Doubt opens doors to alternative possibilities
that certainty closes. “If today we have shortage of doctors, teachers and
civil engineers, it is not due to an excess of planning, but to its deficiency”,
thus concludes Sudha Pillai a former
member secretary of the Planning Commission of India in her opinion piece in Indian
Express on 6/12/2014. This faith in planning even in the face of self
confessed empirical evidence that India has shortage of appropriate human
capital in economic, social, technical and scientific fields is the fatal
conceit that Friederich Von Hayek warned about in his last book Fatal
Conceit: The Errors of Socialism published in 1988.
Set up in 1950 and modelled on the erstwhile
Soviet Union planning system, the Indian planning commission has been perhaps
the most expensive institutional experiment. This is not because of the
explicit cost of running the institution itself, which is quantifiable, but
because of the implicit loss of the wealth that could have been created and
human wellbeing enhanced by its absence. The evidence to support this assertion
is observable indirectly and directly. The license-raj and the regulatory
constraints that shackled the business and industry in India owe their
intellectual debt to the views of the planners who thought they could calculate
exactly that India needed a certain quantities of automobiles, certain amount
of steel and cement and so on. The edifice of command and control economy was
built on intellectual foundation of socialist ideas that planning commission provided
structure for.
Growing up in India when the supply lines of
most products were choked by regulation I remember how much premium one had to
pay for just the allotment letter of Bajaj scooter. There weren’t many scooter
manufacturers as the wise planners had quantified the potential demand for scooters and accordingly granted license for the capacity to meet that demand.
Millions of contemporary youth who are lured today through enticing TV and
print commercials by suppliers of two wheelers may be surprised to know that one
had to deposit INR.500 to book a Bajaj scooter and wait for the lucky draw.
People would fill in dozens of firms to maximise chance of getting allotment
numbers that could be due for allotment. The lucky ones would then sell those
allotment letters for a premium which also necessitated bribes to registrars of
vehicles who would have to record the change of name after the delivery. The
postman (I think it is still postman only in India, haven’t seen post women who
deliver post but would request correction if I am wrong), when delivering the allotment
letters waited eagerly while the receiver opened the allotment letter in
excitement. If the allotment letter indicated early delivery date of the
vehicle the postman expected a tip (bakshish) for delivering the good
news! Indeed it was years later when I started teaching finance and options
contract to students of MBA that I would realise that the value of the premium
on allotment letters was nothing but what is technically called option price.
So what was the implicit loss of government
controlling the supply of scooters, cement, steel and so on. An obvious loss
was deadweight loss that results from monopolistic or oligopolistic competition
which the planned regulation imposed on Indian consumers in many sectors. The deposit
paid for scooter booking could have been used by depositors in more productive
investments. The jobs and the associated wealth that could have been created by
allowing producers to expand their capacities was implicit loss to India. This
evidence may be shot down as anecdotal. One way to counter that argument would
be to look at the number of jobs that have been created by the two wheeler
industry since late 1980s, yes before 1991, when embryonic steps were taken to
deregulate industrial capacity planning by Rajiv Gandhi’s government. Add to that
the jobs created in cement, steel, pharmaceutical, automobiles, airlines, and
other industries that have been freed from license permit and quota raj since
then. That would be direct evidence of what non-planned economic landscape can
deliver. Still unconvinced champions of planning can look up this 2014 academic
paper by Radhicka Kapoor Creating Jobs in India’s Organised Manufacturing
Sectors, published as working paper by the think tank ICRIER. This is just one of many papers that can be
referred.
Mention of the direct and indirect wealth
destroying consequences of the planning for and intervention in the
agricultural sector may be the most difficult to digest for many readers. The strongest
popular perceptions may be weaker than a modest but reasoned argument. So let the
argument be made. How wise would the advice to lioness would be to always hunt
and feed her cub? A cub that grows without hunting skills will either starve to
death or will be killed by pack of wolves. A farmer who is assured of fixed
price for a standard crop of wheat bought from him at his farm by a state
agency like Food Corporation of India has weak incentive to go out to markets,
has weak incentive to find what market demand for his crop is, has weak
incentive to find ways of improving the yield or to try out different crops. The
subsidies, the minimum support price and the state dominated supply chain in
agriculture support farmers in short term but deprive them of the knowledge in
long term that they would have acquired by frequenting the markets, by trying
to understand the demand patterns, by searching and experimenting with
different crops, different technologies and different supply chains. This
knowledge gap is the biggest implicit loss. Coupled with corruption induced
explicit loss the consequences of excessive planned interventions in agriculture
sector are monumental. Economics is not so much about the scarcity of resources
(land/labour/capital) as text books teach. It’s more about information and knowledge
generation and channels of exchange of that knowledge which breed opportunities
and engender risk taking in expectation of rewards. Even neo-classical
economics argues that the prices contain all the information to coordinate the
production and the consumption in an economy. If it is so and the price is administered
politically, the information content of such prices is not the will of
consumers and producers but wily calculation of politicians.
Finally let me support the case for
abolition of the planning commission with a constructive example. Consider the
dramatic story of Indian information technology (IT) sector. The success of IT
sector is an indirect piece of evidence that shows irrelevance of the planning
commission. At the end of March 2014 the IT
sector employed 3.1 million people making up around 24% of the total
employment by organised private sector employment in India. How has this been
made possible? One may put forward many explanations but what cannot be put
forward as reason for growth of IT sector in India is the presence or the contribution
of the planning commission or of any planning by the state institutions. Before
the state institutions and bureaucrats could understand the possibilities of
the explosive growth of internet and communications technologies the engines of
growth had been fired. The IT enabled service providers like Infosys, TCS,
Wipro and the like were global players. Provision of these services was less
dependent on the water, electricity, roads and was relatively free, not be
choice of government, from license permit raj. The sector grew away from the
radar of the planners since the sector. It did not require massive resource
allocation from the state. This allowed entrepreneurs and enterprising corporates
to create wealth and jobs by taking advantage of the time zone dividend that
India enjoys and by recruiting thousands of graduates in arts, commerce,
computing many of them trained by thousands of small software and computer
training institutes.
Some may argue that the IT sector growth
was fuelled by supply of large number of English speaking, low cost engineers
produced by Indian Institutes of Technology (IITs) and other sub-national
institutes which were planned and funded by the government would need evidence
to prove that the planning commission, the ministry of Human Resources
Development and University Grants Commission consciously planned in 1980s to
boost supply IT trained human capital in that would be needed in following
decade. Such planning of human resources for an unknown or emerging sector is
nearly impossible. The availability of the large number of English speakers
actually provides evidence of anti-thesis of planning i.e., unintended consequences.
No one imagined in 1970s and 1980s that command over a language would prove to
be a key skill for India to emerge major supplier to this global service
industry. Contrast this to situation where the state intervention was made. With
increased demand for management and technology human resources Ministry of HRD
responded by creating a licensing authority called All India Council of
Technical Education (AICTE) in 1980s which like most other licensing
authorities soon became another rent extracting bureaucratic machine. In the year
2009 the AICTE
chief was jailed. He and other officials were investigated by the Central Bureau
of Investigation on corruption charges in 2009.
The path to hell may be paved with good
intentions. The corruption is illegitimate child of three potential parents. Regulation,
licencing and inspections are three potential parents of the devilish child corruption,
the child that has grown into a hydra headed monster in India. The ‘planning’
by planners is ideological grandparent of corruption. It is high time to commit
the ideological grandparent of corruption to the uninspiring economic history
of India that the planning commission has scripted since 1950.
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