critique of economic policy. 

(Private) wealth

To make the case for (private) wealth creation, given India’s “tryst” with socialism, the report studies “India’s top 100 wealthy entrepreneurs”, after “excluding those with tainted wealth by applying several filters”.

That the increased wealth of the super-rich correlated with the wage bill of their corporations is used to make the case that society as a whole benefits from the rich becoming richer. But the reason for this correlation is obvious even to the layperson — given that larger companies employ more people.

What matters for the common good is the wage share of the economy, which has drastically declined across the group of 20 countries, including in India, since Margaret Thatcher popularised the development model that has come to be called neo-liberalism. 

Adam Smith’s “invisible hand” is the means to this all-important wealth of course, as it has “guided economic development in several advanced economies”, which again betrays a poor understanding of economic history.

In all industrialised countries, including the UK, Germany, the United States and France, the government played a central role in wealth creation, including through protectionism to protect infant industries.

The moral philosopher’s work has in fact enjoyed a resurgence only since the 1970s with the emergence of neo-classical economics and the so-called marginalist revolution in that discipline.

Turning to the so-called “late-industrialisers”, the state played a key role in South Korea’s economic miracle, but was stymied from doing the same by Indian capital, as has been powerfully argued by Vivek Chibber, a professor at New York University.

In Singapore, the most cited example, the state controls double the proportion of the economy as in the rest of the world, including 80 per cent of the housing market. 

The entrepreneur-centric vision intensifies in the chapter Wealth creation... which centres on ‘Start-up India’. A reminder is necessary that a higher proportion of Indians are entrepreneurs (as street vendors and others) than in rich countries, where a larger proportion of people work for giant corporations.

New firms play a critical role in the economy as well as in the personal lives of those who “want to do their own thing”. But it cannot substitute for scale of operations — kirana shops can seldom compete with Big Bazaar.

In any case, there were no policy recommendations for the vast majority of Indian entrepreneurs. 

Blame game

To make the case for unregulated capitalism in the face of unimpeachable data — suggesting a secular slowdown last decade — the report argues that merely pro-crony policies followed since 2007 are to be blamed.

However, a study of 94 countries “rejected in all the specifications” the notion that economic reforms reduce corruption. Indeed there is much evidence that corruption increases with reforms as the potential gains from capitalist profit seeking as well as government rent-seeking sky-rockets.

The next chapter makes the case that “government regulation hurts” using the case of some pharmaceutical pricing regulations that seemingly led to price inflation of a few drugs. Whatever the specifics of this particular policy failure, India’s global lead in providing affordable drugs not just in India but across the Global South and even in the West is well known.

Globally, regulated drug markets such as the UK result in substantially lower costs to the governments (which pay through the National Health Scheme); in deregulated markets such as the US, patients pay much higher, out of pocket.

The overflowing granaries of the Food Corporation of India (FCI) are also brought up to illustrate the perils of government meddling. The building of a buffer stock to control market grain prices in bad years has been at least as central to Indian food self-sufficiency as the increased production engendered by the so-called Green Revolution. 

The present problem stems from a combination of not enhancing storage capacity and political unwillingness to reduce procurement from states such as Punjab, which have benefited disproportionately from the FCI’s existence. 

Trivial pursuit

An entire chapter is devoted to improving India’s ranking in the World Bank’s Ease of Doing Business Index. It is questionable whether a crucial policy document should pursue such trivialities, but the importance this government places on the same is highlighted by the founding of an Ease of Doing Business Committee of Parliament in 2015.

Not only does such an index have limited relevance to the vast majority of Indian businessmen, but its rhetoric has merely justified cheap land grants to corporates, permits without inspections, and “self-regulation” on labour and environmental issues.

Even Kaushik Basu, who was involved with the ranking for five years, has admitted that its methodology was open to ideological influence (if not “data cooking”) and should not be used to the exclusion of other indicators of well-being. 

The chapter on privatisation begins with a quote on free enterprise as freedom made by Thatcher, who once famously (and perhaps apocryphally) thumped a copy of free market economics pioneer Frederich Hayek’s The Road to Serfdom on the table, booming: “This is what we believe in”.

Britain has led the world in privatisation and its critics have pointed out to savage impact on communities dependent on state industries. But the best case against thoughtless privatisation lies in the fact that large parts of Britain’s electricity and railway infrastructure is now owned by public-sector enterprises from elsewhere in Europe, who have managed to create internationally competitive state-owned behemoths.

The common person finally finds a mention in the last chapter of the first volume, with her needs reduced to food alone. Thalinomics promises to be the single-most important buzz word to emerge from this year’s Economic Survey.

The chapter limits itself to calculating the price of an average Indian thali of food and showing that the same had become more affordable (for vegetarians and otherwise) since this government came to power.

It may be pointed out that India nevertheless ranks 102 among 117 countries in the Global Hunger Index.

It is often argued that documents such as the Union Budget and Economic Survey are no longer relevant as the government controls less of the economy (since the 1991 reforms).

But the 2020-21 Economic Survey, which pushes far reaching policy changes with not even a semblance of subtlety and nuance needs to be read with a fine toothed comb.

Be afraid. Be very, very afraid. 

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