Rediff.com« Back to articlePrint this article

Bad ideas vs good men

June 22, 2004 10:37 IST

The United Progressive Alliance has governed for a month. During this period, Gresham's law ("bad money drives out good money") seems to have held sway in the realm of economic ideas.

The Common Minimum Programme has been a fertile breeding ground for many bad ideas. Subsequent pronouncements by ministers (or reports of their forthcoming initiatives) have also contributed their fair share.

Over the same period, the government's top economic management team has taken shape, with Manmohan Singh as prime minister, P Chidambaram as finance minister and (most recently) Montek Ahluwalia as deputy chairman, Planning Commission. It would be difficult, perhaps impossible, to conceive a stronger economic top team at cabinet level.

Yet their exceptionally high calibre makes for intriguing contrast with the poor quality of economic ideas swirling around in the CMP and ministerial pronouncements.

Such tension between bad ideas and good economic managers cannot persist indefinitely. Economic governance over the next few months should be a fascinating battle between good men and bad ideas, a battle which will yield winners and losers.

Since the quality of the top team is hardly at issue, this piece will dwell on the some of the bad economic ideas ambient in current economic policy documents and pronouncements. Let's start with the CMP.

Item: A National Employment Guarantee Act to guarantee 100 days employment per year at minimum wages for at least one able bodied person in each rural household.

Several analysts have already noted the massive fiscal costs of this proposal and the dubious value of assets that might be created. The organisational challenge is also daunting. Then there is the fundamental issue of long-term sustainability of such "make work" programmes.

Item: "Fullest implementation" of minimum wage laws for farm labour. It's hard to think of a more fearsome anti-poor, anti-employment measure than this innocuous sounding commitment. Let's hope it's not meant seriously or, alternatively, "fullest implementation" connotes the status quo.

Item: Raise public spending on education to at least 6 per cent of the GDP. Aside from the obvious problem of resources, this promise (and the similar one on health) totally misses the real problems of ineffective service delivery and absence of accountability in the bulk of our public social sector service systems.

Item: Government will be "sensitive to the issue of affirmative action, including reservations, in the private sector". If sensitivity leads to enactment of reservations in private sector employment, they will become huge disincentives against any fresh employment and will, at one stroke, grievously undermine the international competitiveness of Indian firms. And the costs in terms of social conflict could be awesome.

Item: "Generally" profit-making, public sector companies will not be privatised. That pretty much terminates existing policies for disinvestment/privatisation. The capital market has certainly taken that view and hugely reduced stock valuations of PSUs. Corridor gossip confirms serious inactivity in the Department of Disinvestment.

As for loss-making enterprises, the chances of successful sales by government are next to nil. Who will have the courage to set reserve prices low enough to allow successful transactions?

Item: Go slow on reform of labour laws. These laws have probably been the single most potent cause of stagnating employment in organised industry. Going slow with their reform means going slow with industrial job creation.

Perhaps the CMP is not meant to be taken seriously? So why worry about the bad ideas and policy suggestions that litter the document? So runs the siren song of some optimistic commentators. To them I would say, beware!

A massive National Advisory Council to oversee implementation of the CMP is apparently being established and will be headed by Congress president, Sonia Gandhi. Besides, most of the policies noted above have been repeated in the President's Address to Parliament making them tantamount to government policy.

The CMP has not been the sole source of bad economic ideas in the past month. There have been others. Take the case of the steel price regulatory authority mooted by the minister for steel.

The proposal is redolent with all the bad old ways of the licence-permit raj. Lest you treat it lightly, be warned that the machinery of the Iron and Steel Comptroller and the Joint Plant Committee still exist and can be swiftly activated.

Most disquieting is the fact that there has not been (to the best of my knowledge) any contrary reassurance from either the prime minister or the finance minister.

Contrast this inaction with the swift bringing to heel of the external affairs minister when he seemed to stray a bit from the "no Indian troops in Iraq" doctrine while holding a joint press conference with Colin Powell in Washington recently.

Another bad old idea that appears to have been resurrected is that of having a national investment commission or investment promotion board, tasked with promoting investment (mainly domestic) in the country.

Such a body is likely to be dysfunctional at best and obstructive at worst. We already have several departments of industry and industrial development whose prime task should be to promote healthy industrial growth and investment. We don't need new administrative organs to promote investment. We need better economic policies and better infrastructure.

If we have those, more investment will happen. If we don't, no amount of administrative tinkering will do the job. Yes, at the level of states, promotional bodies can speed up allotment of land, water and electricity connections and various approvals. Most states already have such organs; they are dormant in some states and effective in others.

A third dubious (and very, very old ) idea doing the rounds is that of sharply expanding rural credit. This one has been thought of quite frequently, approximately once a year at Budget time!

The underlying problems are deep-seated and include a floundering system of cooperative credit institutions, bankrupt regional rural banks and serious weaknesses in the real agricultural economy. Loading this creaking system with politically-driven increases in credit is simply paving the way for more bad loans and more fiscal bailouts of credit institutions in future.

Given the past history of similar compulsions, a good hard look at Nabard's balance sheet may be more urgent than exhorting that apex organ to pump up rural credit.

As you can see, there's no lack of bad economic ideas. Indeed, it's hard to keep them from bubbling over. (It reminds me of a pithy comment on our politics by a wise old friend when he said, "In Indian politics it's impossible to keep a bad man down"! The current controversy about "tainted ministers" vindicates his quip.).

Seven decades ago, John Maynard Keynes, the father of  macroeconomics, warned against the pernicious influence of bad old ideas on current economic policy.

Today, in India, we look to a few good men in the top economic management team to hold back the tide of bad ideas and advance real economic reforms. We should wish them luck from the bottom of our hearts. 

The writer is a professor at ICRIER and former chief economic  adviser to the Government of India. The views expressed are personal.

Powered by

Shankar Acharya