Atanu Dey On India's Development

Fake PM’s Speech — The Full Version

This fake PM’s speech was posted in five parts, starting 11th June, 2007. To aid ease of reading, I am concatenating them in one page.

The “fake”qualifies the “speech” although it could apply to the appointed PM Dr Manmohan Singh with equal force. You must have come across the much celebrated speech that he gave the other day at a CII conference. I read it with rising disappointment and dismay. Smeared with high-sounding socialistic rhetoric, the message was clear: take care of the mess or else dire consequences will follow. Never mind that the mess was not the creation of the Indian industries, that it is not their responsibility, and most importantly that they are not equipped to clean up the mess.

It appeared that the PM’s speech writers are ill-educated socialists. You can’t get good speech writers for the money the government is willing to pay, I suppose. (Even the PM is paid Rs 30K a month.) Now if they had hired me to write the PM’s speeches, that would be a different matter. But then, I suppose they can’t afford me. So as a public service, I present it as I would have written it.

Part 1. Division of Labor

Dear Members of the Confederation of Indian Industries:

I am very honored to be invited to share my thoughts with you on the subject of “Inclusive Growth – the Challenges for Corporate India.” I appreciate deeply the critically important role that Indian corporations play in the present – and will continue to play – in the economic growth and development of India. For that, you have my gratitude; not just mine but the gratitude of the people of a nation that is on the move.

You, more than any other group, certainly understand the source of all wealth – production. And what is more, you know how to create wealth. Wealth does not drop like gentle rain from heaven; it does not come as a gift from some government agency; it does not spontaneously arise from some softly spoken magic spell; it does not materialize out of the vain electoral promises of some demagogue; it does not flow unbidden from the earth like some volcanic eruption. No, you know as well as anyone does that it requires hard work, entrepreneurship, risk taking, imagination, skill, investment, and vision to create wealth.

Production – that is, the creation of wealth – matters because ultimately that is what gets distributed as income to the people. If production were inadequate for whatever reason, even equitable distribution of that production would not eliminate poverty. The problem of a fair distribution of wealth is a much more tractable problem than the production of wealth. Society rightly burdens you – the corporations of the economy – with the task of producing wealth, and relieves you of the burden of correcting for any unfair distribution and assigns that task to the government. It is an understandable division of labor. Corporations have a comparative advantage in creating wealth. If any redistribution is necessitated, then it is the job of the government to do so.

You – the private sector – have to do what the government cannot do. The government does not create wealth; you do. In every sphere, wherever you have been allowed to go ahead with your job – producing wealth – you have surpassed all expectations. Decades of government involvement in attempted production of wealth had resulted in diminished expectations from India and Indians. You have demonstrated that if given the chance, India and Indians are second to none.

Consider for a moment those things that India is known globally for in the world of excellence and achievement. Every sphere in which India competes and comes out among the leaders has been the result of private enterprise, whether it is in IT and ITES, or in manufacturing. What about the government and political leadership? While the captains of our industries – the Tatas, Birlas, Kalyanis, Mallyas, Ambanis, and others – compare very favorably globally, our political leadership is infamous for being a haven for criminals. The percentage of criminals among the politicians is an order of magnitude greater than that in the general population. That is a fact that we have to keep in mind when we talk about governance of this great nation.

Ladies and gentlemen of the CII, in my talk here I will remind you of your responsibility and your duty, of course. But I will also take this opportunity to remind us of what the government’s responsibility is. I further assert that the industry and the government have distinct and important roles, and that separation of industry and government must be maintained if we have to have growth.

The message in the first bit was simply that there are things that the government is supposed to do and there are things that individuals and the private sector is supposed to do. There is a natural division of labor arising from comparative advantages of the competing parties. The government has a comparative advantage in governance, not in producing stuff. The government must stick to governance. Here’s why.

Part 2. Governance

Ladies and gentlemen, the sole objective of a government has to be to provide governance. The raison d’etre of a government is the creation of social capital, to be a guarantor of civil rights, to maintain law and order, to correct for externalities, to create an environment where individuals and corporations have the freedom to create wealth. The government has to be an enabler in the process of wealth generation, not an inhibitor that it has been for so long.

The role of the government is to set the rules, not play in the great economic game. Nobel prize-winning economist Douglass C. North noted that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.” It is a cautionary observation and clearly underlines what lies at the root of our failure so far in sustaining our economic development: the government has abdicated its primary function of designing the rules and enforcing them fairly, and instead entered the game as a player.

The results of the government’s involvement in production rather than in rule-making and enforcement are plain to see. Just to take a very critical example, consider the generation, transmission, and distribution of electrical power—the life-blood of a healthy economy. Public sector power corporations have let us down. The shortage of power is severe, acute, and chronic. Just in the state of Maharashtra, demand outstrips the supply of 15,000 MW by over 5,000 MW. It is a crisis for consumers, but even more for our industries, the producers of wealth. It raises the production costs of our manufacturers and they are handicapped in the global marketplace.

In an era of globalization and international competition, Indian corporations face challenges that are mainly derived from government interference and control. Indian industry faces an acute shortage of trained human resources. It is regrettably reported that only about a quarter of our college graduates are employable—a sure sign of our failed education system. Once again, the government needlessly prevented the private sector to be in education, and instead took monopoly control of the sector. The results are as could be expected: poor quality, extreme shortages, and high costs.

The production of goods and services is not the job of the government; that is the job of the private sector. By getting into production – too often as a monopolist – the government has demonstrated its abject failure. And this is understandable because governments are not capable of inventiveness, entrepreneurship and innovation; qualities that it does not have and thus cannot compete in the marketplace. By wasting its energies on activities that it has no comparative advantage in, the government has neglected what it is required to do: design the rules and enforce them, and create the environment where contracts can be made and enforced. That failure is as costly – if not more – than the failed attempts by the government to produce goods and services efficiently and in sufficient quantities. Consider the functioning of our legal system, as an example.

Among the institutions of governance are the legislature, the executive, the bureaucracy, and most importantly the judiciary. The statistics of the inadequacy of the judiciary are staggering. There are an estimated over 20,000 cases pending in the Supreme Court, around 3 million in the high courts, and a mind-numbing 22 million cases in the rest of the legal system. There are cases in the high courts which date back to the 1950s. Aside from the deep concern that justice delayed is tantamount to justice denied, the backlog of cases has a detrimental effect on the conducting of business in India. When contracts cannot be enforced, the economy loses from potential trades that do not take place.

The limited liberalization of the economy from the shackles of socialistic control has given us an economy growing at a respectable rate of 7 to 9 percent annually. But unless the governance of the economy is improved, even further liberalization – which is sorely needed – will be insufficient to sustain growth. And if growth is not sustained, the hundreds of millions so long trapped in poverty will not have a reasonable shot at economic emancipation. Let’s consider what needs to be done.

Why has profit become such a profane word in India? I believe that it is due to a failure to fully comprehend the nature of what humans do when they engage in economically productive activities and what results from that action. If you believe that the world is static in the sense that there is only a limited amount of stuff to go around irrespective of what one does, then naturally you would believe that it is a zero-sum game, a game in which Ramesh gains only at the expense of Suresh. But perhaps the world is dynamic and when economic activity takes place, the available amount of stuff goes up and Ramesh’s profit is not necessarily Suresh’s loss. True, the question remains about the distribution of the total gain from the activity: perhaps Ramesh gains disproportionately more than Suresh. But even in that case, it can be argued that it is better for society to allow that activity than to prohibit it merely because of the unequal division of the gain.

Anyway, let’s move on with what the PM should have said at the CII address.

Part 3. Fair and Just Profit

Ladies and gentlemen, poverty is a fact in India. The vast majority of Indians – over 80 percent – actually live on less than Rs 100 a day. They are poor and have been for decades. The socialistic policies followed since independence did not allow for rapid economic growth. Inward-looking autarkic policies isolated India from the economic growth that propelled the economies of East Asia. Only after the mid-80s was the country granted a very small degree of economic freedom, and that too was in response to a severe balance of payment crisis facing the nation.

By the time India gained political independence, it was a very poor country, impoverished by the dictates of colonialism. But why did prosperity elude India even after independence? Could it be that we – the leaders of independent India – failed to provide the economic rules that promote and sustain economic growth? A dispassionate review of the facts force us to answer that question in the affirmative.

A lot of self-congratulatory chest thumping can be heard from some quarters of the government for having liberalized the economy to some limited extent. But that is like a man claiming that he is a wonderful husband because he has reduced the severity of the daily beatings of his wife. Liberalization of the economy has given us some gains but certainly not enough liberalization has been done. What the government has to do is to reduce the interference of the government in the economy so that the economy can be truly free to grow.

Big governments that control every aspect of the economy are harmful for social welfare for an obvious reason: it creates an incentive for individuals and corporations to seek profit not legitimately by providing goods and services in a competitive marketplace, but by bribing the politically powerful and thus influencing policy to gain undue advantage in the marketplace for making monopoly profits. Big governments force people to engage in what Jagdish Bhagwati, an illustrious son of our soil and one of the most celebrated economists in the world, calls “Directly Unproductive Profit-seeking” or DUP activities.

In this discussion on “Inclusive Growth – the Challenge for Corporations” I mention the failures of the government because the government is the greatest challenge that corporations face in what they are supposed to do, namely, produce goods and services so that the economy grows. We must remember that inclusive growth is predicated on growth.

Ladies and gentlemen, every segment of any modern large complex economy has distinct roles to play. It can be considered as a higher-level division of labor. Failure of even one segment to properly discharge its duties and responsibilities has repercussions for the whole economy. The government’s duty is to create a society that is free, fair, equitable, just and peaceful. Unfortunately, we are well aware that we have not achieved the ideal society and to a very large extent it is the failure of our government. Although it is fashionable in certain circles to lay the ills of our society on corporate doorsteps, I will not do so because it would be clearly hypocritical of me. Furthermore, it would be pointless to expect corporations to address those social ills which it has neither created nor has any particular expertise in addressing.

So what is the basic responsibility of corporations? Stated most simply it is this: To make a profit. Ours is a deep and ancient culture. Our cultural legacy not only includes profound spiritual values but also ethical business values expressed compactly in the dictum of “Shubh Labh” or “Fair and just Profit.” When you make a profit honestly supplying goods and services to society, it implies that society gains since the benefits (represented by the price paid) exceed the costs incurred to produce the good or service precisely by the amount of profit. Making that fair and just profit is your corporate social responsibility and nothing else.

I am here not to ask what corporations can do for the government (or even for the society at large) but rather to promise what the government should do to help corporations. Let’s examine that next.

I have a strong aversion to sanctimonious hypocritical idiotic talk (just to spell it out) but it happens, as they say. Perhaps it doesn’t just happen, it is demanded. A sort of reverse Says’ law, “demand creating supply.” If not actually demanding it, sufficient people are not disgusted by it that the supply is maintained. Lack of aversion, or at least a publicly stated aversion to the peddling of it.

Part 4. Social Contracts

Friends, the primary job of industries is to produce goods and services. The first necessary condition for a successful economy is that it produces sufficient amount of stuff. If industry cannot meet that goal, all other activities are futile. Distribution of insufficient production – however equitably – will not solve the problem that we face. Nor will merely generating employment because employment is a means, not a goal, of economic activity. Let’s not confuse means with ends. Given sufficient production, the problem of equitable distribution can be tackled if necessary by the government.

Which brings us to one important distinction between industry and government. Baldly stated, industries engage in productive activities whereas the government, at best, engages in activities that are sterile. A government takes part of the production in the form of taxes and redistributes it according to some objective function that is arrived at through a process of political bargaining among the electorate. This redistribution is often necessary but is not costless. Part of what it extracts with the purpose of redistribution, the government “consumes” in the process of redistribution. That is a “deadweight loss” which grows not just with the size of the amount redistributed but also with the size of the government mechanism doing the redistribution. One of our former prime ministers, Mr Rajiv Gandhi, had famously stated just only 15 paise out of every Re 1 gets redistributed; the deadweight loss is 85 percent in India. Therefore increasing the efficiency of distribution is paramount if taxes have to be reduced without actually reducing the transfer to those who need it.

Reducing the size of the government is important for increasing the efficiency of transfer, of course. But there is another more compelling reason: reduction of corruption. It is a simple matter to recognize that the larger a government is, larger the control it has, which in turn creates an incentive for people and firms to “capture” the government. It creates an unholy nexus between the government and industry, with the former being lobbied by the latter for licenses, permits, and quotas.

We both, the industry and the government, have a social contract. Yours is to produce efficiently without imposing social costs, and to make a profit. Market forces will ensure efficiency and the laws will ensure that externalities are compensated for. Our social contract is to make and enforce the laws fairly and efficiently, and to correct for any imperfections that exist in society.

Let’s take the matter of employment to distinguish between the two social contracts. You will compete in the marketplace to employ the best that you can. Who you hire and how much you pay is not our business. Today your survival in the global marketplace is determined by how well you run your business. The government will not dictate how you go about conducting your business. If your employment policy discriminates against people based on any criterion not relevant to the job, the discipline of the market will weed you out in short order.

The government’s job is to ensure that every citizen – irrespective of caste, religion, sex, or economic status – has an equal opportunity to be what he or she is capable of being. The government must enforce equality of opportunity but cannot, and must not attempt to, enforce equality of outcome. Discrimination is abhorrent and the government will not practice it nor force the industry to do so. To give equal opportunity, the government will support the education of the poor without discrimination. That is, the playing field will be level but who plays well and who doesn’t will depend on the individual.

Your job is to produce as much as you can and as efficiently as you can. Our job is to make the rules and ensure that everyone has a fair shot at playing in the game. To level the playing field, we have to do some appropriate redistribution of production. We must keep the amount we redistribute within reasonable limits so that we don’t cripple the industry. We have to become more efficient in effecting the transfer and this means we will reduce the size of the government.

The PM in his speech had quoted from Tagore’s Gitanjali. I suppose the irony of quoting Tagore in the context of the government’s sustained effort to divide the country along caste and religious lines is lost on him. Severe cognitive dissonance perhaps. I have critically examined the PM’s speech for what it was, an attempt to browbeat the Indian industrialists into further crippling the Indian economy. It is all very sad.

Part 5. Of Economic Freedom and Bondage

Ladies and gentlemen, our society is not today that heaven of freedom which Tagore prayed for, where “the world has not been broken up into fragments by narrow domestic walls. . .” The industry did not create these walls. The fragmentation of our society along caste and religious lines is the doing of political policies. Our policies of favoring special groups arise out of “the dreary desert sands of dead habit” of dividing the country for narrow-minded mean political gains.

The industry did not create the divisions in society, it cannot be expected to correct these distortions, and it must not be commanded to perpetuate these odious divisions by hiring based on caste and religious categories. The destruction of whatever Indian industry has accomplished must not be lost in the cesspool of communal politics. Industry did not create the deep social inequalities. The government by raising the specter of violent social revolt to force industry to assume responsibility for the divisions in society is guilty of blackmail, criminal negligence and gross dereliction of duty.

The government has failed so far to address the real concerns of its citizens. Universal primary education, although guaranteed by the constitution, is still not a reality after 60 years of independence. It is shameful that half the world’s illiterates are Indian. Surely, the failure of the Indian education system cannot be laid at the doorsteps of Indian industry. Indeed, Indian industry itself suffers as a consequence of the massive failure of the government in providing education. If Indian industry can build world-class corporations, surely it is quite capable of efficiently educating the population – provided of course that it is allowed to do so.

Indians are as talented a people as any other. Wherever they have enjoyed economic freedom, they have been among the best, in everything from steel manufacture to high technology. Let’s ask ourselves why Indians in the US do so well, to just take one example out of scores of places where Indians shine. They succeed more often outside India than within India because in India they are denied economic freedom. They are forced to leave India to concentrate their entrepreneurial and innovative skills in building things rather than stay and fritter away all their energies in fighting our impossible bureaucracy. Our laws and regulations are so onerous that it can sap the strength – if not kill – the most talented and dedicated of our entrepreneurs. We have to radically change our regulations and our labor laws.

Indians thrive when they are free to get into the rough and tumble of the competitive marketplace. But our socialistic policies have crippled India’s industries. Allow me to quote Pranab Bardhan, one of India’s foremost economists at UC Berkeley (India loses fine academicians and researchers as well, not just engineers and doctors, due to a lack of freedom). “Leftists are understandably wary of the ‘wastes of competition’ and of the ‘anarchy of the market-place.’ But the last several decades of socialism have shown us unmistakably that the waste and anarchy of the bureaucratic command system are far more injurious to the health of the economy. Without competition in the sense of rivalry among firms (public or private) and a mechanism for exit for chronically sick firms, no economy can attain or retain its vigour and dynamism.”

The market rewards excellence and punishes underperformance. The government does not have to worry about whether you are doing your job to the best of your abilities or not – you would not be here if you were incompetent. But in government and politics, competency is not that much of a barrier to entry. The ability to manipulate the system is more valued. It appears that it is politics, not patriotism, which is the last refuge of the Indian scoundrel. Hardened criminals sit in our legislative bodies and we all are apparently powerless to change it. But there is a way out, I believe. If you, the captains of the Indian industry, were to support clean political candidates, you can make a difference. It is choice that you can exercise as citizens of this great democracy.

In conclusion, thank you for helping build the nation. You have my gratitude and you have my promise that I will do everything I can to help you create wealth so that no Indian is poor. Let’s make India a great nation.

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  • Parijat

    Hi Atanu,

    Good to read this one. I’ll be honest that it is often disconcerting to read some of your pieces because of the way they appear to be super-prejudiced. This one though is just great because it is so direct and yet not an ad homenim attack (I know you think its ok to attack MMS personally.. but I like it to be otherwise).

    Anyway.. you mention the following – “If your employment policy discriminates against people based on any criterion not relevant to the job, the discipline of the market will weed you out in short order.” Kaushik Basu’s book, Beyond the Invisible Hand (before you stop reading any further, I didn’t quite agree with his policy recommendations either, but his argumentation is pretty good), he makes out a case that these discriminatory practices aren’t necessarily economically counter-productive for the firm… and that productivity of specific communities can actually be affected by these practices, setting in motion a vicious cycle. Reasonably good game-theoretic argumentation too, it was.