Bhupesh Bhandari: We are all socialists

In a recent interview on television, Uttar Pradesh Chief Minister Akhilesh Yadav started out by saying the next government in New Delhi should be secular and socialist. The economic policies of the last few years, he said, had not yielded the desired results on prosperity; so there was a need to rethink these policies. During the interview, one got more insight into his economic thought. For instance, to help weavers in the state, Mr Yadav said, it was necessary to control the profit made at each stage of the supply chain. That is price control by another name. Also, said the 40-year-old, his government has decided to buy saris from weavers and distribute them to women in the state. Water has been made free for agricultural use, and weavers now get subsidised power like farmers.

Mr Yadav did not say what exactly he meant by a socialist government. I guess he was making the case for an interventionist government, one that uses taxes and subsidies to achieve certain economic (more often, political) objectives. There are many definitions and variants of socialism. For simplicity's sake, it is safe to assume that it is what a free market isn't. In popular Indian imagination, a free market is only about maximisation of profit. The point often forgotten is that it leads to efficient allocation of resources. This becomes all the more important in a poor country like India where there is a scarcity of resources. So, if a particular industry is being decimated in its home turf by Chinese imports, that's because it is inefficient. (One might argue that Chinese cost structures are opaque and the country's industry benefits from several subsidies, but the fact is that the factories there with their focus on large-scale production have come to dominate global production.) Is it wise to deploy resources in an inefficient activity? Shouldn't we let the market decide what is efficient and what is not?

Interventions cause distortions. In the pre-liberalisation era, many companies were lured into investing large sums of money in remote areas by the government's backward area scheme. These locations were away from ports and away from markets; logically, these shouldn't have come up. But they did because of the incentives thrown in. These factories managed to survive as long as India was a closed economy. Once it was opened up, these units became sick in no time. The country's landscape is littered with such industrial ghost towns. Another example: the last Samajwadi Party government in Uttar Pradesh launched an incentive scheme for new sugar mills in the state. Massive capacities came up, which caused a mad scramble for sugarcane. Combined with high price (the states fixes the price at which mills can buy sugarcane), this has caused the fortunes of the industry to plummet. All mills are mired in losses. (Of course, the Bahujan Samaj Party, when it came to power in 2007, promptly withdrew the incentive.) What the country needs now is less intervention.

Actually, Mr Yadav's Samajwadi Party is pretty upfront about its economic vision - samajwadi is Hindi for socialist. It draws inspiration from Ram Manohar Lohia, the freedom fighter who "worked towards putting an end to capitalist-feudalistic tendencies". Others hide it in the fine print. Thus, the object of the Congress is the "well-being and advancement of the people of India and the establishment in India, by peaceful and constitutional means, of a socialist state based on parliamentary democracy in which there is equality of opportunity and of political, economic and social right". To become a member of the Congress, you have to be above 18, abstain from "alcoholic drinks and intoxicant drugs", be a "habitual weaver of certified khadi", subscribe to the "periodicals approved by the All-India Congress Committee" and believe in - and work to promote - the principles of secularism, socialism and democracy. The socialism of the Congress variety veers towards a welfare state: guaranteed work, inexpensive food, free medicine, etc. Does it distort the market? Consider this: after the rural employment guarantee scheme was rolled out, there was a shortage of farmhands and this led to an artificial rise in the demand for tractors and other implements. Once the employment scheme ran out of steam (mostly because the money was pocketed by the middlemen), the demand began to flatten out.

That brings us to the Bharatiya Janata Party, or BJP, which feels it has already come to power. Its vision document (2004), posted on its website, makes no reference to socialism, but it was the BJP-led National Democratic Alliance that launched the biggest intervention in recent years: income tax benefits for housing loans. It inflated the demand for homes. Many people will tell you that it has caused the crisis the real estate sector finds itself in right now: the supply is way ahead of the demand. Cement makers who put up fresh capacities to meet the demand from the developers find themselves in a spot of bother. So do steel makers. Banks and financial institutions, which had taken a huge exposure to the sector, are staring at a bagful of non-performing assets.

That leaves us with the Aam Aadmi Party. Its 49-day rule in Delhi showed strong interventionist mindset (cutting power tariff, free water, etc), yet, a few days after remitting office, Arvind Kejriwal, the party leader, told the Confederation of Indian Industry that he believed in minimal intervention and stable rules and regulations (including taxation). If he really means that, Mr Kejriwal could be worth listening to.