II. Planning and command economy: 1950-90

Classical tenets of state intervention

The classical view of public policy3/ assumes that public intervention in economic affairs takes essentially three forms: taxes and subsidies, regulation, and public production. Besides revenue generation, taxes serve the important purpose of guiding incentives at different levels of economic structure; on the contrary, subsidies (negative taxes) stimulate economic activity considered socially or economically desirable. The state also intervenes through law and quasi-legal instruments which work better in ‘regulating’ than in ‘stimulating’. When the state cannot ‘stimulate’ economic activity to the desirable levels in certain sectors either through tax/subsidy approach or through legal approach, it turns into an entrepreneur/economic player and undertakes ‘public production’ of that activity. In this view, planning would essentially involve planning of public investments and supportive incentive and a regulatory structure.

The Reality of Modern India

The Indian state has extensively used numerous combinations of all these three categories of public intervention in economic activity. The state has assumed the role of an entrepreneur in establishing co-operative organisations; as an entrepreneur-manager in creating organisations like the Food Corporation of India (FCI) and the State Trading Corporation (STC). It has undertaken public production of rural development services through myriad forms: organisations (like the DRDAs), programmes (like the JRY), and campaigns (such as the technology missions and literacy campaigns). A major input in all these inter-ventions has been investment of resources; though resources by no means have been the decisive input in determining the success or failure of these interventions.

The failure of the Indian agricultural and rural development policy is to be explained not so much by inadequate or mal-allocated investment as by the indifferent performance of the state in devising and deploying all these three sets of instruments of public intervention in a manner that would achieve the overall goals of policy. There are four common drawbacks which characterise this institutional failure in all state interventions:

a) goal confusion: most interventions end up trying to achieve more than one, and often conflicting goals;

b) mistargetting: most fully or partly miss their target groups or objects;

c) redundancy: most tend to survive long after they stop serving their original purpose; we have singularly failed in devising an ‘exit procedure’ for interventions/organisations no longer relevant to their original goals; and finally,

d) negative loops: most end up in the centre of a new political economy that gets created as the consequence of their implementation with deeply entrenched pressure groups and vested interests (the ten-per cent-wallahs, as these have come to be popularly known).

These are not peculiar to India; indeed, these are general features of state intervention in the economic sphere in modern economic development everywhere. What is peculiar to India is that we have failed to recognise and manage these drawbacks as effectively as some other nations have (often by abolishing such interventions). There often are, within India or in countries with comparable conditions, superior and more efficient examples of achieving the same goals for which the state intervention was planned in the first place. As a nation, we have tended to learn little from these, much less to make mid-course corrections on the basis of such new learning.

 

Assessing state intervention

Subsidies: Subsidies have been extensively used in the Indian agricultural-rural economy as a means to guide incentives and to effect direct or indirect resource transfer to weaker sections. Fertiliser subsidies are an example of the first while food subsidies exemplify indirect resource transfer, and the million-well-scheme illustrates attempts at direct resource transfer to poor. There is much formal research and investigation on the effectiveness of subsidies in the Indian agricultural-rural development field. The Dagli Committee Report (1979) on controls and subsidies highlighted the general evils that subsidies and non-market controls engender. Minhas’s recent analysis (1991) of the Public Distribution System (PDS) is a good example of the mis-targetting of food subsidies. Rajagopalan (1982) showed long ago that 44%-60% of the subsidised sugar leaks out of the PDS into the open trade. Phansalkar (1990) has explored how the subsidised sale of edible oils through PDS is diverted by trade for adulteration and how the rents so generated lubricate Gujarat’s political machine. Gulati’s analysis (1989) shows how hidden subsidies allow Punjab to be the nation’s largest rice growing state although it makes no economic sense for it to do so. The Chairman of the Commission on Agricultural Costs and Prices himself has strongly argued for reducing the ‘retention price’ of fertiliser. He has shown convincingly that in the name of subsidies to farmers, it is the fertiliser companies which walk away with the "cream" by overpricing their plants and equipment and stashing away hundreds of crores.

The broad conclusion of this corpus of research is: subsidies always tend to outlive their utility; seldom reach their target groups fully, and are almost always used as instruments of patronage. Each new subsidy gives rise to a new class of ‘rent seekers’ - the "per cent wallahs" - who earn their living not by productive activity but as specialists in mastering the procedures and cultivating the ‘contacts’ needed to secure their "cut" in subsidies. Finally, and most importantly, subsidies interfere with the normal processes of development even when they are diligently planned. This is most evident in biogas programmes. A 1988 study by IRMA on the biogas programmes implemented by NGOs suggested that the cash surplus available from biogas subsidy was often the prime beneficiary goal in installing a biogas plant. Far too often, the plant was seldom meant to be used and therefore, naturally, the digester was never filled.

Regulation: The state regulates the actions of private organisations and individuals through a legal framework consisting of laws, quasi-legal instruments and government regulations (GR). Legal framework is the foundation of a modern civilised society. However, if this framework is not adaptable to the needs of a modernising society, it can stifle development. Laws are the primary instrument the state uses to operationalise ideology. The legal framework of a society at a given point in history therefore, provides good indication about how sensitively the state is able to adapt the vision of the society it wants to create to its understanding of how laws actually influence the course societies take. Thus, the Nehruvian socialist state enacted MRTP as an instrument to contain excessive concentration of wealth and economic power; the Industrial Policy resolution of 1956 to place the state at the commanding heights of the economy; land reforms acts to restructure property rights. That the land reforms acts remained on paper, and the other two laws were very nearly scrapped by the present government is an indication that the Indian state was not adept at judging how laws can affect people, institutions and society; worse, it took long to learn and to devise better instruments.

The co-operative societies act is a classic example of how a legal framework can stall the growth of a whole movement for four decades. In the apparent fear that an independent, member controlled co-operative movement would be prone to sabotage by local vested interests, the law has perpetuated the hegemony of the government and the bureaucracy over co-operatives. Our present co-operative act, enacted in 1904, is a colonial one reflecting the natural propensity of the alien ruler to control native institutions, and therefore it provides enormous powers to the registrar of co-operatives. In recent decades, rather than protecting co-operatives from petty, sectional interests, the law has been unabashedly used, in numerous instances, by politicians and petty bureaucrats to stifle their growth by superseding their boards and suspending elections to their boards for decades. In Tamil Nadu, for instance, elections to co-operatives were not held for 15 years and in Andhra Pradesh, for 10 years.

The prevailing legal framework formulates the immediate legal environment within which people and institutions operate. A farmer will plant and protect trees if the law upholds his right to be its owner — which would include the right to use, cut, sell, transfer, lend, gift or do whatever he wants with his tree. When the laws curtail private property rights even partially, they hit incentives in economic activities. Worse, when laws/regulations are made without appreciating the dynamics of implementing them, they create a complex maze of criss-crossing impacts: the strong and the smart turn the new regulation to their maximum advantage; the weak and the conscientious end up as suckers. The destructive power of GRs has been extensively studied in recent times in the context of natural resources. Several scholars including Saxena (1987), Shah (1987), Chambers et al (1989) have highlighted how numerous restrictions on harvesting, transporting and marketing of privately owned trees induce rent seeking by petty forest officials, depress incentives in tree cultivation and protection, and hit forest based tribal economies in many states including Orissa, West Bengal, Maharashtra and Gujarat.

When laws fail to curb economic activity of the undesired type, they result in a parallel economy operating on its own devious logic. Shah (1991) has documented such phenomena in the siting and licensing restrictions for installing wells. In this case, since direct implementation is impossible, the electricity board and financial institutions enforce the norms before granting power connection and loan respectively. The norms do not affect the resource rich who use diesel pumps and are able to self-finance their investment, nor of those who can get both power connection, loan as well as subsidy by making what economists euphemistically call "side payments". As with subsidies, here too tight linkage between instruments and targets is not possible. Therefore, the numerous regulations produce unpredic-table impacts which typically hit economic activity as well as the poor people.

 

Assessing state intervention

Direct Action: A recent analysis by Liberman and Ahluwalia (1990) of the state’s direct intervention in markets has confirmed the conclusion of several other earlier studies. Through such direct intervention, the society buys an indifferent social outcome at a prohibitive social price. The instruments created state to intervene in the markets end up, within a decade, as monolithic, inefficient, self-serving white elephants. The FCI is one such example. Created in 1957 in response to the recommendation by the Ashok Mehta Committee, the FCI grew into a colossus employing nearly 80,000 workers. In its checkered history, the FCI was never viable, its staggering losses cumulating to several hundred crores during 1958-89 period. Directionless and without a long-term strategy, the FCI became a den of corruption and inefficiency. With strong labour unions, the operating costs shot up to unheard of levels. For example, the FCI’s average loading cost is Rs 200/mt compared to Rs 25 for private grain handlers; its storage losses have averaged 3% compared to 0.5% for private handlers; its grain losses due to moisture alone are what private handlers tolerate under all categories. Organisations like the FCI are beyond redemption - difficult to manage, impossible to turn around.

Providing support prices to farmers and building a foodgrain buffer stock is an important task for the nation, but FCI may well be too high a price to pay for getting such a task performed, particularly as in recent times we have witnessed several new institutional innovations in market intervention in which the state plays a supportive role while autonomous networks/organisations perform market interventions. Two examples of such intervention are mentioned later.