Economic growth: Optimising economic policies
Vinod Anand | 31 Dec 2011

Lot of researches have been done and lot of papers presented to highlight the economic policies that the country needs to be adopt in order to feed its increasing poor population.

IN ORDER to achieve sustained economic growth, there must be an optimal mix between various economic policies. As we know, there is a strong relationship between farm size and productivity in agriculture, and on tax evasion in a context of uncertain discovery of evasion on commercial policy and also a relationship between poverty, under-nutrition and malnutrition as also other issues in developmental economics.

There is a lot of research being done on the economic development and policy reforms in India and in recent studies; there has been a critical look at the proposals to use trade policy instruments to enforce environmental and labour standards as well as human rights. There are a classic theoretical writings ranging from optimizing policies of rational individuals to the role of the state within the systems of economic structure. These writings cover a period of nearly 30 years.

There are also many papers that cover such diverse subjects like investment criteria and choice of technique of production, optimal savings in a two sector model of growth, choice between capital and labour mobility, a political-economy- theoretic model, representing quid pro quo foreign investment and welfare, comments on Prof. Romer’s theory and articles championing the need for developing countries to participate in the GATT system.

There are also many research papers, written by various economists, on India’s economic reforms where they have traced the origins of post-Independence economic development strategy, the objectives and policy framework, the achievements and failures since Independence concluding with a detailed analysis of the Rao-Manmohan Singh reforms. Most of them agree with Bhagawati that extensive bureaucratic controls over production, investment and trade, an inward looking trade and foreign investment policy and a public sector going well beyond the conventional confines of public utilities and infrastructure, led to utter failure of development in India. These papers laud the reforms initiated by Dr. Manmohan Singh as systemic, conceived as a package of coordinated action in several areas going beyond liberalizing the irksome controls at the margin and stressing the need for all-round reforms for maximum benefit.

It is considered that the achievements in the post-reform period are highly impressive and it is suggested that there are some disquieting features in important areas representing the unfinished tasks, especially in such areas like foreign trade, industry, agriculture and infrastructure as also fiscal and monetary reforms. The country should be cautioned that without a considerable acceleration and deepening of reforms especially in the areas like privatization, labour and bankruptcy laws and infrastructural investments, India cannot hope to achieve the rapid and sustained growth needed to eliminate abject poverty and will be left behind by other Asian countries.

There are also papers on hunger, destitution, agricultural backwardness under semi-feudalism and development in the context of rapid population growth. A paper on nuclear power and economic development in India may appear dated as it was published before Pokhran II. After all, the Government of the United Kingdom and its leaders have not shown much rationality in sending their fleet equipped with nuclear weapons and incurring avoidable loss of human life to defend the right of self-determination of 6, 00,000 sheep and 2000 human beings in the Falkland Islands and allegedly, the principle that aggression should not be rewarded, a principle observed only in the breach by the U.K. in its long and violent colonial history.

Prof. Srinivasan is a champion of India’s pluralistic society, though he concedes that with many competing ideologies, India is placed at a disadvantage compared to China or Korea. He discounts the theory that a benevolent state can intervene in an optimal way to correct market failure. Instead, the state is seen to be pushed and pulled by lobbies and interest groups that are mostly interested in redistribution rather than growth and development. State intervention intended at best to improve the efficiency of resource allocation and channel it in socially desired directions and at worst creating fairly small dead weight losses due to distortions may instead end up diverting resources to a significant extent from production to rent-seeking (unearned income through nefarious activities of the so called political entrepreneurs)

We must know that democracy markets and development is of absorbing interest. In authoritarian Korea, labour unions operate freely; stalling privatization though they represent only a very small minority of the labour force employed in organized manufacturing. The overwhelming majority of the labour force in India is self-employed or employed as wage workers in agriculture, informal manufacturing and service sectors. Unionization is irrelevant for such self-employed people and they will not be able to organize. India’s labour laws are unrelated to the labour market realities and have created and sustained labour aristocracy in the organized manufacturing and public sectors with a disproportionate influence in politics.

A caveat may be entered here. We should harp on how a small labour force is stalling reforms. We have nothing to say about the rent seekers in industrial India cornering all the fruits of development both under the ‘Licence permit Raj’ and in the new era of reforms. Indeed, we must admit that the directly unproductive profit seeking activities (DUP) and rent seeking models illuminate the analytics of some forms of corruption arising from the competition to obtain rents created by state intervention in the economy and also to influence public policy.

It is also said that pampering the labour aristocracy at the expense of the poor is not alright for the economy, and Feudal landlords and captains of industry of all hues cannot ask for far better champion of their interests. Let me also say that the various papers on economic reforms sound like a ‘victory speech’. A paper on economic stability vs. political instability, Italy had political instability in the sense of rapid turnover of governments without it adversely affecting the economic performance. Of course, if the involvement of the state in the economy is not extensive, political instability is less likely to affect the economy adversely. Let us hope that India will be able to achieve sustained economic growth through the measures as mentioned above.