Leaps and bounds in Indian Economics

Those who have not read the chapter 2 of latest economic survey should at least read the following paragraphs which are something like a basic economics textbooks should teach students in a holistic way!

• "For achieving inclusive growth there is critical need to rethink the role of the state. The early debate among economists about the size of the Government can be misleading. The need of the hour is to have an enabling Government. India is too large and complex a nation for the state to be able to deliver all that is needed. Asking the Government to produce all the essential goods, create all the necessary jobs, and keep a curb on the prices of all goods is to, at best, court failure, and, in greater likelihood, lead to a large, cumbersome bureaucracy and widespread corruption.

• The aim must be to stay with the objective of inclusive growth that was laid down by the founding fathers of the nation, but to take a more modern view of what the state can realistically deliver. This is what leads to the idea of an enabling state, that is, a Government that does not try to directly deliver to the citizens everything that they need. Instead, it (1) creates an enabling ethos for the market so that individual enterprise can flourish and citizens can, for the most part, provide for the needs of one another, and (2) steps in to help those who do not manage to do well for themselves, for there will always be individuals, no matter what the system, who need support and help. Hence we need a Government that, when it comes to the market, sets effective, incentivecompatible rules and remains on the sidelines with minimal interference, and, at the same time, plays an important role in directly helping the poor by ensuring that they get basic education and health services and receive adequate nutrition and food. This rollback of the Government in the former will enable it to devote more energy and resources to and be more effective in the latter. This changing view of the state will briefly be elaborated upon and then some detailed policy suggestions taken up.

• In many poor nations the Government takes the stance that, when in doubt about the goodness or badness of two or more adults voluntarily conducting an exchange, stop them. An enabling state, on the contrary, takes the view that, when in doubt, do not interfere. There are, of course, many actions of individuals and groups that will need to be stopped for the welfare of society at large. But the default option of an enabling state is to allow rather than stop, to permit instead of prevent. This altered conception of the state can have dramatic effect on the functioning of an economy, in general by promoting greater efficiency and higher productivity.

• The main challenge is to direct the money already allocated to help eradicate poverty. The inability to do so has more to do with ideas than vested interests. Some propositions are obvious as soon as one gives them some thought; but not obvious when one gives them a lot of thought. These are the ones prone to policy mistakes. And once a policy is put into effect and kept in place for a while, vested interests gather in its favour and those interests resist change. But beyond that it is a question of having a road map of where we can go and demonstrating to the larger public that it is a potential beneficiary of the proposed change. Fortunately such a road map is feasible. There are systems of delivery of subsidies to the poor that can be vastly more effective, entail substantial savings and involve no extra organizational cost. In discussing these, it is useful to keep a few principles in mind. For goods that are important for the poor, it is only correct that the state should intervene to cushion the poor. The standard way to do this is by using some kind of a subsidy. However, a common mistake is to suppose that a subsidy scheme has to be coupled with price control.

• This is typically a slippery slope. In a large and complex economy, it is difficult for the state to gauge what the right price of a good is. Moreover, once the Government becomes involved in setting the price of a commodity, this becomes a matter of politics and lobbying, which cumulatively adds to the distortion. Hence prices are best left to the market. If we want to ensure that poor consumers are not exposed to the vagaries of the market, the best way to intervene is to help the poor directly instead of trying to control prices, which almost invariably does more harm than good in the long run, and often even not so long a run. On agriculturesector policy and price control there is need to go the way India did with industry in 1991. Keeping this in mind, it is possible to outline systems of supporting the poor which are more efficient and better targeted than the present ones.

• Through a vast network of public distribution system (PDS) outlets across the nation, we try to deliver some minimal supplies of heavily subsidized grain to our below poverty line (BPL) households and also some to our above poverty line (APL) households. The PDS stores are first given this subsidized grain and then instructed to deliver it at below market price to these specified households. It is believed many of these storekeepers (i) sell off this subsidized grain on the open market, and (ii) then adulterate the remaining grain and sell the diluted product to the BPL and APL households, who have no choice in the matter. We may harangue about the dishonesty of PDS store-keepers and all those entrusted with delivering the subsidies. It is indeed true that personal integrity, honesty and trustworthiness in the citizenry are vital ingredients for a nation’s economic progress—there is enough crosscountry evidence of this. But when crafting policy, there is need to be realistic about the system within which we work. To assume that all those entrusted with the task of administering the programme will do so flawlessly and then to blame them when the system fails, is not the mark of a good policy strategist. For effective policy, what is needed is to take people to be the way they are and then craft incentive-compatible interventions.

• This paragraph outlines an altered system that, once in place, will be no more costly to run than the existing one and is likely to be much more effective. The plan suggested here is not novel and has been suggested on occasion by Indian policymakers and even in Budget documents. However, it has never been fully spelled out. The two planks of this system are (i) the subsidy should be handed over directly to the households, instead of giving it to the PDS store-keeper in the form of cheap grain and then have him deliver it to the needy households and (ii) the household should be given the freedom to choose which store it buys the food from. Suppose the BPL household gets a net subsidy of Rs x for wheat each month. Instead of giving this by charging the household less than the market price for wheat, it should be given coupons worth Rs x, which can be used at PDS stores in lieu of money when buying wheat. Under this new system no grain will be given at a subsidized rate to the PDS stores and they will be free to charge the market price when selling grain irrespective of who the customer is. The only change is that the PDS stores are now allowed to accept these coupons which they can then take to the local bank and change to money, and the banks, in turn, can go to the government and have them changed to money. Further, households that get these coupons should be allowed to go to any PDS store of their choice.

• (ii) the household should be given the freedom to choose which store it buys the food from. Suppose the BPL household gets a net subsidy of Rs x for wheat each month. Instead of giving this by charging the household less than the market price for wheat, it should be given coupons worth Rs x, which can be used at PDS stores in lieu of money when buying wheat. Under this new system no grain will be given at a subsidized rate to the PDS stores and they will be free to charge the market price when selling grain irrespective of who the customer is. The only change is that the PDS stores are now allowed to accept these coupons which they can then take to the local bank and change to money, and the banks, in turn, can go to the government and have them changed to money. Further, households that get these coupons should be allowed to go to any PDS store of their choice.

• Such a system will be more impervious to corruption. Since the store owner will get the same price for grain from all buyers, poor and rich, he will have no incentive, to turn the poor buyers away, as happens currently, and cater to those buying at market price. (If it is felt that changing coupons to money is a bother, we can have a provision for paying store owners an extra 2 per cent when they change coupons to money.) Second, since BPL buyers can go to any store with their coupons, they will be able to boycott stores that try to sell them poor-quality grain or mix gravel with the grain.

• Moreover, it may be desirable to not impose any restrictions on farmers selling off the coupons. If the recipient of a coupon decides that she does not want to buy fertilizers but would rather spend the money on buying a television set instead, we have every right to have misgivings about this preference, but it is not a good idea to use the state’s enforcement machinery to correct this. Modern behavioural economics reminds us that there are situations where individuals act against their own interests because of lack of self-control or inconsistencies in their inter-temporal preferences, and so some paternalistic interventions can be good for them. While this is true, Government action to redirect individual choice ought to be measured and minimal. To try to meddle excessively in individuals’ preferences is a mistake because it encourages Government to reach out to doing more than it realistically can, creating unnecessary bureaucratic hurdles and breeding corruption.
• India has one advantage over most emerging economies and even some industrialized ones–its vibrant democratic institutions and independent judiciary. This has greatly helped India gradually take its place among the leading global economies of the world. While this has helped the nation, there is another feature that has been a hindrance–India's high bureaucratic delays. Thanks to recent data collection from around the world on bureaucratic transactions costs, there are now hard statistics on where India stands.
• If one were to look at this from a brighter angle, India’s unpardonably large bureaucratic costs are like a valuable resource buried under the ground, waiting to be excavated and used. Cutting down these costs is like unearthing a free, valuable resource that was lying idle. It can release large energies in the nation and boost productivity and growth. Ironically, this can be India’s gold rush.
• This problem is at times put down to the size of India’s bureaucracy. But that is not right. A complex economy such as that of India’s does need substantial numbers to regulate and run it. By comparison with even some vibrant market economies, the actual number of people running the Indian Government is not large (see Box 2.3 for illustration in the context of India’s tax administration). Further, there is a lot of talent in the Indian bureaucracy, since the selection process is highly competitive. The problem lies elsewhere, in our conception of the state, to wit that it has to directly deliver on every front and not be content with an enabling role; and also in the rules, regulations and procedures inherited from our colonial times, and made more cumbersome with layers of further procedures and regulations added like on a palimpsest. The situation is like a traffic jam–asking each person to move is useless advice. The need is to reform the system. If the current system of subsidies can be reformed, this itself will release a lot of human resource that is presently tied up in the pointless complexities of running an inefficient system. Also the changes in the tax system—the Goods and Services Tax and the Direct Tax Code— that are being contemplated can have substantial impact on not just improving the efficiency of the taxes but on simplifying the procedures for paying taxes."