"Neo-liberals,” "Neo-leftists" and Intelectual vested interests

Introduction

       In an article in this paper (Indian Express, August 22, 2014) Prof Ashutosh Varshney of Brown University asserts:  “It is Amartya Sen, the nemesis of neo-liberals, who would emphasize toilets as much as growth.”  This is perhaps a true perception in the exalted World of Western Academia and among the many academic followers of Prof Sen in India. However what happens in the trenches of Yojna Bhavan, North and South block where many of these and related issues were decided is starkly different. It is the followers (neo-communist/neo left?) of Prof Sen who emphasized increased “private health spending” on middle class diseases over “public health” spending on sewers and sanitation. It is the “neo-leftists” who emphasized “right to food” as a means of eliminating malnutrition as against, sewers sanitation and toilets, that “market liberal” like me showed was the main cause of child malnutrition.[i] It is these neo-leftists who emphasized doubling and tripling the money allocated (inputs) on standard inefficient, corrupt, leaking food, education and health programs (mostly States subjects), ignoring or downplaying arguments on the vital need to achieve better outcomes/results by first improving their effectiveness by addressing governance issues(including that of corruption).

Market Liberal Analysis

  A Planning Commission paper Virmani (2006)[ii] analysed poverty, hunger, education and health indicators (in a comparative framework) and their linkage to government policy and programs and argued that, “The broad theme that emerges is that the failures on this front, apart from the indirect effects of growth, are linked directly to the failure of governance.   This failure has many dimensions; the misallocation of government resources, the failure to follow norms of social benefit-cost analysis that were the reason-de-tar for the introduction of national planning, the neglect of public and quasi-public goods that are the most fundamental justification for the existence of government and a gradual (over decades) but progressive deterioration in the quality of governance. This conclusion differs radically from the conventional wisdom (national and international) about India’s poverty, social indicators and income distribution.  Even if treated as a hypothesis it merits debate and further analysis.” 

The paper concluded that, “It can be argued that the ideal (most efficient) social welfare policy is a direct transfer of income to the poor through a negative income tax.  In a developed country this would be very easy.  How can we transfer these amounts directly to the poor, the needy and the disadvantaged in a poor country?  The answer, by setting up an Indian version using a modern smart card system that delivers cash and/or subsidies to the poor based on their entitlements as per specified parameters and norms.  Such a smart card could be programmed with identity (photo & biometric fingerprint), and have information on social (SC/ST) and personal/household characteristics.  Each person/ households’ entitlements could be in the form of specified subsidies for the purchase of each of a set of items.  The set of items could include food/cereals, kerosene, midday meals, nutrition supplements, drinking water, toilet/ sanitation services, basic drugs, schooling (primary/secondary), internet access, electricity and a host of other items reflecting the dozens of subsidies and programs currently in existence.  The entitlement could be varied with and dependent on various economic and social handicaps such as SC-ST, age (infant or aged), mental handicap, physical disability, female head of household, lactating mother, chronic illness.   In this way all the current stakeholders, special interest groups and social policies could be accommodated within a single integrated system.”

“Figure .. shows clearly that the access of our population to sanitation services is much worse than is to be expected at our level of per capita GDP.  Further 89% of the countries for which data is available perform better on this indicator than India.  This is rank is worse than our rank on the mortality indicators and life expectancy indicators”

 

“Where we have failed as a nation is in improving our basic social indicators like literacy and mortality rates.  Much of the failure is a legacy of the three decades of Indian socialism (till 1979-80).  The rate of improvement of most indicators has accelerated during the market period (starting 1980-81).  The gap between our level and that of global benchmarks is still wide and our global ranking on most of these social parameters remains very poor.  This is the result of government failure. Government overstretch, misplaced priorities and deteriorating quality (corruption) has resulted in a failure to fulfil the traditional, accepted functions of government like public safety & security, universal literacy and primary education, public health education (superstition & quackery), provision of drinkable water, sanitation drains & sewage facilities, public health (infectious & epidemic diseases), building roads and creating & disseminating  agricultural technology.  Consequently the improvement in social indicators has not kept pace with economic growth and poverty decline and has led to increasing interstate disparities in growth and poverty.”

Neo-leftist Sabotage

    A presentation of this paper to Planning Commission Members and their Advisors was scheduled and cancelled several times because of the unavailability of ‘certain’ Planning commission members and never took place because of their active discouragement. Apparently the neo-leftists thought it was too dangerous to even present the comparative data on hunger, health & education, or discuss the conclusions reached.
The idea of “eliminating” poverty was perhaps too explosive for the “neo-leftists” and “neo-communists” who were comfortable with “alleviating” poverty for another half century. Even the fact that “sanitation” was a more important problem in India than general health, education, hunger and poverty was too dirty a thought for the “Brahmins of  Poverty”.  Not surprisingly, the analysis and recommendations relating to sanitation and malnutrition the next year, were similarly ignored.[iii]

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A version of this article was published in the Indian Express of August 25, 2014, under the banner, “Wrong End of The Right Debate: The Neo-Liberals emphasise Sanitation, Sewers and Toilets, not neo-communists,” http://indianexpress.com/article/opinion/columns/the-wrong-end-of-the-right-debate/

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[i] Arvind Virmani, “The Sudoku of Growth, Poverty and Malnutrition: Lessons For Lagging States,” Working Paper No. 2/2007-PC, Planning Commission, July  2007

 (http://planningcommission.nic.in/reports/wrkpapers/index.php?repts=wrkpap).

[ii] Arvind Virmani, “Poverty And Hunger In India: What is needed To Eliminate Them,” Working Paper No. 1/2006-PC, Planning Commission, February 2006

 ( http://planningcommission.nic.in/reports/wrkpapers/index.php?repts=wrkpap).

[iii] Virmani (2007) op cit,  fn i

Tentative Rollback of License-Permit-Quota (LPQ) Raj: Indira 2-Rajiv

Introduction

     An earlier article, "Nehru-Indira Socialist Economics Failed," showed that the welfare of the average Indian declined relative to that of the average citizen of the world between 1950 and 1980.  Towards the end of the 1970s a number of analysts began to realize that the Socialist ideological – Statist - Bureaucratic approach to economic policy was leaving India further behind the dynamic developing countries.  The Janata Party was in the forefront of efforts to reverse the most egregious features of this regime, but it could not change much because of political instability within its ranks. Mrs. Indira Gandhi had three years, post 1977 election defeat to hear newly emboldened critics of her economic policy failures.  When she returned to Power in January 1980, she started reversing some of the most oppressive controls she had instituted, controls never seen before or since in a non-communist country. The rollback of the LPQ raj was continued by Rajiv Gandhi, who succeeded her on her death in 1984. V P Singh became PM after the 1989 elections and Chander Shekhar who succeeded him, were more like book ends to this phase of Economic development, given the political turmoil and dissensions unleashed by them. The roll back of the Nehru-Indira1 LPQ raj by Indira2–Rajiv resulted in an acceleration of the rate of growth of India’s per capita rate GDP during 1980 to 1991 and began the Welfare catch-up of India with the rest of the World.

 Welfare Catch-Up

     The World Data Indicators, the standard series of data for World economy has data on Per capita GDP at purchasing power parity from 1980.  It is therefore the preferred source for comparing Welfare relative to the rest of the World from 1980 onwards.  According to this source India’s per capita GDP at PPP was 0.15 of world average in 1980 and had increased to 0.18 of the World average by 1991. In other words the Welfare of the average Indian, improved by 19.3% relative to that of the average World inhabitant between 1980 and 1991.  17.2% points or 9/10^th of this improvement came during the Indira 2- Rajiv regime.

   The average per capita growth rate of GDP in India during 1980 to 1991 was 3.0% per annum compared to an average per capita growth rate of 1.1% per annum for the World.  Thus India’s per capita GDP grew an average 1.9% faster than the World economy during this period.  This was almost a complete reversal of the relative per capita growth rates in the previous two decades.  Though the average Indian was still pathetically poor relative to the average world inhabitant in 1991, the process of “welfare catch-up” with the rest of the World had finally begun.

Tentative Change

   At the end of the 1970s every aspect of production, pricing, investment, import and export was controlled by the Central Government. In the 1980s only the most glaring distortions were corrected. The scope for diversification (production of related items) and expansion of capacity for the industries under investment licensing (up to 25% above licensed from 0) was expanded. The definition of small-scale industry (SSI) was raised by increasing the size limit (value of output/sales) abd 40 industries de-reserved. The cement and aluminum industries, and others with assets below 5 (15) crore de-licensed in in 1985(1988) subject to conditions. The limit below which MRTP clearance was not required for investment by “laege industrial houses” was gradually raised to Rs. 100 crore. There was virtually no reform in other production sectors such as mining and agriculture.

   Imports of capital goods were made procedurally easier through licensing of imports for modernization and export industries. Intermediate imports were gradually moved from licensing to tariff protection and made available for export production at lower duty.   Tax rates declined slowly from the absurd highs they had reached in 1970s e.g. 100% marginal rate on income from assets, inclusive of wealth tax) and modified value-added tax (MODVAT) credit was introduced into the excise tax.

The control regime, however, continued to be extended in exchange management and import tariffs continued to rise.  The fiscal deficit also expanded from around 6% in the early 1980s to 9% in 1991 while the revenue surplus became a deficit of 4% over the same period. This was one of the reasons for the Balance of Payments crisis in 1990-1991 that concluded this phase of economic development. By 1991-92 the share of the Public sector in total GDP had risen to 25.9% from 22.1% in 1979-80. The public sector share of Gross Capital Formation was still high at 38.4% of total [Virmani (2004)].[i]    Leaving aside small scale sectors like Agriculture, Trade, Hotels and Restaurants and unregistered manufacturing the presence of Government was much higher.  Government thus still controlled the commanding heights of the economy besides retaining much of the institutional structure of the stifling LPQ Raj

Conclusion

      The LPQ raj started to change during 1980s and its enforcement slackened due to deterioration in governance.  Though individual policy reforms were incremental (‘tinkeization’), remaining controls and restrictions started to be evaded thus resulting in greater de-facto de-control.  They were also politically credible signals of the intent to reform failed policies. This had an impact on the investment environment leading to more private investment and a shift from building of structures towards machinery and equipment. The opening of the economy to capital goods imports reduced their relative price and magnified the impact on investment efficiency. An increase in the fiscal deficit, stimulated government consumption and raised production in the presence of an output gap.  Consequently the massive gap between the welfare of the average Indian and that of the average World citizen began to close for the first time in modern Indian history.

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[i] Arvind Virmani, “India’s Economic Growth: From Socialist Rate of Growth to Bharatiya Rate of Growth,” Working Paper No. 122, ICRIER, February 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233 and

Arvind Virmani, “Sources of India’s Economic Growth: Trends in Total Factor Productivity,” Working Paper No. 131, ICRIER, May 2004. http://www.icrier.org/page.asp?MenuID=24&SubCatId=175&SubSubCatId=233.

Nehru-Indira Socialist Economics Failed

Introduction

    How can we judge the performance of the Nehru-Indira socialist, mixed economy that prevailed from 1950 to 1979? This approach is also characterized as the “License Quota Permit (LPQ) Raj.” First note that Shri Jawaharlal Nehru(JN) was PM from 1947 to his death in May 1964, while Mrs. Indira Gandhi (IG1) was PM from January 1966 to March 1977.  Thus father and daughter led the country for 25 out of the 30 years. Though there were other PMs in 1966-67 (Shastri) and 1977-9 (Morarji, Charan Singh) they didn’t have time to change the fundamental development approach.  The reason for using a cut-off date of 1979 is because the Indira Gandhi (IG2) that returned as PM for a second tenure in 1980, initiated a clear reversal of her own failed policies of the Socialist Era.

Methodology & Benchmark

     Next we need a performance measure and a comparator. Growth and Poverty reduction have often been used (including by the author) to compare performance across time periods.   But in this note we use a much more effective summary measure of Welfare, the per capita GDP at purchasing power parity, to show how the average Indian fared relative to the rest of the World. This helps us to compare the effectiveness of the Nehru-Indira socialist development strategy relative to the effectiveness of development strategies prevailing in the rest of the World during the same period.  

Many writers argue that Socialist policies were fine as growth was faster than under colonial rule. The problem is that the whole world did better after 1950, so the fact that India also did better tells nothing about the effectiveness of our policies compared to alternatives that were not only available but were actually adopted in other countries.  Other writers take specific countries such as S. Korea and argue that we performed abysmally relative to them. Though this is true it is subject to criticism of selection bias - picking the best performing countries as comparators would obviously make India look bad! Such criticism cannot be leveled when the comparator is the whole world.  A development model that leaves the relative welfare of the average Indian worse off than that of the average World inhabitant surely needs to be ostracized (not praised, as it still often is in India)!

Results

   So how did the JN-IG1 socialist approach fare? In 1950 the welfare of the average Indian was 29% of that of the average World inhabitant.  By 1979 it had been reduced to 20% (1/5^th) of that of the average world citizen.  This means that the rest of the World on average was progressing faster than India; Not just S. Korea, not just E & SE Asia, but Africa, Latin America and the developed countries (all) taken together!  During PM Nehru’s tenure, India’s per capita GDP at PPP as a proportion of average world per capita GDP at PPP, was reduced by 3 per cent points ( or -11%).  It declined further during the 1965 war and was 23% in 1966 at the start of Indira Gandhi’s 1^st spell as PM. During this first  tenure of PM Indira Gandhi (IG1) the welfare of the average Indian relative to that of the average World inhabitant declined by 2 per cent points (-8%) to 21% in 1976. It was at the same relative level in 1980.

Per capita income growth data from a different source confirms that Indian economic growth was slower than that of the rest of the World.  Between 1960 and 1979 India’s per capita GDP grew at an average rate of 1.1 per cent per annum compared to an average growth of per capita World GDP of 2.7 per cent per annum.  Thus the average Indian’s per capita income was falling behind the World by 1.6 per cent per year during this period.

Winds of Change

The Janata government formed in 1977 with Shri Morarji Desai as PM did try to change the direction of economic policy. It appointed a “Committee on controls and subsidies (Dagli),” and the “Alexander Committee on Import-Export Policy,” to analyze the LPQ Raj and suggest a new approach.  I still remember that my first foray into practical policy advise was to give a memorandum to the Dagli committee arguing that tax policy was more efficient than ‘controls’ in achieving desired objective and recommending industrial decontrol and to depose before P C Alexander on import decontrol. The Morarji government fell before the Dagli or Alexander committee recommendations could be implemented.  The Charan Singh government that replaced it barely had time to settle down before it fell in 1979.  It was only after the arrival of the second Indira Gandhi (IG2) government in 1980 that import decontrol started in earnest with surprisingly positive results.

Lessons

The Nehru-Indira version of socialism was a failure compared to other market based models being used in other parts of the World after World War II.  The main negative elements of this approach were:

(1) Nationalization of large industry and financial institutions, their consequent monopolization & suppression of competition. (2) Suppression of private entrepreneurship (including non-profits)  through oppressive controls on every sphere of economic activity and their conversions into “rent seekers”.  (3) Obsession with heavy industry to the detriment of both labor intensive light industry (rendered uncompetitive through rigid labor laws) and of agriculture. (4) Gross neglect of basic education and literacy(3 R s). (5) Creation of a large, unspecialized, overextended and oppressive bureaucracy that behaved like the inheritor of the colonial/princely rulers.   

It was only with the gradual abandonment of this model by one of its architects (IG2) that Indian growth accelerated and the Welfare gap between Indians and the rest of the World started closing.

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A version of this article appeared on the Editorial page of the Times of India on November 21, 2013, under the title, “The God That Failed: Nehru-Gandhi socialist Model placed India in precipitous decline relative to the World.” 
 http://timesofindia.indiatimes.com/home/opinion/edit-page/The-god-that-failed-Nehru-Indira-socialist-model-placed-India-in-precipitous-decline-relative-to-the-world/articleshow/26112532.cms