The furore over the attempt to open up FDI in multi-brand retail reminds us of several things about India. But the true lessons may not be the seemingly obvious ones. It is certainly possible that the government?s handling of the policy change was not the best it could have been. On the other hand, those with long memories will recall numerous occasions where policies have been floated, reversed, modified or even transformed. At one time, all FDI and disinvestment were controversial?now the discussions are more nuanced (even if political rhetoric remains strident).
One might almost view the current situation as a necessary part of the process of reform in India?s peculiar democratic system. Policy reforms require political bargaining, debate at different levels and in different forms, and a public search for a minimal consensus. Already, new ideas are being floated, for modifying the scope of the FDI liberalisation (its application to sectors), its conditions (requirements for sourcing from small suppliers) and its degree (the percentage of foreign ownership). One only has to look at
current mess of politics in Europe or the US to form a more sanguine view of Indian policy making and politics than some of the most stringent critics of the government?s handling of the issue.
So the first lesson is that India?s process of reform may not be too bad. If that is optimistic, the second lesson is more sobering. One problem with India?s political process is that it sucks up time and attention. Is FDI in multi-brand retail the best use of this scarce resource? Perhaps not. If India?s over-riding policy objective is inclusive growth, will multi-brand retail be a significant contributor to that objective, versus, say, forging ahead with labour-intensive manufacturing? What are the relative benefits in terms of employment, technology transfer and organisational innovation? After all, much of the East Asian miracle was achieved with retail remaining a relatively ?backward? sector, continuing to serve as a sponge for mom-and-pop enterprise.
The second lesson is that Indian policy making still lacks prioritisation, and prioritisation is made more important by the costs of the process of reform in a heterogeneous coalition-based democracy. Perhaps the government?s political capital should have been saved for reform of land acquisition, labour laws, enterprise zones and overall manufacturing policy, to spur new business creation in sectors with high growth potential. If the goal of opening up FDI in multi-brand retail was to improve the supply chain for agricultural products, perhaps there could have been more direct policy levers to achieve that.
The question of inclusive growth suggests a third, deeper lesson to extract from the current debate. What should our objectives be? Fortuitously, John Roemer of Yale University recently provided some new thinking in a talk at the Delhi School of Economics ?Winter School.? Roemer operationalises the idea of equality of opportunity as a primary development objective. This is reminiscent of Amartya Sen?s earlier focus on capabilities. As Roemer points out, the Human Development Index broadened the measurement of outcomes to include more than just per capita income, but it still remained outcome based. Roemer suggests that
inequality of effort and inequality of circumstances should be separated out, something that outcome-based objectives do not do. He offers a two-part objective, based on measuring the level and degree of opportunity inequality.
Skipping the technical details, circumstances include factors such as parental income and education, but also all outcomes for children. The logic is that children should not be treated as directly responsible for their effort choices, until they are mature enough. There is a broader point that Roemer makes about adjusting for the indirect impacts of circumstances on effort. Roemer is careful to acknowledge the limits of opportunity equalisation, where it conflicts with meritocratic allocations. But the implications of his analysis seem clear: focus policy on equality of opportunity, especially in health and education, and especially for children.
This conclusion is not too different from some of the current policy thinking in the ruling party?s advisors. It also suggests why people are unhappy with policies that seem to favour large firms, including multinationals?those policies act against equality of opportunity, which even the aam aadmi understands as embodying fairness, something that human beings value intrinsically.
The gap in policy thinking and policy making is in implementation. The government has not let go of the idea that policy objectives have to be achieved by direct government provision. Mobile phones are a good example of where letting go of a government monopoly allowed greater equality of opportunity, in that case in communication. If the government could focus on creating similar playing fields in the (admittedly more challenging) areas of health and education, allowing private action with the right fiscal incentives (such as school vouchers and health insurance), it would be better from the perspective of process, priorities and development.
The author is professor of economics, University of California, Santa Cruz