6 steps to move from cozy socialism and crony capitalism

Prof Vaidyanathan  19/08/2014  12:17 P M


Market economy is not something Government can “impose”  overnight. It requires social recognition, re-drawing social contracts and probity in public life and ethics in relationship-based transactions


Three societies namely China, Russia and India are struggling to become a market-oriented economy from being in different shades of socialist practices. Of course, China and Russia were hard core socialist economies with state controlling most of the aspects of economic sphere. In the case of India, it was what was called “socialistic pattern of society” wherein the commanding heights of the economy were controlled by the state ownership pattern.

Major companies in heavy and light industry and banking and insurance sector were all State-owned. State ownership has in practice the following characteristics

  • Senior executives are appointed based on political preferences
  • Major expansion/location decisions are taken based on political consideration
  • All major lending/waiving loan decisions are based on political considerationsThe State begins to occupy dis-proportionately larger role in different aspects of not only  economic activities but also other areas like art, literature and films. It distributes favours and it also provides awards. Over a period of time a state dependent “Culture” gets created, wherein the answer to every problem is assumed to lie with the Government.

    State acceptance is confused with ‘social acceptance’ and State awards or rewards equated with excellence in the corresponding field.

    Obviously, this creates a huge corruption system, where greasing palms slowly becomes fuel to the engine of any business decision. Substantial amount of time in doing business is spent on dealing with Government minions and worrying about regulatory compliance. Huge departments are created to satisfy compliance, business men have a major pre-occupation –namely managing Government. It starts as an art and ends up as science.

    Knowing a minister or a bureaucrat connected with your business is more important than knowing your business. In such an atmosphere, innovation, customer care and service excellence take a back seat. Even sectors, like information technology (IT) in India shines due to its off-shore activities. Good numbers of capable youngsters vote through their feet and migrate abroad.

    Bank lending decisions are suspect and no serious system of punishing defaulters or chairman for wrong or sometimes mala fidedecisions. See an excellent write up that recently came outin this magazine —

    In such an atmosphere, when you “open up” the economy, it means entry to large amount of foreign capital and encouragement is given to the same old group of business tycoons to expand their activities. Again, access to power centres is more important. Clamour for reforms ultimately ends up as clamour for foreign capital since that is the easy option to many business tycoons and Government.

    Market economy is not something Government can “impose” on the society overnight. It requires phenomenal amount of social recognition, re-drawing social contracts and commonly accepted probity in public life and ethics in relationship based transactions.

    Moving away from socialistic pattern of society to market mechanism is not accomplished with a magic wand. Also, market mechanism need not be only the Anglo-Saxon model. It can be different one, based on specific cultural habits and traditions. Fortunately, in a country like India, in spite of all efforts by the Nehruvian socialistic pattern of society, except some 20% of the GDP, all others were generated by private initiative. But regulations and license permit raj have created a humongous corrupt bureaucracy and to come out of it is not easy.

    Our innate ability to respect private initiatives has to be brought back. For that the following needs to be done…

  1. Dismantle half of ministries at the Centre, which are mirror images of ministries at State level
  2. Dismantle more than half of ministries at the State level, which are mostly money making activities for the babuclass
  3. Strengthen municipal and corporation level activities by banning construction contractors and real estate barons occupying elected posts
  4. Abolish most local regulations on shops and establishment Acts to food and adulteration act and introduce swift and severe punishments for wrong doing
  5. All courts to function in two shifts with enhanced pay for participants. At least criminal cases should be concluded within three years
  6. Courts should be discouraged from giving adjournmentsBasically central Government should focus on defense, foreign affairs and central taxes and state Government on law and order.

    The initiative should be left to individuals and state should only be a regulator stepping in when things go wrong. It is not an easy task to build a proper market-based economy when most business is not familiar with it.

    Crime will lead to punishment is the only mantra, which can make systems to function with probity. Last, but not the least, political leadership must show maturity and probity and willingness to accept that networking and Sifarsu-based system is no good.

    Are we ready?

    P.S. Intriguingly, an e mail-released today by Jet Air says that it plans to merge its Konnect type services with main airlines, which -among other things- means providing meals to all passengers. The note says subject to Government approval

    (Views expressed in this article are personal)
    (Prof R Vaidyanathan, Professor of Finance and Control, has taught at IIM Bangalore for over three decades and is consistently rated as one of its most popular teachers. Prof Vaidyanathan has coined the term ‘India UnInc’ for the largest component of the Indian economy comprising small entrepreneurs, households. Prof Vaidyanathan sits on the advisory boards of SEBI and the RBI.)



One comment

  1. Excellent thought. Thanks Professor for sharing. Its time to change our country.

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