Economics has been a fascinating social science that has accompanied the industrial revolutions. The first formal organization of economic thought, albeit in a political setting, is attributed to Adam Smith (1776) for his book “An Enquiry into the Nature and Causes of the Wealth of Nations”. Alfred Marshall’s text book “Principles of Economics” (1890) laid the foundation to the microeconomic branch of economics. The adverse economics of the Great Depression of the 1930s spurred the development of macroeconomic thought. John Maynard Keynes’ book “The General Theory of Employment, Interest and Money’ provided new perspectives of macroeconomic thought. Over the years, almost every aspect of human endeavour got its own economics perspectives; from industrial economics to welfare economics, for example. Microeconomics and macroeconomics, however, continue to be the more dominant streams of economics to date.
Microeconomics deals with the economic behaviour of individual markets, firms, entities and individuals, focusing on matters such as, but not limited to, production, cost, scale and efficiency; supply, demand and equilibrium; scarcities, surpluses and elasticity of demand and supply, costs and prices, and theories of firm and industrial organization. Macroeconomics deals with the issues of economy from the top, focusing on matters such as national income and output; jobs and unemployment; price inflation and deflation; savings, investment and consumption. Flow of money and business cycles as well as economic growth, international trade and international finance are some of the other considerations. It studies the impact of monetary policy and fiscal policy. Monetary policy is implemented by the central banks to control the liquidity in the economic system to ensure economic stability. Fiscal policy relates to the use by the governments of revenues and expenditures, along with savings and taxes to influence economic growth.
India, ever since its independence in 1947, has been following established economic theories to drive economic growth. The socialistic pattern of development curtailed free market economics until 1991 but the macroeconomic liberalization thereafter gave a new upward drift to the Indian economy. Regardless of the economic system, monetary policy followed by the Reserve Bank of India and announced in its periodic policy reviews, and the fiscal policy followed by the Central government and effected through the annual union budgets influenced the investment and consumption patterns of the society. The sensitivity of the markets to banking liquidity and interest rates and to tax and allocation policies has been only increasing with years. In addition, budget times have also become important periods for economic reforms and policy stimulation measures, including export-import policies, industrial development policies and poverty alleviation programmes.
India has been home to some of the sharpest economic brains. Amartya Sen, Amit Mitra, Arvind Panagariya, Ashok Desai, Bibek Debroy, Bimal Jalan, C Rangarajan, D R Gadgil, D Subbarao, I G Patel, J C Kumarappa, Jagdish Bhagwati, Jairam Ramesh, Kaushik Basu, Manmohan Singh, Montek Singh Ahluwalia, Nanabhoy Palkhiwala, Omkar Goswami, P C Mahalanobis, Raghuram Rajan, Subramanian Swamy, V K R V Rao, Y K Alagh and Y V Reddy are some of the well-known names. Several political leaders including Jawaharlal Nehru, the first Prime Minister of independent India, and several finance ministers from C D Deshmukh and T T Krishnamachari of the yesteryears to P Chidambaram and Arun Jaitley of current years have been economically savvy leaders. Mahatma Gandhi, the father of the nation, had articulated his own brand of Gandhian economics targeted at economic self-sufficiency and growth of cottage and small industries which is relevant even today.
Although the phrase “Incredible India” has been coined only a few years ago, India has always been incredible. The scientific and technical thought that went into the centuries old Indian heritage of Ayurveda, Yoga, Astronomy, Architecture (especially temple and palace architecture) was indeed phenomenal. Post-independence too, India demonstrated rare pluck to construct its own massive dams, build its own heavy industry, establish its own banks and financial institutions, develop its own educational infrastructure and creates its own aerospace infrastructure. India may not have gained global competitiveness but the country certainly acquired the capability for self-sufficiency that is rare amongst the emerging markets. In all this, adoption of micro and macroeconomics to an Indian context, in a somewhat serendipitous manner, played a role. India’s development may have lagged behind its true potential but a base has certainly been laid for more accelerated development if right constructs are developed and relied upon.
At the same time, India has indeed been an intriguingly bipolar country characterized, for example, by paradoxes such as massive educational level but meagre skill level, strong penchant for growth but constraints all the way, vibrant democratic culture but strong vestiges of feudalism, and phenomenal wealth generation but continued acceptance of poverty. Economic growth with social equity has been the avowed objective of parties and governments alike but togetherness in fulfilling the growth with equity objective has been missing. The paradox of incredible growth potential constrained by intriguing plurality of thought makes one wonder if India can benefit to the requisite degree only by Western economic thought or would require a distinctly Indian economic constructs that are tailor-made to solve indigenous socio-economic problems without losing the global contexts. Even issues like quantitative stimulus or directed subsidies are not discussed and framed with objective economic thought that addresses India’s issues in a customized manner.
India’s success would lie in enhancing agricultural productivity with sustainable crop economics, improving technological innovation with rapid commercialization, developing infrastructural sinews with meaningful capital productivity, expanding manufacturing capacities with global competitiveness, rural and urban renewal with protection of ownership interests, and creation of jobs with minimal migration pains. Economic policies and administrative actions of the successive governments have tried to provide policies and budgets with incentives and subsidies to tackle some of the above needs individually, depending on the political perspectives. Most of these have been based on established macroeconomic and microeconomic approaches which are buffered by Indian socio-economic and cultural compulsions. Given that all of these cumulatively have not helped India reach its full potential, it is time that economic models that specifically address India’s development concerns are created.
India’s socio-economic needs would require an Indian social economics theory (and practice) that addresses the typically Indian issues of (i) agrarian economics, (ii) infrastructure economics, (iii) Make in India economics, (iv) renewal economics, (v) employment economics, (vi) migration economics, and (vii) behavioural economics. The reason for focussing on the first six aspects is fairly obvious; if well-researched and well-modelled economic theory is developed on these aspects, not only better economic policies that stimulate gross domestic product and higher per capita income can be developed but also they can be better implemented with widespread support. These aspects which are independent as well as integrated can together provide better socio-economic development in the country. All of these will, however, need to be supported by a solid understanding of Indian behavioural economics with perspectives that are regional as well as national. The seven branches of Indian social economics are discussed below.
(i) Agrarian economics
India, despite decades of industrial development and the recent burgeoning of service economy, is still an agrarian economy. The potential for capacity expansion and productivity in agricultural production and distribution is impacted by crop economics on one hand and irrigation economics on the other. Economic models which assess the impact of crop mix on food grain and commodity self-sufficiency and the impact of dams on year-round crop patterns are required. The microeconomics of India’s debt ridden small farmer are affected by spot prices and distribution margins. While farm subsidies mitigate the burden to some extent, an in-depth study of crop economics for individual and national sustainability is required. Similarly, the economics of dams and reservoirs are also poorly understood. There is no reason why major irrigation projects like Polavaram (in Andhra Pradesh) had to hang fire for decades; economic modelling of irrigation projects could stimulate better allocations or encourage setting up of special purpose vehicles.
(ii) Infrastructure economics
That India has lagged behind all the developed nations and key emerging economies in infrastructure development is well known. The NDA government has admitted that the public-private collaboration model has not had much impact, and needs redefinition. Most private sector infrastructure firms carry huge levels of debt from public sector banks. The economics of infrastructure development in the Indian context are unique with long lead times and slow returns even after project completion. From the project conceptualization stage through the project appraisal stage the economics of each infrastructure project need to be understood not merely in terms of the internal rate of return for the project but the overall economic uplift because of the multiplier effects of infrastructure projects. The study of infrastructure firms should be a special branch of microeconomics while budgeting of such projects should be a special branch of macroeconomics with appropriate monitory and fiscal policies to support.
(iii) Make in India economics
With India’s low wage costs, large talent pool, frugal engineering and mass mobilization capabilities, the world should embrace Prime Minister Narendra Modi’s Make in India mantra enthusiastically. There are two caveats: India should evaluate and propose objectively to the investors the sources of economic advantage of Make in India strategy in respect of each industrial activity. Secondly, India should evaluate and propose for itself the role of India’s large domestic market in leading to globally competitive production. Typical economic thought teaches us that high-end niche products subsidize low-end mass products. In the Indian economic milieu, it could be the other way around; India’s bottom of the pyramid can provide huge scale economics which can be leveraged for global products. Tata Motors’ success with JLR is a corporate level economic behaviour of this theorem. There is a need for a more rigorous understanding of the unfolding Make in India economics.
(iv) Renewal economics
India has an enormous need, and hence offers immense potential, for rural and urban renewal. There is no habitat that can be excluded from the renewal paradigm. Yet, renewal is not easy in India. The way the residual government of Andhra Pradesh is scrambling to build a new capital on a zero base as a multibillion dollar venture is proof of the developmental needs. However, as illustrated by the same example, any distributed renewal or new development – urban or rural – has several implications for overrunning current land use and community avocation practices, in spite of such renewal being essential. On the face of it, continuous renewal offers the most economical way of developing habitats in a distributed manner relative to big bang new constructions. Only when the economics of renewal are understood can the overall spatial planning in India, including development of smart cities and smart villages, can be brought to global standards, consistent with the Indian socio-economic imperatives.
(v) Employment economics
India needs jobs for the democracy to work in a positive manner. The unemployment rates of India varied between 5 and 10 percent historically, and is currently trending at 5. 2 percent. This may be better than the Euro region which is trending at 11.2 percent but is only comparable with US and UK (trending at 5.5 percent) and worse than China and South Korea at 4.1 percent and less. More than gross employment, underemployment and overemployment as well as skill-need gaps are causes for concern. Underemployment is characterized by people performing jobs of lower level than they are capable of (for example, just digging trenches rather than building reservoirs). Overemployment is characterized by more people than required performing the same job (for example, three or more people manning a toll plaza post). Skill gap is characterized by an individual failing to work to a national or international standard (for example, a painter failing to prepare a surface prior to painting). The elimination of underemployment and overemployment and investment for skill development have economic implications that need a uniquely Indian thought.
(vi) Migration economics
Urbanization is a concomitant of economic development, universally. Migration of people from rural areas to urban areas is also a natural accompanying phenomenon. However, unplanned and under-resourced migration causes urban squalor and triggers urban unrest. India has an additional dimension of people migrating from States of lower per capita income or lower economic activity to other States perceived to be better. The economics of migration with people chasing minimal employment tend to be mirages. Real economics would occur when economic activity moves into regions where people reside, and touch their lives directly. Large scale industrialization or large scale mining of natural resources with necessary caveats is one solution. More importantly, such underdeveloped regions should be stimulated with a small and micro enterprise start-up culture that brings soft economic touch to indigenous evolution and promotes self-sustainability. It must be a form of Gandhian Economics whereby the well-to-do regions and people act as trustees for the underdeveloped regions (be it, Bastar forests, Idukki river bed or Manyam agencies). Migration economics needs to be a uniquely Indian requirement.
(vii) Behavioural economics
Behavioural economics as is well understood is the study of the impact of psychological, social, emotional and cultural factors on economic decisions made by individuals and institutions, and the consequences for microeconomic and macroeconomic factors like costs, prices, savings and investments. Standard economic theory suggests that as long as individuals understand the economic consequences of their decisions they take decisions that are in their best self-interests. The reality is that individuals (and even institutions) suffer from biases and transient perceptions and do not necessarily have self-control and objectivity. Given the plurality of the Indian society and the lack of insightful literacy for vast sections of population (at all levels of the population pyramid) and the divisive nature of political discourse, economic decisions tend to be inappropriately made or even appropriate decisions tend to get stalled. We have seen earlier that there is a paucity of economic theories that are tuned to India’s indigenous problems. This inadequacy coupled with the vast mosaic of Indian behaviours makes it mandatory that Indian version of behavioural economics is urgently developed.
Indian social economics
The country is in need of an integrated Indian social economics thought which applies all the established disciplines of economics including, in the main, micro and macroeconomics, to develop economic principles that are uniquely relevant to India to enhance capacities, capabilities and effectiveness in the areas of agriculture, infrastructure, manufacturing, renewal, employment, migration and behaviours. These are typically Indian issues on which everyone is agreed in terms of the overarching goal of economic growth with social equity. However, lack of directed and issue-specific economic thought has prevented due progress and fulfilment of potential. India does have its general and applied schools of economics. Every premier college or institution has a department of economics. There are also specialized institutions like Madras School of Economics, National Council for Applied Economic Research (NCAER), Institute for Social and Economic Change and so on.
The established schools and centres, however, have not been focussed on analysing economic issues that need to be specifically addressed in India. Nor has there been an effort to develop economic principles that guide public policy and governance at central and state levels. While several case studies have been conducted, there has been no specific vision to develop an India-specific economic theory. Intellectuals and administrators are more focused on variations in known policy measures and instruments rather than develop India-specific prescriptions. Now that the NDA government is keen to establish new centres of higher education and research and the States are also keen to participate in such higher educational initiatives, it would be appropriate to establish Indian Institutes of Social Economics and Research in the principal geographical regions of the country to develop India-specific economic thought and practice with a board of economists with Indian and indigenous passion.
Posted by Dr CB Rao on March 8, 2015