Turn the clock back

Indian Express, 7 July 2005

To the time before immense economic power was usurped by the state

The agenda for economic reforms in India today consists of turning the clock back to 1969. Economic policy of the 1969-1976 period consisted of enormous powers being usurped by the state. From 1969, Indira Gandhi turned left seeking political support, and India witnessed an unprecedented increase in control raj. Economic enterprise and private initiative were sharply restricted. Most of the policies of the period are still with us.

Small scale industry reservation: in 1969, the policy of explicitly reserving certain items for production by small companies was created. Indian industry lost out enormously because of being unable to harness economies of scale. Consumers were the biggest losers. India missed the bus of the enormous rise in exports, which was harnessed by East Asia, in these labour-intensive items. While the list of reserved items has become shorter, what is really needed is a complete repeal of the Act which gives the government such intrusive powers.

Industrial Disputes Act (IDA): factories with over 1000 workers used to require government permission for layoffs. The size threshold was amended in 1976 to 300. In 1982, when Indira Gandhi was back in power, this was further reduced to 100. This is now one of the most damaging elements of Indian law about companies.

Bibek Debroy, Director of Rajiv Gandhi Institute for Contemporary Studies, has drawn attention to Chapter V-B which was introduced into the IDA in 1976. The provisions Chapter V-B/Sections 25-K, 25-L, 25-M, 25-N and 25-0 apply to industrial establishments that require prior permission of the appropriate government before layoffs, retrenchment and closure. Most problems connected with the Industrial Disputes Act arise, according to Debroy, from Chapter V-B, since the government becomes a third party to the dispute even if the employee is satisfied with the severance package. These sections of the Act need to be considered along with Section 2-A, which makes any dispute between an employer and an individual workman an industrial dispute regardless of the fact that no other workman nor any trade union is a party to the dispute.

However, the National Common Minimum Programme (NCMP) clearly states that the IDA will not be reformed. Thus, it is likely that progress on this front can only come about after the UPA government goes.

FERA: draconian currency controls and restrictions on foreign investment came about when the Foreign Exchange Regulation Act (FERA) was passed in 1973. While FERA has been supposedly replaced by a “more liberal” FEMA, the mentality of controls is very much there in FEMA as well. No modern market economy in the world has a law like FEMA. An army of 7,286 babus at RBI continue to operate hundreds of rules that meddle with India’s engagement with the world.

Urban land ceilings: on February 17, 1976 the Urban Land Ceiling Act was passed. It covered 73 towns and cities and imposed a ceiling of 500 to 2000 square metres on urban land holdings. It constitutes a major distortion of the urban land market. Incidentally, this was a state subject, but the Constitution allows Parliament to pass a bill if more than two states agree, and this path was chosen during the emergency.

MRTP: the Monopolies and Restrictive Trade Practices (MRTP) Bill was proposed in 1967. It became an act and came into force from June 1, 1970. The MRTP Act, which gave huge powers to the government, sought to check the expansion of large industrial houses with assets over Rs 1 crore in businesses where their share in the market exceeded 33 per cent. The MRTP was mercifully scrapped; it was replaced by the Competition Act in 2002.

Bank nationalisation: Indira Gandhi nationalised all big banks. There is now a considerable consensus amongst economists that the government has no business to be in commercial banking. However, the legacy of this action is still with us.

In these columns, Shekhar Gupta proposed a hypothesis (‘Emergency’s Reality Czech’, IE, June 25): when we think of the emergency our dark memories are mostly about the denial of political freedom. We tend not to notice what we lost of our economic freedom. While there was an uproar among politicians- judiciary-media, whose freedoms were denied, no such uproar took place on the loss of economic freedom.

We keenly notice that there was an effort to grab power and make India into a communist-style state in the political sphere, and we resent that. But we tend not to notice that there was an equally damaging effort to grab power, to make India into a communist-style state in the economic sphere. We tend to not notice the loss of political freedom that comes from a government that has a big say in the economy.

In the political sphere, every element of the emergency has been reversed. Comparable progress has not taken place in bringing back economic freedom. Apart from the repeal of the MRTP Act, all the other draconian acts are still in force. The Constitution was amended by Indira Gandhi’s rubberstamp Parliament to call India a “socialist” republic, and that word still stands.

The most striking illustration of the lack of opposition to the principle of state usurping economic power is the acceptance of bank nationalisation. Imagine if tommorow morning you woke up to headlines that India’s major private sector banks had been nationalised using a midnight ordinance. This is what happened on July 19, 1969. At one stroke, the ordinance gave the government control over a big chunk of the savings of the Indian people.

What has changed since the days when banks were private is that instead of industry, today the government is the main borrower from these banks. More than half of the deposits in PSU banks go to the government to fund its deficits. Earlier, the private owners of banks used to steal from them. Now, there is a new owner of the banks — the government — which steals from them. If the clock is to be turned back, PSU banks must be privatised.

If India is to become a fast growing economy, utilising the powerful forces that freedom of enterprise unleashes, the clock must be first turned back to the pre-Indira Gandhi policies, before immense economic power was usurped by the state.

Ila Patnaik

Ila Patnaik