1st February 2020
India’s Economic Survey released recently copies what I have been saying for 20 years
EXTRACT FROM PREFACE
The Survey documents that ideas of wealth creation are rooted in India’s old and rich tradition ranging from Kautilya’s Arthashastra to Thiruvalluvar’s Thirukural, which emphasizes ethical wealth creation as a noble human pursuit. The Survey uses the ancient literature and contemporary evidence and to show that India’s dalliance with Socialism – a few decades is after all ephemeral in a history of millennia – is an exception with belief in the invisible hand of markets being the norm. Maddison (2007) provides the historical evidence that India has been the dominant economic power globally for more than three-fourths of known economic history. Such dominance manifests by design; not happenstance. The Survey draws on literature describing the ancient system to show that the invisible hand of the market supported by the hand of trust led to such dominance. The growth performance of the Indian economy and various sectors after India returned back to its roots post economic liberalisation in 1991 provides the contemporary evidence. Events from the Global Financial Crisis and the problems with the Indian financial sector provide evidence of the need for the hand of trust to support the invisible hand. Introducing the idea of “trust as a public good that gets enhanced with greater use”, the Survey also makes some suggestions for enhancing this public good. The Survey’s conceptualisation of wealth creation, thus, presents a synthesis of the old and the new, be it in the combination of ancient Indian tradition with contemporary evidence or in suggesting the use of FinTech for our Public Sector Banks.
EXTRACT FROM Chapter 1 Wealth Creation: The Invisible Hand Supported by the Hand of Trust
“Wealth, the lamp unfailing, speeds to every land, Dispersing darkness at its lord’s command.” – Thirukural, Chapter 76, verse 753.
“Make money – there is no weapon sharper than it to sever the pride of your foes.”
– Thirukural, Chapter 76, verse 759.
For more than three-fourths of known economic history, India has been the dominant economic power globally. Such dominance manifested by design. During much of India’s economic dominance, the economy relied on the invisible hand of the market for wealth creation with the support of the hand of trust. Specifically, the invisible hand of markets, as reflected in openness in economic transactions, was combined with the hand of trust by appealing to ethical and philosophical dimensions.
The Survey shows that contemporary evidence following the liberalization of the Indian economy support the economic model advocated in our traditional thinking. The exponential rise in India’s GDP and GDP per capita post liberalisation coincides with wealth generation in the stock market. Similarly, the evidence across various sectors of the economy illustrates the enormous benefits that accrue from enabling the invisible hand of the market. Indeed, the Survey shows clearly that sectors that were liberalized grew significantly faster than those that remain closed. The events in the financial sector during 2011-13 and the consequences that followed from the same illustrate the second pillar – the need for the hand of trust to support the invisible hand.
The Survey posits that India’s aspiration to become a $5 trillion economy depends critically on strengthening the invisible hand of markets together with the hand of trust that can support markets. The invisible hand needs to be strengthened by promoting pro-business policies to (i) provide equal opportunities for new entrants, enable fair competition and ease doing business, (ii) eliminate policies that undermine markets through government intervention even where it is not necessary, (iii) enable trade for job creation, and (iv) efficiently scale up the banking sector to be proportionate to the size of the Indian economy. Introducing the idea of “trust as a public good that gets enhanced with greater the Survey suggests that policies must empower transparency and effective enforcement using data and technology to enhance this public good.
IMPORTANCE OF WEALTH CREATION
1.1 For more than three-fourths of known economic history, India has been the dominant economic power globally (Maddison, 2007). The country has historically been a major wealth creator and a significant contributor to world’s GDP as shown in Figure 1.
Figure 1: Global contribution to world’s GDP by major economies from 1 AD to 2003 AD
Source: Maddison A (2007). Note: X-axis of graph has non-linear scale, especially for 1-1500 AD, which underestimates the dominance of India.
1.2 Economic dominance over such long periods manifests by design, and not by mere chance. In this context, the Survey notes that our age-old traditions have always commended wealth creation. While Kautilya’s Arthashastra is given as a canonical example, wealth creation as a worthy human pursuit is recognised by other traditional literature as well. The Thirukural, a treatise on enriching human life written in the form of couplets by Tamil saint and philosopher Thiruvalluvar, asserts in verses 753 of Chapter 76: “Wealth, the lamp unfailing, speeds to every land; Dispersing darkness at its lord’s command.” In verse 759 of the same chapter, which forms the second part of the Thirukural called Porul Paal or the essence of material wealth, Thiruvalluvar, declares: “Make money – there is no weapon sharper than it to sever the pride of your foes.” Needless to say, Thirukural advocates wealth creation through ethical means – an aspect that is discussed later in this chapter. Verse 754 in the same chapter avows: “(Wealth) yields righteousness and joy, the wealth acquired capably without causing any harm.”
1.3 Despite such a “rich” tradition of emphasizing wealth creation, India deviated from this model for several decades after independence. However, India returned back to these roots post economic liberalisation in 1991.
1.8 Wealth creation happens in an economy when the right policy choices are pursued. For instance, wealth creation and economic development in several advanced economies has been guided by Adam Smith’s philosophy of the invisible hand. Despite the dalliance with socialism – four decades is but an ephemeral period in a history of millennia – India has embraced the market model that represents our traditional legacy. However, scepticism about the benefits accruing from a market economy still persists. This is not an accident as our tryst with socialism for several decades’ makes most Indians believe that Indian economic thought conflicts with an economic model relying on the invisible hand of the market economy. However, this belief is far from the truth.
1.9 In fact, our traditional economic thinking has always emphasized enabling markets and eliminating obstacles to economic activity. As far as half-a-century back, Spengler (1971) wrote that Kautilya postulated the role of prices in an economy. Kautilya (p. 149) averred, “The root of wealth is economic activity and lack of it brings material distress. In the absence of fruitful economic activity, both current prosperity and future growth are in danger of destruction. A king can achieve the desired objectives and abundance of riches by undertaking productive economic activity (1.19)”. Kautilya advocates economic freedom by asking the King to “remove all obstructions to economic activity” (Sihag, 2016).
1.10 A key contributor to ancient India’s prosperity was internal and external trade. Two major highways Uttarapatha (the Northern Road) and Dakshinapatha (the Southern Road) and its subsidiary roads connected the sub-continent. Meanwhile, ports along India’s long coastline traded with Egypt, Rome, Greece, Persia and the Arabs to the west, and with China, Japan and South East Asia to the east (Sanyal, 2016). Much of this trade was carried out by large corporatized guilds akin to today’s multinationals and were funded by temple-banks. Thus, commerce and the pursuit of prosperity is an intrinsic part of Indian civilizational ethos.
1.11 Much before the time period that Maddison (2007) analyses, a stakeholders-model existed in India as is discernible in Arthashastra in which entrepreneurs, workers and consumers share prosperity (Deodhar, 2018). Arthashastra as a treatise on economic policy was deeply influential in the functioning of the economy until the 12th century (Olivelle, 2013). During much of India’s economic dominance, the economy relied on the invisible hand of the market.
1.13 The evidence since 1991 shows that enabling the invisible hand of markets, i.e., increasing economic openness, has a huge impact in enhancing wealth both in the aggregate and within sectors. Indeed, the evidence presented below shows clearly that sectors that were liberalized grew significantly faster than those that remain closed. This is not surprising as the market economy is based on the principle that optimal allocation of resources occurs when citizens are able to exercise free choice in the products or services they want.
1.17 The freedom to choose is best expressed in an economy through the market where buyers and sellers come together and strike a bargain via a price mechanism. Where scarcity prevails and choice between one use of scarce resources and another must be made, the market offers the best mechanism to resolve the choice among competing opportunities. This principle is fundamental to a market economy. The command and control approach contends that the price of a good should be regulated. Our economy still has some of the regulatory relics of the pre-liberalisation era. The survey provides evidence in Chapter 4 (Undermining Markets: When Government Intervention Hurts More Than It Helps) that government intervention hurts more than it helps in the efficient functioning of markets. For instance, in the pharmaceutical industry, government regulated formulation prices increase more than unregulated formulations. Moreover, the supply of unregulated formulations is more than that of regulated formulations. Government interventions often times lead to unintended consequences such as price increases, when compared to markets that are unregulated. Unlike in command economies where prices are determined by the government, in a market economy, price of a good is determined by the interaction of the forces of supply and demand. The survey finds that unshackling the economic freedom for markets augments wealth creation.