by Roopa Pai
Since Indian industry was so underdeveloped, the government felt that, at least for a while, it should be allowed to find its feet and gain confidence without worrying about competition from foreign industries, which were more established, more aggressive, and far wealthier.* India had just come out of a dark period where exactly that kind of competition had destroyed our industries, so this seemed like a great idea at the time.
And that’s why your parents grew up eating Indian burgers and Dabur Chyawanprash, keeping all their valuables in a Godrej almirah, piling into Ambassador cars to go on family holidays, watching a single television channel called Doordarshan, and drinking fizzy drinks called Thums Up and Limca!
But don’t believe your parents when they tell you what sad, deprived childhoods they had—that’s just regular parental drama, so that they can tell you what an ungrateful child you are. In reality, they loved their Parle biscuits and their Thums Up, which explains why those brands are still around today!
Of course, after about fifty years of protecting our home-grown industries, India began to realize that lack of competition was not such a great idea any more. Without competition, our industries had become smug and complacent. They were happy making inferior products (why bother making our products better when they are already the best available here?), treating customers badly (they have no choice but to come back to us, anyway), and not trying at all to make a profit (the government will keep giving us money and not let us collapse, so why hassle ourselves?). What made it worse was that even smart Indian businessmen with good ideas and India’s welfare in mind were restricted in many ways so that they would not be able to compete with the inefficient government-run industries.
So, in 1991, India finally decided to liberalise, or open up the economy, and let foreign companies come in and set up shop. Mollycoddled Indian industries would have to up their game and compete—or die trying. As expected, many inefficient industries died, but several others got their act together, and are still around, competing fiercely with the foreign ones and even expanding beyond Indian shores. With the new freedom to start companies without too much government interference, thousands of new, exciting Indian companies with fresh ideas on what the Indian customer would like also opened their doors.
In 2016, we celebrated a quarter century of liberalisation. Everyone agrees it has been a huge success and that it has made life far more comfortable, interesting and fun for all of us. After all, that’s the reason you are getting to watch Modern Family and Quantico while snacking on Lay’s chips and guzzling Pepsi!
LEARN THE LINGO
Economic Systems
When your parents were growing up, India had what was called a ‘Protectionist Economy’, where we protected our industries against competition from foreign ones. When we opened our doors to the world in 1991, we liberalised our economy, making it more the kind of economy our old friend Adam Smith would have liked. Basically, though, there are four main kinds of ‘economic systems’, or ‘ways in which a country does business’. Here’s a quick primer.
Traditional economy: Money? Wozzat?
Imagine a country where money doesn’t exist. With no money to buy or sell things, the people of this country use the barter system, where Good A (coconuts, cooking oil, vegetables, steel vessels, and so on) is exchanged for Good B (mud pots, dining tables, books, iPads, and so on). It sounds cool and all, but how in heaven’s name does one decide how many coconuts add up to the value of an iPad? Also, what if the iPad seller was not interested in coconuts, even if you offered him 10,000 of them in exchange for one iPad? Economists call this the double coincidence of wants problem. Unless Trader 1 wants coconuts and Trader 2 wants an iPad (i.e., unless there is a ‘double coincidence of wants’), there can be no trade, and this economy will collapse, which is what has happened in most of the world. The traditional economy does not exist anymore except in small, primitive and self-sufficient rural communities which do not trade with the outside world.
In certain unusual circumstances, however, barter has resurfaced even in developed economies. During the severe financial crisis that hit Germany after World War II, the bankrupt country carried on trade with other countries through barter! During the financial crisis in Zimbabwe more recently (see box, page 97), newspapers actually carried advertisements that offered, for instance, a barrel of fuel in exchange for a ton of soya beans. When money loses its value, and for a limited time period, barter still works!
Command economy: My wish is your command
Imagine a country where the government, and not individual people, owns all the means of production—factories, machines, minerals, metals, crops, electricity, water, anything, basically, that is needed to produce something else. Imagine also that this government sits down periodically and decides what crops should be grown in the country, and how much, what minerals should be mined, and how much, what goods should be produced, and how much, and what each of these goods should be priced at. This grand plan is based on what the government thinks people need, and what they think will help the government earn the maximum amount of money through exports to other countries. Once the plan is ready, it is shared with the people, after which the people go off and grow, mine, make and sell the stuff that the government has ordered them to do.
This government also decides a salary for everyone—carpenters, house help, software engineers, doctors. If you are a house help, you get exactly the same salary as every other house help, whether you are a good help or a bad one, a hard-working help or a lazy one.
The logic is that the government has all the data about everything and everyone in the country, so naturally it is in the best position to make such a plan. Also, since the government is made up of carefully selected (not elected) smart people and has only its citizens’ welfare in mind, this kind of planning will ensure that everyone in the country has a job, and a decent salary. There will be no rich and poor in such a society, no upper class and lower class. The country’s wealth will be ‘owned’ equally by all its citizens, instead of by a few rich, greedy people who will oppress everyone else.
The theory sounds good on paper, and command economy is still practised in a few countries like China, Cuba and North Korea, all of which have a Communist* system of government.
In reality, no government really has all the data about anything, so they end up making several bad decisions. Even if a government does have all the data, trying to guess what people need is a hugely complicated exercise and likely to be completely off the mark. Maybe the government decides to make too little bread one month because their data tells them that rice has become more popular (so that lots of people who love bread are forced to go without). Or they may decide to make as many cars as they have always done (because their data didn’t spot the new fitness trend that has caught on over the past year, which is making everyone buy bicycles instead of cars). This is how countries with command economies usually end up with scarcity (not enough bread) or surplus (too many cars), instead of having just enough for everyone (which would have happened if they had just let people decide for themselves).
The other problem with the command economy (and Communism) is that it doesn’t take into account one important thing about human nature—the power of incentives. If everyone is going to get the same salary no matter how hard they work or how smart they are, no one will bother working hard or being smart at all! But if you offer people incentives (rewards)—the more kurtas you stitch, the more money you will stand to make; if you don’t miss a single day at work, you will win an all-expenses paid trip to the Dubai Shopping Festival—they will work harder, smarter and more efficiently. That is why most countries have now done away with Communist governments and command economies and gone over to democratic governments and a different economic system.
(One variant of the command economy is the planned economy, where the government makes a master plan for how development should go, but then allows individuals to take charge as long as they keep to the pl
an.)
Market economy: No rules; let’s paartayyyyy!
Now imagine (sigh! your poor overworked imagination!) a country where it isn’t the government, but the market (all the buyers and sellers in that country) that decides what crops to grow, and how much, what minerals to mine, and how much, what kinds of bread to make each day, and how many loaves of each, what medicines to produce, and how much of each to stock in which pharmacy, how much to pay someone for the work he or she does and so on. The market makes these decisions based on what people want to buy, not what people should buy. Producers don’t want to make things that consumers don’t want (that way, there is no surplus, or waste), and consumers are happy knowing that what they want will always be available (i.e., there is no scarcity).
The market also decides the price of each good based on the situation (‘It’s Diwali and people are spending like mad, so it’s a good time to give discounts so they will buy more!’ or ‘The festive season is just over and no one is spending any money, a good time to give discounts and get rid of some extra stock.’ or ‘Whoa! Everyone is suddenly into organic food, time to jack up the prices on everything organic!’ or ‘Wow, this accountant is brilliant. I want her to work for me so bad that I will make her an offer she can’t refuse. I’ll pay her double what anyone else would pay her.*) The government does not interfere in any of these decisions.
Also, it is individual people, not the government, who own the means of production, which includes factories, hospitals, schools, airlines, mines, banks, electricity companies, water companies, garbage companies, and so on. And… hey, hang on a minute, you don’t have to imagine all this. This is what things are actually like, more or less, in India, and in many other countries!
But only ‘more or less’, because there are problems in a pure market economy too; the kind of problems that the founders of Communism were worried about. If a country allows the market to decide everything, the market, which is essentially selfish, will only do things and produce goods that will make a profit, instead of doing things and producing goods that are necessary and good and right for the country or things that will help the poor and underprivileged and eventually build a fairer society. That is why, most democratic countries, including India, have adopted a combination of command and market economies, which is called the mixed economy.
Mixed economy: A little bit of everything in my life
If you’ve read this far, you know that the economic system that actually makes practical sense is a mix of the two extremes. Most countries in the world today have a mixed economy, but the mix itself is different in each case. In countries like Singapore, Australia and the USA, for instance, the mix has a lot more ‘market’ in it than ‘command’ or ‘planned’. Countries like Norway, Sweden, Iceland, Denmark and Finland have a different kind of mix—they are called welfare states because the government owns and runs all the schools, colleges, universities and hospitals in the country so that it can provide free education and healthcare to its citizens, but otherwise allows the market to decide things.
In India, we have a mix that includes some planned economy (if you’ve studied Five Year Plans in Civics, you know what that is about. If you haven’t, go look it up!), some command (the government still entirely owns and runs some industries like weapons manufacturing, although that may also change soon), and a lot of market.
Another concept which has often worked well for India is a concept called public-private partnership (public means government-owned, private means owned by individuals), where the government and one or more private companies jointly own and run industries. That way, private companies are allowed to make decisions based on what the market wants and make profits for themselves, but the government gets to keep an eye and ensure that no private company is focusing so much on profit that it begins to do things that are bad for the country or the society (environmental pollution, overpricing of goods, unfair work practices, unethical behaviours that only benefit certain people, and so on).
Overall, since 1991, after India opened her economy, things have gone very well for us. Today, based on GDP or Gross Domestic Product, which is a fancy name for ‘the money value of all the goods and services produced by a country in a year’ (India’s GDP was around 2,066 billion US Dollars in 2014), India is the seventh-largest economy in the world, and growing at a fast clip! It would grow much faster if there wasn’t so much corruption, so much illiteracy, and so much poverty, but those problems will take a while to solve. The good thing is that those problems have to be solved if the country has to go forward, and so people have begun to focus on them now. The battle has begun, and you can—and should!—join it.
Bet you didn’t know that!
An ancient Indian tradition = a unique kind of economy
There is another unique kind of economy that doesn’t fall into any of these categories. It is called the ‘gift economy’. The concept of ‘selling’ things does not exist in this economy (i.e. when you give someone something, you don’t expect money in return). Even the concept of swapping things, or barter, does not exist. You see why this is called a ‘gift economy’? If such an economy did exist, where people unselfishly gave away things to each other, do you see what a beautiful world it would be? It would be the exact opposite of a society where the selfish, greedy, profit-seeking ‘market’ drives everything, where money becomes more important than human relationships. But can such an economy exist, except between very close friends and family? If you think about it, we even give birthday gifts with the expectation of a birthday gift in return.
But the amazing thing about human beings is that we can, when we really want to, rise above our worst natures. To ensure that this happens, some societies create formal practices. The ancient Indian tradition of daana is one such. The closest English translation of daana is charity, although it doesn’t quite have the same meaning. When you give daana, say the ancient scriptures, you must expect nothing in return; you are not even allowed to feel, ‘Aww, what a lovely person I am! I made the giftee so happy!’ The scriptures go on to say that if you want to lead a blessed life, you must, must, MUST regularly give daana; and you must especially give away things that you are fond of, without feelings of regret, and without hoping that now the giftee will give you something that she loves too because you were so unselfish about giving your favourite thing to her.
Sounds really difficult, huh?
But human beings are doing daana all the time, even though they may not realize it. Every time someone donates blood to a stranger, volunteers time at an old-age home, writes a software program and shares it on the Web for the world to use (and improve) for free, gives money to help an artiste or an innovator chase a dream via a crowdfunding* campaign, or jumps into a river to save a drowning person, they are doing daana. And it is precisely because of that parallel gift economy that runs quietly under the world’s other economies that the world is still such a wonderful place.
P.S. It isn’t only humans that behave unselfishly. Evolutionary biologists, from Darwin onwards, have found that altruistic behaviour is quite common in the animal kingdom. Vampire bats regularly regurgitate blood and donate it to other members of their group who haven’t, for one reason or another, been able to feed that night. Vervet monkeys give alarm calls to warn other monkeys—and thereby other animals—that a predator is around. Their calls draw the predator’s attention to them, putting them at greater risk, but they still do it. And we all know how things work in ant and bee colonies, where truly altruistic worker ants and bees spend their entire lives building nests, foraging for food, and feeding and caring for their queen and her babies.
Yup, being unselfish could well be part of our evolutionary DNA, a ‘gene’ that helps the human species survive!
BIG QUESTION 3
We have millions of really poor people in our country. Why doesn’t the government simply print more money so that everyone has some?
I know, right? But there are very good reasons. However, the a
nswer is rather convoluted, and involves understanding several other things first, like why governments print money at all. So brace yourself, this is going to be a long one.
What happens when you print money? The amount of money that people have increases, but, at the same time, the price of things goes up, so that nothing actually changes. The poor can still only afford what they could before the money was printed.
Eh? How does that work?
Year 1: The government prints some extra money
Let’s say there are ten people in a village. The government decides to print five 100-rupee notes and gives one note each to five people in the village (A, B, C, D and E). Suddenly, there is more money overall in the village, or in the village ‘money pool’, never mind that only five people have it.
A—₹100
B—₹100
C—₹100
D—₹100
E—₹100
Overall increase in the village’s ‘money pool’—₹500
Now let’s say it is the mango season, and a lovely harvest of mangoes has just come in. The mango farmer, Alphonso, has five boxes of mangoes, and is selling them at ₹50 each. A and B arrive first, eager to spend their money.
Day 1 (morning): 1 box—₹50
That afternoon, C and D arrive to buy mangoes. Alphonso sees an opportunity! He ups the price!
Day 1 (afternoon): 1 box—₹75
That night, A’s family finishes the box of mangoes. They enjoy them so much that they want more. But he cannot afford them now, because Alphonso has done it again! E buys the last box of mangoes for ₹90.
Day 2: 1 box—₹90
You see? When the amount of money in a system increases (by ₹500 in our example), without the number of goods available increasing (there are only five boxes of mangoes available), the prices of things go up. In other words, the value, or purchasing power, of your money goes down. ₹100 can no longer buy today what it could buy yesterday (two boxes of mangoes).