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Showing posts from January, 2020

Part 1: What needs to be done to get INDIA back into 8% growth

Classical economic theory from the time of Adam Smith and Karl Marx considered the four factors of production as  Land, Labour , Capital and Entrepreneurship.  This model was appropriate for Basic agricultural and emerging industrial societies but can be tweaked to encompass factors which are relevant for the modern post industrial era as well.  For the economic machinery to operate in balance, there are two critical but implicit assumptions :  1)   Rule of law 2) Free Market  Think of the overall economy very simplistically as a very large box full of gears of different sizes - green gears for Land, red for labour and blue for capital and think of entrepreneurs as people who buy these different gears and connect them to a very large rotating shaft of  there   economy  which has a very large number of black gears of different sizes attached to it.  The job of the entrepreneur is to create his little machine of green red and blue gears and ensure that it’s connected to t

Part 2 of What needs to be done to get INDIA back into 8% growth .... Why is stable , fair and transparent Rule of Law critical for a well functioning economy

A stable, fair and transparent rule of law allows for 2 very important things : 1)  no coercion of any sort and 2) contracts can be enforced .  Let’s take the latter first. If contracts can be easily and timely enforced, it creates a high trust society, which increases efficiency all around. In the absence of ability to quickly and cheaply enforce contracts , societies rely on family and clans and their social enforcement mechanism like ostracism, which by definition reduces the talent and partners pool and therefore the size and output of the enterprise.  If entrepreneur 1 has setup a b2b business - supplying to entrepreneur 2 under a contract and entrepreneur 2 refuses to honour the contract for whatever reasons, entrepreneur 1’s business is impaired and if it takes years for restitution, many such businesses will not even start reducing the overall output. Therefore countries in which the legal system is slow, complex (like in India) and consequently expensive lose out by

Part 3 of What needs to be done to get INDIA back into 8% growth .... Free markets and confusions relating to it

Free markets allow for everyone to have access to all factors of production equally, for prices to be determined fairly and for anyone to have the ability to enter and exit any business.  Free markets have a very bad press in the liberal left media. Paraphrasing Winston Churchill’s famous quote on democracy “free markets is the worst form of economic system except the rest”...  They are associated with the wild west , robber barons, monopolistic oligarchs and high level of inequality, among other evils. Nothing could be further from the truth.  These are all situations of jungle raj (might is right) and not rule of law.  Let’s take each one of them and prove that they were not free markets. If readers are to take away one thing for. This article , it should be that. The west west was not a free market because coercion and violence was used by the settlers to acquire land (which in an agrarian society was the main factor of production). So a critical determinant of fre

Part 4 of What needs to be done to get INDIA back into 8% growth .... how to leverage Indian entrepreneurial culture in nation building

The invention of the joint stock company with limited liability was the single most important invention to unleash entrepreneurship. This allowed entrepreneurs to take business risks without the risk to life and liberty (earlier, there was a concept of debtors prison where business failure and the inability to repay business loans could lead to imprisonment and even death because of unlimited liability) led to an explosion of business building.  India is a land of entrepreneurs(Including the small farmers and unorganised vendors) surrounded by an army of bureaucrats who in general have a deep rooted suspicion of entrepreneurs. Every bureaucratic intervention is designed with the mindset of “guilty unless proven innocent”. This mindset was formed during the command and control raj of the British overlordship and further buttressed during the socialist / license raj days where guanxi (“ connections with the right people”) and the ability to find loopholes in the impossibly comp

Part 5 of What needs to be done to get INDIA back into 8% growth .... land reforms needed to unleash India

China is on track to become the largest economy in the world on the back of massive industrialisation and movement of agricultural labour to factory workers to become the factory for the world. While India remains stubbornly rural with close to 50% of the population still dependent of agriculture.  The zamindari abolition (redistribution of land to the tillers from absentee landlords) remains an unfinished agenda. The unfinished agenda report has been gathering dust for a decade being “studied” by the Indian bureaucracy. More than 10 million people remain landless labourers and sharecroppers.  However, even if the redistribution (which is a state subject) were to be expedited, it is not going to be transformative. The increase in population and therefore fragmentation of holdings has led to a situation where an average farmer has less than 2 acres of land. This is a fraction of the minimum viable size to invest in mechanisation and has ensured that Indian agricultural remains

Part 6 of What needs to be done to get INDIA back into 8% growth .... Criticality of labour reforms

Labour reforms are not just about rules of hiring and firing.  Probably because agricultural and early industrial societies required only base labour and capital was the constraint only base labour was considered as a factor. To get into the right mindset, we need to now think broadly about human capital management policies !  From an entrepreneur’s perspectives, What is required is : A) healthy B) appropriately trained and educated workforce. C) with no restriction on tenure or pricing of contracts (within a set of minimum health, safety and minimum wage rules)  D) easy exit rules in case of ups and downs in business which is a special case of (c) above.  Therefore the HR agenda is very clear. 1) invest in universal affordable primary health and dissemination of health insurance - ideally again using market based mechanisms such as vouchers for insurance and vouchers for primary health access.  Globally, government provided healthcare has proven to be suboptimal. The

Part 7 of What needs to be done to get INDIA back into 8% growth .... How to unleash capital in the service of Indian growth

Capital includes money and means of production (including the infrastructure needed to get the products to the market).  This is the low hanging fruit.  Let’s start with money capital in which India is starved and therefore needs to open up FDI more. I applauded when the FIPB (which had morphed into the Foreign Investment Prevention Board in practice rather than the promotion board it was supposed  to  be) was abolished.  The debt markets need to be opened up for FDI. PSU’s should only be in sectors where the risks are too high for private entrepreneurs to bear. The government has no business being in business and is a very poor manager of scarce capital. It is obvious from the experience of Air India , BSNL or PSU banks, that government managers just cannot compete on a level playing field with private entrepreneurs and the capital being burned (either through direct losses or because of very low returns) should be better used to  create a safety net for citizens an

Part 8 of What needs to be done to get INDIA back into 8% growth .... Summary and specific 10 point agenda

India is at a turning point.  The first set of reforms undertaken in 1991 have run their course and minor tinkering around the edges is not yielding the desired outcomes anymore.  The GST has finally made India into one market instead of 28 separate state markets but it is a spaghetti of complexity. There is a demographic dividend possible but in the absence of jobs it could end up into a demographic disaster.  The China , US rivalry is now structural ( inspire  of the current ceasefire) and long term and global supply chains are looking for a new home as an alternative to China. But the beneficiaries of this huge but one time opportunity so far have been the south East Asian countries.  The markets are  waiting with bated breath on whether this government will bite the bullet and undertake the second generation of difficult but much needed reforms or lose heart and revert to spin. Whether this slow down becomes structural or cyclical depends on the choices that are made wi