13 Economists and their Economic Strategy for India

Former governor of RBI Dr. Raghuram Rajan and MIT professor Dr. Abhijeet Banerjee have written an article, viz. Eight things India must do in 2019, in Times of India on 1^st January, 2019[i] in which they present a list of eight things which according to them India, government and people collectively, must do in new year to improve her future. In this article I want to critically analyze their proposal.

Rajan and Banerjee give the following background as a cause of their proposal,

Last October thirteen of us, all economists, got together in the hope that as the country gears up for elections, we could start a conversation by identifying a set of policy ideas that might help inform party manifestoes and policy visions. While our views stretch across the spectrum from right to left, we found surprising agreement on the challenges India faces and reforms it needs now. Two of us sifted through the set of ideas, picking what we felt were the top challenges and proposals to address them.

The first thing that comes to mind reading this background is that 13 economists got together and started to think about how to socially engineer India. They want their ideas to become part of political party manifestos in coming Assembly election as well as guide the Indian policy makers. The important issue here is ethical. As long as Rajan, Banerjee and other 11 economists are contemplating these ideas in their minds there is no ethical consideration involved, but the moment they want policy makers to impose their ideas on the people of India serious ethical consideration enters the discussion. The question is, on what ethical basis these 13 economists want to impose their ideas on people of India? What is the moral/ethical basis of their policy recommendations? Why should Indian people be made guinea pigs in this experiment of these 13 economists? In their article they do not discuss these ethical issues at all. They, just like most other mainstream economists, simply bypass the whole ethical question assuming that they are in a God like position to impose their ideas on billions of Indians!

Arguedno leaving aside the above discussed important ethical issue, we will now focus on the merit of their policy arguments.

Below I present, one by one, eight things that Rajan and Banerjee propose and then go on to analyze them critically. Their policy proposals are bulleted followed by my analysis.

• The massive aggregate fiscal deficit of the states and Centre combined leaves fewer, costlier, resources for private investment. We should aim to hit the FRBM-suggested 5% by 2023, but not by creative accounting or off-balance sheet transactions. Instead, we must increase revenues, both through better compliance and more progressive taxation, and target spending better. State deficits have grown, partly because markets assume that the Centre will bail out over-extended states and therefore do not charge them higher interest rates. To incentivise better behaviour, any state’s borrowing above agreed limits should be funded through special bonds that are explicitly free of any federal guarantee. A Centre-state council modelled on the successful GST council could supervise fiscal federalism.

The proposal of filling the fiscal deficit by increasing revenue, through better tax compliance and more progressive taxation, is antithetical to the goal of better future that is envisioned by these economists. The problems being faced by the Indian economy today are a direct result of increasing interference of the Indian government in all aspects of the market and peoples’ lives. This increasing interference is made possible by the increasing government spending. Economic theory and history are crystal clear on the role of the government in nation’s economy and society. They both inform us that for any kind of progress to take place it is important for the government to refrain from meddling in the working of the market economy. Bigger interfering government with its bigger taxes will always stifle progress. No matter what the time and place is, Laissez faire is the best policy. And Laissez Faire policy requires government to immediately decrease its spending and balance the budget.

• Three sectors that are distressed today are agriculture, power, and banking, despite massive past government intervention, and often because of it. For example, periodic export bans and large-scale imports to keep food inflation down have radically moved the terms of trade against agriculture, while reducing the farmer’s ability to plan. Cheap or free power to farmers have depleted the water table to the point of disaster. Farmers do need assistance. However, the instruments used – loan waivers, inflated MSPs without adequate procurement, and input price subsidies – often exacerbate the problem. In addition to enhancing investment in new technologies and irrigation, a government move towards lump sum payments to farmers for holding below a certain limit, in the spirit of Telangana’s Rythu Bandhu scheme, will be an improvement.

Rajan and Banerjee here correctly identify the government intervention in the farm, power and banking sectors as a cause of their distress, but again instead of proposing the complete abolition of government intervention in these sectors, they want politicians to support the farmers by giving them cash handouts. These economists hold contradictory thoughts in their minds. On one side they do recognize government intervention as a problem, but on the other side they continue to advise for that same intervention to continue!

• We need a better business environment – whether to create the jobs for those leaving agriculture, urban schools, or our universities, or to ramp up our woefully inadequate exports. We need to learn from state experiences about what works in areas like land acquisition, industrial regulation, provision of power and logistics, and environmental clearances. A Centre-State Productivity Council can be useful for this; such a Council could revive the idea of Special Economic Zones where coordinated land, environmental clearances and transportation infrastructure are available on a “plug-in” basis. Such zones, not necessarily targeted at exports, may also be used to experiment with reforms such as changes in labour laws before an all-India roll-out, to provide the evidence needed to build consensus for them.

India definitely needs a better business environment, but to believe that government will create and provide that environment is a mistake on the part of these 13 economists. A better business environment is that where entrepreneurs have freedom to do their business inside the set limits of the Rule of Law, where they can retain their profits without it being taxed away by the government so they can use it for reinvestment in expansion of their activities, which in turn will create more jobs and growth, where the external business environment, in the form of government policies and overall regime uncertainty,  is more certain and not extremely uncertain like in India today where we don’t know what new shock policy like demonetization or GST the government will implement next, where the property rights of businesses are absolutely secure so they can peacefully engage in their daily business activities, and where bureaucratic meddling is non-existent so businesses can focus more on satisfying their consumers instead of busy filling paper works for government legislation compliance. Rajan and Banerjee offer no such policy proposal.

• Sustainable growth requires more effective but less burdensome regulation. Our cities are choking and climate change is upon us. Municipalities need the powers and funding to deal with these challenges, which means more decentralisation. In other areas, we need more centralisation: for instance, a new and technically beefed up environmental regulator, combining powers that are currently with multiple bodies, setting fees based on careful analysis of tradeoffs, and enforcing them.

Again, Rajan and Banerjee are harboring two contradictory ideas in their minds. On one side they are demanding decentralization of power, which is a good thing, but on the other side more centralization! And no where they are clearly defining the meaning of “more effective but less burdensome regulation”.  The only form of ‘more effective and less burdensome’ regulation is the regulation by the market forces! The price and profit and loss systems of the market are capable of providing environmentally sustainable high rates of growth. But instead of remaining consistent in their thoughts and advocating a roll back of government interventions in the economy, Rajan and Banerjee choose to remain confused.

• Government has to provide for benefits, but is not always best suited to deliver them. To reduce the implementation burden and free up its ability to take on new challenges, government should move towards cash transfers. As a first step, beneficiaries of all specific government subsidy programmes should have the choice between cash transfers and benefits in kind.

Rajan and Banerjee here simply assert that “government has to provide benefits” without giving any logical economic or ethical justification for this assertion. Who said that it is government’s job to provide benefits? Benefits to whom? To everyone? If yes then how can they provide benefits to all when they must tax one group of Indians to provide benefit to other group? And, as before, they remain confused here too. They think government has to provide benefits but then believe that it is not best suited to deliver these benefits!  They also don’t tell us how “cash transfers” are going to be beneficial to the people of India? As I have analyzed in my previous article, any such ‘cash transfer’ will be detrimental to the future of Indians.

• We need more skilled personnel in government – at higher levels in technical areas like digitisation, trade negotiation, and environmental regulation but also at lower levels outside the larger cities. More lateral entrants, merging into the permanent civil service, are desirable near the top. At lower levels, too many youth waste years taking competitive exams for government jobs that most will never get. One alternative that will give them skills and work experience is a multi-year paid government internship at salaries comparable to entry level market wages (much less than what the government pays) for those under 26 to work as support staff in government offices/ public sector enterprises where needed. Performance on these could help entry into permanent government jobs, though political pressure to make these internships permanent should be resisted.

Murray Rothbard once said,

Who wants good people in government? Good people should be in the private sector. Helping us out, helping themselves out in the private sector. We want schmoes in government. We want people who can’t find the doorknob. Why waste productive people, as well as looting the taxpayer?

Rothbard also correctly said that, the state is a gang of criminals, writ large. In this light how advisable it is to ask good skilled people to join this criminal gang? But of course for liberal economists like our 13 fellow economists, the state is no such thing. For them the state is a necessary system which just needs some fine tuning, as advised by philosopher kings like them, to work well. No matter how much they will see evidence of government failure, they will never give up their belief in the efficacy of the statist system.

• The Right to Education Act focuses on input requirements for schools that have little bearing on learning outcomes, which have deteriorated alarmingly. Learning must be our central focus, with all schools, public and private, responsible for delivering a minimum level of basic skills to every child. Bringing those falling behind up to par through remedial teaching will be critical.

As long as learning of children is concerned, we don’t need any Right to Education Act or Sarva Shiksha Abhiyan or any such public education schemes or public education itself.  It is better we keep our children away from schools if we want them to critically learn about the world and be creative and innovative. As John Holt said years ago, Children learn best when they are on their own outside school classrooms. Children fail in their lives because they go to schools where their faculties of critical thinking, learning and imagination are killed systematically. As John Taylor Gatto said, schools only dumb down our kids. Rajan and Banerjee and his fellow economists should listen to what H L Mencken said years ago that,

The most erroneous assumption is to the effect that the aim of public education is to fill the young of the species with knowledge and awaken their intelligence, and so make them fit to discharge the duties of citizenship in an enlightened and independent manner. Nothing could be further from the truth. The aim of public education is not to spread enlightenment at all; it is simply to reduce as many individuals as possible to the same safe level, to breed and train a standardized citizenry, to put down dissent and originality. That is its aim in the United States, whatever the pretensions of politicians, pedagogues and other such mountebanks, and that is its aim everywhere else.

It is better that we look at the much better alternatives like homeschooling or unschooling for the learning of our children instead of continue to (falsely) believe, like these economists, that in some distant future the public education system will finally educate our children.

• We must address the coming explosion of Non-Communicable Diseases, which will require engagement with the frontline providers. The vast majority of these have no formal qualifications, but the evidence suggests they can be trained and pushed towards practising better medicine. Since they have the patients’ ears, the health system should use them better rather than ignoring them.

This is agreeable, but will require dismantling the health monopolies like various medical profession associations and opening the health market for full competition. The report prepared by our 13 economists do not discuss any such monopoly dismantling goals. Also, the health issues in India are linked to many other proximate causes like lack of wealth generation, environmental degradation etc. And they all in turn depend on the single root cause of ‘lack of private property rights’ and the ‘rule of law’ which can successfully enforce this regime in India. People are malnourished and sickly because they are poor. The economy of India doesn’t produce the needed surplus to food, cloth and shelter every Indian in a decent way. And even if surplus is being produced, it is squandered by the politicians on their various boondoggles. For all these the socialist policies of the successive governments are responsible. A rich country will more likely be a healthy country. So India must become rich first before the health of its inhabitants can improve. And India can only become rich by following the economic system of Capitalism, which in turn requires people to accept and follow this system. This capitalist mentality and culture in India are lacking today and so any change for better will take thousands of years of determined efforts.

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[i] The full article is available here.