India Should Re-Wrap Economic Reforms

I do not minimise the difficulties that lie ahead on the long and arduous journey on which we have embarked. But as Victor Hugo once said, “no power on earth can stop an idea whose time has come”. I suggest to this august House that the emergence of India as a major economic power in the world happens to be one such idea. Let the whole world hear it loud and clear. India is now wide awake. We shall prevail. We shall overcome.

In the two decades since Manmohan Singh’s hat-tip to Victor Hugo, and open markets, per capita income in India has grown from $309 to $1,477 (in today’s dollars), outstripping that of 19th century US and 20th century Japan. Life expectancy at birth grew by seven years, infant mortality rate fell by 40 percent and wage inequality between scheduled caste and other workers declined during the same period. Caste-based differences in grooming, eating and occupation narrowed as more open markets allowed a greater number of people to access a wide range of consumables and services. Yet, despite these lofty successes of the 1991 reforms, pro-market policies are viewed with deep suspicion and antipathy in India.

The reason for that perhaps lies in the way reforms were thrust on the country. A 2008 paper by Peter Boettke, Christopher Coyne and Peter Leeson titled ‘Institutional Stickiness and the New Development Economics’ has an explanation that could fit India. The economists theorised that big institutional changes should be rooted in existing cultures, customs and belief systems of a nation to succeed. They called it métis.

Métis is a set of informal practices and expectations that allow ethnic groups to build successful trade networks. The diamond trade in New York City, for instance, is dominated by orthodox Jews who use a set of signals, cues, and bonding mechanisms evolved over centuries for trading. The trade would not function as smoothly if random traders were placed in the same setting. This difference can be ascribed to métis. Because it is based in the accepted, understood, and habituated mentalities and practices of indigenous peoples, the presence or absence of métis explains the stickiness of various types of institutions. In fact, métis can be imagined as the glue that gives institutions their stickiness.

A large portion of the Japanese métis, which was harmonious with large-scale organisations, trade and market exchange, remained intact in the post-war period, helping in its successful reconstruction. While the Japanese adopted a constitution affirming their commitment to Western democratic institutions, much of the language expressed pre-World War II traditional Japanese social and political values.

Why did India fail to do this? The reasons are embedded in what and who influenced post-Independence India’s politics and economic thinking. The foremost perhaps is the Nehru-Gandhi family’s socialist bent. Socialism took India from one of the first developing countries to manufacture automobiles in the 1930s to one whose primary export was communicable diseases by 1991. No member of the Congress party dares say Nehru or Indira Gandhi got it wrong because the Indian métis is incompatible with socialism, even when moving away from it. Manmohan Singh began his July 24, 1991, Budget speech by saying how he was “overpowered by a strange feeling of loneliness” because Rajiv Gandhi was no more. He went on to say, “thanks to the efforts of Pandit Jawaharlal Nehru, Indira Gandhi and Rajiv Gandhi, we have developed a well-diversified industrial structure.”

Forty years of socialism meant that India produced political parties which excelled in winning elections in a socialist economy! Winning elections meant selling ‘collectivist’ ideas that were alien in an India métis. Market reforms in India remain a set of ‘dry economic ideas’ because there are few with the experience of selling these as ‘political ideas’. The reformers were unable to convince even the intellectual elites in influential economic institutions and learning centres. That meant the premier institutions dedicated to studying economics and Indian society did not believe in reforms, at least initially.

It has had its natural consequences. Not only did economic reforms sell poorly, the new policies edged out—instead of integrating and modernising— traditional economic institutions and practices like badla (stock market lending mechanism), hawala (a much-maligned, but low-cost and efficient money transfer mechanism), and rural moneylenders.  

It is time India expresses economic freedom through its own social values—not as a tool, but as a value in itself. Economic freedom ought to be seen as a pre-requisite to benefitting from a rich tradition of business and entrepreneurship inherent in India’s diversity. Various communities have showed sharp business acumen, innovation and entrepreneurial skills. Indian managers are prized assets even on Wall Street. The Sikhs, Jains, Marwaris and Parsis have demonstrated their skills in building world-class businesses.

The idea of economic freedom must also be explained through the thoughts of influential Indian intellectuals. It is no secret that B.R. Ambedkar’s economic beliefs tilted towards Adam Smith rather than Karl Marx. Freedom fighter and India’s second home minister C. Rajagopalachari went even further. “A free market…will result in expansion of industry and rise in employment,” he wrote in 1958. Rajaji, as he was widely known, believed that political freedom could not survive unless it was sustained by economic freedom.  The idea of economic freedom is not new to India. The challenge for reformists in India is to promote elements of the Indian métis that are in harmony with a free market economic outlook. In short, the way in which economic reforms are presented matters.

Vipin P. Veetil is doing his Ph.D in economics from Iowa State University. B. Chandrasekaran works in public policy in New Delhi.