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Indian economy - A victim of two experiments?

Last updated on: January 14, 2013 13:25 IST

Indian economy - A victim of two experiments?

M R Venkatesh

India's monstrous public distribution system ensured that the government, and not private players, became a huge hoarder of food grains, writes M R Venkatesh.


The Economic Survey 2012 provides us fascinating details about the Indian economy. The Survey document reveals that the average daily per-capita food grain consumption of an Indian in 1965 was 418 grams and that of pulses, 62 grams. Remember, in 1965 we had a war with Pakistan on top of a deadly drought.

Approximately after five decades of our "successful" tryst with green revolution, the survey shockingly points out that the average daily per capita food grain consumption of an Indian in 2010 was a meager 407 grams and of pulses, a disappointing 32 grams.

Obviously, we are not producing enough food grains or pulses now when compared to 1965 on a per capita level. Yet, for the past four decades or so we have been under the mistaken belief that distribution, not production, to be key to the issue on hand.

That explains why we created a monstrous public distribution system (PDS) in the first place. Crucially, we assumed that this will settle our production deficiencies in our farm sector.

That is not all. The PDS mechanism ensured that government, not private players, became a huge hoarder of food grains! This in turn had a debilitating impact on grain prices in the open market. But how does it bother our rulers?

Importantly, if you thought that the idea of PDS was of a socialist vintage, you could be completely wrong. Not only does the idea of PDS flourishes even in 2013, but attempts are being made to make it bigger and bizarre by the proposed National Food Security Bill (NFSB). In short, our fixation with socialism continue even to this day.

But socialism is not the only idea that is ceaselessly experimented on India. Our belief in globalisation of Indian economy as a solution to all our economic ills is another. The Indian establishment is equally split between the two grand experiments.

The Economic Survey for 2012 published by the Government of India points out to a myth generally held by Indians and Indian establishment: "With globalisation and the lowering of boundaries between nations, the world economy is gradually moving towards a single economy."

Is the world economy moving to become a single economy? Well the truth again is exactly the opposite. In an article titled "Globalisation - Going Backwards" the Economist (issue dated December 22, 2012) concluded based on the DHL Global Connectedness Index that the "World is less integrated in 2012 than it was in 2007."

The economic crisis of 2008 seems to have taken its toll globally on the very idea of globalisation. Nations across continents understood that globalisation was not a one way ticket to prosperity. Importantly, the world realized that it is not an idea without pitfalls. No wonder, capital flows - one of the crucial indices of globalisation - in 2012 is far below the flows recorded in 2007. Why?

That is simply because the experiences of successive global financial crisis since East Asian Crisis have demonstrated that capital flows as the root cause of economic downturns. Between discretion and valour, (and tempered by global experiences) nations seem to chose the former.

Yet we believe in a single economy, unified market and globalised world!

Will they download food grains?

In the first week January 2013, as the Finance Minister met economists in the run up to the Budget preparations, one idea that seemed to gather mass is to impose a higher rate of tax on the "super rich." Similarly, another idea reportedly suggested by these economists seems to be imposing an inheritance tax.

In the process these economists have forgotten that rationalization of tax laws, reduction in tax rates and scrapping of irrational levies has been central to tax reforms of the past two decades. This reformist approach has greatly benefitted the tax payer and substantially increasing our tax collections.

Another idea mooted by these economists is to attempt moderating local demand for gold by increasing import duty without realizing that such increased demand is cultural, financial and given the performance of the economy, logical too.

The National Advisory Council (NAC) is a natural by-product of this corrosive ecosystem in Delhi. It was constituted ostensibly to provide "policy and legislative inputs: to Government with special focus on "social policy and the rights of the disadvantaged groups." Consisting of the usual suspects, the draft NFSB has been one of its biggest (and bizarre) ideas of state intervention.

The NFSB seeks to extend subsidized food grains to at least 75 per cent of the country's population - 90 per cent in rural areas and 50 per cent in urban areas - through legislative intervention. But the NAC does not pause to ponder: Does India produce enough food grains in the first place to make this legislation meaningful? Will they download paddy and wheat?

Suggestions to roll-back reforms discussed above may well provide a context in attempting to control, if not roll back, of entire reforms process itself. On a superficial examination it might well be intriguing. After all our reforms process has been a modest success. Yet, why such outlandish suggestions, that too, from economists? The answer for the same is not far to seek.

Let us not forget that Delhi even to this day is infested with socialists (masquerading as economists) who believe in increased state intervention, government control and higher taxes as a gateway to economic nirvana.

Experiments gone awry

Believe me socialists are not the sole culprits as globalisation fundamentalists are now rapidly emerging as their partner in experimentation.

The Economic Survey of 2012 (authored by sections of globalisation fundamentalists) while conceding that globalisation could have the adverse effect of creating inflationary pressures in an emerging economy, nevertheless qualify it as a "desirable change." But if globalisation causes inflation, it should cause inflation in all countries too, especially in those countries more globally connected than India. Logical isn't it?

This is where the Economic Survey is at its ingenious best. It reduces the current ills of the global economy to a "variant of stagflation" - a combination of stagnation and inflation and concludes that the "global economy is characterized by a salad-bowl stagflation - 'stag' in some nations, 'flation' (sic) in others."

Put pithily in a globalized world, if some countries are stagnating, others have to necessarily face inflation. Implicit in their argument is that India is playing a global role and shouldering an important responsibility!

But there is a larger unanswered question. If globalisation causes economic stagnation in some countries and inflation in others, pray why then be global in the first place? Where is the benefit, especially to India? The answer is obvious. Recall Globalisation is a "desirable change" for our establishment and inflation (or for that matter stagnation) a small price for it.

In effect, the two grand ideas - Socialism and Globalisation - are a continuous experiment on India. There are fundamentalists on both sides. One assumes that government should (despite global experiences to the contrary) intervene at all costs and probably at any cost while the other presumes that globalisation (despite successive global economic crisis) is the answer to all ills plaguing our economy.

Global fundamentalists do not appreciate that global capital is virtually non-existent. Where is the question of global capital when countries after countries are facing debt crisis. When they are in a borrowing mode how can they invest?

Yet, we are awaiting the mythical foreign capital to fund retail, aviation, insurance, pension, roads, ports, airports, manufacturing, infrastructure, even in higher education. As foreign capital refuses to enter India, globalisation fundamentalists increase their scale (and range) of experiments on our economy. And this is their view of reforms.

Ditto with socialists too. As government fails in delivering they believe more in the very same instrumentality to deliver. NFSB, NREGA, subsidies for food, fuel and fertilizers and direct cash transfers are all by-products of this demented thinking. And this too is passed as reforms.

From education to health, public transport to agriculture our government for the past six decade has been a spectacular failure in deliverance (barring exceptions). Yet to rely on the very same model reveals the fixation of section of our establishment on the outdated and outworn and idea of socialism.

The other extreme we have people telling us repeatedly globalisation (read global capital inflows into our economy) of the Indian economy will be the ultimate solution. From education to heath, public transport to agriculture, for them, for them it is foreign capital that will be the vehicle for deliverance.

Indian economy is caught between the two globally failed ideas. If NAC and some economists represent one group that continues to experiment through the socialist mode, the PM leads another group that seeks to experiment through the globalisation route. Either way Indian economy is home to extensive clinical trial!

If one promises the moon the other promises water from the moon. In this war of semantics, posturing and grand experiments, people of India do not matter. Neither does the Indian economy.


The author is a Chennai-based Chartered Accountant. Comments can be made at mrv@mrv.net.in


Photographs: Reuters