Towards a meaningful market economy

Currently the emphasis is on government schemes and projects. The focus needs to shift to enabling policies

Over time, India has attempted to move from creating a planned to a meaningful market-oriented economy. We are quite familiar with what the government should not do. What is less familiar is what the government should still do, or do more emphatically. That is the main concern here. 

Contract enforcement and respect for property rights are crucial in a market economy. However, this is possible only if we have considerable expansion of and improvement in institutions like the judiciary in India. At present, there are serious weaknesses on that front. Also, there is a need for consistent rule of law, not selected rule of law. The government needs to change all this.

At present, there is a major emphasis on a variety of government schemes and projects. However, there is a need to shift focus towards enabling policies.

While capitalism has its importance, there is a need to keep a check on crony capitalism. Relatedly to some extent, the ease of doing business has improved in India. But the same cannot be said for the ease of entering business. It is the free entry that provides more meaningful competition; the success on start-ups is somewhat limited to tech-related businesses. The government needs to meaningfully enable entry in business. This may even pave the way for the government to substantially reduce its current budget of around Rs 2 trillion for just the production-linked incentive (PLI) scheme.

We still have a large public sector and many parts are inefficient. It is not even clear if much of it is helping in achieving some social objectives, which cannot be achieved more economically. There is scope for privatisation at a fair price to the right buyers, and not just disinvestment.

We do need policies for macroeconomic and financial stability. And, this stability should be with minimal costs to the taxpayers and with minimal financial repression. For example, real interest rates should not be kept low, for long, in attempts to deal with an economic slowdown, which may not even be cyclical in India.

Sometimes protection for the domestic industries is justified on the grounds that we should make use of unused or under-utilised resources within the economy. However, it is important to draw appropriate lessons from three different fields — macroeconomics, development economics and international economics. This is a challenging task indeed, but we need to keep the basic principles in mind while attempting second best solutions in the real world. Relatedly, Customs duties and other barriers should not be increased beyond a point just because these are not violating the letter of the World Trade Organization rules.

While it is important to weed out the anti-worker labour laws, there is a need to retain pro-worker laws and policies. For example, it should be possible to fire employees in distressed or dynamic industries but if a worker gets injured at work, it should be possible to get meaningful and immediate compensation from the employer.

Often the market mechanism does not pay attention to the environment (think of the air quality in Delhi particularly in the winter months). So, it is important that the government corrects for negative externalities from sectors like agriculture, transport and industry.

It is important to improve regulation and to substantially raise the tax-gross domestic product ratio, as the so-called capitalist nations in the West have done. This should be without harassment and without creating uncertainty about the tax rules. The emphasis should be on reducing tax exemptions and on meaningfully spending on technology and public administration that can keep a check on tax evasion. It is also important to bring back taxes like the wealth and inheritance tax on large fortunes, and do so with respect. And, of course, the public money should not be spent on freebies, which are not merit goods or public goods, in order to “buy” votes in elections.

Though licensing was abolished in the manufacturing sector in the early 1990s, effectively it is still present in parts of the economy like the real estate sector. This needs to go. Relatedly, the government needs to provide, or enable the private sector to provide, the infrastructure that is much-needed for real estate development on a huge scale in a less urbanised country like India. All this can even act as an engine of growth and employment. It can reduce the price of homes, which can, in turn, reduce, if not obviate, the need for a government scheme like the Pradhan Mantri Awas Yojana.  

To conclude, it is, in fact, not always clear that we are moving unambiguously towards a market economy. To the extent that we are, we need to move towards a meaningful and sustainable market economy, and not just a market economy. There is a long journey ahead.

The writer is visiting professor, Ashoka University. gurbachan.arti@gmail.com