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.)

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    Sankar Amburkar

    6 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

    6 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


    6 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

    6 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

    6 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.


    6 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

    6 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

    6 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.


    6 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

    6 years ago

    Several excellent policy recommendations. The govt. needs to read this.

    3 Reasons why labour market is hindering India’s growth
    According to Morgan Stanley, current labour laws in India incentivize firms either to remain small, employing fewer workers, or to use capital- intensive approaches. No wonder, the share of India’s manufacturing sector in GDP of is one of the lowest among EMs
    India’s track record in terms of creating productive jobs has been slow so far. One of the key issues stifling productive job growth is labour market regulations in the country. In addition, multiplicity of laws, rigidities in the system and trade unions play a major role in holding back India's labour market environment, says Morgan Stanley in a research report.
    "Labour regulations in India are seen to be complex, rigid, time-consuming, and one of the main impediments to job growth in the organized sector. However, it is important to note that most labour regulations are seen to stifle job growth in the manufacturing sector. The services sector (mainly IT/ITES, retail comes under a different) has largely escaped stringent government, administrative requirements. Moreover, labour laws also create segmentation in the labour force – ultimately, the labour provisions meant to safeguard worker interests are applicable only to the much smaller organized labour force, which is about 16% of total. Thus, majority of the workers in India are not covered by regulations that are needed to protect their interests," the report says.
    Labour law is a concurrent subject under the Indian constitution, which implies that both the central government and state governments have the right to formulate laws on the subject. This has resulted in multiplicity of laws, at times with overlapping jurisdictions. Currently there are 44 central laws and about 160 state laws on the subject (ILO, 2013). Many of the laws are archaic, dating to pre-independence – creating an urgent need for an overhaul of the laws to attune them to present realities. 
    Indeed, there are multiple laws governing a single area. For instance, there are 19 laws governing conditions of work and industrial relations, 14 laws on social security and labour welfare, etc. Here we have only mentioned the central laws applicable to these areas. 
    According to Morgan Stanley, a fallout of the cumbersome labour law structure is that the organised sector has remained small, accounting for only 16% of the total employment and the bulk of labour force is employed in the unorganised sectors.
    In addition, Morgan Stanley says, the regulations are also viewed as increasing rigidities in the labour market, owing to restrictive conditions on hiring and laying off workers, closure of plants, and dealing with trade unions.
    "Though India does not have the provisions for collective bargaining, the emergence of various trade unions leads to bargaining at an individual firm level. Moreover, the most pressing issue faced by industry is that trade unions tend to get associated with/backed by different political parties, leading to politicization of trade unions and making it difficult for employers and employees to resolve the issues," the report added.
    Comparing labour regulations in India with other countries, Morgan Stanley says, most other nations do not have a stringent requirement of prior approvals and consultations (hire and fire practice), apart from Pakistan and Sri Lanka. The report says there is dire need to reform labour laws, especially related with trade unions.
    Under Indian law, there is scope for multiple trade unions in a single factory – e.g., a company with 700 workers can have 70 trade unions. In most other countries, the requirements for minimum membership for trade unions to be recognized are higher than those in India, reducing the scope for multiplicity of unions. 
    Morgan Stanley says, it believes India needs to amend provisions,  which allow outsiders to be office bearers. Currently one-third of the office bearers or five (whichever is less) can be outsiders. India also needs to introduce a strike ballot such that a strike can be called only if it is supported by a qualifying majority. Moreover, under the Industrial Disputes Act there is no provision to give advance notice for a strike unless industries are mentioned under public utilities, contrary to the general practice in many countries. Thus,  there is a need to amend this to introduce a mandatory advance notice for all firms, it added.
    Indian policy makers are slowly paying attention to the fact that tight labour market regulations are having a negative impact, especially on manufacturing sector job growth. There has been a lot of discussion of this, yet governments have stopped short of making any full-fledged changes to the laws to reduce the rigidities in the system, Morgan Stanley says.
    From the early days of its formation, the new government has been making announcements of its intention to boost manufacturing sector jobs. Indeed, Prime Minister Narendra Modi again made a firm commitment on the need to work towards boosting manufacturing exports in his speech on Independence Day.
    Morgan Stanley said, apart from amending the laws, the state governments will need to initiate effort to bring about a change in attitude among local field officers and inspectors who are in charge of enforcement of labour laws.
    A comprehensive review and restructuring of labour laws is required to make them more attuned to the present economic realities. "We believe that the central and state governments have recognized the need to initiate labour law reforms in order to boost manufacturing sector jobs. So far the governments have taken a piecemeal approach – but there now appears to be serious effort by the central government and some of the state governments to revive the manufacturing sector," the report says.
    Morgan Stanley says it is cautiously optimistic about amendment to labour laws by the Central Government, since getting approval in the Upper House (Rajya Sabha) for some sensitive changes could be a challenge with a lack of majority for the ruling coalition. It says, "We are more optimistic about state governments going ahead with meaningful labour law reforms. The recent amendments to labour laws by Rajasthan are a case in point."
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    India-China: Important issues to settle in September
    Apart from the frequent border incursions in Arunachal Pradesh, China has showed its distinct dislike for even India to explore oil blocks that Vietnam had offered. Can both countries bury the hatchet and settle all impending issues when their chiefs meet in September? 
    One of the earliest diplomats to visit New Delhi and call on the Prime Minister Modi was Wang Li, the Foreign Minister of China. This was in apparent early bird move to ensure a meeting of President Xi Jinping with Prime Minister Narendra Modi in September, which is now confirmed. But the dates have yet not been officially announced. The Chinese President is aware that Indian PM Modi is set to meet President Barack Obama on 30th September in the White House.
    His emissary, in the person of Sushma Swaraj, is on the move and has covered several countries, including Myanmar. She is now in Singapore. Modi's plans include a short visit to Japan to meet Shinzo Abe, his counterpart, and a great friend and admirer of India. (Abe has a few issues of his own to deal in relation to China). Modi will also receive the Australian PM Tony Abbott in September.  A very tight schedule and a lot of important issues are to be covered with all these important diplomats.
    Of immediate importance is the planning for President Xi Jinping's visit. Indian imports from China have been increasing at a tremendous pace to reach $52 billion in 2012-13 as against India which could manage a poor $13.5 billion.  In the meantime, the target for trade by 2015 could reach $100 billion of imports. Imports from China are likely to be far more than the exports India can muster.
    In order to make President Xi Jinping's visit a success all round, efforts have already been made by the Chinese government. An advance team from China visited India to study the prospects for cooperation in Railways. It appears this team has had its first round of preliminary consultations with the Ministry and all others concerned. According to China's Consul General in Mumbai, Liu Youfa, they may even sign an MOU (Memorandum of Understanding) on their cooperation in this area.
    In the recent months, China has made other moves showing its ambition to be the lead banker for infrastructural development in Asia by garnering support from BRICS in setting up NDB (National Development Bank) with an  authorised capital of $100 billion. All the five members will equally share $10 billion to meet the paid up capital.  The founding members, Brazil, Russia, India, China and South Africa are also keen to go ahead with this. China has been explaining that NDB will be able to reduce the clout enjoyed by the World Bank and Asian Development Bank. Beijing's ultimate interest is to reinforce its economic clout in this area.
    In so far as Modi's visit to Japan is concerned, both India and Japan have a common factor of checking the aggressive designs of China. Since 1894, Japan has been controlling Senkaku Island, which the Chinese call as "Diaoyu".  China has attempted to dominate the East China Sea and has territorial claims also on Vietnam, Philippines, Malaysia, Brunei, Indonesia and Taiwan.
    It must be noted that these claims with all its maritime neighbours are in violation of the UN Convention on Laws of the Seas (Unclos). Because of this bullying attitude all, these nations look towards the US for support. In the case of India, apart from the frequent border incursions in Arunachal Pradesh, China has showed its distinct dislike for even India to explore oil blocks that Vietnam had offered. India should go ahead with this exploration, and also not be afraid of taking part in joint military exercises with Japan, US or any other nation.
    Apart from the two-way trade relationship that China enjoys with Australia (reaching $133 billion in 2013), the latter also has inward migration from Chinese people.  Although Australia's relations are good, they have some concerns too. After seeing what is happening in the neighbourhood, the Australian cabinet minister Malcolm Turnbull, a key lieutenant of PM Tony Abbott is reported to have called the Chinese policy of dealing with its neighbours as "counterproductive" and "singularly unhelpful" to regional security.
    As far as India is concerned, China's claim on Arunachal Pradesh has no legal or historical basis. It may also be remembered that illegally occupied Aksai Chin was passed over to China by Pakistan, which has been, so far, its closest friend! China's policy of "strategic containment" of India by enchancing Pakistan's military might, particularly in the nuclear field has been alarming, to say the least.  Also, they are in various stages of completion of Gwader all-weather port in Baluchistan.  They talk of friendship but are covering India from all sides.
    The Chinese have employed other techniques to keep claiming Arunachal Pradesh as their own. From time to time, they issue wrong maps of their own choice and creation; they issue stapled visa for Indians from Arunachal Pradesh visiting China and most importantly, they do a lot of export of goods that can be easily made in India. Here, it is the importers in India who should be blamed for obtaining such cheap goods from China.
    When President Xi Jinping comes to India for serious discussions, it is imperative that Prime Minister Modi, while welcoming him as an honoured guest of India, must ensure that the following issues are discussed threadbare and basic understanding reached, so that final agreement can be signed within the agreed time frame.  These are:
    a) our present LOC is the final actual border between the two countries and that China should return back those territories given by Pakistan from PoK. The PLA will not any more tresspass into our territories, nor there any intrusions in the air.
    b) China will whole-heartedly support the induction of India as the permanent 6th member of the UN Security Council
    c)  India would welcome a restructuring of the UN Security Council itself. The policy of UK and France enjoying the permanent member status should be null and void, and should be replaced by a permanent representative nominated by European Union
    d) this change, if approved by the UN General Assembly, would leave USA, China, Russia, India and European Union as permanent members.  If, however, UNSC is to be made a 7-member council, Brazil, South Africa and Indonesia should be considered and two of them selected
    e) To increase our bilateral trade and other relations, it is essential that China undertakes to not give any more military assistance to Pakistan. India will be willing to sign a no-war treaty with Pakistan, if China truly guarantees that it will not arm Pakistan any more. Also, China should not support so-called jihadi groups in J & K region.  If anything, China should advise Pakistan to dismantle such terror camps.
    f)  China will not be the springboard for shipping fake Indian rupee currency notes
    g) China and India agree to mutually help each other in exploring for oil and other sources of energy, such as solar
    It would be a great day if PM Modi and President Xi Jinping can jointly achieve these objectives before them so that both Indian and Chinese people can live in peace.
    (AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce. He was also associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
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