The Hindu Business Line : Why every community needs capital

Beyond the stage of economic infancy, every community needs capital (and capitalists) to grow higher. At that stage, a wise polity will cultivate capitalists; it will not reject what capitalists can do better than the state. Citing the case of Kerala, P. V. Indiresan says the State should learn to welcome capital — both financial and human.

THE FOOD we eat depends on how old we are: It is baby food during infancy, junk food for teenagers, low-fat health diet in old age. Similarly, the input a nation needs for development depends on the level of its economic growth. To begin with, development will be based (primarily) on material assets, then on skilled labour, later on accumulated capital and, ultimately, on technological prowess.

Likewise, economic policies too should change with the state of development. Many policy-makers in India are sold out on socialism the same way India's Cricket Board has been enamoured of Saurav Ganguly. That kind of socialist bias and anti-capitalist fervour were very much in evidence at a recent seminar on Kerala's development.

Kerala's love for socialism is genuine. Admittedly, it has done much good to the State, taking it half-way up the path of development. In consequence, Kerala is no longer in the infant stage of development. Precisely because Kerala has become fat on a diet of socialism, it needs to change its diet.

Such a change does not mean that the State should swing to the other extreme and copy what capitalist countries are doing. That is like giving whisky to young boys. What the US does today is not necessarily appropriate for us. However, we may be better off imitating what the US, or China, did when they were at the same stage of development as we are.

Thus, Kerala needs a mix of the old and the new to move on to the next stage of development. If it does so, it has a good chance of raising its Human Development Index (HDI) above 0.8 in the next 10-15 years and become the first Indian State to attain high development status. However, if it does not take care, there is every possibility that it will lose the race to other States such as Tamil Nadu. Of the three indices, which constitute the HDI, Tamil Nadu is already ahead of Kerala in some aspects of health. Further, Tamil Nadu's rate of progress in education and in income generation is higher. Hence, Kerala is in no position to rest on its laurels.

Unfortunately, the State has got into an ideological groove. In the crucial sphere of higher education, it is lagging far behind Tamil Nadu and several other States. Its industry has stagnated for years. In the fastest growing sectors of the economy, such as information technology, pharmaceuticals or automobiles, Kerala is nowhere in the picture. At the seminar, one of Kerala's leaders voiced an impassioned complaint about the iniquity of a five-star hotel that paid one of its cooks a meagre salary of Rs 6,000 only because he had no qualifications. Without getting into the rights and wrongs of the case, we could ask, if that hotel had not been there, whether there would have been any other job at the same wage for that, admittedly unqualified, cook.

Or, we could ask, if the private entrepreneur had not established the hotel, whether the State would have done so. We could even ask whether if the entrepreneur had not provided the capital, whether the State could have filled the gap, and whether, on balance, the entrepreneur made Kerala a richer or a poorer State.

These questions are worth asking because an economy cannot grow tall on the contribution of labour alone. Beyond the stage of economic infancy, every community needs capital (and capitalists) to grow higher. At that stage, a wise polity will cultivate capitalists.

If capitalists are not perfect, neither is labour. Every time labour leaders demand above-average wages, they are increasing income disparity and destroying jobs. When looking for culprits in the matter of unemployment and poverty alleviation, instead of pointing their fingers at capitalists, Kerala's socialists should look in the mirror. That is the reason why Kerala should look at its socialism dispassionately. Without swinging over to unabashed capitalism, it should consider whether the time has not come for it to promote public-private partnership.

Only those with red-tinted glasses will see all capitalists as black and all labour as snow-white. At this stage of development, Kerala needs public-private partnership. Copying Kerala's example, the BIMARU States may still need to be bottle-fed on socialism; those States may still need protection from globalisation but the rest of the country, including Kerala, has become mature enough to taste capitalism.

Kerala cannot bank on its material assets either. As the examples of Nigeria, Mexico and Venezuela have shown, even oil wealth does not make nations prosperous — unless populations are small. Kerala is an over-populated State; it will not go far if it depends on natural resources. For instance, the State has a plan to expand fishing industry. That thrust is unlikely to enrich the State significantly, unless it is combined with rapid growth of tourism industry — a fish on the table in a five-star hotel will fetch ten times more than what it can in the international market.

One of the participants in the seminar pointed out that such schemes as the National Rural Labour Employment Guarantee are of little use to the State where most of the jobless are highly educated.

Due to acute shortage of unskilled labour, the State is importing workers from Tamil Nadu and even from far off Orissa. Hence, what Kerala needs (as do many other parts of the country) is employment for the educated. Unfortunately, as Mr Ajit Balakrishnan, the sole entrepreneur at the seminar, emphasised, most of our educated are unemployable.

Mr Balakrishnan pointed out that India's IT industry is handicapped not because of poor state patronage but because barely one-two per cent of university graduates are employable. He wanted no state patronage. In his view, Indian industry needs no subsidies. It will go wherever talented, well-trained youth are available.

In a recent worldwide survey of university education, The Economist succinctly observed that, "the US has the best higher education system in the world because it has no system". That is true in most cases. In India, too, the IT industry and cable TV grew by leaps and bounds only because the government had no rules for them. The government has a fatal tendency to destroy what it coddles most. Housing for the poor is a glaring example of how the government crushes what it embraces.

So far, Kerala has occupied a position of economic leadership because it has moved farthest up the ladder of human development. However, precisely because the State's policies have been so successful, it should change them now. The Kerala of today is different from that of yesteryear. The policies it has practised may still be useful in BIMARU States but they are no longer of much relevance in Kerala itself.

In the changed circumstances, the State should learn to welcome capital — both financial and human. It should stop exporting its best talent but export what that talent can produce. It should stop producing unemployable graduates and learn to impart the kinds of skills modern industry and business require. It should realise that its education system is obsolete and unsuited for the Knowledge Era. The State should also give up its prejudice against entrepreneurs. It should be welcoming Ajit Balakrishnans, not forcing them to take their talent and money elsewhere.

Why organised sector does not create many jobs

IN INDIA, the average wage in the organised sector is four times the national average. Arithmetically, a maximum of 25 per cent of the workforce can enjoy such high wages — leaving the others with no income at all. In practice, no more than 5-6 per cent of the workforce commands such wages. Even then, such privileged workers consume a lion's share of 20-25 per cent of the national wage bill.

Every time trade unionists demand above-average wages, they hurt non-unionised labour. In theory, socialism requires that wages in all organisations should be the same. The socialism that trade union leaders practice is different. It patronises rich workers to such an extent that it is a major culprit in increasing income disparities. In the bargain, it destroys jobs too.

Incidentally, in the capitalist US, wages are not as skewed as they are in socialist India: In the US, top employees in the organised sector, university professors, for example, earn, typically, three times the per capita income; in India, a professor's earnings are fifteen times the per capita income.

Ultimately, employment will maximise and poverty will become least when government salaries and organised sector salaries come closer to the national average.

(This is 160th in the Vision 2020 series. The previous article was published on October 3.)

(The author is a former Director of IIT Madras. He can be contacted at Indiresan@vsnl.com)

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