The socialists in India have scored yet again. Neyveli Lignite and NALCO have been saved from the abyss. And anyone with an understanding of even school level economics is in despair. The tragedy is not that the communist parties in India oppose privatization but that a large section of people feel wary of free market economics. The communists and other political parties of India have exploited this wariness to garner votes by turning themselves into saviours of the “common man” from the demonic forces of the free market. However, making the free market into a bogeyman is not something that only Indian politicians are particularly adept at. Politicians across the world have exploited the fear and dissatisfaction that fluid product and labour markets create.

The cause of this fear and dissatisfaction is linked to free market’s major drawback of deepening the rich-poor divide and ignoring negative consequences to society and environment in the pursuit of profit. This has been exploited to the hilt by left leaning politicians who wish to throw the baby out with the bath water in their zeal for more active government involvement in markets. Empirical evidence and economic principles show that the capitalist free market economy is more efficient and better able to achieve growth than other systems.

Instead of discarding free markets we must aim to ameliorate their negatives through effective government action. This means a thrust on welfare systems and worker retraining rather than preserving jobs for life and public sector control of business. For a developing country like India, where government is inextricably linked to the economy, it also means creating conditions conducive for the existence of free markets. Only then will India’s productive potential be realised and development follow.

Why then the tirade against privatisation?

This can be analysed through two aspects; one is political and the other economic. As the state withdraws from business, the ability of those in power to use public sector companies as personal fiefdoms to grant employment and other benefits to loyal foot soldiers diminishes greatly. Also, as markets become freer with less government interference and less cumbersome laws, the opportunities to extract economic rent (bribes, etc) reduce, depleting political party coffers. As this is a column focused on economics, we will assume that these two facts have nothing to do with politicians’ zeal to oppose privatisation and they must truly believe that their economic policies are more sensible.

Empirical evidence against economic policies of state control and big government is overwhelming - the implosion of the Soviet Union; North Korea’s survival on handouts from South Korea and China; the latter’s repudiation of the communist model; UK’s turnaround under Margaret Thatcher; India’s own dismal economic growth record until 1991. However, these examples are usually countered by the “flawed execution” argument. The leftists like to believe that poor execution ruined good policies and instead of changing the policies, we should aim to improve execution.

Opposition of privatisation is one part of the larger argument for greater state control of the economy. The main pillar on which this argument rests is that the government knows best. It can combine economic growth with equality of income and generate more favourable societal and environmental outcomes. This assumption is at best flawed and at worst dangerous. A committee sitting in a government office cannot know or calculate what each of the billion people in the country desire. They can at best approximate using the statistical law of large numbers to come up with an “optimal solution”. It is akin to manufacturing one shoe size based on an average foot measurement. A lot of people are forced to go barefoot and a large percentage of production is wasted.

The policies are flawed and therefore impossible to execute. Assumption of a benevolent and far seeing public sector recalls Plato’s nonexistent guardians of the republic. In the real world, idealised aim of policy has to be balanced with the practicality of achieving that aim. Human beings are far from ideal – corruption, greed, intolerance, cruelty exist along with honesty, generosity, tolerance and kindness. The aim of any policy cannot be realised if implementation assumes one set of emotions to be absent. This is the fundamental problem with the “flawed execution” argument. Teachers will not go to villages and teach only because they believe it is their national duty to educate the rural masses. Substantial incentives also have to be provided. Similarly higher income taxes will not be paid because greed dominates over any sense of duty.

The leftists are not wrong in trying to protect the poor. A hand-to-mouth existence is easily snuffed out by a few days of unemployment or a crop failure. A free market is woefully inadequate in addressing problems of social equity. However, the solution is not to eliminate the market by creating a public sector machine which functions as an employment guarantee scheme. The solution is to create growth through the market and develop a welfare net to support the marginalised.

The public sector is inefficient both as a business and as a welfare net. In trying to balance socialist priorities with business aims, it botches up both. It does support the marginalised but at a much higher cost to society than a direct welfare program. Worse, it creates special interest groups through disturbing freedom of the market and creates opportunities for extracting economic rent. The decision to set up factories in backward areas is political not economic. As a result, sugar mills are set up thousands of kilometres away from sugarcane farms. These may improve living conditions but increase cost of logistics, very often threatening the viability of the business. Unionised workers fortunate to find employment do force higher wages and better living conditions, but at the cost of non-union outsiders remaining unemployed.

The government is right to make provision of employment a priority. This is the only way to ensure everyone with a ‘decent’ standard of living. However, the unemployment problem cannot be tackled by enlarging the public sector. The solution lies in a twin pronged approach – reducing red-tape and enhancing labour skill set. Onerous regulations deter entrepreneurship. No sane person will start a business if it takes 6 months to obtain permission and which is impossible to close even if it is loss making. Lack of skills due to sub-standard education not only reduces employment opportunities by discouraging the private sector to set-up shop but also prevents people from taking advantage of available opportunities. Often manual labour is the only option possible, forcing them to be in the bottom of the income range.

Therefore there is need to create conditions to enhance demand for labour, not through opening loss making PSUs, but through reforms encouraging business. Along with this, education should be provided to increase skill level thereby enhancing worker prospects. Of course there may still be some who will face unemployment. For them there should be a welfare net which provides a basic standard of living. A net which cannot be easily hijacked by special interests and is more immune to corruption so that it can actually prevent those in need from falling into the abyss.

Ironically, the political party which achieves this can be assured of being voted to power. The beneficiaries outnumber the special interest groups by the millions. But is anyone brave enough to trust Indian democracy?

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