Economic policy in India, and perhaps in many
other countries, is constrained by powerful prevailing myths and
prejudices. Sometimes these myths simply reflect lazy thinking or an
apparent immunity to facts. Sometimes they are shored up by strong
vested interests. Sometimes all three.
Whatever the reason, it
is hard to dispute the potency of myths in economic policy-making. Here
are my ten favourites, some old, some new.
Higher minimum support prices for foodgrains are good for farmers.
Not so. Yes, they are good for a powerful minority of farmers who have
sizable marketable surpluses and ready access to government procurement
programmes.
But the majority of Indian farmers (especially
poorer marginal farmers) are hurt by higher food prices for the simple
reason that they are net buyers of foodgrains.
And when you add
in tens of millions of landless labourers, it is quite clear that
inexorably higher MSPs for wheat and rice are often quite damaging for
rural households.
The move to a Goods and Services Tax will reduce the burden of taxation.
I hope not! Or the already massive fiscal deficit will soar higher.
The
more thoughtful government pronouncements do speak of a reform which is
revenue-neutral or even revenue-enhancing. But there are many who tout
the illusory prospect of a lower tax burden.
The underlying
logic of this reform is not tax relief but rather relief from distorted
economic incentives and avoidable hassles and uncertainties, which are
embedded in the current system of multiple indirect taxes.
There is no role for monetary policy when inflation is driven by supply shortfalls.
Not
quite. The truth is that the extent and duration of an inflationary
bout triggered by a supply shock (such as a drought) do depend on the
degree of accommodation offered by monetary policy.
If
liquidity is excessive, the inflationary consequences will be greater;
if liquidity is tighter, price increases will be less. Of course, the
act of tightening monetary policy can reduce output expansion.
Hence the trade-off between inflation and growth is a live issue even when the initial shock is from the supply side.
And
then there is the problem of expectations: if monetary policy stands
pat in the face of supply-induced inflation, then inflationary
expectations can fuel the fire.
Our labour laws protect labour.
Quite
the opposite. Present laws over-protect a tiny minority (about 5 per
cent of India's 450 million plus labour force, not counting government
employees) at the expense of the vast majority of workers.
By
making it extremely difficult to retrench workers in the organised
sector, our present laws massively discourage the employment of new
workers in organised enterprises.
In effect, our laws are very
anti-employment and lead to huge underutilisation and "casualisation"of
our most abundant resource, low-skill labour.
The exchange rate only matters to exporters.
This is a common misperception, even among trained economists.
Actually,
the exchange rate is the single most important price in the economy,
which powerfully influences the relative profitability of all tradable
goods and services versus non-tradables (like haircuts in Delhi or
restaurant meals in Mumbai).
Thus, an appreciation of the rupee
(versus foreign currencies) not only makes exports less profitable but
also hurts an even greater range of import substitutes, that is goods
and services produced for our home market in competition with imports
from abroad.
Reducing fiscal deficits hurts growth.
In
the present "stimulated" environment, there is much anxiety that a
reduction in the current record high fiscal deficits (over 10 per cent
of GDP) will hurt growth.
The massive deficits of 2008-09 and 2009-10 were perhaps justifiable in the face of contractionary effects of the global crisis.
But
these deficits are neither sustainable nor desirable. Actually, the
Indian economy has grown fastest during periods when deficits were
being reduced (1992-97 and 2003-08) and slower when deficits were
expanding (1997-2002).
This is because less government borrowing usually facilitates more productive private investment.
Subsidies on food, fuel and electricity mainly help the poor.
Not
so. The food subsidy mainly helps better-off farmers and consumers in
only four or five states where the public distribution system has
effective coverage.
The great majority of India's poor do not
have effective access to subsidised foodgrains. Many studies have shown
that the huge subsidies on petrol, diesel, LPG and kerosene mainly
accrue to better-off urban households (all those fuel-guzzling cars and
SUVs).
The large state subsidies on electricity for agriculture
have helped to thoroughly undermine the development of a viable
electricity distribution network and kept our villages in darkness.
In contrast, note how the rapid spread of mobile telephony did not need subsidies.
Foreign capital inflows are always good for our economy.
Twenty
years ago, most Indians believed the opposite, that all private foreign
capital inflows were bad and somehow designed to impoverish us.
In
the last two decades, the conventional "wisdom" has swung to the
opposite extreme. In fact, as both the Asian crisis of 1997-98 and the
global financial crisis of 2008-09 have amply demonstrated, foreign
capital inflows into a developing country can be a mixed blessing.
Specifically,
for India, the capital inflow surge of 2005-08 posed serious problems
of an overly appreciated exchange rate, excess domestic liquidity and
an asset price boom.
The more thoughtful of our policy-makers,
including then RBI Governor YV Reddy, grasped the need for capital
account management in such situations.
Private provision of infrastructure can effectively substitute for government.
Private
public partnerships (PPPs) are the ruling mantra of the day. Since the
government has failed badly in providing adequate power, roads, ports,
water, sanitation and so forth, we must turn to PPPs for our
deliverance.
Or so runs the new myth. Of course, there is a big
and useful part that the private sector can play in building up our
infrastructure. But the experience from all over the world suggests
that the government must continue to play the major role in this area.
In
particular, PPPs cannot substitute for effective governance in
infrastructure provision. Indeed, there is a growing body of experience
which suggests that the governance requirements of PPPs are pretty
high, if we are not to fall prey to the rip-offs of crony capitalism.
The trader (or middle man) is at the root of many of our economic problems.
This
is one of our really hoary and hairy myths. Whenever the rate of
inflation rises, governments blame rapacious traders and deploy
regulations to control their stocking and other activities.
The truth is traders are essential to the efficient functioning of an economy. Commerce is the lifeblood of economic activity.
Of
course, individual traders exploit whatever monopoly power
circumstances grant them to maximise their profits. But the problem
does not lie with traders. It rests with the circumstances and policies
which nurture national or local monopolies and oligopolies.
The
best antidote to monopolistic exploitation is competition. And that is
best nurtured through better connectivity (transport and communication)
and reduction of regulations and levies, which fragment markets and
raise barriers to competition, whether from abroad or at home.
Unfortunately, myths have of a life of their own.
