The Hindu Business Line : Market failure versus bureaucratic failure

Indian economy is a fascinating amalgam, and if Indian Economy Since Independence offers insights into its working especially in the last half century, The India Economy is all about heresies, policies and practices. Energetic economic reads, recommended by D. MURALI, for the year-end.

There can be no better way to wrap the year than spending an afternoon with Indian Economy Since Independence,' edited by Uma Kapila, from Academic Foundation (www.academicfoundation.com).

Now into the 17th edition, the 1,000-plus-page book opens with Kapila's intro that rewinds time to 1947 — when nearly 85 per cent of the population lived in villages, and depended on agricultural and related pursuits.

Almost 7 out of 10 working people were then into agriculture, yet the country was not self-sufficient in food and industrial raw materials. Famines were recurrent, illiteracy reigned at 84 per cent, and about 6 out of 10 children in the 6-11 age group did not attend school.

Interventionist planning

What happened then? `Interventionist' planning rolled on for more than forty years, though it "did little to make the country literate, provide a wide-based health service, achieve comprehensive land reforms, or end the rampant social inequalities," as Jean Dreze and Amartya Sen wrote about a decade ago.

"The dramatic events and policy initiatives of the two-year Plan holiday period between 1990 and 1992 demanded a full reappraisal of the planning methodology, and the Eighth Plan represents the first efforts at planning for a market-oriented economy," recounts Kapila, an economics teacher for 42 years.

"We have to start rolling back the public sector investment from those sectors of the economy where the private sector can move in and step up our investment in the social sector," observed Pranab Mukherjee, Deputy Chairman, Planning Commission, in the preface to the Eighth Plan, dated June 18, 1992. "A Plan with a difference," he called it. "A Plan for managing the change, for managing the transition from centrally planned economy to market-led economy without tearing our socio-cultural fabric."

It is easy to slip into one of the two moulds — market mania and market phobia — cautions the editor. "In India, a common form of market mania is the notion that radical deregulation is all it would take to kick start the economy." How naïve, she wonders, because market efficiency and state action are complementary to each other.

"For instance, allowing private entry into new sectors (such as medical insurance or electricity distribution), which may be considered as a form of deregulation, calls for an adequate overseeing framework, especially if these sectors have features (such as economies of scale, information asymmetries, pervasive externalities) that interfere with the efficiency of the market mechanism."

Public v. Private Sector

Among the dozens of essays on various economic dimensions, there is one on `Public vs private sector' by B. S. Minhas. "We have a reasonably well worked out and fairly convincing theory of market failure. However, an equally convincing theory of bureaucratic (government) failure has not come into existence yet," he rued in the 1991 essay, which may ring valid even today. The social costs of market failure do not weigh up against `the uncertain costs and harmful side-effects which bureaucratic activism in the market might entail,' Minhas declared.

"The bureaucratic management of the overall environment of economic policy in India has turned the system into a fast-breeder reactor for the generation of inefficiency, industrial sickness and corruption, both in the public as well as private sector. Instead of climbing to the Commanding Heights, the bureaucratic command system has succeeded in trapping the economy in the deep swamps of inefficiency... "

Too tough for bureaucrats to digest.

Different question papers

If Minhas sounds heretical, how about a whole book of heresies, policies and practices, written by Jayanta Sarkar: The Indian Economy, from Pearson Longman (www.pearsoned.co.in).

Let's start with his views on the break that India made in the terminal decade of the 20th century. Comments Sarkar: "Many of the new measures look no better than overdone or underdone copies of the model that is now in vogue in most parts of the industrialised world. No one is quite sure how that model will fit in the Indian context. Little effort has been made to customise it for what remains primordial Indian reality with its own ethos, legacy, and preference."

He cites a quote of Rabindranath Tagore thus: "God has given different question papers to different countries, and so copying cannot help."

One such copying, perhaps, was `redistribution of surplus lands of big farmers, often held in someone else's name or a fictitious name, among the actual tillers', as undertaken by the West Bengal government.

"Most of these lands have ended up in benami possession of the village rich," writes Sarkar. "A State government report in 2004 admitted that the number of land-owning cultivators had dropped from 38.4 per cent in 1991 to 25.4 per cent in 2001. During the same period, the number of landless households had risen from 41.6 per cent to 49.8 per cent."

Make or Break

Agriculture still makes and breaks, asserts a chapter. "Agriculture's importance to Asian countries does not lie merely in what it contributes to their GDPs. It carries the load of a large proportion of their workforce. This is very much unlike what prevails in the West, where normally only around 2-3 per cent of the workforce is in agriculture," reasons the author. "When the crop is bad, that hurts not only the 60 per cent of the workforce which directly depends on farming but the entire economy."

In a chapter on markets, one finds Sarkar appalled that rural markets don't get the attention they deserve. India Inc displays a `pathetic ignorance of the realities of this market', he says. Three common misconceptions that our companies suffer from are: One, `the rural market is one that can only take cheap, low-end products of indifferent quality and shoddy looks'; two, `most village customers do not know what value for money is'; and three, `traditional items have the best chance of doing well'.

Rural societies are changing not only in consumption habits but also in their awareness of `things that broadly make the content of life', such as schools, roads, banks, hospitals, electricity and so on. "Corporate response to these changes has remained tardy," laments the author. Why not there be dual pricing, `one for the urban market, another for the rural, and subsidising the second from the margins made from the more affluent buyers', he asks. "Banks and insurance companies, for instance, offer mostly the same type of instruments for urban and rural clients. This cannot work, this has not worked."

Dismal figures

A dismal statistic that stares from the final chapter is the per capita availability of cereals and pulses. It stood at 468.7 grams in 1961, writes Sarkar. "Over 40 years later, in 2003, the quantity had not only not risen but gone down to 436.3 grams." And the number of people below the poverty line in absolute numbers has fallen only marginally, though percentage drops seem impressive, frets the author.

"Privatisation could unbolt personal freedoms, but that could also call for keener regulatory mechanisms," insists the author. He foresees governments, having to be content with much less power and also less resources, even as "they will have to contend with the challenging tasks of providing more and better basic necessities such as food, water, clothing, housing and sanitation to people who would be much more demanding."

Energetic economic reads before you bid bye to 2006.

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