HVK Archives: Indian Economics: Nonsense on stilts
Indian Economics: Nonsense on stilts - The Economic Times
Sauvik Chakraverti
()
25 August 1997
Title: Indian Economics: Nonsense on stilts
Author: Sauvik Chakraverti
Publication: The Economic Times
Date: August 25, 1997
Indian Economics, as taught in school and college, is but a bundle of
falsities. It encourages a world-view that accepts India's problems - like
poverty, unemployment and population - to be huge and intractable, and
incapable of solution without massive statal action. To a free-marketeer
it would appear that the strong socialist state has created a constituency
by spreading economic illiteracy.
Indian Economics justifies the manner in which public money is invested.
Poverty must be alleviated, employment must be generated and population
must be controlled through huge outlays 'planned' by ,experts' in Yojana
Bhavan that's basic Indian Economics for you At its core lies the theory of
the 'vicious circle of poverty', which says that poor people are trapped in
cycle of low income and low surplus, from which they cannot escape without
direct statal interference.
Lord Peter Bauer has been an unrelenting critic of Indian Economics,
dismissing the theory of the vicious circle of poverty with a scathing "if
the proposition were &m, the entire world would still be in the Stone Age".
Poverty, to Bauer, indicated just one thing the absence of economic
achievement. This achievement occurs in markets. Open up markets and access
to markets and the possibilities of economic achievement increase rapidly.
He called for a free economy with public investments - not in the public
sector or rural 'schemes', but in transport and communications. Indian
economists, with the sole exception of Prof B R Shenoy, lauded the Second
Five Year Plan instead.
Bauer and Shenoy both predicted that the massive amount of deficit
financing - red printing money - approved in the Second Five-Year Plan
would lead to a collapse of the currency. They were both proved right. It
brought in import and currency controls. It invested public money in a
massive state-owned industrial sector. It did not invest in transport and
communications. All subsequent plans have followed the trend. The results
are plain to see. We don't have highways worth the name. The public sector,
undeserved subsidies and various 'schemes' designed by the Planning
Commission are eating up our money. How?
To begin with, employment cannot be 'generated'. Whether tax payers spend
their money themselves, or the state spends it for them, the same amount of
employment occurs. If tax payers save money in banks which make sound
investments with their money, then too the same amount of employment
occurs. However, when the government spends from deficits, inflation taxes
the poor. And when public banks make poor loans with public money, the
wealth of society is frittered away. Indian Economics does not look at
things this way. Instead, it attempts to justify a massive diversion of
scarce resources away from public goods like roads towards the financing of
'politics' - through deficits if necessary.
Another piece of bunk in textbooks of Indian Economics is the idea that
population is a cause of poverty. Singapore, Hong Kong, Japan, West
Germany, Holland and Belgium have higher population densities than India -
and they are all quite rich. In India itself, we can see that big cities
are richer than small towns, which in turn are more prosperous than vacant
countrysides. Indian Economics, through its faulty analysis of population,
provides the state with an excuse for not being able to generate sufficient
prosperity. There is an essay by Lord Bauer in his latest book that goes
into the population question and argues that open boundaries and increased
commercial contact amongst people will bring in the prosperity and the
values which will led to lowering of the birth rate. Indian Economics
justifies Sanjay Gandhi.
The 'values' which will bring down birth rates are urban in nature. Unlike
the economists working for the Indian state, free-maketeers take urban
areas and urbanisation seriously. India has over 4000 urban areas - all in
a state of decay. Rent control, urban land ceilings, poor municipal
government - these only add to the decay. Excellent transport and
communications all around, with a free market, would foster urban
decongestion, a lowering of real estate values to normal levels, and a
narrowing of the rural-urban divide that characterises India. Slums exist
because of laws like rent control, and urban overcrowding is simply on
account of inadequate investments in transport and communications.
It would not do, while discussing the fallacies of Indian Economies, to
by-pass two home grown doctrines which have huge public acceptance:
swadeshi and khadi. The former believes that local manufacture increases
prosperity: it ignores trade. The latter believes machinery causes
unemployment: it ignores productivity.
The doctrines of swadeshi and khadi are both based on an incorrect analysis
of imperialism. By 1920, India had emerged as Britain's largest market -
not for textiles, but textile machinery. India was beginning to
industrialise. At that time she was also the world's second largest
exporter of machine-made cotton yarn. Then, laissez faire ruled the
British mind. India was a market in which Americans, Germans and Japanese
were highly active. She was not throttled to serve British manufacturing
interests.
Free-marketers look for ways by which the entire world can become
'developed'. For India, the prescription: connect villages to towns, towns
to cities and cities to the world market - invest in transport and
urbanise. If the state invests in pubic goods - especially roads and the
courts system - and the private sector is allowed to freely operate in the
rest of the economy then, with free trade, this huge nation will take steps
towards Prosperity and genuine development.
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