Atanu Dey On India's Development

What Holds India Back

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In August in a post, Is the Indian Government the Greatest Enemy of India’s Prosperity?, I had quoted a WSJ piece which read in part, “Because India’s entrepreneurs have succeeded amid dysfunctional government and financial institutions by developing a kind of independent and experimental ingenuity, it stands to reason that the enterprising class would prosper even more were India to reduce barriers to business and clean up corruption.” I commented on that and wrote:

Note “reduce barriers to business and clean up corruption.” Reduce business barriers? OK, the government erects them; only it can remove them. But it does not have an incentive to do so because those in power actually gain from them while the country loses. The story is the same with corruption. Sure the average smalltime crook is into corruption. But for massive multi-tens-of-thousands of crores corruption, you have to be in government. The high level corruption eventually trickles down and gives support to the petty corruption that the average person encounters daily.

I think a reasonable case can be made that the biggest enemy of India is the government of India. It began with the British, and the job was eagerly taken over by FNehru, and from then on, with only a short few breaks, the FNehru clan has presided over the destruction.

I repeat that here because it bears repeating: The Indian government is the greatest barrier to India’s development.

I am quite sure that this realization is not novel and certainly I am not unique in having it. Scores of able observers before yours truly have noted it. The great Milton Friedman is one of them. In a talk he gave in India in 1963 — nearly half a century ago — he said:

[Westerners] think in terms of the large, modern corporation, of General Motors, Genera Electric, and other industrial giants. But it was not firms like this that produced the Industrial revolution; they are, if anything, its end products. The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the wall firm, in the small and medium size enterprises, in Ludhiana not Jamshedpur; in the millions of small entrepreneurs who line the streets of every city with their sometimes miniscule shops and workshops. If the tendencies so evident in Ludhiana could be given full rein, and not hampered and hindered in every direction by governmental interference and control, India could achieve a rate of growth that would exceed today’s fondest hopes.

As this final remark suggests, the correct explanation for India’s slow growth is in my view not to be found in its religious or social attitudes, or in the quality of its people, but rather in the economic policy that India has adopted; most especially in the extensive use of detailed physical controls by government. {Emphasis added.}

Nearly half a century later, the government still exerts its baleful control over the economy. Why does the Indian government use “detailed physical controls” that are evidently so damaging to India? Because that’s the way to expropriate part of the wealth the economy produces. It engineers shortages by controlling the supply. Shortages raise prices significantly above costs which end up as profits for the controllers. This is typical monopolistic behavior.

The higher the degree of control, the greater the profits. The greater the profits, the greater is the incentive to become the controller. If being the controller affords, say, $10 billion in profits, then it is worth spending a few billion to become the controller. Also, since these profits can only be had if one is criminally dishonest, it stands to reason that it will attract the most corrupt and indeed that in the competition for control, the most criminally corrupt will emerge victorious.

So here’s the whole sordid story in outline. Certain misguided ignorant people (who need not be named here) got control of the government when the British let go of their control. The new bunch was led by one particular guy who is notable for his hubris (that he knew what’s best for everyone in every sphere) and his ignorance of his own incomprehension of how an economy works. Between the father who commanded unquestioned obedience and the uncle who thought he knew it all, India was screwed.

Hubris and ignorance among the powerful is a potently destructive mix and a sure recipe for disaster. The outcome is the disaster we see today. They set up the command-control-license-permit-quota raj. It is the best way known to humanity to retard economic development.

But what’s worse is that it set up the conditions for attracting criminals to politics. Mid last century, the degree of corruption in Indian politics was high but compared to what is the norm today, it was as if the politicians of the past were veritable saints.

It’s a downward spiral. Reports of corruption in the tune of billions of dollars have lost their power to shock and surprise. At the highest levels of the government there are criminals, and the general public just takes it as business as usual. Fact is that most people are totally unaware that those billion-dollar corruption deals affect their wellbeing, and theft of public money is coming right out of their pockets.

There is a significant middle-class educated population which is capable of actually comprehending the connection between the corruption and government control. But having the capacity to comprehend is not the same as actually comprehending. Trouble is that they have not had this connection actually explained to them. The education system does not clue them in. Then of course they are too distracted by bread and circuses (or pizza and cricket, if you please) to figure it out. But even if some of them have figured it out, they are a minority and worse still, a minority that does not bother to express its outrage.

The story becomes even more dismal when you consider what the criminals do to remain in power. They tax the productive sector of the economy and hand out largess to the unproductive sector in exchange for their votes. As the saying goes, robbing from Peter to pay Paul will always ensures Paul’s support.

To summarize: Control of the economy does two things. First, it reduces economic activity and consequently growth. Second, it gives rise to rent, which then attracts the most criminally corrupt to gain control of the government. Rent-seeking rather than good governance becomes the sole aim of those in government. The criminally corrupt are not competent to make good policy given that it was not their public policy brilliance that brought them to power. Besides, good policy generally entails a reduction in government power and control of the economy. So why would they do it even if they were advised by others who know better.

This does not have to be a counsel of despair. The reason I keep harping on this is because I believe that comprehension precedes positive change. We must first admit that there is a problem, then we have to understand the causes of the problem, then we have to figure out how to address those causes, and then do what is required.

To my mind, we have to reach, teach and breach. Reach those good citizens who are fed up of the rot, teach them the causes of the rot, and together breach the bulwark behind which the criminals govern India.

Related Posts:

The Congested-Shortage Economy. April 2010.

Manufactured Shortages and Corruption. June 2006.

  • http://www.indianliberals.org Ashish Deodhar

    @Atanu

    “We must first admit that there is a problem, then we have to understand the causes of the problem”

    This is where the whole problem lies. I have known so many intelligent Indians who either don’t give a damn or who are easily fooled by the “India shining” story. (not surprising that they all come from the Bangalore, Mumbai, Delhi middle-class, who have witnessed the malls and multiplexes rise in their lifetime!)

    And then there’s another lot who think that everything Indian is superior to everything else – our culture, our religion… our economy, our cricketers…

    It really gets very frustrating at times!

    “Reach those good citizens who are fed up of the rot”

    I am a little sceptical about people who want to bring about “change” (once bitten, twice shy, you see!). But would like to know what plans you have in mind to reach, teach and breach.

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  • larissa

    I do not think any amount of economic theorizing is going to help India. India needs nothing short of a revolution, not in a communist sense but in the sense of what re-volution really means, a revolvere or going back to origins. India never had its revolution, after the British left, the institutions never changed. In short, Hindus (by which I mean all those others belonging to native religions as well) have not really been in control for the last 800 years, and the sham secular government does not count as representing Indian culture. From being a manageable country of about 350 million at the time of independence, India has become an utter hell hole in the last sixty years. I do not see much coming out of India’s much vaunted democracy in the last sixty years except more misery and a fourfould increase in population which could have been kept at the rate at the time of independence if the government really wanted to. This increase alne will permanently cripple India and nothing is even being done to address this issue–its not the number of people that counts, but the quality of people.
    As for democracy who, ever heard of the same family being party leaders? In the U.S. Kennedy’s daughter had a hard time even running for Governor.
    What can India boast of since independence? Bpllywood and cricket? What does it create that others seek to emulate, which is the mark of a creative, vibrant society? What has it done to improve the life of its people? Where are its top notch universities competing with that of other countries? Not a single Indian universtiy ranks among the top in the world. What technology do India’s factories produce that are the envy of others? Nothing. Somehow I think India has retrogressed not progressed, and retrogressed almost to the point of no return with an unmanageable population that gets only larger. I remember my mother going to Benares after forty years to the university where she studied. She was shocked at the increase in the amount of people, almost ready to run you over…
    There has to be someone strong to get hold of power–someone who can establish discipline, honor and dignity again–this requires a leader of steel –I do not see this happening amidst a passive population. Moreover, fake democracy has so corrupted Indians, that there is no sense of command and order, so that even if a great capable leader is somehow in politics, he will find it impossible to lead people who are guided only by self-interest. Not only is a good leader required, but also people who are capable of being lead, because without the support of such people a good leader is also useless. And for a peoples to be lead also requires discipline on part of the people. This is lacking.
    The problem of India is deep, it is rotting institutionally, and the rot is very deep. Economics is going to change things only at a cosmetic level, India needs a fundamental overhaul, nothing short of a revolution. But India being the way it is, the chances of this happening is slim.
    Perhaps the bad state of affairs will get to a breaking point that people are forced to wake up, just as the inept government was forced to initiate some reforms when India went almost bankrupt. India seems to only get active only in response to crisis anyway, as currently it just exists, without national strategy or vision, it is just limping along.
    Few malls are opened in middle class areas, and people get to shop in them, some more middle class get jobs in the tech industry and in business, and it is thought India is progressing!
    I would say a fundamental change in leadership is needed.

  • Ramaswamy

    Great article, Atanu. The readers of this blog may be interested in http://www.gurumurthy.net also. Under the category of “Economics”, the article by Shri Gurumurthy titled “The Blind following the Blind” dated 23-Aug-2008 throws more clarity on this subject.

    Keep up your good work.

  • DesiGuru

    What you point out is overtly simplistic. Though I understand your intent in making sure everyone hears it enough number of times.

    My moment of clarity came after 3 years of travelling and spending at times months across rural as well as urban India. The clarity is in the confusion that is in my mind.

    1. Are there are too many weaklings ? – genetically (IQ, physical et al) or otherwise in India. Unlike our western pals and Australians too we just have not eliminated over the last 2000 years, the weaklings. I mean agreed the famines and partition have eliminated some but the partition dying of genes was based purely on luck and not on quality of genes.
    2. Lower the quality of the people higher the potential damage that will be caused by weakling/dying memes and ideologies like Islam, socialism etc
    3. Genetic cleansing in the sense that the ‘really smart’ who create over 50% of a country’s wealth have gone and will continue to get to greener pastures in the long to even very long term. Primarily because even if perfectly managed this place is just too crowded and not fun enough for the ‘really smart’ with 1.2+ billion people.

    Anyways too bored to continue. And ofcourse I like your blog and though its tough to discuss the above issues its a pretty big chunk of the reasons for India being held back.

  • larissa

    @Desi Guru
    Sometimes I wonder if the majority of the good specimen of Hindus have been either killed off and converted over the centuries leaving only passive sheep, who tolerate everything and have no will apart from self-interest.

    “”Are there are too many weaklings ? – genetically (IQ, physical et al) or otherwise in India. Unlike our western pals and Australians too we just have not eliminated over the last 2000 years, the weaklings.”"

    Even if the strong are 100 million, that is still something. But I agree in that the crowding in India is the worst problem problem which reverses any progress that is make, and no one wants to to anything about it or even acknowledge it is even a problem.

  • larissa

    above–progress that is “made”

  • larissa

    @DesiGuru
    One has to understand that much of the aristocracy was destroyed in India. I do not mean aristocracy in a feudal sense, I mean the most beautiful, intelligent, brave people, who could do something beyond self-interest and had a sense of honor, people who were moved by higher principles, people who were creators of culture. Most societies do not survive if the best and brightest are killed off over centuries of invasions and foreign rule. India is an exception in that despite slavery for 1000 years its culture survives in a sickly form, a mere shadow of what it was formerly. It survives mostly in the institution of the family, as the state (the Islamic then British rule, the sham secularism artifically imposed today) has been against the native culture for the last 800 years so the family is the only thing that preserves what culture remains in India. This too is disintegrating with urban life. India has not been a real creator for the last 800 years (although producing a handful of exceptional people), but merely reacts and copies. You can see this in its form of governance, in its mass culture, its educational system and so on, which are copied and borrowed without proper understanding what it can mean to the culture. You see, India cannot even view its problems with any creativity but keeps importing all kinds of foreign solutions which it does not even understand.
    As I said, this pattern of the state of things in India is soon to crack open, as it is completely unsustainable; India is virtually sailing without a direction, strategy or plan. Some bad things are going to happen–more Maoist uprisings, more Islamic sepratism and so on, so people better be prepared for it.
    I think there are some Indians who retain acute awareness and consciousness of their past and history, who understand what is happening, and find themselves utterly alienated from what modern day India represents, as they do not sympathize with it in any way. They are mostly helpless as they are not in power politically, and the democratic state makes it certain that only the “numerical majority” counts, even if the “numerical majority” is not enlightened to make decisions requiring some shedding of self-interest.

  • Oldtimer

    >>It’s a downward spiral. Reports of corruption in the tune of billions of dollars have lost their power to shock and surprise

    http://www.dailypioneer.com/283047/Rampant-corruption-has-devoided-India-of-economic-equality-Report.html

  • http://indiachatbox.blogspot.com bloggi

    I agree with Iarissa on many counts. Most of them, that India needs a revolution of sort.
    But that need not be a bloody or violent one. Revolutions sometimes are brought about by crisis situations or a legendry leader changing the course of events.
    In one place, however, I don’t fully agree. Family in the sense of an institution is perhaps a desirable institution and it should not be mixed up with family in clan / khap / feudal sense. The two are not fully correlated.

  • Kiran Jaisingh

    There’s a reason why the best and brightest leave India and I’ve had enough of the smart alecs and their usual retorts of “why don’t you don something about it”. Because you just can’t. Anyone with even a 2-digit IQ can see that. What are you going to do? Stand for election? Get elected? Then what? Under you, around you and above you will be hundreds and thousands of ultra-corrupt mobsters and criminals in power. How long do you think a Mr. Clean will remain there?

    Second reason is the quota and reservation system. This is the second biggest reason for India’s downfall. It has completely lost its meaning. It’s only a vote bank now.

    India has no hope except for a violent military-style or communist revolution.

  • larissa

    India is even losing outsourcing to China…So what is it going to remain good at? Nothing?
    http://blogs.wsj.com/chinarealtime/2010/09/15/china-at-your-service/?mod=rss_WSJBlog&mod=chinablog

  • rb

    It appears that the only way to break the stranglehold of the corrupt is for states to become much stronger, and focused on development. In many ways, I am thinking that regional parties might eventually produce a better result since by definition a regional party might care a little bit more, and be accountable to the local people. Please share your thoughts. Have fun.

  • veer

    we need MODIJI to unLEASH us!

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  • http://gtoosphere.blogspot.com gtoosphere

    @Atanu: I’ll tell you an excellent example. We know that the elections were around the corner in Tamil Nadu and Kerala. So to keep the voters cool, what the Congress govt. did was to divert power from Andhra Pradesh (my home state) to the Tamil Nadu and Kerala as a result of which there is a huge power shortage in Andhra where most of the state has 4 hours of power cut in the afternoons and all industries are forced to shut down by a govt. directive for 2 days a week i.e. on Sunday and Monday. My father owns a small manufacturing unit and you know how it is!