Thoughts on economics and liberty

Naozer Aga’s paper on Indian political liberalism presented at Hamburg

As promised, I’ve OCRd and am publishing Naozer Aga’s 1986 paper, presented at the Liberal International Hamburg Convention. Download a Word version here.

HAMBURG-CONGRESS May 1986

Theme Report 1986 : “De-regulation and State Intervention, the Liberal View”

“The Challenge of Liberalisation in the Third World” by Mr N.J. Aga

The Legacy of Rajiv Gandhi

Industry and Allied Sector

According to a recent survey conducted by the Association of Indian Engineering Industry in the “competitiveness” scoreboard, India ranked fourth from the bottom line. It ranked 23rd in respect of financial dynamism and socio-political consensus and stability, 24th in its dynamics of the market and dynamism of the economy, 26th in human resources and industrial efficacy and 28th in natural endowments. Ironically enough in terms of parallel economy India ranked fourth from the top.

The dominant presence of the Government, besides a fettered financial sector lacking in diversity and lack of consumer orientation were the other factors that had come in the way of faster progress. One of the root causes of this precarious situation is the dismal financial performance of the so called Public sector which is actually State Owned Enterprises (SOEs) in which the public have no ownership.

Agriculture

Indian agriculture is still very backward. Its productivity (yield/hectare) is amongst the lowest being one-third of what has been achieved in developed countries, and nearly three-fourths of the world average.

India has 11.6 per cent of the world’s total arable land, but the production of food grains in 1981-82 was only 8.8 per cent of the world production. India’s population in that year was 15.5. per cent of the world total.

The State Foodgrains Distribution System has outlived its utility. To maintain this system, the public exchequer has to shell out ever increasing amounts as subsidy, the farmers and traders have to forego their right to free trade; the consumers have to accept sub-standard products, and the banking system has to lock up its funds to the tune of Rs. 55,000 million, at concessional rates of interest, which could be more profitably employed elsewhere.

Besides being irrelevant to the present conditions, it is the costliest system anywhere in the world (the cost of distribution being between 75% to 85% of the price paid to farmers), caters to the needs of no more than 14% of the population and cannot be sustained except at the cost of farmers, who for it; sake, are deprived of their right to sell at the best availabIe price.

General

The rate of growth has been exceedingly slow. It has averaged 3.5% over the years. 3.5% of a miniscule GNP is very little indeed.

There has been a failure to control population. [Sanjeev: this is actually an illiberal comment, but I guess liberalism is very new in India and we can let this pass] Distribution has been very bad. 48% of the people are below the poverty line, which is defined in India virtually at the subsistence level. Wealth has been created but it has not percolated in spite of socialism. The other failure has been the inability to control inflation. The inflationary rate is 5.6% per annum compounded for 35 years. The country is suffering from corruption which is a cancer eating not only into the body politic but also into the soul because it has been accepted now as a way of life.

This is a consequence to a large extent of the socialist economic policies, because corruption follows where you nave physical controls and regulations, and maladministration follows where you have corruption.

Of course, in absolute terms, the infrastructure has been developed and the industrial base considerably strengthened. India is now in a good position for further development. Compared with 1950, in 1980 (figures in million tons) coal production increased from 35 to well over 100, cement from 3 to over 20, steel from 2 to over 10 and fertilisers from 0.02 to 3. Electricity generation increased from 6 billion KWH to about 110 billion KWH. Up to 1986 crude oil increased from 0.3 to 23 and grains from 56 to 150 leading to self sufficiency and even exports of rice and wheat.

Response of the Government led by Rajiv Gandhi

The severe constraints arising out of the failure of socialism, as practised in India over the past 40 years nearly, called for urgent changes which resulted in the emerging economic policy system in India, which has been given the epithet “New Economic Order ” (NEO).

The fundamental keynotes of the NE0 are

(a) The State will increasingly shed direct responsibility for running portions of the economy by delegating, decentralising, autonomising, “dediscretionising”, desubsidising existing and impending commitments. The change will be incremental in the first instance but gradually may also affect current stock situations.

(b) Rules rather than discretion, ad-hocism, improvisations.

(c) Efficiency, viability, consumer and owner accountability, and speed in decisions.

(d) More items will appear in portfolios of investors and householders, portfolio choices for them and for organisations will be less constrained.

(e) Administrative ceilings and controls, prices and allocations will give way to market-determined direction’s and prices.

If a phrase can describe the NE0 it is Marketisation with Social Justice and Macro Rules. India is making its own amalgam. It is mixed economy seeking fulfilment of macro goals of growth and poverty eradication in an environment of micro freedom at levels of households and firms.

Benefits of the NEO

There has been a major effort at reforming the policy frame relating to industry to make it more consonant with contemporary changes and to make it more effective in the pursuit of the growth objectives. The poor performance of infrastructure sectors in the industrially advanced States of the Indian Union, the time-lag in implementing projects, question of selecting suitable foreign technology, slow pace of modernisation, lack of vigorous efforts to boost exports, inadequate information system, and the emerging new pattern of investment are some of the problems faced by industry.

The share markets have responded to the NEO with unprecedented buoyancy and tax collections have surpassed the ambitious targets.

Limitations of NEO

The Prime Minister wants to make India a nation fit for the 21st Century. However, there are restraints on these aims, this makes it necessary to break the stranglehold of government on the economy. This is evident from the Congress (I) meeting in 1985 when the new economic policy resolution draft approved by Rajiv Gandhi was most embarrassingly abandoned and a new one affirming commitment to socialism hurriedly prepared and passed.

The system of controls has outlived its usefulness. The economy is too complex to be administered in the detailed case by case approach of the bureaucracy. Most economic policies are stated to be currently under review by the Government of India. This exercise will, however, prove to be no more than cosmetic treatment, so long as the rural policies, which impinge on the lives of 76 per cent of the country’s population, remain unchanged. The changes are not yet over and unless the whole economic system becomes void of discretionary rules, orders and permits, it cannot be said that the new order in full has emerged.

The hurdles against a smooth change to the new system are many. There is a hump of an induced exchange crisis implicit in the changes. Secondly, there is a temporary possibility of the distribution system getting more skewed. Thirdly, there is a danger that the core public sector projects in agriculture, irrigation, fertilisers etc, may get slowed down.

In one sense, the changes so far have been only from the end of the Central Government. The State governments are dealing with a number of spheres like small industry, trade and agriculture. They have been lukewarm. Even the Long Term Fiscal Policy concerns only the Central Government. It is time that a national policy framework is evolved and announced.

There is a need to fulfill the promise of democratic decentralization up to village level. The people should be given an opportunity to participate in formulation and implementation of schemes which are of immediate concern to them.

There are three main interests which feel threatened by the policies of the NEO. The most subtle attack comes from certain business houses who are unwilling to give up old habits of manipulation politics through bribery and corruption. The second attack comes from the old Soviet lobby which has reason to worry because if liberalisation is carried too far and the Indian economy gets more seriously integrated with the capitalist world, there will be a political fallout in foreign policy.

The third attack comes from a section of the bureaucracy. In the past the bureaucracy had developed an alliance with business houses and politicians, as intermediaries and thus acquired a financial interest in the corrupt old system. The Government has made a lot of bureaucrats nervous by dismantling this nexus as well as by dismisssing and retiring a few. Indeed, the slowness of this cleansing and trimming has enabled bureaucrats to slow down policies.

The response of Rajiv Gandhi’s government to correct the system is inadequate in its conception as well as execution. It has concentrated only on the economic aspects of liberalism and ignored the political, cultural and social factors, (except for some superficial and cosmetic action) which continue to be severely regulated with excessive state intervention.

The Relevance of Liberalism to India

The inherent drawbacks in the socialist system, inherited by Rajiv Gandhi, to deliver the goods, led to the introduction of the NEO. This in itself is a damning indictment of the socialist system as practised in India.

The massive poverty and gross inequalities of India do not prove the irrelevance of liberalism but its contrary. Precisely because the entrepreneurial base is narrow it needs to be broadened so that the fruits of technological development can be increased and distributed. To speak of relevance of liberalism to the Indian situation is an understatement. It is more than that for it provides not only the philosophy of the original Constitution but also a framework for the future development of the culturally diversified society of India. Ironically, the policies of the Indian government for three decades and a half have served to underline some of the lasting lessons of liberalism. The expanding power of the state in all the key areas of human activity, the growth of Indian bureaucracy, the control of not merely the economy but also of the mass media, the clumsy and costly system of regulation and control have all conspired to smother initiative. It is no wonder that creative individuals have either suffered frustration or have become sycophants of the powers that be.

Meeting the Challenge

The history of liberalism and its relevance to India clearly dictates that there is a sizeable base available for its further growth and development.

Unfortunately, after the dissolution of the Swatantra party, there is no single political platform available at present to Indian liberals. The Congress (I) is distinctly socialist with all opposition parties falling between communism and at best an incompatible mixture of socialism with patches of communism, fascist or liberalism depending on the area of operation and the vote banks which they cultivate.

Except for the Communists, no party has any commitment to a cause, philosophy or ideology. They are opportunist; populist and vote oriented. The only common link is an all consuming. passion for achieving and retaining power at any cost. There is, therefore, a need for a political platform to be created for Indian liberals which will ensure a well co-ordinated and systematic effort of like-minded individuals working for a common objective with dedication and zeal. Many liberals are today spread out in various political parties and countless others nave refrained from joining any party. Unless the liberal elements in such parties, either separately or in combination embark on a liberal path on their own, the only alternative would be for a new liberal party to rise on the Indian horizon.

A NOTE OF CAUTION

The Challenge of liberalism as faced in India is without doubt unique and quite distinct from any other country. Hence, any detailed political action programme such as the Manifesto of a liberal political party must take into account, among others, the specific needs of Indian philosophy, the social, political and cultural dimensions and the exact degree of deregulation and state intervention required depending on emerging situations. A complex transformation of the type India has to undergo cannot follow any rigid preconceived model. It will be necessary to find indigenous solutions to meet the Challenge. For example, can anyone predict the social upheaval resulting from deregulation of the State or Public sector? What would happen, in the short term, to the supply demand equation, the price level, the employment pattern etc?

There is no experience, either in India or elsewhere, that one can fall back on and an innovative and creative outlook is necessary. While undoubtedly, the Indian system of values and ideals (which is relevant to Indian conditions) must draw from global experience, it must above all be firmly rooted on Indian soil. The nature and role of religion, class and caste, urban and rural, rich and poor, large scale and small scale, freedom and dissent, deregulation and state intervention, etc, have to be accurately analysed and appropriately included in the political Manifesto as a smooth, harmonious and result oriented programme.

Liberal political development in India must occur in step with the drive for modernisation and take into account the technological, economic and socio-cultural reality of the country.

The pendulum of liberalism will have to swing, when necessary, in more directions and more deeply into the socialist and conservative preserves, in comparison with the developed world. A sensitive and dynamic system with flexibility and capacity to respond quickly to changes in external and internal stimuli will have to be devised. Deregulation, particularly sun-set legislation, and state intervention, if properly used, would be very effective in maintaining the equilibrium.

 

Sanjeev Sabhlok

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