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Tackling challenges of deregulation

Mathew Kurian, Jul 12 2017, 0:33 IST
In the early 1990s, neo-liberalism made a powerful case for deregulation. Back then, one did not have to look far to find a justification for reform — the effects of a bloated public sector were all too evident. There was rampant corruption and inefficiency in the delivery of public services including education, health, electricity and telecommunications.

The overwhelming consensus among policy makers was for deregulation; in other words, minimising the role of the state and encouraging private enterprise to participate in the organisation and delivery of public services. Twenty five years on, the effects of deregulation are evident on the middle class — an economic category often credited with advancing the case for deregulation.

India’s deregulation story is important in today’s global landscape characterised by protectionism in America and the global refugee crisis that has buffeted Europe. From reading Alexander Betts and Paul Collier’s new book Refuge, one can conclude that the intensity of the global refugee crisis could have been far worse if India’s de-regulation story had failed.

When read together with Joan Williams’ White Working Class, one may be curious about the extent to which India’s success with deregulation hastened a restructuring of manufacturing jobs in the US by attracting overseas talent into tech sector.

India’s approach to deregulation may be classified as “gradual”. By contrast, a number of Latin American countries underwent a more knee-jerk process of deregulation. For example, deregulation of public water utilities in Argentina was a relatively disjointed project undertaken with the backing of multilateral financial institutions and participation of European companies seeking international investment opportunities.

Such knee-jerk reactions often resulted in sale of public assets at throw away prices and often without due diligence. Further, poorer consumers were left without services when companies raised tariffs with an eye on reducing their levels of debt.

In extreme cases as in South-East Asia, notably Thailand during the 1997 crisis, currencies had to be devalued in order to pay off international creditors. The strongest argument for deregulation in the global south, one may recall, was based on the claim that a growing middle class was demanding improved services from the public sector.

And yet, international experience shows that when efficiency was emphasised through budget cuts, staff downsizing and private sector service contracts the results were disastrous. A more gradual approach to deregulation like the one India adopted was determined to a large extent by the institutional landscape.

India’s parliamentary system made it mandatory that divesture of public sector companies was predicated upon public scrutiny to ensure that the terms of engagement of private service providers were properly structured and mechanisms were installed to safeguard against abuse of power as was the case with the 3G scandal a few years ago.

The decision to opt for a gradual approach was not made by a despot, technocrat or a plutocracy. Instead, India’s default setting for decision making was one based on consensus reached through negotiation within a federal system with in-built checks and balances to guard against excesses.

It is important to recognise in this context that over the years, the middle classes have played an important role in consolidating a federal state system by supporting the establishment of a bureaucracy, public sector companies, judiciary, free press, central universities and the rule of law, notwithstanding their imperfections.

Political mobilisation
The middle classes by voting religiously in elections further legitimised the role of the state and political parties. Political mobilisation was crucial for India’s economic liberalisation through reforms that resulted in outsourcing, opening of the electronic media and invitation to foreign institutional investors through a vastly expanded stock market.

India’s middle class of the pre-liberalisation era was educated, held pensionable jobs and had limited options when it came to consumerism. The opening up of the electronic media and the outsourcing phase, however made children of the erstwhile middle class aspire for a future outside India.

The forces of reservation in public sector employment and rising costs of living due to speculation in the property market increased the pressure to migrate. The dream of improving upon a middle class lifestyle was feasible as long as the west remained open to attracting the best talent as it continued to grow and innovate.

But gradually and most notably after the 2008 crisis, the dream has soured. Sadly the reality for the children of India’s erstwhile middle class has become one of job insecurity, less hope of a pensionable job and the psychological torment of being jettisoned between jobs in the west and India.

Nevertheless, their success in navigating the challenges of deregulation has in no small way made it possible for the very poor to join the ranks of the middle class and for the very rich to consolidate their wealth through accumulation of middle class properties. How much of that accumulated wealth is being reinvested to fuel the growth of a domestic market for goods and services remains a moot point.

(The writer is Academic Officer – Capacity Development and Governance, United Nations University, Dresden, Germany)

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