Twisting the invisible hand

Of late, the breezy confidence among commentators that the Indian economy is destined to grow at 8-10 per cent come what may, has given way to a gloomy suspicion that even a 6-7 per cent growth is perhaps beyond its reach. The ongoing downcycle has strengthened this suspicion. There’s also a tendency among commentators to convert the debate on economic growth into a ‘whodunit’. While one camp argues that it was the Congress/UPA rulers, starting from the first Prime Minister onwards who set the economy up for this downward spiral, the other lays it all at the doors of inept management by the ruling BJP/NDA.

In their book All the Wrong Turns: Perspectives on the Indian Economy , TCA Ranganathan and TCA Srinivasa Raghavan — one a career banker and the other a veteran economic writer — take an apolitical look at India’s economic journey over the decades since independence and conclude, like Hercule Poirot in Murder on the Orient Express , that everyone had a hand in it.

But the book’s six essays (40-60 pages each) on the six key facets of the economy studiously focus on what went wrong, rather than on who was behind it. The essay format makes for easy readability; you can hone in directly on the sectors that interest you and need not read the book chronologically.

What makes the book stand out from most other academic tomes is its willingness, from the word go, to demolish the established narrative on what ails a sector; and to present a provocative new hypothesis in its place. So, in the very first chapter on agriculture, the authors demonstrate with data that Indian agriculture is not as badly off as people make it out to be. Citing the NSO, World Bank and other sources, they show that gross value added for Indian agriculture in the post-liberalisation era in money terms has consistently outpaced that in physical terms, leading to steadily improving terms of trade for agriculture. With banks constantly arm-twisted to up agricultural credit, credit flow to the sector, too, has been growing plentiful at 18 per cent a year.

Why, then, is agrarian distress felt so much? The authors conclude that it has more to do with dwindling farm extension efforts which have led to the overuse of expensive inputs and ad-hoc regulatory interventions in the agri-markets that resulted in misleading price and output signals flowing to the farmer.

The missteps

Manufacturing has remained a small sliver of the GDP despite pious resolves by successive governments to transform India into an industrial powerhouse. Here, the book finds that after an impressive build-out in capacities in the initial Plan years, Indian enterprise ran into a wall in the form of the Industrial Policy Resolutions and the Industrial Development and Regulation Act (IPR/IDR). These gave the state unnecessary powers to dictate not just the industries and locations entrepreneurs must invest in, but also the exact capacities they go in for. Old habits die hard, and the tendency of government ministries to micromanage their constituents has continued even after the official end of the License Permit Raj.

It also posits that the Indian industry remains uncompetitive because of active incentives for MSMEs to remain sub-scale and operate in low-tech areas, with such sops being withdrawn the moment the small unit succeeds.

On why the Indian share in exports remains minuscule, the authors have a bit of fun at the expense of the ‘China-is-a-dictatorship-so-it-has-it-easy’ theory. They argue instead that India has not managed to replicate even a fraction of the Chinese success in manufacturing because it has gone about it in a topsy-turvy fashion. China fashioned its remarkable industrial success around the rapid modernisation of its satellite towns. To develop its industrial hubs and SEZs, China first built highly liveable urban centres with great health, education and public infrastructure, which proved a draw for highly skilled workers and foreign investors. Vibrant industrial clusters automatically followed.

In India though, attempts to develop SEZs and industrial estates have centred around offering tax breaks to get industries to explore undeveloped backward areas, with nary a thought to the dodgy infrastructure and poor living conditions that would put off both employees and investors.

In fact, if there’s one abiding theme running through the book, it is that Indian policymakers have messed up by consistently taking the wrong turn when it comes to making the choice between growth and equity. Seeking spectacular growth, they start off with market-driven policies in every sector, but soon veer off to socialistic attempts to temper it by redistributing its fruits, so that enterprises have a hard time surviving.

In short, they follow the credo of Bollywood’s favourite villain Ajit, whose one-liner is cited in the book: “Raabert, isko liquid oxygen mein daal do. Liquid ise jeene nahi dega aur oxygen ise marne nahi dega ”. (Dunk the hero in liquid oxygen. The liquid won’t let him live and the oxygen won’t let him die).

Provoking opinions

Depending on whether you are an academic or a layperson, you may either be shocked or pleasantly surprised by such citations and the fact that book does not hedge its opinions in the accepted style of serious academic works. The last chapter critiques the Indian Constitution for being complicated and confusing and giving the state unnecessary powers to micromanage the lives of citizens; it calls for rewriting it.

A slightly jarring aspect of the book is the uneven writing style. While initial chapters are data-heavy and present reams of background information to back their diagnosis and solutions, the later ones dive straight into the prescriptions without such preliminaries and are opinion-heavy.

Overall, you may either agree with this book’s contents or disagree vehemently, but you are likely to read it nevertheless for its provocative contents. It also provides a ready answer to what the government should be doing about the slowing growth trajectory — preferably, nothing. In the authors’ opinion, undoing state interventions and letting the invisible hand of the market do its job seems to be the best way to let the derailed sectors of the Indian economy attain their full potential.

COMMENT NOW