Review: India’s Government Is Hurting Its Economy

In India’s Big Government: The Intrusive State and How It’s Hurting Us, Vivek Kaul paints a grim picture of the economy and focuses on areas from banks to education in which the government plays a decisive, and all too often negative, role.
informal economy india

The German economy post 1945 was deeply influenced by an economic school called ordoliberalism. Its torchbearers looked for a third way between the planned economies of Nazi Germany and the Soviet Union and also rejected both pure laissez-faire liberalism and Keynesian demand management. Today the Wirtschaftswunder (economic miracle) – the era of reconstruction and economic growth following the Second World War – is mainly credited to ordoliberal ideas implemented by Ludwig Erhard, the then minister of finance.

Ordoliberals argue the state should form an economic order instead of directing economic processes. The state has a crucial role to play in fostering market competition, by preventing e.g. the rise of monopolies that can exert harmful economic and political power. At the same time, the state must also avoid distorting the free market. Hence the German state is a strong state that sets and enforces rules, rarely meddles in economic affairs and trusts the private sector to create innovation and wealth.

The Indian state, neither ordo, nor liberal

In a sense this seems to be quite the opposite of Indian economic planning as described in Vivek Kaul’s India’s Big Government: The Intrusive State and How It’s Hurting Us. It is quite a hefty analysis – the book is 700 pages long but is engaging despite its length. This is largely because Kaul tries to explain economic ideas clearly.

According to Kaul, the Indian government is not a big government because of the number of people it employs but because it is trying to do “things that it shouldn’t and in the process ignoring the things that it should be doing.” He makes a comparison with the US which shows why the number of employees is not the real benchmark, and quotes from the Seventh Pay Commission report:

“Available literature indicates that the size of the non-postal civilian workforce for the US federal government in the year 212 was 21.3 lakh. (…) The corresponding (number of) persons in position in India for the central government in 2014 was 17.96 lakh. The total number of federal government personnel per lakh of population in India and the US works out to 139 and 668, respectively.”

The problem lies with the fact that the Indian government comes up with ambitious plans while ignoring its own limited capabilities. The state, therefore, ends up meddling in markets with unintended consequences that hurt the economy.

This runs from everything from education:

“To cut a long story short, the state of primary education in India is in a huge mess. It all started with the government paying attention to higher education in the quest to produce manpower for the public sector enterprises. While they did manage to produce manpower the public sector enterprises, primary education got grossly neglected in the process.”

To public sector banking:

“Another reason why investment is not picking up is because a substantial part of the Indian private sector is highly leveraged. Furthermore, there have been huge corporate loan defaults, and this has led to distress in the public banking sector. This is a big government factor, with the politicians over the years having forced these banks to lend to many crony capitalists, who are no longer in a position to repay their loans.”

In 13 thematic chapters – from public sector enterprises and banks, to education, labour, real estate and land acquisition – the author covers nearly all the areas in which government plays a decisive, and all too often negative, role. A chapter on Aadhaar, one of the biggest intrusions into citizens’ life, would have been a useful addition, but I presume the author might add another chapter on that soon.

Using the available data and quoting many experts, Kaul paints a grim picture: the Indian economy simply does not create enough jobs, investment is low, credit isn’t flowing and the education system releases way too many students into work life whose ability to read, write and do basic maths are at best shaky.

Paying for goods versus creating public goods

One of the themes running throughout the book is that government needs to distinguish between paying for goods and services and producing as well as distributing them. Over the decades the Indian state has shown its mechanical view of the economy by believing it could produce nearly everything while ignoring that economies are evolving eco-systems delivering affordable, innovative products only if markets provide direct feedback and if entrepreneurial risk is rewarded. Kaul reasons the government while present in many areas where it is not needed is absent in those areas it is really needed. Instead, focusing on delivering public goods by improving market infrastructure and access should be the government’s agenda. A proto-ordoliberal thought.

Kaul’s book is an important wake-up call backed up by statistics and a long list of expert quotes. Unfortunately, none of India’s current political heavyweights seem to listen at the moment. Kaul does not provide a magic pill in the form of easy slogans. He carefully lays out many issues that have to be tackled and concludes a change of mindsets among decision makers (or better: decision avoiders) is needed to succeed. He is clear in his message: Enact reforms now, don’t wait until yet another 1991 back-against-the-wall scenario. If the Indian political elite doesn’t act now the demographic dividend which was actually considered to kickstart the Indian economy might end up as a demographic ticking time bomb.

Unfortunately, his one takeaway is that only a “bomb” – a crisis – is what will get the government moving, or at least that is what an unnamed Modi government economist tells him: 

“The so-called big bang reforms only happen when a country is facing an economic crisis.” He further told me that there was enough research in economics going around to back his claim. He offered this as a justification for the Modi government not attempting any big-bang economic reforms.

In the Kafka-esque world of the overly intrusive Indian state, it seems that the only way India may avert a crisis is to have one.

This book review is written by Ruben Dieckhoff, Project Manager South Asia at the Regional Office of the Friedrich Naumann Foundation for Freedom (FNF). It was originally published here.