TCS Daily

Liberalization and the Indian Elections

By Vijay Dandapani - May 21, 2004 12:00 AM

Last week's election results in India caught virtually everyone unawares. Nearly as surprising was the dramatic drop of 11% in India's leading stock market index, the Bombay sensex. While the drama in the aftermath of the election continues with the dominant Congress party's see-sawing on the Prime Minstership, what was not surprising was the negative direction of the stock index. Nor was it a surprise when the leftists (including the Congress party) pulled out that old chestnut -- the conspiracy theory -- as an explanation for enormous loss in wealth. By blaming the former ruling party, the BJP, and its ostensibly money-grubbing commercial interests for the fall in the stock index, the Congress and its allies seem destined to set themselves up for failure.

Leading the charge against the supposedly malign commercial interests is author and leftist diva, Arundati Roy. While accusing the corporate world of a "blatant game" for conspiring with members of the former government to manipulate a market crash she extols Congress party leader Sonia Gandhi's "timidity by not playing the princess". For someone who believes modesty to be an unqualified virtue, there is a noticeable economy of that in her pronouncements. The hypocrisy and intellectual dishonesty of leftists like Roy is only underscored by their enduring belief in state sponsored solutions while ignoring international awards that they get as a direct benefit of their other bugbear -- globalization. While quick to prescribe elixirs for the poor, they ignore the implicit condescension in their advice -- that they know best about the needs of the people whose causes they claim to champion.

Beginning with a characteristic disdain for facts, Ms. Roy and the leftists damn the free markets for all the problems that bedevil India's vast agricultural industry. Never mind that the percentage of India's poor, while still substantial, has showed a steady downward trend from nearly 40% ten years ago to approximately 30% today. With the fervor that ought to be the envy of the very people they term fanatics, they rail against the evils of the free market while retaining a tireless belief in the benevolent hand of the government -- a phenomenon that has never been borne out empirically anywhere including in India.

Fatuously, they expect that the private sector, the object of their scorn, to lap up the loss-making Public Sector Units. At the same time they expect the few remaining and fast diminishing profit making government owned companies to remain at the mercy of rent-seeking bureaucrats and politicians. Somehow, these individuals, most of whom have never been accountable to competitive market forces, are expected to make command and control decisions that will accrue to the benefit of the poor and downtrodden while supposedly disgorging ill-gotten profits from the evil businessperson. The inherently ill-concealed contempt for the poor lies in their thinking that the poor (farmer) cannot compete without an over-weaning government. That countries around the world have never risen from the morass of poverty based on aid or subsidies is an argument that falls on deaf years.

The left is unwilling to acknowledge that the miserly 3% historical rate of growth in agriculture in post-independent India has less to do with the unpredictable monsoons and much more with the constraints on inputs, distribution and pricing. Is it any wonder that despite accounting for some 30% of GDP Indian agriculture's impact on world trade is less than one percent? Quite evidently, the small farmer did not benefit adequately or quickly enough from the patchy liberalization policies of the last decade. The plight of the small farmer today (as always) may give Congress and its dirigiste allies reason to crow but what is notable is their selective amnesia in ignoring the fact that it was their decades long practice of central planning that brought the farmers to their present sorry state.

The reality is that the liberalization followed by the erstwhile NDA coalition was not too much but too little. There is little reason to believe that partial liberalization even to "good governments" such as the erstwhile regime in the state of Andhra Pradesh was anywhere near adequate. A recent CATO institute study has shown that foreign aid even to governments with ostensibly good institutions and policies tends to hurt rather than help. The analogy can easily be extended to India's agriculture sector which could do with far more economic freedoms. With a numbing array of rules on distribution, pricing and import controls still in place it is unsurprising that only large farmers have benefited from the limited light shone by way of partial liberalization. The disconnect between 20% export-growth since liberalization in the farm industry was introduced in 1991 and the stifling of the small farmer stems from a variety of factors not the least of which is the unequal opportunity afforded for export while constraints remain on the domestic production sector.

In the end, individual economic choices, more than any coddling by the state, are likely to break the monopoly of the large agricultural families who benefit by gaming the system to their advantage. India's new rulers should glean the right lesson from their wafer thin mandate to govern by applying an equally slender set of governmental regulations to industry.


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