1. How great economists failed Indian economy; Meghnad Desai explains

How great economists failed Indian economy; Meghnad Desai explains

Despite the frequent assertion of unity, when it comes to rational economic decisions, the most divisive local interests are given front-stage.

By: | Published: April 10, 2017 7:35 AM
Despite the frequent assertion of unity, when it comes to rational economic decisions, the most divisive local interests are given front-stage. (Express Photo)

The Indian economy is as confusing as the country is. Even so, things are looking up. The passage of the GST Bills through both Houses of Parliament is an ecumenical reform. All parties agree to it. But we have to contend with the federal/state tussle as well as inter-party rivalry about who gets the credit. What should have taken two or three years has taken a generation. This delay is despite the fact that all parties subscribe to the same economic philosophy—a sort of khichdi of a bit of statism, some localism, suspicion of business, especially SMEs (the big boys can bribe their way through), weakness in face of the slightest mass pressure from trade unions or caste lobbies and grains of sound economics and a moderately efficient civil service.

The fact that it has taken 70 years to establish a single market in goods and services is an indictment of the crippled political economy of Indian politics. Despite the frequent assertion of nationalism and unity, when it comes to rational economic decisions, the most divisive local interests are given front-stage. The system of local taxes and restrictions on movement of goods (especially food grains), the absurd pricing system which tried to punish states near the origins of a mineral amounted to a policy not so much of getting prices right but as wrong and distorted as you possibly could in the name of socialism.

We have never had a calculation of how much bad economics has cost India in terms of missed growth. You can compare India with South Korea or Malaysia or the Philippines. As of 1950, India was ahead of them all. The gap between their income levels and India’s at present is a small indicator of the colossal waste of time and resources which bad political economy has cost India. This waste is despite the fact that India has some of the best economists in the world. By the mid-1950s, India’s growth plans were attracting economists from all over the world. By the 1960s, Indian economists were making waves in the world of academic economics. Indeed, there is no other Asian country, except Japan, which has a stake in the Nobel Prize league when India already has one in Amartya Sen and no doubt there are more in the waiting room.

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The recent reissue of the 1974 Pitambar Pant Memorial volume Poverty and Income Distribution in India, edited by two senior economists, Bardhan and Srinivasan, and two younger ones, Banerjee and Somanathan, is one clue to the Indian political economy. The book was published in the heydays of planning and socialism. Garibi hatao was the slogan. Pitambar Pant was the dynamic head of the Perspective Planning Division, the indispensable Number Two to Mahalanobis’s Number One . The book contains some of the best work on the measurement and theory of poverty of the day. This is the work that laid the foundations of poverty studies for developing countries. There is pioneering work on sample surveys as tools for empirical investigation. The book also contains a new section with a revisit to the issue by Amartya Sen as well as articles by the new generation economists.

There is however a gaping hole in the book. It was there in1974 and is unfilled in 2017. While there is expert measurement and analysis of poverty, there is no reflection on why poverty persists in India. Not a single essay in the 1974 volume asked whether the poverty of India was for some reason due to the anti-growth, anti-business policies followed by the government of India with the imprimatur of Mahalanobis and Pitambar Pant. This is despite the fact that among the authors is TN Srinivasan who—along with Jagdish Bhagwati and Padma Desai—was fashioning a critique of the policy. Even at this distance there is no reflection on why poverty was so difficult to eradicate until 1991. Indeed, even today, the eradication of poverty takes a junior role to alleviation of poverty. Entitlements and subsidies crowd out investment in human capital, especially thanks to bad legislation such as Right to Education. The public sector’s failure in primary and secondary education has driven households at all levels of income to take recourse to private schools.

There is also no question asked whether the dismal situation in rural India is not due a failure to industrialise and whether that in turn is not due to bad labour market legislation which puts a tariff on large-scale manufacturing establishments. South and South East Asian countries succeeded in creating a thriving export driven manufacturing industries sector while India stagnated. Mahalanobis and Pitambar Pant must bear some responsibility along with Indira Gandhi for this. No doubt, Indian economists will go on winning Nobel Prizes. They will do fantastic work in measuring poverty and income distribution. The task of reducing poverty is something else. To paraphrase Marx, economists have hitherto measured poverty. The task however is to eliminate it.

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