In your interest.
Online Personal Finance Magazine
No beating about the bush.
Market economy is not something the government can “impose” overnight. It requires social recognition, re-drawing of social contracts, probity in public life and ethics in relationship-based transactions
Three societies, namely China, Russia and India are struggling to become market-oriented economies from having been in different shades of socialist practices. Of course, China and Russia were hard core socialist economies with the state controlling most aspects of the economic sphere. India adopted the “socialistic pattern of society” wherein the commanding heights of the economy were controlled through state ownership.
Major companies in heavy and light industry, banking and insurance were all State-owned. State ownership has in practice the following characteristics
• Major expansion/location decisions are taken based on political consideration
• All major decisions regarding lending or waiving of loans are based on political considerations
The State begins to occupy a dis-proportionately large role in different aspects, not only of economic activity but also other areas like art, literature and films. It distributes favours and it also gives out awards. Over a period of time a state dependent “Culture” gets created, wherein the answer to every problem is assumed to lie with the Government.
State acceptance is confused with 'social acceptance' and State awards or rewards are equated with excellence in the corresponding field.
Obviously, this creates huge corruption in the system, where greasing palms slowly begins to fuel the engine of any business decision. Substantial amount of time in doing business is spent in dealing with Government minions and worrying about regulatory compliance. Huge departments are created to satisfy compliance needs; business men have a major pre-occupation –namely managing Government. It starts as an art and ends up as science.
Knowing a minister or a bureaucrat connected with your business is more important than knowing your business. In such an atmosphere, innovation, customer care and service excellence take a back seat. Even sectors, like information technology (IT) in India shines due to its off-shore activities. Good numbers of capable youngsters vote with their feet and migrate abroad.
Bank lending decisions are suspect and no serious system of punishing defaulters or chairman for wrong or sometimes mala fide decisions. See an excellent write up that recently came out in this magazine --
In such an atmosphere, when you “open up” the economy, it means entry to large amount of foreign capital and encouragement is given to the same old group of business tycoons to expand their activities. Again, access to power centres is more important. Clamour for reforms ultimately ends up as clamour for foreign capital since that is the easy option to many business tycoons and Government.
Market economy is not something the government can “impose” on the society overnight. It requires phenomenal amount of social recognition, re-drawing of social contracts, probity in public life and ethics in relationship based transactions.
Moving away from socialistic pattern of society to market mechanism is not accomplished with a magic wand. Also, market mechanism need not be only the Anglo-Saxon model. It can be different one, based on specific cultural habits and traditions. Fortunately, in a country like India, in spite of all efforts by the Nehruvian socialistic pattern of society, except some 20% of the GDP, all others were generated by private initiative. But regulations and license permit raj have created a humongous corrupt bureaucracy and to come out of it is not easy.
Our innate ability to respect private initiatives has to be brought back. For that the following needs to be done...
1. Dismantle half the ministries at the Centre, which are mirror images of ministries at the State level
2. Dismantle more than half the ministries at the State level, which are mostly money making activities for the babu class
3. Strengthen municipal and corporation level activities by banning construction contractors and real estate barons occupying elected posts
4. Abolish most local regulations on shops and establishment Acts, food and adulteration act and introduce swift and severe punishments for wrong doing
5. All courts to function in two shifts with enhanced pay for participants. At least criminal cases should be concluded within three years
6. Courts should be discouraged from giving adjournments
The central Government should basically focus on defense, foreign affairs and central taxes and state governments on law and order.
The initiative to do things should be left to individuals and the state should only be a regulator stepping in when things go wrong. It is not an easy task to build a proper market-based economy when most businesses are unfamiliar with it.
Crime will lead to punishment is the only mantra, which can make systems function with probity. Last, but not the least, political leadership must show maturity and probity and a willingness to accept that networking and Sifarsu-based system is no good.
Are we ready?
P.S. Intriguingly, an e mail-released today by Jet Air says that it plans to merge its Konnect type services with main airlines, which -among other things- means providing meals to all passengers. The note says subject to Government approval
(Views expressed in this article are personal)
(Prof R Vaidyanathan , Professor of Finance and Control, has taught at IIM Bangalore for over three decades and is consistently rated as one of its most popular teachers. Prof Vaidyanathan has coined the term 'India UnInc' for the largest component of the Indian economy comprising small entrepreneurs, households. Prof Vaidyanathan sits on the advisory boards of SEBI and the RBI.)