Some Thoughts on Indian Economic Development

Ajit Balakrishnan is the author of The Wave Rider and writes “The invisible hand of the government” in rediff business HERE 

“Why don’t Indian universities (and the Indian Institutes of Technology, Indian Institutes of Management and the All-India Institute of Medical Sciences) and Indian businesses converse with each other, define research problems and quickly produce the stream of inventions that will lead to explosive growth and completely new industries, asks Ajit Balakrishnan”

“Very little direct government expenditure was incurred -- success was relatively costless. But the “invisible hand” of the government is rarely acknowledged in popular accounts.
Depending merely on Adam Smith’s invisible hand, the market, transforming an individual’s pursuit of his own again into a societal gain may not go far in these matters.
Thousands of heroic entrepreneurs in hundreds of industries could be energised with similar costless policy initiatives. 

These policy initiatives are the invisible hand of our time.”

Comment

Seems a sensible and practical question.  However, the suggested case examples include the “Indian pharmaceutical industry” and “India’s IT services industry”.  In Pharmaceuticals, the government initiated changes in patent laws, making imitation easier and in IT it sponsored Unix and related data base systems, leaving entrepreneurs to take advantages of the new rules.  Two apparent successes do not make a sure thing (were there no failures at all?).

With millions of qualified graduates on stream from universities and colleges, the needed workforce was available.  As India was moving from a heavily-populated rural economy and its town populations were booming, these changes accelerated the processes needed for rapid economic boom. Towns have always been hot-beds for markets.

But Indian Governments were dominated for decades after independence by an ideology inimical to the development of markets.  Left-leaning, socialist thinking governments considered that state-managed planning was the road to development, not ‘capitalism’.  Internationally, India was non-aligned, stepping outside the Cold War fixations of the Western democracies versus the Soviet 5-year planning regimes managed by communist parties in Russia and the dictatorial Communist Party in China.  State planning stunted the development of an entrepreneurial culture in all the planned economies and had the same debilitating effects on their performance in many communist and European democracies.

So both the measures advocated today by Ajit Balakrishnan required a massive change in Indian political ideologies that had dominated the State and electoral parties in India for many decades since independence in 1947.  Much of this happened electorally in India. There is a long way to go – films about the slums of Mumbia show just how far India has yet to travel. They also show just how vibrant entrepreneurial energy there is in India right down into those slums, even at the petty level of waste reclamation and a habitat suited to criminality.

The population of India at 1 billion has potential markets for all manner of consumer goods, and most critically too, the potential for capital markets in modern industries like steel, motor vehicles, chemicals, IT and aircraft.

The vast bureaucracy of the Indian government, the corruption endemic across society, the shuffling of political alliances of convenience, and the in-built inefficiencies of state-managed ‘investment’ in projects in pursuit of rapid results, combine to slow down the very entrepreneurial transformation that is wanted on all sides of the political spectrum.

Ajit Balakrishnan is not wrong in his objective, but he may well be wrong in the means by which he hopes to realise it.  For Adam Smith in 18th-century Europe, markets and their associated innovative technologies and products were also associated with personal liberty, sound government, the rule of law, and private property rights. Two-hundred and fifty years of the experience of market-led opulence confirmed Smith's insights.