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View: Back to basics is the way ahead


By KP Krishnan

Prior to Prime Minister Narendra Modi’s announcement of a very welcome second Covid-19 economic stimulus package of Rs 20 lakh crore on Tuesday, which will be detailed over the week by finance minister Nirmala Sitharaman, there was a veritable downpour of suggestions on what GoI and state governments should do in post-Covid-19 lockdown.

These suggestions will only fly thicker and faster now. While there is a case for high levels of public expenditure in some sectors, on policies at a fundamental level, we need to go back to basics and reconstruct the ‘new deal’ on simple and time-tested economic principles. Markets and private economic agents create wealth and prosperity.

The State’s role in the economy should be to enable this to happen, to correct market failures and to ensure desired levels of income and security for the vulnerable. Pre-Covid-19 India had many strengths and many weaknesses.

The pandemic and lockdown brought all the known weaknesses back into focus. That non-banking financial companies (NBFCs) and mutual funds (MFs) struggling for liquidity in the wake of the pandemic reflects the absence of a liquid corporate bond market with its concomitant currency and derivatives markets to manage risks.

This phenomenon has been with us for over two decades. Like other weaknesses, it got magnified during this crisis. Migrant labour distress is also not something we’re witnessing for the first time. Non-enforcement of a social security legislation dating back to 1979 magnified this problem that has been with us for decades.

If the liquidity crisis is an example of amissing market, the migrant labour crisis is a disturbing example of State failure and incapacity. At the same time, some of the more effective coping and response mechanisms during lockdown have been the result of actions of private actors.

For example, online markets fulfilling essential needs of consumers, and farmers selling directly through farmer producer organisations (FPOs) and not through a dysfunctional agricultural produce market committee (APMC), are developments that have stood out during the last seven weeks.

What are the meta-lessons these examples throw up for the future? Long ago, Adam Smith spoke about the importance of markets. Modern economic theory has clearly shown that markets and freedom work well in all but four cases of market failure: provision of ‘public goods’, correcting for externalities, solving information asymmetry, and preventing abuse of market power.

There is no fifth case for State intervention in the markets for reasons of efficiency. The virus hasn’t changed this economic principle. Post-Covid-19, public policy should return to this basic design principle and use the opportunity provided by the pandemic to reset the balance of State and markets.

We often hear that it is impossible to acquire land for industry because the new Land Acquisition Act has made this both costly and timeconsuming. Equally, almost no one will quarrel that land acquisition in India has mostly been at the expense of land losers and in favour of land recipients. Yet, a correction in that 100-year-old problem is now held to be the major cause of ‘Make in India’ not taking off.

The right question to ask here is why there is no voluntary sale and purchase of land for those who want to make in India. The answer is the poor state of Indian land markets. The more appropriate role of the State would be to put in place laws and systems that assure secure title to owners and purchasers of land. This is a classic case of public good provision by the State to enable the market rather than a direct role as a participant.

Another example would be to strengthen market-based social security for labour (e.g., national pension system) so that workers and employers can co-contribute with the State, becoming the third contributor of higher amounts for lowincome earners, in turn financed by appropriate taxation.

To enable flexibility for employers, it is possible to reorganise existing government-financed social security schemes to be ‘employer-agnostic’, so that there is social security for workers without necessarily linking it with a specific employer. However, suspension of labour welfare legislations in a situation of labour distress is the wrong solution.

Post-Covid-19 India needs a better and smarter State in many areas, (e.g., public health, deeper and more liquid markets in land and corporate bonds). Instead of an ‘either-or’ manner, public policy needs to focus on ‘and’ and go back to basics and build stronger public systems in the social sector to protect, empower and support the weak and strengthen markets where markets are known to work.

The writer is former secretary, GoI

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