6 steps to move from cozy socialism and crony capitalism

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


  • • Senior executives are appointed based on political preferences

• 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.)

Sankar Amburkar
7 years ago
"Are we ready?" - if this is a question to the (paid) readers of moneylife, the answers most likely to get is an resounding "YES". If this is question for the entire country then probably NO.

We have heard the political circle and pundits talk about various reforms in many forums. What is required now is action. There are some who are ready for it and there will be many who will oppose. The question I have is "How do we implement these changes?"

Mahesh S Bhatt
7 years ago
Professor its good to give gyan from IIM B but challenge is we defeated Anna who was fighting for Bhasmasura Corruption across boards.

To get permission for Sports Complex we need Sports Ministry, HRD & scores of respective sports body.

This is global so what are the real challenges.

We had extreme socialism failing extreme Capitalism making world stare at World Biggest recession.

Inculcate Values for Vision & Wealth.preview http://www.youtube.com/user/kirtidabhatt Mahesh
7 years ago
Who will bell the many cats? Sixty Seven years of India's grotesquely evolving Animal Farm constitution, where "all animals are equal, but some are more equal than others", "four legs good, two legs bad" and "farmer Jones is coming back" have surfaced a neta-babu-milard-cop-kleptocracy and ensured that the sina-qua-non of power and wealth is corruption, cronyism and abuse of power. The very raison de etre of the Indian Republic is to apply the resources of the Nation to personal pelf, pomp, pleasure and perpetuation.
shadi katyal
7 years ago
The article does shows the way for such changes but will the bureaucrats let it change as they donot wish to kill the golden goose of bribery.
As for the public mindset has to be changed and after the liberalization people found the freedom and quality products yet we did not go all the way.
Permit Raj has to be dumped and I fully agree that lot of ministries must be abolished. We are still tied to the apron of colonial days and thus too much interference of Govt in every aspect of investments and industrial polices.
Our greed drove INTEL away from India to Vietnam despite INTEL wish to build a $2 Billion plant.
We have certain anti-industry social elements who try to block any progress. POSCO is a good example.
Govt must get rid of all PSU and let the private management take over as senior Govt officers are a hindrance and live in the cocoon life of VIP. Many export industries had been
destroyed because of highhandedness and undue interference.
Nation did not fully liberalized and thus now we are confused.
The Russian model of Nehru does not suite but Anglo SAXON will do better as it is a tested one.
Can new Govt do it????
Abhijit Gosavi
7 years ago
From some recent alarming tweets on twitter, it appears that RBI hires are also based on connections. Perhaps, RBI was always like that (I honestly don't know), but with the new govt. in place, there was great hope that things would change and that merit would supersede connections.

If merit/due process of interviews in hiring are ignored, then, nothing will change, and that makes me v. sad. Honestly, I am appalled that economic policies do not appear to be changing. Elderly people like my parents did not stand in long lines to vote for a continuation of UPA policies. And I say the following from the bottom of my heart.

Prof. Vaidyanathan, whose excellent book (India Uninc) I am currently reading, is undoubtedly an expert on the Indian economy. Homegrown experts like him have a superior understanding of the problems there than people studying these problems from miles away. What they say needs to be taken far more seriously than someone who even had released questionable data about the Gujarat model.
7 years ago

Professor Vaidyanatha , is a well respected person and his opinion will surely count.

Somehow he seems to have truncated the article without going the whole distance in many critical aspects like real estate, forex convertability, stock exchange , food and distribution , education etc. All these areas have created massive corruption and utter disregard to talent and quality.

Also the suggestion that state be a ' regulator' should be replaced by 'facilitator'

Gopalakrishnan T V
7 years ago
The article is well presented and needs to be given a serious thought for implemetation of various suggestions to reap the benefits of socialism and remove the disadvantages of crony capitalism.In all our public policy documents,the intentions spelt out are really laudable but they provide lot of scope for corruption and no scope to arrive at the benefits derived. The need to have a social audit with persons of proven integrity with only social bent of mind is what is called for to ensure that the benefits intended under public policies are really derived and reaching the masses. Business run on political considerations, contacts and influence only damages the social amd moral fabric of the society and that is what is seen in our Public Sector Banks with staggering NPAs,dishonest and unskilled professsionals getting appointed as Board of Direstors, auditors lack of concern for ethics in dealing with public moneyetc. This article should serve as an eye opener and should help to bring the badly needed change in our system of Governance and management of Public Policies and institutions.
Bankimchandra Desai
7 years ago
Prof.R. Vaidyanathan's suggestions are known to all politicians and bureaucrats for long. Rajiv Gandhi with absolute majority could have done this. He did not. Now NaMo has a chance to do this. He will NOT do this. His very survival, political, will be at stake. Absolute political power at New Delhi was his dream, which he will not allow to wither away.
7 years ago
The Article is comprehensive and impresses directly those who want something better for the country and disown the current system of governance-corrupt to the hilt and incapable out and out. The principle and practice of market economy is clearly dependent on a nexus between Govt and private operators. PPP model means all resources like land, forest, water and minerals to be provided free by the Public and profit to be earned by the Private. Inefficient functioning by the Sarkari Babus and the Govt machinary must be brought under criminal code and made punishable under the law.Somebody should explain how and why Babus and most of the corrupt politicians are still not behind the bars when everyday we read of the proven stories of their incompetence.
Abhijit Gosavi
7 years ago
Several excellent policy recommendations. The govt. needs to read this.
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