Despite rapid development brought out by opening up of markets in India, I was surprised by the extent to which many people still favor state regulation and ownership. They blame the infrastructure problems on liberalization and some even argue that quality of life was much better in the old days. Poverty is still rampant in villages where most of the people live. Despite poverty reduction among masses especially in the urban areas, people still blame that liberalization has not brought benefits to poor people. On the contrary, the people who are still poor in villages would have been the same (or) even poorer if the government has not opened up the markets.
As Greenspan put in his book "The age of turbulence", the acceptance of capitalism more lies in the society's culture rather than in the actual results. This post is my attempt to dissect cultural impact on India's path to capitalism, it's effect on people's lives and why India would settle down in its own mode of capitalism. I'll also propose solutions to two problems that exist due to government intervention. But let me warn before hand that I am neither an expert in finance nor in politics. I also confess that I may be talking from the middle class point of view and not taking the poorer sections into the calculations. Last but not least, I am a fan of free economy and capitalism (and of course the great Milton Friedman).
Rental car without A/C
I had to rent a car in Bangalore International Airport to go to my sister's place. There were two rental agencies at BLR, one is government operated and the other is privately owned. My curiosity and (probably greed) led me to inquire prices at both the agencies. To my disbelief, I found the government owned rental service cheaper. The govt-rental-agency acts as a mediator between customers and privately owned (& operated) rental cars. Customers pay to the gov-owned booth at the airport. The driver drops me off and collects the receipt from me. He later reimburses the receipt from the government. Government gets to decide the rental prices, which are adjusted regularly based on fuel prices.
After we got off the airport, i asked the driver to switch on the A/C. He asked for the receipt and pointed me to an empty place in the receipt. He said if I had hired an A/C cab, it would have been "A/C" in that column. However the reservation agent never asked me if I needed an A/C car or a non-A/C car.
The economist inside me had to ask him "How does the agency work and how do you get paid?". The driver told me that each driver gets to pay Rs.20,000 as a collateral for misbehaviour to Govt and gets a contract to operate the rentals. He gets 90% of the revenue and Govt collects 10% of revenue. I thought for a minute and asked him, "Did you have to bribe a govt servant to get the contract?". He said "Yes". Then I asked him, "Does the govt change the rates promptly enough to fuel price changes?" He said sometimes Govt promptly adjusts the rates and sometimes drivers would have to revolt!
I asked him why any customer would choose govt owned service over the privately owned service. He told me that it's all about trust. People beleive that a govt owned service does not cheat as it does not have anything to gain from. He also told me that there is every possibility that a driver in a privately owned service can rob you and take your purse away.
I convinced him that the trust part was a simple problem to solve. It's just a matter of govt ensuring that rental agencies issued receipts and regulating that the rental operators disclose price before the vehicle is hired.
These rental car operators (Govt delegated) have no impetus to upgrade their cars. They were driving age old TATA indicas. They have same business independent of how old the car is. The Govt agency had a way of getting feedback from customers. The receipt had a 1-800 number that i could use to provide feedback on the service. I asked the driver what would happen if I complained that he was not driving well (i asked for an honest answer). He was scared at first, but then replied that he would have to bribe a govt official to continue to operate the rental vehicle.
Govt should do away with presence in any service sector, where private enterprises are already thriving. People believe that private enterprises work for profit and hence untrustworthy. This is more true when there is competition from Govt. After an hour long drive, I convinced the driver that there is no rationale for govt presence in rental agencies . I also convinced him that I deserved to be told that the car did not have A/C. I was drenched in sweat by then.
Pay-go rules for political parties will bring out honesty
In most political debates in US, any new promise (or) economic reform is usually accompanied by a source of funds to achieve the same. For example, if a political party proposes $100 billion more money to be spent on schools, they will have to come up with a way of generating these funds. During elections, political parties in India make huge promises like low support price for rice, free electric power for farmers and so on. The parties however do not come up with formula for generating money to support such promises. If the parties were forced (either by Election commission OR by debates in media) to do so, it would definitely improve honesty in politics.
During my visit, local news channels covered demonstrations made by opposition parties in Andhra Pradesh asking the Govt to support a minimum price of Rs.1000 for rice quintal. But, the market price was only around Rs.500. Bottom line was that they wanted the Govt to buy rice from farmers for Rs.1000 and to resell rice to vendors for Rs.500. But no one mentioned where the govt is going to generate that surplus money. They had no justification why a quintal of rice should be Rs.1000 and not Rs.500 either!
The root of the problem has to do with export controls imposed by Govt in times of excessive demand. When demand for agricultural products crosses certain level, I was told, Govt imposes export controls to contain inflation. Farmers are not educated enough to understand that it's these export controls that are robbing them of prosperity. Their common sense tells them to revolt for higher support prices from Govt. Everyone loses at the end of the day.
Urgent need for proper monopoly and antitrust laws-
Indian courts (or) lawmakers did not stop BCCI from starting it's own 20-20 league. Lawmakers also did not prevent BCCI from sabotaging players for embracing the competitive league. BCCI was not chided for heavy-handling the ground owners and for not allowing them to host matches from competitive league. This is blatant monopoly and for long term success of the country's free economy, it's crucial that law prevents such behaviour in any sector.
On the same note, why is Reliance allowed to expand to other sectors? Reliance's huge cash reserve gives them unfair advantage in any new sector they venture into. This is probably the worst nightmare situation reformers worried about when India moved from socialism to capitalism. Very few individuals or companies can afford to raise such a huge capital.
India has an urgent need for antitrust laws to solve these kind of problems. Even though most people understand these concerns, they don't believe that solutions exist for such problems. People dont expect Govt oversight on monopoly issues.
Insurance for personal drivers - Free market style
I had my own car during the trip but did not have the skills of James bond to drive in the Indian roads. So, I hired a driver to take me around. Many people in India hire drivers to drive their kids to school (or) to take themselves to work. Such drivers are usually on monthly salaries. Almost all cars in India are pre-insured on multi year terms with a deductible. If a car runs into an accident, it's insurance covers the damages. Independent of who drove the car, the car's insurance covers for any damages. The owner of the car gets to pay the deductible.
I was appalled and angered when I came to know how the drivers were punished for their mistakes and accidents. If an accident happens, it's a norm that the owner of the car deducts the expenses from monthly salary of the driver. To protect themselves from such a behaviour, drivers formed state-wide and nation-wide labour unions. In case of a driver-owner conflict, the union takes it up with the car owner.
There are many problems with such an approach.. Labor unions tend to become protectionist , which in turn will lead to reduced quality of service from the servicemen.
What if the driver was really reckless?
What if the driver has a chronic drinking problem?
What if the driver was disobedient and unpunctual during that particular month?
The owner of the car ends up paying more than what the driver deserves. I propose a simple solution to this problem. What if the driver takes additional insurance whenever he drives a car owned by a third-party. The driver passes these costs to his employer. Owner of the car has to take up any accidents directly with insurance agency. Insurance agency will decide the cost of driver's insurance based on his past record. The job should be terminate-at-will which lets owner terminate the job of the driver anytime he wishes!
Now, what if the employer himself is dishonest and did not pay the driver regularly? Govt regulations should force drivers to issue receipts for payments and have documented agreements for car rental before the start of the service..Is this solution more like how car rental works at US airports?.. Yes, almost.
For people to understand these solutions, they need to understand the fact that there is no need for labor unions (or) governmental intervention to enforce the agreed upon contracts. The judicial courts are good enough.
All he needs to do is sign everyday to make ends meet
That's a dream job. Obviously more luxurious than any CEO in corporate America. That's the job of a ticketing officer in Indian Railways. I had a chance to talk to a railway ticket-inspector in India (no offense to him as I only know about one day of his tenure). He is expected to come to office everyday and sign a time-sheet. He is also expected to collect a minimum of Rs.30 for the department from unauthorized passengers. He is also given Rs.200 per diem to cover for his meals during his trip.
Don't you see an obvious flaw in the system? Railway department gives him Rs.200 for every day's work in addition to his salary and expects Rs.30 back from him. He could use the perdium to pay the R.s.30 to the railway department. He could sign the time sheet, go back home and still make a profit.
Development of railway infrastructure needs a lot of support from the Govt. However, there is absolutely no need for Govt presence in servicing passenger trains. It will be more efficient if Govt leases trains in auctions to private companies.
(I dont know if this is still the case) There is huge resistance among political circles about privatization of profit-making PSUs (Public sector units). However, privatization would lead to much higher efficiencies and revenues through leases and taxes for Govt. It would ultimately lead to a better nation.
People need to understand the benefits brought upon by privatization. They should view any resistance from PSU employees as a mere consequence of incompetency.
Real-estate riches and peer pressures
Real estate has appreciated massively in certain Indian cities in recent years. However, those estate owners may never be able to cash out and enjoy those riches. Peer pressures and employment would force people to stay in their houses for much of their remaining lives.
When Eve teasers got innovative
Internet and technology have eased access to information all over the world, including India. This has huge impact on the innovation and constructive destruction. A news article in India regarding such a change caught my attention. There is a provision in certain states (or in all?) to SMS a vehicle's registration number and get a report of the vehicle's owner, his/her address and phone number. The provision enables people to find run-away criminals (or) petty thieves without having to go to a Govt office to get the records. However, just like anything else in this free world, every change has its implications. Eve-teasers had started using the feature to get contact information of cute girls by looking up their automobile registration numbers. People started complaining about invasion of privacy and media suggested Govt to bring down the service. Oh Fish!!!!
Would these people ask Govt to bring down internet because it's also used to distribute porn? Would these people ask Govt to bring down telephone service because it's also used by drug traffickers?
Of course not! That's because those services (phone and internet) bring them benefits they can easily identify. However, the phone number service provided by traffic dept did not have immediate visible benefits. Benefits of free economy cannot be fully exploited if lawmakers don't understand the implications of their decisions.
One possible solution would have been to identify people who use such service for illicit purposes and prosecute them for invasion of privacy and unwarranted soliciting. However, the easy solution that strikes anyone's mind at first is to bring down the service.
Flight turbulence defended by patriotism
During the trip, I flew twice between HYD-BLR by SpiceJet. In my earlier trips, I flew by other Indian domestic airlines including Jet airways, Deccan and Air India. There was something common among all the flights. Heavy turbulence. Later when I thought about it, it's probably due to the fact that the domestic flights in India are much smaller compared to flights in US (My conclusion could as well have been wrong).
Anyway, I was discussing this with two of my old friends who visited US at least once. They argued that their experience in domestic flights in US was far worse compared to Indian flights. I was stunned!! I later attributed this (no offence to them) to false pride among Indians in general about being Indian.
Kids are taught that
- their nation is the greatest of all,
- that their culture is looked as being superior by the west,
- the technology India has is one of the best in the world and so on.
- US companies had to offshore work due to lack of skill in US.
I knew that they were all incorrect and that the technology had at least 100 years to go before Indian companies can compete with innovative companies of the west. From having direct experience with people who work in both technology sector and service sector, I knew first hand that it's all about cost. MNCs are compromising quality in short run to get the cost benefits. However, as Indians gain experience, that might change. As the world gets flatter and globalization achieves it's ultimate goals, there is no reason to be patriotic anyway! It only matters how efficient a nation's people are and it's companies are compared to other nations'. It does not matter how the nation as a whole is performing.
The path ahead
For 40 years, fabian socialism proposed by Nehru, complimented by people's attitude to accept things that don't work, inhibited growth in India. I cannot believe that a person of Nehru's intellect could not understand the obvious advantages of capitalism and the flaws of socialism.
At some point ahead, Indian economic growth is going to stagnate. Indian culture and financial structure need to be flexible and open enough to shrug off any recession. Competition creates anxiety, chronic fear of job loss which in turn create discomfort among people. From my personal experience, risk tolerance among Indians is quite low. Indians should accept and embrace constant scrapping of old ways of doing things for the new. This also means people have to constantly keep themselves up with advancements in technology. Otherwise, their skills would be obsolete before they even realize.
People believe that Govt should bail them out of every problem. They also believe that solution for every problem should be govt initiated. They expect Govt to pay remuneration during famines, massive accidents and so on.
Benefits and effects of capitalism need to be taught in primary education. People need to be taught about monopolies and the rules of capitalism. This would eliminate (or) at least mitigate the vote-bank politics though meaningless price controls and concessions.
Capitalism will definitely lead to material well-being of people. But, happiness is a relative state detached from personal wealth. Inspite of the fact that people have accumulated huge personal wealth, they still question the benefits of capitalism. It has to do with the fact that definition of who's rich and who's poor keeps on changing. As long as people keep comparing themselves with Joneses (rather Reddys or Naidus) next door, they can never feel richer.
Adam smith, the inventor of capitalism, said 300 years back "Individuals who compete for private gain led by invisible hand will promote common good". That's exactly what's happening in India today. Nothing more and Nothing less.
