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Percy S Mistry: Paying the price of ignorance

Percy S Mistry  |  New Delhi 

Reading India's pink papers suggests incontrovertibly that the country is paying a high price for pervasive ignorance, that is, the innate beliefs/prejudices of: (a) its political and administrative class; as well as (b) an uninformed public brought up on a diet of propagandised falsehoods for over six decades. Those beliefs are a deadweight drag on continuing with reform.

Typical false beliefs: A mixed economy with large-scale state intervention is in the interests (for growth and equity) of as ethnically diverse, poor and inequitable a country as India. Nehruvian socialism rather than a free-market economy is the right model to follow. Prices are guided better by bureaucrats than by markets. Price subsidies are quintessential to make basic commodities affordable for the common man. Government has a natural duty to control prices because markets get them wrong. Consumers in India have a basic right to be protected against the laws of global supply/demand and against droughts/floods and climate change. State intervention in the economy works in the interests of the dispossessed; it ensures greater access, equality and opportunity. [If so, why has it not delivered for 60 years?]

Markets work to private not public advantage, and that of the rich. Sophisticated market instruments increase systemic risk. Sarcastically condemning bright young people, who know far more than former chief economic advisers do, averts systemic risk!! Closing the capital account will enable us to deal with India's openness and integration with the world economy! STT and CTT will make securities and commodities markets less volatile. Manipulating exchange rates through RBI fiat will help us control better our internal and external account imbalances. It will enable us to grow our exports, contain imports and manage inflation more efficiently than letting markets work!

Their implications: Too large an embedded role for the state in the economy as an enterprise owner and manager, as well as regulator/referee. This leads to profound conflicts of interest, structural inefficiencies, and perverse incentives. The result: chronic and endemic fiscal incontinence. Yet central and state governments are unable to undertake basic asset/liability management (that is, sell public assets and reduce public liabilities) in the public interest. The present government acts like the proverbial rat trapped in a maze of its own construction from which it cannot exit by application of reason! Bureaucrats have managed the past so well that no one else is capable of managing the present and future; they are particularly allergic to analysts who strip their arguments bare and show them to be absurd.

Too large a public debt and debt-servicing burden at all levels of government. That pre-empts government from acting in the interests of the poor. A runaway price subsidy budget (for energy, food, fertiliser and so on) which is financed off-budget (through things like oil bonds) that favours the rich and middle classes but penalises the poor. A GoI/RBI-dominated financial system pivoting around state-owned banks (ostensibly to protect the deposits of the poor) that is deliberately retarded and kept primitive.

Apparently, primitivism protects India from financial crises. Hence proper insurance, risk management, and derivatives markets are not allowed to develop. Banning futures markets is believed to reduce commodity prices! That is like the Aztec belief that daily blood sacrifice is necessary for the sun to rise every morning!

The perverse reasoning applied by our

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First Published: Sat, May 17 2008. 00:00 IST