A Pragmatic Economic Policy for a Government That Works

Summary

Reproducing an article originally published in Tata Economic Consultancy Services’ bulletin Economic Scene and reissued as a Forum of Free Enterprise pamphlet in June 1981, this anonymous “study team of three” steps back from year-to-year quarrels over rains, strikes and remittances to argue that India’s three-decade rise in prices is an endemic phenomenon driven by aggregate investment that exceeds the economy’s capacity to bear. The authors call for a tough counter-inflationary programme even at the risk of recession, and reject the popular consolation — voiced by the Prime Minister and many industrialists — that more production will by itself cure inflation. In an Indian setting of overstretched resources, they argue, the attempt to push output further raises money incomes more than proportionately and so feeds the very inflation it claims to fight.

The authors propose treating monetary stability and the mobilisation of savings as two distinct functions, personified as the “Stability Man” and the “Growth Man”. They want the Stability Man — the monetary authority — given much greater authority, including a stiffer liquidity ratio, higher interest rates, an end to the “lend more and be lenient” reflex of nationalised banks, tighter discipline on state overdrafts and, above all, a sharp curb on Reserve Bank credit to the Centre, which they identify as the principal factor behind India’s endemic inflation. They are sceptical of the new special bearer bonds (because their transferability makes them quasi-money), critical of Maruti as inflation-financed investment that private money could have bought for one-hundredth of the cost, and impatient with a finance ministry that refuses to let a private unit trust compete with the public one or to publish “White Papers” arguing the pros and cons of policy.

On the savings side they urge a richer ecology of institutions and incentives — state lotteries that convert consumption into savings, denationalisation of some banks to restore competition, easier capital-issue rules, and minority public shareholding in public-sector undertakings — arguing that India has been so preoccupied with controlling the use of savings that it has neglected the prior question of generating them. The closing pages turn to industrial policy, which the team says has shrunk to “two ideas: control the big industrialist and help (protect) the small industrialist”, neither of which has worked. They propose dropping the small/medium/large dividing lines, adopting a “universalised” industrial policy that asks every firm to bear social obligations in proportion to its capacity, and re-conceiving the state not as owner of a “sector” but as a multi-role “ARM” — builder, promoter, manager, collaborator, specialist and trouble-shooter — whose entry into lucrative consumer fields like polyester is judged on its merits rather than as a cross-subsidy device.

Key points

• Frames India’s three-decade price rise (1.5% in the ’50s, 6.1% in the ’60s, 9.7% in the ’70s) as endemic inflation driven by aggregate investment outrunning the economy’s capacity to bear it, not by passing shocks.

• Rejects the Prime Minister’s and industrialists’ claim that more production cures inflation, arguing that in an overstretched Indian economy higher output raises money incomes more than proportionately.

• Proposes separating the functions of monetary stability (“Stability Man”) from savings mobilisation (“Growth Man”) and giving the Stability Man much greater authority over liquidity, interest rates and credit.

• Identifies Reserve Bank credit to the Centre as the principal source of created money behind the endemic inflation, and presses for the Centre to be “strict to itself” in deficit financing.

• Criticises the Finance Minister’s special bearer bonds (transferability makes them token money), Maruti as inflation-financed investment, and the refusal to let a private unit trust compete with the public one.

• Argues for re-energising private savings through state lotteries, easier capital-issue rules, minority public shareholding in PSUs, and asks whether India will have the “courage to denationalize some banks” to restore competition.

• Reframes industrial policy as “universalised” — scrap the small/medium/large dividing lines, free every industrialist to expand subject to public-interest rules, and impose social obligations in proportion to capacity.

• Proposes the term “ARM” rather than “sector” for the state’s industrial role, recognising it as builder, promoter, manager, collaborator, specialist and trouble-shooter rather than as a permanent owner of segments.