Ministers of Finance

In 2014, a party traditionally close to business came to power. It was expected to favour liberalism; but the party has not changed any major policies, and seems to have no ideas about how to do it.

This issue of Swarajya is about the Budget; that is what I should write about. But I have watched the Finance Minister for a year and a half. His economic judgment is poor; writing about what he will or should do is a waste of time. So I would like to urge my readers to look further.

The principle of laissez faire—leaving things alone—was a concomitant of 19th century capitalism. There were uncomfortable ups and downs—trade cycles—but if the government intervened, there was always a possibility that it would favour one interest group against another. Apart from issues of fairness, such intervention would introduce an unpredictable business risk. So it was considered desirable that capitalists should cope as well as they could with changes in economic conditions; if some of them failed, the fittest would survive. The government should provide the services that businessmen could not provide on their own: defence, law and order, justice. For the rest, they should be left to their own devices.

This view faced two challenges in the first half of the 20th century. The first was the Russian revolution. The Bolsheviks, who overthrew the Czar, came in with the ambition of freeing Russia of capitalists and running the State for workers; they ended up running it for the Communist Party. The other was the Great Depression of 1929, which extended into the 1930s. Depressions were not uncommon; they usually ended after some time on their own. But this depression saw unprecedented levels of unemployment in industrial countries, with no early end. It led in Germany to a takeover by National Socialists and to rearmament; elsewhere, the Depression was ended by World War II. After the War, Soviet Union set up Communist regimes in the territories it had won from Germany.

Independence of India in 1947 brought to power leaders with a fixed view of their own history: that the British, the world’s first industrial power, had destroyed India’s pre-industrial manufacturing and prevented its re-industrialization. The new rulers wanted India to industrialize rapidly and catch up with the West. There was a difference, though. Hitler was a dictator, and his reign was ended by World War II; Soviet Communism was a party dictatorship, which ended with the secession of member states, beginning with Poland in 1989, and their conversion to partial capitalism. India was a parliamentary democracy; its crises merely led to a change in ruling party or coalition.

There were three major crises. To sequester foodgrain for their armies and keep prices under control, the British had set up a procurement system in 1939: a government monopoly bought the grain from farmers, and allocated them to the army and the cities. Underpricing of grains and general inflation led to severe shortages and made the rationing system even more necessary. So the government of independent India kept it; it was bailed out by the US, which gave its surplus wheat free to India. This arrangement collapsed in the late 1960s for two reasons. There was an unprecedented drought in 1965; at about the same time, the Americans ceased to have a surplus, were annoyed with India’s closeness to the Soviet Union, and stopped supplying free wheat. But their scientists had also been transferring to India the technology of high-yield wheat seeds they had developed; by a lucky accident, it led India’s wheat production to shoot up soon after the Americans turned off their supplies. This episode made the Indian government extremely paranoid about grain shortage; since then, India has produced what grains it needed, and kept out imported grains, whatever the cost.

The next crisis came in the 1970s, when Arab countries, smarting under Egypt’s defeat by Israel in the six-day war of 1973, cut supplies and raised oil export prices. The rise in the cost of oil unsettled India’s balance of payments; despite (or rather, because of) its draconian system of import controls, payments became unmanageable. Imports were slowly released from the clutches of bureaucrats—first imports required by exporters in the 1970s, then other exports in 1991. That still left extremely high import duties; the government gave them up, very reluctantly, when the it was told by industrial countries in the Uruguay round that duty reduction was the price it had to pay if it wanted to qualify for access to industrial countries’ textile markets. It was 2001 before the process was complete.

The third crisis began in 1988 and reached its peak in 1991. The oil price rise in the 1970 made oil-exporting countries extremely rich. Not knowing what to do with so much money, they deposited it in banks in New York and London, and asked them to get them good returns. The money was first lent to Latin American countries. That led them to bankruptcy in the 1980s. Their exit qualified India as borrower; it overborrowed in the late 1980s, and went bankrupt. It could find no lender except the International Monetary Fund; the IMF loan file was at the top of my table when I was taken into the Finance Ministry in 1991 to design reforms. Under its persuasion, India dismantled the remaining controls, especially industrial licensing, and began to reduce taxes. I was eased out as soon as we had overcome the crisis. I concluded that persuading those in power was not a good way to change policy; one had to persuade the public. So I started writing and speaking in the media. It was another 10 years before India became a relatively liberal economy.

India’s average annual growth rate in the 1970s was 3.3 per cent; it rose to 5.5 per cent in the 1980s, 5.8 per cent in the 1990s, and 7.8 per cent in the first decade of 2000s. That decade saw the highest annual growth rates in India’s history since national income calculations began: 9.3 per cent in 2005-06, 10.2 per cent in 2007-08 and 9.8 per cent in 2010-11. In 1991, India was not even amongst the world’s top dozen in terms of GDP at purchasing power parity; today it is the fourth largest, below only the EU, China and the US, having just gone past Japan. The connection between economic policies and growth rates is a loose one; but I do feel somewhat satisfied that there has been no payments crisis since 1991, and that with reserves in excess of $350 billion, it would require extraordinary policy incompetence for India to have another payments crisis.

But this smugness is punctured by the fact that India is hardly a paragon of liberalism. Manmohan Singh is credited with the liberalization of 1991; but what we did then was economic liberalization. He became Prime Minister for two terms from 2005 onwards; but they saw no liberalization of any kind. What they saw was enormous expenditure on populist programmes, especially the subsidized foodgrain distribution programme and the casual unskilled workers’ employment programme. If they had been run honestly and efficiently, they would have bought the Congress sizeable votes. Instead, it lost to the alliance led by the Bharatiya Janata Party.

A populist party has given way to a party traditionally close to business. It would have been expected to favour liberalism; but the new party has not changed any major policies, and has no ideas about how to do it. The image it gives sometimes of a paragon of intolerance is exaggerated. It is based on the fact that it has anti-Muslim and antique Hindu elements; now that it is in power, what till now were their private mutterings find public expression. There have been murders of dissentients—the very opposite of liberalism—but their central direction or connection with the ruling party is still to emerge. What is more disturbing is that there is a shortage of idealism, of looking out and ahead, of aiming at something better.

There was a similar muddle in industrial countries after the War. Their democratic structures gave no room to Communism, but its concern for the workers and the poor found an echo. Socialist parties in power used the power of redistributive taxation to create elaborate and expensive systems of social insurance. Today, these cost close to a half of GDP in many West European countries; the high levels of taxation have discouraged enterprise and innovation, and growth rates have come down close to zero.

There are a number of things that we need to change to make India a liberal economy. First, its federal structure is antiquated. It goes back to the beginnings of British rule in three separate presidencies, their division into small districts at a time when movement and transport were expensive, and the consequent decentralization of power to district collectors. This, reinforced by Gandhi’s love of village democracy, has led today to extreme devolution of powers to local bodies in which feudal hierarchies manipulate democratic structures. Historical evolution can be chaotic: we need to rethink our federal structure, and in particular, make sure that no elected or judicial body can impinge upon the basic liberties that should be the right of all who live in this country, or create barriers to their movement and livelihood.

Second, we need to ask how we can make legislatures an arena of fruitful debate instead of confrontation and polemics. One reason for adopting a first-past-the-post electoral system was that it results more often in absolute majority for some party; but it has failed to do so. Another reason is that first-past-the-post electoral systems in Britain and the US, their countries of origin, led to two-party systems in which parties were stronger than individual politicians; money, consequently, gravitated to parties, and their members were relatively honest. This is no longer true of India, where member-level corruption is rife both before and after elections. As a result, political businessmen make it into the legislatures; rational debaters find no space.

The essential purpose of legislatures is discussion, argument, reasoning, debate. Our legislatures fail in this. Proportional representation favours parties vis-à-vis candidates; and it is possible to modify it so as to ensure a majority for a single party if necessary—for instance, by removing parties and candidates if they poll less than a certain proportion of the vote. And the upper houses are quite useless currently; they could be differently elected—for instance, by an electorate of graduates, income taxpayers or both—and be given some power over legislation.

Third, let us seek freer debate in the open. Political systems are invariably difficult to reform. But we do have fairly free public opinion space. We should generate far more vigorous, more reasoned—and less vituperative, less polemical—discussion.

Fourth, although India has reduced traditional trade restrictions, and its trade-to-GDP ratio has doubled over the past 20 years, it still trades less than other comparable countries. Countries that have smaller neighbours account for a high proportion of their exports and imports. This is not true of India; it accounts for a smaller proportion of the trade of Sri Lanka, Myanmar, Bangladesh or East African countries than, for instance, the US, EU and South Africa do of their neighbours. This is partly due to the Indian style of bureaucracy, especially customs, and partly because India has neglected development of infrastructure, especially roads and ports. It has few ports, and they are mostly too shallow to take large ships; larger ships unload cargo in Colombo and Singapore, from where it is transshipped in smaller vessels. It is perfectly possible to build deeper artificial ports: Madras was the first one, constructed in the 1890s. We should build more. And let us not welcome goods and services alone; let us also let foreigners in and out more freely, as was our tradition before the arrival of the British.

Four points are enough to start with. These are not final thoughts; they are invitations to think. Liberalism is not an ideology; it is a condition of free thought. It is not enough for liberals to sloganize free thinking: they must show the way to think—not by demonizing those who disagree, but by persuading them. Let us begin today.

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