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There is no doubt that India has come a long way from its socialist past. Markets are far more open, foreign investment and imports are relatively welcomed, government is slowly getting out of the way, overall environment is getting very business friendly, and emphasis is on start-ups. Still there exist some very powerful social and political forces of inertia that want to keep India in the same old state. Most people still believe that government improves economy and creates jobs while the fact is that government destroys economy and jobs. In the midst of all this, Modi secured a sweeping victory in last elections based on very high expectations of radical and revolutionary reforms in India’s economy.
Modi has a very successful record as Chief Minister of Gujarat. Contrary to media, general public and even his voters, he seems to understand that his job is not to bring a government run economic revolution. He knows that his job is to get government out of the way. But, he has to live and survive in an environment of strong Socialist traditions. Big bang free market reforms, although good in long term, can create a short term havoc in political, economic and social spheres which is very likely to lead to a major unrest in politicians, media, general public and even in his voters.
So, he and his government is taking a gradual approach. Seems smart. But, political and economic climates in India are not very stable. With population of over a billion, mostly still living in poverty, things can take a major turn any time and he may not have such a huge mandate anymore. So, while long term strategy may be good, very long term strategy may not be feasible, in most cases. Overall policy must be somewhere in the middle. In addition to this, any gradual approach, requires proper setting of priorities. In my view the major issues with India’s economy are as follows:
1. Lots of business is still under the control of public sector.
2. Economy is heavily subsidized by tax payers.
3. Banks are mostly state controlled.
4. Foreign investment is still limited to 49%.
5. Public sector cost of healthcare and education is very high and growing.
6. Budget deficits are improving. But, need more attention.
Like China, India hosts a very large population of highly talented and intelligent people who have been strangulated by a strong feudal system, first and a Socialist economy, later. Opening the markets and freeing people made India second fastest growing economy in world.
As long as main stream media, politicians and people do not understand that the strength of Indian economy lies in free market Capitalism and not in government handouts, the destination is still far away. Foreign investment and ownership is not a bad thing. It brings in money and capital, and creates jobs. Curtailing imports with subsidies and tariffs limits choice, and causes price hikes and inflation. Open markets also force local manufacturers and providers to provide and produce better, at competitive prices. I know that the countries like India and Pakistan have a very adverse experience with East India Company.
But there is a difference. East India Company was mostly a royal enterprise. Private businesses are different and we live in a new world, now. Foreign ownerships make other countries and nations interested in your well-being, survival and growth. This is extremely important for a successful and efficient policy foreign policy. Shared foreign ownership also discourages lots of investment and hampers overall growth. Economies, mow-a-days are getting so vibrant, complicated, broad, deep, competitive and investment sensitive that without an open and free investment policy, it is very hard to have an impressive growth rate.
Subsidies are paid by tax payers. Government must tax or borrow in order to pay subsidies. Government is not a business. Its only sources of income are taxes, borrowing or printing money. Printing money devalues currency and borrowing must be paid back with tax payers paying principle and interest. All taxes are ultimately passed on to buyers and consumers, and cause inflation and reduced demand which in turn causes reduced production, and jobs are lost. Lost jobs again cause reduced demand and this perpetual circle goes on and on. The best way to improve economy is by improving supply. It creates jobs, provides more choices, improves quality of products, services and life and cuts inflation.
Government run infra-structure projects just divert the money from more critical and more productive investments through taxation. Good and sound infra-structure is critical for any economy. But, using it as stimulus to economy is simply ridicule. This money can always be invested better by more efficient, more productive and job creating private investments. Even infra-structure usually runs more efficiently and becomes more productive with private investment. Contrary to private businesses, governments are mostly corrupt, inefficient, lazy and fully infested with red tape and bureaucracy.
Government run banking system is another enormous burden on tax payers and economy. It also provide incredible tyrannical powers to governments. Under contemporary monetary systems in which there is no more gold standard and paper money is the rule of day, central banks have become government wallets for worthless money. They just print and print more money for government. Availability of too much money devalues currency resulting into inflation. It is just another form of indirect taxation. Since, direct taxes are widely unpopular in voters, governments have devised several methods for indirect taxation. Printing money lays at the top of those.
Government run healthcare and education look very good at first glance. But, these too have lots of hazards attached to it. It kills the research and innovation. Since government becomes single or major payer, it determines prices which are usually very low. With those prices companies are left with little or budget for R&D. It kills choice. People are left with little or no choice except to use government determined facilities, doctors, labs, medicines and surgical procedures. One buyer or the biggest buyer in country buys from a very limited and most corrupt and connected providers and buyers. This kills the competition.
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