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14 August 2013, Gateway House

In search of economic liberalism in India

The reforms of the early 1990s did not bring economic freedom to a majority of the population. That explains a large proportion of the economic and social ills that affect India today. Why is economic life in India of the ‘Taliban type’? Why is illiberal thought still our guiding principle?

Member, Indian Prime Minister’s Economic Advisory Council

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Economic liberalism is easy to define – it is what India does not have. And barring a few well-known exceptions, in terms of economic liberalism, India has been, and is, among the most ‘Talibanic’ of nations. This is surprising and counter-intuitive, given that we are celebrating the 66th anniversary of India’s independence and the gain of political freedom.

But before we go overboard with self-praise, we should realise, accept, and appreciate that political freedom was not a gift bestowed on us by either the Congress party or Jawaharlal Nehru. India had a high probability of choosing democracy precisely because it had been colonised by the British rather than by the French, or the Dutch, or others. As it happened, former British colonies almost invariably ended up as democracies, starting with the most famous of examples, the United States of America. And if our cultural heterogeneity is taken into account, India had a more than an 80% chance of choosing democracy.

Unfortunately, for the citizens of India, independence came with a profound lack of understanding of that other very important component of freedom – economic freedom. The lack of economic freedom was in large part responsible for our exceedingly slow rate of growth from 1950 to 1980. Indeed, poverty rates stayed the same during those 30-odd years, as population growth ate up almost all the income growth that did occur.

That the reverse of economic liberalism was Nehru’s agenda was clear when he explicitly stated in 1958: “Socialism to some people means two things: Distribution, which means cutting off the pockets of the people who have too much money, and nationalisation. Both these are desirable objectives.” (Jawaharlal Nehru, Hindustan Standard, Delhi, May 17, 1958; emphasis added).

Freedom does have many advantages, and greater economic freedom means higher economic growth. The acceptance of this fact helps explain the Confucian paradox – why authoritarian East Asian economies grew under dictatorships. It also explains why authoritarian and economic freedom-repressed economies, and democracies, did not grow in Africa and Latin America.

The importance of economic freedom came late to Indian policy makers, but it did enter their psyche in the early 1990s. However, the sad reality is that the economic reforms of the early 1990s did not bring economic freedom to a vast majority of the population. That explains a large proportion of the economic and social ills that affect India today. The music of economic reforms, and faster growth, has however stopped. Is it too much of a coincidence that the music stopped precisely at the time when Manmohan Singh and Sonia Gandhi went back on the reforms initiated by Manmohan Singh and Narasimha Rao?

It is the ideology, stupid. A good question for psychiatrists and historians is to assess why India is the way it is – and why illiberal thought is the major guiding principle. The best way would be to compare India with what theory describes as economically liberal – but that would be subject to the justified criticism that one is comparing ground reality to sky utopia. So let us compare how economic life in India is of the ‘Taliban type’, and not of the liberal type.

More than half of India’s population is engaged in agriculture, and production of food grains is a major component of individual and government life. There is no more telling example of Taliban economics than the story of food grain production and redistribution to the poor. In order to achieve the latter, the government bans the interstate movement of food grains, and makes the government the major buyer of marketable surplus. Why should the government do any of this in order to achieve its objective of delivering food to the poor? Would it not be a lot simpler, and considerably more liberal, if the government instituted cash transfers, or at a minimum, delivered food stamps to the poor? Both developed and developing countries, the U.S. and Sri Lanka, respectively, have more than 100 years of joint experience with the operation of food stamps.

Food stamps give the buyer the freedom to buy from whichever grocery store she chooses. She has the money, provided by the state, to buy food; whether she chooses to buy bread or broccoli is her concern, her freedom. How can we get more Talibanesque than deciding what food she should buy, and even from what shop? The rest of the world faces identical problems as India, yet they address and solve these problems by allowing maximum freedom to the consumers (I am excluding Zimbabwe from the calculation). The world has moved on to cash transfers and in India we are still debating the merits of food stamps and/or cash transfers – and expanding our Taliban-style policy of food procurement and distribution.

Another example of our extreme economic illiberalism is from the field of education. An economically liberal state would subsidise primary and secondary education, since basic education has benefits for the entire society. And such a state would subsidise higher education to the needy by charging fees to the privileged. But not in an illiberal country like India.

Starting from the economically illiberal Jawaharlal Nehru, India has built education temples for the elite, paid for by the elite. Not much redistribution or liberal thought. Neither are the poor benefiting much from the state provision of education, since they are spending close to three percent of their monthly expenditure on education. The state schools are not considered good enough by many of the poor. Given this reality, what does the illiberal state do? It brings in a “right” to education act, which mandates that poor private schools have to have cricket-size playgrounds.

Indeed, a major illiberal theme in India has been the introduction of legal “rights.” Economic liberalism is less state intervention, not state monopoly. Economic liberalism is carefully targeted redistribution, not universal benefits for all (like the elitist education system we have in place). Economic liberalism is the goal of equal opportunity in fact, and not rights in theory. It is affirmative action rather than reservations of jobs. It is recognising the worth of an individual, not the diktats of a Taliban state.

Surjit S. Bhalla is Chairman of Oxus Investments, a market advisory firm, a Contributing Editor at ‘Indian Express’, and a senior advisor to Blufin, a financial information company.

This article was written exclusively for Gateway House’s Independence Day special report, ‘India’s Liberal Agenda. You can read more exclusive content from Gateway House here.

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