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I hold Deepak Lal in high esteem for his writings against statism in India. I first came across his work in the mid-1990s through one of his books where he questioned the need for a separate discipline of development economics. Impressed by his work, I met him in his office in UCLA in 1997 while writing a political pamphlet entitled, Becoming Rich and Powerful – a Primer for the Citizens of Pakistan, India, and Bangladesh (which I did not got the time to finish, yet). I was later in touch with him for a while, then lost touch. 

 

His new article provides a crisp summary of the key policy issues facing India today. The paper has three parts. I quote:

 

(1) “The first concerns new forms of rent seeking, which are to be found not only in India but also in China and Russia after they moved, however imperfectly, from the Plan to the Market.”

 

(2) “The second concerns the rising tide of populism – reminiscent of the past and current policies of many Latin American countries – and the dangers this poses for sustainable growth in India.”

 

(3) “Finally, linking the two is the general theme of the growth and dénouement of ‘entitlement economies’ – the social democratic ideal – in the fiscal and debt crises now enveloping Europe and the United States.”

 

In the first part of the paper Lal observes that rent seeking (i.e. corruption) is alive and well in India. He notes, as a technical curiosity, that its operation is now less harmful than it was prior to 1991. For instance, pre-1991 industrial licensing and price controls adversely impacted production decisions. The recent “innovations” in corruption, however, extract “composite quasi-rents” and therefore have a less deleterious impact on production.

 

One example is corruption in the allocation of the 2G spectrum (a “quasi-rent” since the short-run supply of the spectrum is limited, but in the longer run the supply could increase in response to increasing prices). The government has sold off this scarce public asset at a lower price than its market value and pocketed the difference. This kind of corruption, according to Deepak Lal has a lesser effect on production decisions, being a “lump-sum” tax. 

 

While this is an interesting diversion into economic theory, I would argue that both the “new” corruption and “old” corruptions are almost equally harmful. Indeed, both forms were practiced in pre-1991 India, as well. All that has happened now is that the mix (of the types of corruption) has slightly changed.

 

In my view, all corruption arises from the same source: socialist policy (including socialist electoral laws). While there has been some reduction in socialism in India, the incentives created by the electoral laws are almost unchanged. This precludes the possibility of reduction of corruption. BFN explains this in detail.

 

As to the parts 2 and 3 of his paper, these point to the continuing problems of socialist policy that India faces:

 

Lal talks about the “eerie similarities [of the Brazilian and Mexican populist policy regime] with India’s current economic policies”. Basically, what happened there was that Keynesian/Fabian socialist policies of expanding the public sector through borrowings, led to macroeconomic “imbalances” (the countries went broke due to high debt), crushing their growth momentum from over 6 per cent per annum to less than 1 per cent.

 

In this regard, Lal points to the “vast network of fiscal entitlements [that has] been enacted [in India], and [is] planned from the burgeoning tax revenues that are assumed to automatically accrue.” All this, while corruption even in these schemes remains strong. 

 

He also notes how India's labour laws prevent open small businesses from growing larger because of the onerous burdens imposed after a particular threshold.

 

He notes that it is a mistake to think that [the hierarchical-minded] Indians care for equality of outcomes. “It is this profound cultural misunderstanding of the Nehruvian wing of Macaulay’s children that accounts for their current endorsement of the populist policies that could lead, as in Mexico, to a growth collapse.”

 

Finally, he refers to the entitlement economy being promoted by the “constitutionally unaccountable” National Advisory Council which is creating a vast entitlement economy and “quotacracy” in India.

 

His conclusion?

 

“Though – as in the small, boom-time, resource-rich open economies – these may seem to be easily financed by the rapid growth the initial economic liberalisation of 1991 has engendered, the damage they can do to India’s productive potential, once this primrose path is trodden, makes me wonder about India’s ability to achieve the high potential growth rates and the concomitant great power status it craves. It might find, like Argentina in the early part of the 20^th century, that its seemingly unstoppable economic rise, to rival the US or China, turns to ashes.”