Capitalism: India needs to be cautious
Starting with a mixed economy after independence to the recent PSE(Public Sector Enterprises) privatization plan, India has come a long way. The question that arises is whether Capitalism can create the constitutional requirement of the welfare state that Socialism failed to do?
Capitalism — Private industries will be given free hand to do business. The role of the government will be to regulate the private sector.
Socialism- Industries will be set up by the government; meaning the government itself will do business to ensure social welfare .
Indian Economy At a Glance
Indian economic model at independence was shaped by 2 major events of the first half of the 20th century — The great depression caused by American capitalist policies and the success of the USSR’s socialist model. Therefore, the left inclination of India’s economic model was inevitable. But since India is a land of Buddha, we chose the middle path of both capitalism and socialism. The government set up major industries and private companies were given some space to operate but with strong regulations( AkA License Raj)
During Indira Gandhi Government, socialism got stronger with the nationalization of banks and with Garibi Hatao Andolan(Remove poverty Campaign). However, there is some inherent problem with socialism which is the social welfare objective behind the working of Public sector Enterprises. How can a company sustain itself if it is not thinking about profit but social welfare?
For example, According to Government guidelines, a PSE should buy from small industries at 30$ for social welfare but the same thing it can get at 15$. It’s unsustainable, leading to inefficient allocation of resources. Also, there is no incentive for small industries to grow big. Economic Survey of India called it ‘Peter Pan Syndrome’.
Soon its unsustainability came to the limelight- First with the Fall of the Berlin wall( Russia lost the war from the US) and Second with the Balance of Payment crisis in 1990 in India.
Then came 1st generation reforms in 1991 spearheaded by Manmohan Singh. We also broke down our Berlin wall, and our economy was opened and LPG( Liberalization, privatization, and globalization) reforms were taken up. Soon our GDP garnered strength as it unshackled itself from the ‘Hindu rate of growth’. India started a journey that china began 2 decades ago and it helped so many people to move above the poverty line. We recovered on the Balance of payment part, right now we have one of the largest international reserves.
However, Our economic model created some structural challenges. Generally, the flow of economy is -
Agriculture — >Manufacturing — ->Service
But our economy moved from agriculture to the service sector directly without the mature manufacturing sector.
It is the manufacturing sector that absorbs most of the working people and increases the productivity of the economy. But due to the immature manufacturing sector, many problems are caused in the economy such as unproductive employment in agriculture(~50% of the population are directly employed in agriculture), informal economy, rising unemployment, etc
The main reason being the absence of 2nd generation reforms which require tough parliamentary processes. Some examples are-
- Manufacturing requires land. But inadequate land reforms in India.
- Socialistic labor laws giving no incentive for companies to have formal employment. In India, 90% of the Labor force is in the informal sector.
- No exit policy for unproductive companies. The Economic survey 2015–16 called it the ‘Chakravyuh challenge’
- No clear direction of Indian Economy- Whether its Socialism or Capitalism
What is happening now?
Major reforms undertaken by the government should be seen in the above context. Reforms such as erstwhile Land acquisition Act( to reform land laws), New Labor Code( to reduce over-regulation and simplify labor laws ), Insolvency and Bankruptcy Code( an exit policy for unproductive companies), New Agriculture laws( to reduce unproductive labor force in agriculture), Privatization of Public Sector Banks, etc are undertaken to give a definite direction to Indian Economy which is Capitalism.
The Future
After world war II, the cold war began between the USA and USSR over the future of economic policies( Capitalism vs Communism( extreme socialism)) to be followed around the world. And after the fall of the Berlin wall, Capitalism triumphed. However, Capitalism has started a new war between the Rich and the Poor.
Only 26 people on the earth now own the same amount of resources as the 3.8 billion people. This highlights the intensity of the concentration of wealth. ( Oxfam Inequality report)
All the countries around the world are trying to include welfare policies inside their framework of capitalism; however, there is a need to change some fundamental assumptions of capitalism.
- Bury Adam Smith’s invisible Hand theory. The theory assumes that man is rational and will always act in self-interest, leading to individual prosperity and then to social prosperity. However, Behavioral economics has strong evidence to suggest that man is an irrational being and the social environment often leads him to act irrationally. See the work of Richard Thaller( Nobel Prize Winner)
- Supply and demand do not work in inefficient systems. It is wrong to say that having more minimum wage reduces the number of jobs. See the case of Seattle for example. Seattle increased the minimum wage to 14$/hr in 2015, leading to an increase in the number of jobs.
- Cooperation rather than competition is needed to increase productivity. Any new laws that are passed should include all the stakeholders. For example, the New Agriculture laws of India were passed without any consultation with the farmers leading to social unrest today.
- Social infrastructure is needed for businesses to function smoothly. In many cities of India when the lockdown was eased, many companies found no labor present there to do the job. All the labor went to their hometowns to look after themselves as cities in India have poor sanitation, housing, and health infrastructure.
India needs to follow these new principles to become a superpower and a welfare state.
