The Future of Free Market in India
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Issue Net Edition | Date : 15 May , 2024

Capitalism and its essential bedrock free market are generating a divided society. Many people lead anxious lives. The social bases of these anxieties are geographic, educational, and moral. It is the rural hinterland rebelling against the metropolis, the less educated rebelling against the more educated. It is the struggling workers rebelling against the rent-seekers. While the fortune of the educated has soared, pulling up national averages with them, the less educated are now in a crisis. The resentment of the less educated is tinged with fear. They recognize that the well-educated are distancing themselves, socially and culturally. Anxiety, anger, and despair have shredded people’s political allegiances, and their trust in government. The less educated were at the core of the mutinies that saw Donald Trump defeat Hillary Clinton in the USA; and Brexit defeat ‘Remain in the UK’.

Nature abhors a vacuum, and so do voters. The frustration born out of the gulf between what has happened and what is feasible has provided the pulse of energy for two species of politicians; populists and ideologues. The last time capitalism derailed, in the 1930s, the emerging dangers were crystallized by Aldous Huxley in Brave New World (1932) and George Orwell in Nineteen Eighty-Four (1949). Keynes’s General Theory (1936) was an effective counterpoint to classical economics’ faith in automatic equilibrium of the economy and the importance of a welfare state to pull countries out of economic depression. The end of the Cold War in 1989 appeared to usher in a credible prospect that all such disasters were behind us; or as Fukuyama would suggest ‘End of history’, a permanent utopia, where liberal democracy and free market are the credo of all countries.  Instead, the 2007 US subprime crisis and its contagion effect showed, that we are facing the all too credible prospect of dystopia.

Capitalism last worked well between 1945 and 1970. During that period, policy was guided by a communitarian form of social democracy that suffused through the mainstream political parties. But the ethical foundation of social democracy corroded. Its origins had been in the cooperative movements of the 19th century. its narratives of solidarity became the foundation for a deepening web of reciprocal obligations that addressed these anxieties. However, the leadership of the social democratic parties passed from the cooperative movement to utilitarian technocrats and Rawlsian lawyers. Their ethics lack resonance with most people and voters have gradually withdrawn their support. Currently, the political battlefield is characterized by alarmed utilitarian and Rawlsian vanguards under assault from populist ideologies This is the political menu from hell. Social democracy needs an intellectual reset, setting in motion interesting mid course correction.

 Anthony Crosland in The Future of Socialism gave intellectual coherence to social democracy in its heyday. It decisively parted company with the Marxist ideology by recognizing that, far from being the barrier to mass prosperity, capitalism was essential for it. Capitalism spawns and disciplines firms, and organizations that enable people to harness the productive potential of scale and specialization. Far from alienation that Marx thought capitalism causes to the workers, many modern firms give workers a sense of purpose, and sufficient autonomy to take responsibility for fulfilling it. If capitalism is to work for everyone it needs to be managed so as to deliver purpose as well as productivity. Capitalism needs to be managed, not defeated.

The new class divide between the prospering educated and the despairing less educated has to be narrowed. None of the new social cleavages can be healed by relying on the market pressures and individual self interest, as Adam Smith had cheerily prophesized. The left assumed that the state knew best, but unfortunately, it did not. The vanguard-guided state was assumed to be the only entity guided by ethics. This wildly exaggerated the ethical capacities of the state. The right put its faith in the belief that breaking the chains of state regulation – the libertarian mantra- would enrich the power of self-interest to enrich everyone. This wildly exaggerated the magic of the market, and correspondingly dismissed ethical restraints. Joseph Stiglitz , the Nobel laureate , in the aftermath of the US financial crisis wrote in his book The Price of inequality: ‘ It led unscrupulous bankers ‘ well-being, with the rest of society bearing the cost’. We thus need an active state which regulates such toxic trends  but one that accepts a modest role. We need the market harnessed by a sense of purpose securely grounded on ethics.

In a remarkable book “The Future of Capitalism” (2018) Paul Collier proposes to heal these cleavages through policies he calls ‘social maternalism’. The state would be active in both economic and social spheres, but it would not overtly empower itself. Its tax policies would restrain the powerful from appropriating gains that they do not deserve, but not gleefully strip income from the rich to hand to the poor. Its regulation would empower those who suffer from Schumpeter’s creative destruction by which competition drives economic progress. The philosophical bedrock of this agenda is a rejection of ideology. The twentieth century’s catastrophes were wrought by political leaders who either passionately espoused an ideology or peddled populism. In contrast to such leaders like Mao or Indira, the most successful leaders of the century were pragmatists. Taking on a society mired in corruption and poverty, Lee Kwan Yew tackled corruption head-on and turned Singapore into the most successful society of the 21st century

In the book The Fix, Jonathan Tepperman studied ten such leaders, searching for a formula by which they each remedied serious problems. He concludes that what they had in common was that they eschewed ideology. Instead, they focused on pragmatic solutions to core problems. They were prepared to be tough when necessary; their willingness to deny patronage to powerful groups was the hallmark of success. Yew was prepared to jail his friends.

In the Indian context, ideology played a major part in shaping public policy, which eschews economic pragmatism, and the role of incentive in improving productivity.  Nehru embraced the socialist ideology of the USSR when he embarked upon central planning with gusto in 1956 and called the public sector undertakings ‘temples of modern India’. His daughter Indira went one step further. While emulating Nehru’s Fabian socialism, she adopted a deadly cocktail of nationalization of banks and coal mines with populist policies like loan melas to garner votes. This was the low noon of growth and productivity when India achieved what Prof Raj Krishna calls a “Hindu rate of growth of 3.5 percent”.

Fortunately, good sense prevailed when spiraling inflation and abysmally low levels of foreign exchange reserves forced India to turn towards a free market philosophy in the ‘90s by dismantling the license, quota, and permit raj. This has unleashed growth momentum, as never seen before, with savings, exports doubling, and a deluge of FDI. Unfortunately, it has also led to an increasingly divided society with the less educated feeling strong resentment against the more educated, because of the lack of employment opportunities. The income inequality between the top 10 percent and the bottom 50 percent of the population has sharply increased as per the World Inequality Report (2023). This is not due to an accident of history but as Thomas Piketty writes is due to conscious public policy that favors the superrich by reducing tax rates, abolishing wealth tax (2017), and giving humungous tax refunds to big corporates.  India under Modi is also countenancing the specter of crony capitalism, with a handful of industrialists monopolizing national resources like infrastructure, energy, and telecommunication. State patronage to powerful corporates has roiled free competition which is the heart of liberal democracy.

Paul Collier writes that ‘with the rise of extremist religious and ideological identities, the social menace is fragmentation into oppositional identities sustained by the echo chambers of social media’. After Brexit and the rise of Trump, political menace is exclusionary nationalism. We are seeing similar specter in India as the nation is in the throes of a general election and the card of religious divide and exclusionary nationalism is unabashedly being played. Building a shared identity in a society with diverse cultures and diverse values is necessary for mutual well-being. Fostering brotherhood is a constitutional mandate. Crony capitalism is getting pitted against the reckless populism of Congress, which proposes to use taxation as an instrument of distributive justice and distributing doles as a gateway to winning elections. Unlike Singapore, which took on corruption head-on, embraced pragmatism and bolstered the quality of education, the main contenders to power in India are twisting the election manifestos to achieve their warped purposes. As the Nobel laureate Abhijit Banerjee and Piketty bring out in their seminal survey of Indian elections from 1962 to 2014 -“political conflicts are increasingly focused on identity and religious conflicts rather than on tangible benefits like education and employment and class-based redistribution”. The present elections are sadly in the hands of charlatan extremes, who are gleefully twisting it to their warped purposes. Free market philosophy which has brought India unprecedented prosperity is hostage to toxic ideology rather than our shared identities and culture.

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The views expressed are of the author and do not necessarily represent the opinions or policies of the Indian Defence Review.

About the Author

Prof (Dr) SN Misra

was previously Joint Secretary (Aerospace), Ministry of Defence, Government of India.

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