For a reforming economy, India is letting a lot of things occur in the marketplace that evokes for it the adjective ?dysfunctional?. They serve neither social purpose nor make any economic sense, and smack mostly of arbitrary political interventionism. On a larger plane, the economic policy framework is now avowedly market-based and opposed to any form of strategic intervention. Weaving social objectives into economic policies is frowned upon. The agenda of economic reform does not include social interventions like the NAC?s employment guarantee scheme and so on.
So, when politics intervenes in what should be strictly the realm of economic policy, we are caught unprepared. Remember the finance ministry?s passion for dual pricing in the cement sector? Initially, it was given a cloak of anti-monopoly action, but has ended up as expected, with state governments dictating discriminatory prices for favoured users. Tamil cement honchos had no option but to fall in line. From cement, the argument has gone to housing. Hapless industrialists, it seems, are falling in line on price control. Just recently, a Mumbai real estate businessman argued meekly against threats of quantitative intervention, and was reduced to pleading for discriminatory prices through discount condominium offers.
Intervention can be costly. Once we let it take place, in competitive coalition politics, the quantities that are politically determined will keep rising, as also the price differentials. To add insult to injury, policymakers will deliver lecture after lecture on the virtues of purely market-oriented liberalisation.
Dual pricing regimes are not new in India. They were once advocated as a measure to ease the transition from a closed economy to a market one. In sectors such as cement, fertilisers, sugar, textiles and so on, price decontrol was phased with a low ?ration? price and a higher market price. But the former was tuned to a normatively determined long-term marginal cost figure that was worked out transparently to ensure supply efficiency. Some of the best economists?Omkar Goswami, R Radhakrishna and Isher Ahluwalia, much younger then?worked on these problems. When we?d defend their work in government circles, the argument always was that if we were to make a mistake, ?the market would correct us?, and we would change the parameters for the computation as we went along. Tax and tariff policies were harmonised with these objectives. The state, as the Narasimhan Committee was to underline, was to play the umpire and not a participant in a rule-based system aimed at moving India towards a market economy. This is important. Otherwise, mimicry of that period in an empty shell can throw us into a bottomless pit of political interventions.
As we go through the consequences of the US subprime crisis, there is a larger backdrop to all this. A market economy has many virtues: economy of information, flexibility of response, pursuit of efficiency and the use of incentives to achieve objectives. Only a charlatan can scoff at these. But a market economy also has a discipline of its own, and is ruthless when it ?corrects? itself and by implication those who wish to profit by riding popular waves. Prudence requires policy to understand this and not play to the gallery. Corrections can be painful and must be discussed with sensitivity.
Fortunately, as I have said before these events in this very column, the central bank has been playing an exceptionally mature cautionary role, and so it cannot be said that we were institutionally unprepared.
But there?s a particular kind of political person who would take credit for globalisation and liberalisation in the bull phase, and either deny or underplay the carnage when it begins.
Some changes were only to bhe expected. The time that leaders led by sacrifice and demanded it from others is a thing of the past, for example, which is understandable. But the flip side of the logic of globalisation being denied is neither efficient nor fair.
It?s peculiar. When the East Asian meltdown hit agricultural exports and larger imports subsidised by competitors, I remember the official reaction was one of denial. In years that a sixth of cotton and a fifth of sugar were imported, these were items classified in commerce ministry publications as ?non-agricultural? to show that agricultural imports were not rising. Only much later, and after great damage, was the need of a strategic approach to trade and economic diplomacy recognised.
In a world of trillemmas, it is not enough for the central bank to threaten a tough posture. We don?t see any contracyclical signals from trade and fiscal policy because the government displays no recognition of the globalisation problematique. Why is that?
Instead, when the heat is on, our globalisers rush to put on a mantle of self-reliance, and instead of taking action, they talk of how ?we are a special case? and how ?our fundamentals? are immune to global pressures.
Do we want the worst of all worlds?
The author is a former Union minister for power, planning & science, and was vice-chancellor of JNU.
Email: alagh@icenet.net