Change the mindset

Change the mindset

Governments, the world over, try to attract investment by offering special incentives. They may not be the same for all investors.

In many cases, a particularly big investor might get additional incentives so that he invests in that state.

This would be legitimate state policy to attract investment and improve production and employment in that state.

In India, incentives to the private sector, especially if it is to large businesses, are always suspect.

This goes back to late prime minister Indira Gandhi who was suspicious of private investments and their profit motivation.

Her economic philosophy was of a pseudo-socialist variety.

It assumed that ownership, control and management by the state were more beneficial to all stake holders. Her economic policies reflect this.

The takeover of sick textile mills and creating a sicker National Textiles Corporation; attempt to nationalise wholesale trade in grains, which thankfully did not take place; nationalisation of private banks, and insurance companies, keeping infrastructure and investments in its different areas under government ownership (except where there was a legacy of private ownership), are principal examples.

Jawaharlal Nehru had introduced central direction of all investment, private and public, through a scheme of industrial licensing.

This was done at a time when India was resource short and there was little private sector capability for large investments.

Indira Gandhi took this much farther.

Marginal rates of income taxation were so high that there was not much saving available for investment. Most new investment was by the public sector.

Despite all these controls, ingenious private investors managed to corner substantial capacities in many sectors by cornering industrial licences.

They used under invoicing and over invoicing of exports and imports to accumulate funds abroad to overcome the severe restrictions on availability of foreign exchange.

Nehru was so concerned about the cornering of industrial licenses that he appointed R K Hazari to investigate.

Hazari concluded that cornering was happening.

The Birla group was the main beneficiary.

They went into any sector on the argument that once they had a license, they had a quasi monopoly over the market and could always buy the required technology.

They were well networked and knew what was available.

Did they pay politicians and bureaucrats for information?

They may well have.

But the result was a substantial creation of industrial capacity in many fields.

This could be said of many other ambitious private investors as well who created industrial capacities in a government environment that was hostile to private ownership and profit making.

Creation of monopolies

Can they be stigmatised as crony capitalists, that is, beneficiaries from their networks in government?

Instead, they must be considered entrepreneurs who wanted to build businesses. With government preventing them, they found ways to do so.

They must be lauded, not condemned.

That is not to say that creation of monopolies without any regulation, handing over national resources in many commodities to private investors in return for bribes, creating inefficient and technologically backward industries, should be pardoned.

They must be penalised as must be those in government that helped them.

We have been hearing condemnation of the Adani Groups as being crony capitalists with help of the chief minister of Gujarat.

The fact is that Adani has built a most efficient port and power plant, with all the infrastructure to ensure that there was a high level of efficiency.

If government gave Adani barren land at low prices which is now worth a great deal because of the efficient investments made in it, we must consider the cost-benefit.

What was the worth of whatever favours were given, when they were given, as compared to the benefit to the society today?

It is strange that such investments are criticised when they have been common all over India and in many other countries and have substantially added to the country’s wealth, generated employment and incomes.

We must get out of the mindset inculcated in us by the years of rule by the Gandhi family. They are against private ownership and prefer state ownership.

That is one reason India has persisted with highly inefficient, even loss-making state owned enterprises.

Most of the state enterprises that were privatised by the NDA government, are producing far more efficiently than they were under government ownership.

Private investment must be encouraged.

So must profit making by them. An independent regulatory body could monitor their efficiency and technology, (though the market will do this job if competitive entry is not prevented),  and that their tariffs are not exploitative of consumers.

Instead under the UPA regime we have given special treatment to favoured private investors and allowed them to make windfall profits.

They have appropriated what they should have shared with the government.

This is particularly the case with national resources like telecom spectrum, coal mines, oil and gas fields, and other mineral resources.

That is certainly crony capitalism. Perhaps crony socialism would better describe it.

Our media has been as much brainwashed as economists and bureaucrats in taking private profit as being in some way against the public interest.

We need to be more nuanced in considering the importance of the private sector and its profit making.