Correct these elite distortions

The Indian economy and its workforce deserve freedom from the damaging tyranny of the tiny elites in the next decade

Capitalism and the market economy are often criticised for exacerbating inequalities and creating elites. Ironically enough, socialist or state-dominated economies also create elites and inequalities while professing equality for all. Capitalism’s excesses tend to be more easily corrected because the state can step in to do the correction. But if the state is in charge, who engineers the course correction? 

Consider the Indian context. Among the biggest impediments to efficiency, growth and employment in the economy are the following three: A bloated public sector enterprises sector; stringent labour laws and a higher education system which doesn’t educate enough people and, those which it does educate, are often unemployable. None of these problems is new. In fact, they are a legacy of pre-1991 India. All of these “structural” problems have been highlighted at length by economists in the last three decades. But no government of any persuasion has been able to implement solutions that are as well-known as the problems.

The system of public sector enterprises was created at a time after Independence when it was believed that the private sector neither had the technical capacity or financial resources to set up large industries. That rationale stopped applying in India three or four decades ago. It should have been dismantled after 1991 but barring a handful of privatisations in the Vajpayee era, the public sector is intact. If anything, it has grown since liberalisation mainly through the proliferation of subsidiaries and joint ventures. There are 250-odd operating public sector enterprises, of which at least a-third is sick and the only ones that make serious profit are those that are protected by the government (usually by excluding competition). Their presence, whether in strength or weakness, distorts almost every sector of the economy. They are a tiny minority among the lakhs of companies in India but get accorded preferential treatment at the expense of the efficiency of the rest of the economy.

The story of labour laws is also one of elite capture and not totally delinked from public sector enterprises. Most of the good jobs in the pre-1991 era were either in government or government agencies or government-owned companies. Above all else, they were characterised by security of tenure. Labour laws, applicable to the entire economy, did not allow hire and fire. They also imposed the same type of compulsory benefits denying flexibility to both employers and employees. Unsurpris-ingly, the laws pushed 90 per cent of the workforce into the informal economy, a number which hadn’t reduced significantly post-liberalisation until demonetisation and GST nudged some firms into the formal sector space. Still, some 75 per cent of the workforce is in the informal sector. The labour elite created by socialist India have stalled most attempts at reform, forcing governments to find ways around the problem (the introduction of fixed-term employment, for example) rather than confronting it head on. 

Nothing typifies the elite capture of the higher education system than students protesting nominal hikes in nominal fees and charges at India’s premier universities. India has some fine higher education institutions. But these are too few. They have provided highly subsidised education to a select few, many of whom have subsequently migrated overseas to find work. India’s state-controlled educational institutions of higher learning must be allowed more autonomy in setting fees. Of course, those who need financial support must get scholarships or cheap loans but that does not mean that those who can afford to pay should be subsidised. Overall, the best way to ensure affordability is to facilitate competition by ending the licence-permit raj. But the regulatory apparatus has not moved with the times. The small elite which has greatly benefitted from the system as it exists would like to retain the status quo. 

On the other hand, at least some excesses of the post-1991 market economy have been confronted determinedly. The Insolvency and Bankruptcy Code is dismantling entrenched, but inefficient, business interests. The GST is bringing tax evaders into the tax net. The delivery of welfare to the poor, neglected in the decade after liberalisation, was resurrected in 2004 with quantum increases in spending and reimagined in 2014 with better delivery mechanisms. Of course, not all capitalist excess needs state intervention. Many of the inefficient crony elites of the pre-1991 era were simply swept away by market competition.

Prime Minister Narendra Modi is not shy of battling entrenched elites. He has already dented severely the old political elites and many of their arguments. He isn’t afraid of the business elite either. Now, he must turn his attention to the legacy socialist elites — in public sector enterprises, in labour and in higher education. There will be resistance. And a lot of clatter. But the Indian economy and its workforce deserve freedom from the damaging tyranny of these tiny elites in the next decade.

The author is chief economist, Vedanta