In Service of The Republic: The Art and Science of Economic Policy

AS the world is going through this Novel COVID-19 Corona Crisis, the concerns about how this will impact the global economy and particular national economies are imminent. As of now, India has declared more than 50 Days of total lockdown to contain the spread of this virus affecting the economic activities across the majority of our sectors. Corona Virus Pandemic is the biggest policy challenge of post-world war generations. And on this background, a recent book published on this topic of Public Policymaking in India, written by a noted bureaucrat and a doyen in Indian policymaking  Dr. Vijay Kelkar along with Professor Ajay Shah is a fascinating read. 

The book is titled-” In Service of the Republic: The Art and Science of Economic Policy.” To quote Vinay Hardikar, “India is a sociologist’s paradise and a nightmare of an economist’s.” The more one explores and understand the complexities of Indian reality, the more fascinating the idea of curating policies to such complex situations occurs. And this book with all  its limitations-can be used as a magnifying glass into the panorama of policymaking in India. 

The book tries to outline the key theoretical as well as policy conundrums in the contemporary political economy of India. Written in a non-linear way, it presents the panoramic view of past and present dialectics in Indian-State’s economic thinking. The book revolves around the central question of “Why did the reforms introduced from 1977 onwards deliver success during 1991–2011, but falter thereafter?”And through this question, the authors have tried to present the anatomy of policymaking in India. While answering the above question directly, the authors have made it clear that to regain the momentum back, mere (re)intensification of the 1977–2011 strategies will not be enough. It is a high-time to rethink the very foundations of our policymaking. And adopting the “LIBERAL WAY” and “LIBERAL ECONOMIC STRATEGIES” has been seen as the way in that direction. This is where it gets tricky. While referring to the ‘Liberal Ways’ the authors do not argue the case for any particular strand of Liberal economic theory but see it as a whole panorama of liberal theories ranging from Classical/neo-classical liberalism to Keynesian Liberalism. This lack of single coherent economic ideology can be seen as a reflection of wider cluelessness in Indian policymaking.

With the fall of rivalling socialist systems, the discourse surrounding the liberal market economy and liberal democracy is centred around the question of “WHAT IS THE ROLE OF STATE IN THE MANAGEMENT OF ECONOMY?” And the book too is keen on contributing the author’s version to this debate based on their first-hand experience in policymaking. Here the authors have advocated the case for Keynesian Liberalism. The authors argue that – “Left to themselves, free men and women achieve reasonably good outcomes in most situations.” Now, this idea is essentially Adam Smith and classical liberalism. But taking into consideration how markets and societies have evolved over the last two centuries, the common liberal wisdom suggests that, “Freedom works well most of the time, but there are exceptions, which are in the case of economics known as the market failures. And by addressing the market failures, the State can add value to society. Otherwise, the economy works better when it allows human intelligence to flourish on its own. The predominant narrative from this book essentially operates within the framework of the minimal State intervention in the economy.

Based on this theoretical premise, the authors further expand upon the topic of market failures and the State’s response to it which in a way is one of the central themes in the book. After the initial standard academic classification of characteristics and causes of market failures, the authors present the four common errors in Indian policymaking in response to such failures. These commons errors are, a)situations where freedom works well, where the right thing for the government is to do nothing but the government is doing something, b)a market failure is present, but the politics pointed state power in the wrong direction, c) a market failure is present, the politics worked outright, but the wrong intervention was chosen;  and, d)a market failure is present, the right intervention was chosen, but the implementation was lacking. On the backdrop of this, one can evaluate India’s current response to the Corona Pandemic.

Drawing on the Indian experience, this book too, like many of its predecessors make the case for excessive government intervention in the markets. During the pro-liberalisation movements in the 1980s, a very popular dictum was that the Indian government hardly governs, it always intervenes. This books in a way put an official seal on this argument. The central argument against the excessive governmental intervention in our economy is effective summed up in this following remark about how we distort the grain of price system in India. The authors wrote and I quote,  

“In India, the legislature, the executive and the judiciary have all repeatedly undertaken actions that go against the grain of the price system. These actions are doomed to failure. When the policymaker tries to control the price, this is harmful, and the greatest harm is done when the policymaker tries to control both the price and the quantity.”

Fortunately, the Indian economy is slowly moving away from this excessive government controls in some economic sectors. However, by and large, no political organisation in India has any clear mandate about reducing the State’s control significantly. And at this critical juncture when Neo-liberal ideas are getting pushed back across the world, we are experiencing an increase in the patronising (State) tendencies. And as far as the Indian economy is concerned this dialectic between the need for liberal reforms in the times of Neo-liberal retreat will mark the central policy challenge in the coming decade. The present book while passionately arguing the case for economic reforms, does not sufficiently address these challenges.

Another important argument in this book is that of Prioritising institution-building over just GDP growth.  Robust institutions are the basic most requirement for the decentralisation of the liberal democratic political economy. And weaker institutions have a direct (positive) correlation with excessive patronising and centralising tendencies in any democracy. As rightly argued in this book, weaker institutions lead to low faith in them, which causes the social craving for the ‘MIRACLE MAN,’ who would get thinks done correctly at one stroke.  And historically this kind of Political Romanticism has led to greater economic and political centralisation often subverting the liberal democratic model of governance.  Therefore for the sake of our democracy and sustainable economic growth/development, Indian policy-makers and opinion-makers need to rethink their obsession with the GDP growth.

GDP has been used as a symbol of nations’ development and it is a good indicator in many respects. But on a larger scale, the GDP rate only reflects half a picture. Because GDP growth can be accelerated for a short span without really making the necessary structural changes in the economy. The experiences of the USSR and Japan are salutary reminders of the ability of states to set up short bursts of growth through methods that lack sustainability.  As is evident from the discussions during last year’s prestigious American Economic Association’s annual conference in December 2019 in San Diego, the spectre of ‘Japanification’ is haunting the world economy, wherein, high GDP growth is achieved at the cost of increasing public debt and loose monetary policy.

 In the concluding chapters of the book, the authors have  briefly explained the interrelations between the need for a strong and robust institution and the phenomenon of the ‘middle-income trap.’ The central argument here is that at the early stages of economic development mere mobilisation of labour and capital can be instrumental in economic growth.  But as it matures further, there is a need for a new mechanism that can deal with the increasing complexities arising out of these new political-economic evolutions. Therefore if the market economy is evolving without mature institutions, the growth stalls. This decade saw several developing economies world-wide getting into such Middle-Income Trap. But recent World Bank Report on Poland shows that if a nation can get it’s economic as well as political institutions right, it can transform itself from middle to high income in a decade or two. But doing this is easier said than done. Hence despite making a wise case for Prioritising the institution building, the authors have not provided the roadmap towards that end.

This book has attempted to cover wide aspects of Indian policymaking ranging from fiscal & monetary policy, agriculture to public health and whatnot. As a result of which it has ended up giving us a rather overview than in-depth insights. But more importantly, it lacks theoretical coherence. The book while trying to simple and straight forward at times becomes too simple. Personally, I am not a big fan of the way this book is produced. They have followed a school like technique of first introducing the area, then explaining its aspects with title in 150 words, then summing the same arguments again at the end of each section as well as summing it entirely at the end of every chapter. This has caused this to be repetitive work.

The book does not pay enough attention to the idea that in India, the political wing spearheads and quite often drags the economic policymaking. The book assumes that politics will correct its course in the future to fall in line with economic reality. In my view, it is rather too hopeful to be true. Hence on the topic of public policy, equal if not, more focus should be made on the ‘political’ wing of policymaking. It is not sufficiently covered in this work.

Despite its pros and cons, this book is a very good beginner guide into the complex and yet fantastic world of Indian policymaking. Through this book, the authors perform the “curious task” Frederich Hayek assigned to economists: “to impress upon men how little they really know about what they imagine they can design”