Economic Reforms

India should Re-Wrap Economic Reforms India should Re-Wrap Economic Reforms Chandrasekaran Balakrishnan February 3, 2012 Economic Reforms   I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come”. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome. — Manmohan Singh, finance minister, Budget Speech, July 24, 1991 In the two decades since Manmohan Singh’s hat-tip to Victor Hugo, and open markets, per capita income in India has grown from $309 to $1,477 (in today’s dollars), outstripping that of 19th century US and 20th century Japan. Life expectancy at birth grew by seven years, infant mortality rate fell by 40 percent and wage inequality between scheduled caste and other workers declined during the same period. Caste-based differences in grooming, eating and occupation narrowed as more open markets allowed a greater number of people to access a wide range of consumables and services. Yet, despite these lofty successes of the 1991 reforms, pro-market policies are viewed with deep suspicion and antipathy in India.The reason for that perhaps lies in the way reforms were thrust on the country. A 2008 paper by Peter Boettke, Christopher Coyne and Peter Leeson titled ‘Institutional Stickiness and the New Development Economics’ has an explanation that could fit India. The economists theorised that big institutional changes should be rooted in existing cultures, customs and belief systems of a nation to succeed. They called it métis. Métis is a set of informal practices and expectations that allow ethnic groups to build successful trade networks. The diamond trade in New York City, for instance, is dominated by orthodox Jews who use a set of signals, cues, and bonding mechanisms evolved over centuries for trading. The trade would not function as smoothly if random traders were placed in the same setting. This difference can be ascribed to métis. Because it is based in the accepted, understood, and habituated mentalities and practices of indigenous peoples, the presence or absence of métis explains the stickiness of various types of institutions. In fact, métis can be imagined as the glue that gives institutions their stickiness.A large portion of the Japanese métis, which was harmonious with large-scale organisations, trade and market exchange, remained intact in the post-war period, helping in its successful reconstruction. While the Japanese adopted a constitution affirming their commitment to Western democratic institutions, much of the language expressed pre-World War II traditional Japanese social and political values.Why did India fail to do this? The reasons are embedded in what and who influenced post-Independence India’s politics and economic thinking. The foremost perhaps is the Nehru-Gandhi family’s socialist bent. Socialism took India from one of the first developing countries to manufacture automobiles in the 1930s to one whose primary export was communicable diseases by 1991. No member of the Congress party dares say Nehru or Indira Gandhi got it wrong because the Indian métis is incompatible with socialism, even when moving away from it. Manmohan Singh began his July 24, 1991, Budget speech by saying how he was “overpowered by a strange feeling of loneliness” because Rajiv Gandhi was no more. He went on to say, “thanks to the efforts of Pandit Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi, we have developed a well-diversified industrial structure.” Forty years of socialism meant that India produced political parties which excelled in winning elections in a socialist economy! Winning elections meant selling ‘collectivist’ ideas that were alien in an India métis. Market reforms in India remain a set of ‘dry economic ideas’ because there are few with the experience of selling these as ‘political ideas’. The reformers were unable to convince even the intellectual elites in influential economic institutions and learning centres. That meant the premier institutions dedicated to studying economics and Indian society did not believe in reforms, at least initially.It has had its natural consequences. Not only did economic reforms sell poorly, the new policies edged out—instead of integrating and modernising— traditional economic institutions and practices like badla (stock market lending mechanism), hawala (a much-maligned, but low-cost and efficient money transfer mechanism), and rural moneylenders.  It is time India expresses economic freedom through its own social values—not as a tool, but as a value in itself. Economic freedom ought to be seen as a pre-requisite to benefitting from a rich tradition of business and entrepreneurship inherent in India’s diversity. Various communities have showed sharp business acumen, innovation and entrepreneurial skills. Indian managers are prized assets even on Wall Street. The Sikhs, Jains, Marwaris and Parsis have demonstrated their skills in building world-class businesses. The idea of economic freedom must also be explained through the thoughts of influential Indian intellectuals. It is no secret that B.R. Ambedkar’s economic beliefs tilted towards Adam Smith rather than Karl Marx. Freedom fighter and India’s second home minister C. Rajagopalachari went even further. “A free market…will result in expansion of industry and rise in employment,” he wrote in 1958. Rajaji, as he was widely known, believed that political freedom could not survive unless it was sustained by economic freedom.  The idea of economic freedom is not new to India. The challenge for reformists in India is to promote elements of the Indian métis that are in harmony with a free market economic outlook. In short, the way in which economic reforms are presented matters. Vipin P. Veetil is doing his Ph.D in economics from Iowa State University. B. Chandrasekaran works in public policy in New Delhi. Facebook Instagram X-twitter

20 years since India’s economic reforms 20 years since India’s economic reforms Chandrasekaran Balakrishnan November 28, 2011 Economic Reforms India in the last 20 years has started to reverse the Keynesian-inspired planning that clouded its growth since independence.  A large part of this turnaround was driven by one of Hayek’s students at the LSE, B R Shenoy, whose ideas are now coming into fashion. It is interesting that as the West once more embraces the Keynesian policy options, the East is rejecting it. This article in honour of Prof Shenoy was co-authored with B Chandrasekaran. “An Indian will, on average, be twice as well off as his grandfather; a Korean 32 times” said Robert Lucas in a 1985 paper titled On the Mechanics of Economic Development. The Nobel laureate’s figures were based on the 1960-1980 period when India’s per capita income grew at 1.4% per year. In the period from 1992-2002, India’s per capita income grew at 3.7%, and from 2003 to 2010 it grew 6.9% – at this rate an Indian too will be 32 times better off than his grandfather. August 2011 marks two decades since a high level committee—Narasimham Committee—was setup by government of India to initiate financial sector reforms. The deregulation recommendation by the Narasimham Committee went a long way in improving capital market efficiency – a key ingredient of economic growth. Ideas of free market economics, however, were not new to India. Long before 1991, Prof B R Shenoy had fought a lonely battle to promote free-exchange. Shenoy warned India about the consequences of “central planning” twenty years before Jagdish Bhagwati and T N Srinivasan told us – in their 1975 book Foreign Trade Regimes and Economic Development: India – “that India’s foreign trade regime, in conjunction with domestic licensing policies in the industrial sector… impaired her economic performance”. Shenoy was the only Indian economist to write a Note of Dissent to the 2nd Nehru-Mahalanobis Five Year Plan (similar to the Soviet Gosplan). In the 1955 Note, Shenoy points out that the 2nd Plan “begins by prescribing the increase in national income which the Plan would set to achieve”.  In other words, the plan begins with a certain growth rate and then goes about figuring out how to gather necessary savings. Shenoy says “the availability of real resources must be assessed first and the investment plan must match it”. This was at a time when Joan Robinson’s view that “It is the rate of investment which governs the rate of saving, and not vice versa” was in fashion. The government of India and its economic advisors choose to reject Shenoy’s wise remarks. What followed was an unfortunate verification of Shenoy’s theoretical vision. The average per capita income growth for the first five 5-year plan periods was a meager 1.5%. Joseph Schumpeter in his 1910 essay on Leon Walras says “It has become long since manifest who was being judged when the Academie des Sciences Morales et Politiques rejected his work”.  Perhaps the same can be said of the government of India’s rejection of Shenoy. “Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia’s or Egypt’s?” asked Robert Lucas in the mid 80s. In 1991 the government of India took some such actions. And the debate turned ideological, especially with the IMF’s condition-ridden package. Shenoy was the first economist of independent India to lucidly support free-market policies: Efficient management of business and industrial concerns in a competitive market economy is a highly specialised function…best left to private entrepreneurs. The reforms were greeted with skepticism at best and outright rejection at worst amongst India’s intellectual class. Arun Ghosh—in an August 1992 Economic and Political Weekly article titled One Year of Narasimha Rao Government: A Balance Sheet—declared “The Narasimha Rao government’s economic policies have not brought any promise of harmony and progress to the Indian economy.” Rather symbolically, the article was on the same page as an advertisement for the Hindi translation of a book titled The Russian Revolution by Rosa Luxemburg. Surprisingly, in the midst of the ideological battle of early 90s, Shenoy’s ideas were not resurrected for intellectual support. S B Mehta wrote in 2001 of  events a decade earlier: the then Finance Minister was criticized by many that we were mortgaging our sovereignty to IMF. This author wrote to him that he should declare that we were following the policy that Shenoy hinted for twenty long years…. No politician or economist, however, uttered the name of Shenoy… Thus, it seems, we neglected the sound advice of Shenoy during his life-time [and also] when our policies leaned more towards free market. With his 1931 article in the Quarterly Journal of Economics, Shenoy became the first Indian economist to publish in leading scholarly journal. However, Shenoy is not just a scholar of the past; his ideas are of great relevance today.  Take the debate on corruption, for instance. In February 1975, Shenoy delivered a lecture in Ahmedabad putting forward the thesis that interventionism is the root cause of corruption. And data backs his claim: Transparency International’s perception of corruption index and Heritage Foundation’s economic freedom index are strongly correlated. The 10 least corrupt countries have an average economic freedom index rank of 11, while the average for 10 most corrupt countries is 163! Shenoy choose to be “right in a minority of one”. As India marks two decades of economic reforms, it is time classical liberals come forward to institutionalize B R Shenoy’s ideas. They say that VKRK Rao, a prominent post-independence Indian economist, “strode like a Colossus over the Social Science disciplines”. He established four institutions: the Delhi School of Economics, the Institute of Economic Growth, the Indian Council of Social Science Research, and the Institute for Social and Economic Change. Shenoy established none. The difference was at least partly because of their respective economic views. Rao was awarded his PhD in 1937 from Cambridge and was a student of Keynes. Shenoy was from the London School of Economics and was highly influenced