The king should never forget what “Arthshastra” tells of “Rajdharma”

Author Gurcharan Das
Facing bankruptcy, India made a U-turn in 1991 through a series of reforms that dismantled socialist institutions and replaced them with oriented ones. More than two decades of capitalist growth has made India the fastest growing economy in the world. During these years, India experienced a ‘golden decade’ of growth from 2002 to 2012 when GDP growth averaged over eight percent a year and lifted millions out of poverty, falsifying the old prophecy of the that markets would impoverish the working class.

The middle class also grew explosively after the economic reforms--from around twelve percent of the population to around a third — and gradually it began to change the country’s rhetoric towards middle class aspirations for a better life. True to its history and its temper, India is today rising from ‘below’, almost despite the state, unlike China, whose success has been scripted from ‘above’ by an amazing, technocratic state that has built extraordinary infrastructure.

Freed of the shackles of the License Raj Indian entrepreneurs responded, even beyond the most optimistic hopes of the reformers. By 2010, there were over 150 companies with a market capitalization of over a billion dollars; foreigners had invested in over a thousand Indian companies via the stock market over the past decade; 150 international companies had research and development centers in India—a testament to its human capital; 390 out of the 500 companies had outsourced software development or business processes to India.

Twenty-five Indian companies were globally competitive, and another twenty were on their way, and a few were expected to become recognizable brands globally in the next decade. Because some sectors of the economy are unreformed, ‘robber barons’ emerged, especially in the Congress led government between 2010 and 2014.

If Indians won their political freedom in August 1947 and their economic freedom in July 1991, they attained dignity in May 2014. This was the significance of Narendra Modi's landslide victory. The hopes and dreams of an aspiring middle class were affirmed for the first time in India’s history. Modi made millions believe that their future was open, not predetermined, and could be altered by their own actions. In her book, “Bourgeois Dignity”, Deirdre McCloskey, explains that the same thing happened during the ‘great transformation’ in the 18th and 19th centuries in the West when the industrial revolution created a middle class that changed the master narrative of western societies.

That narrative is incomplete in India. Many Indians still believe that the market makes ‘the rich richer and the poor poorer’ and leads to corruption and crony capitalism. Despite the market having generated broad spread prosperity over two decades, people still distrust it and the nation continues to reform by stealth. India continues to reform furtively because no political party has bothered to explain the difference between being ‘pro-market’ and ‘pro-business’, leaving people with the impression that liberal reform mostly helps the rich.

They do not understand that being pro-market is to believe in competition, which helps keep prices low, raise the quality of products, and leads to a ‘rules based capitalism’ that serves everyone. To be pro-business, on the other hand, means to allow politicians and officials to retain power over licenses, which distorts the market’s authority over economic decisions and this leads to ‘crony capitalism’. This confusion explains the timidity of reform and prevents India from performing to its potential.

The blame lies partly with the reformers who have not ‘sold’ the competitive market as did in Britain. The job fell primarily on our chief reformer, former Prime Minister Manmohan Singh. But he did not even succeed in selling economic reforms to Sonia Gandhi and his own party, the Congress, which ruled over India with its allies from 2004 to 2014. It was able to make a false trade-off between growth and equity.

After its victory in 2004, the Congress party concluded that India's free-market reforms were not helping the poor and so it changed the government’s focus to spending on welfare under a seductive slogan, ‘inclusive growth’. Instead of building roads and other infrastructure, it turned its energy to guaranteeing 100 days of employment to the poor, giving cheap energy, waiving loans to farmers, and enacting a food security law that would guarantee food to two thirds of India’s population at ten per cent of the market price.

Approvals for new projects came to a virtual halt, mostly on environmental grounds. As a result, investors lost confidence; inflation rose partly because spending was not backed by production; growth plummeted, millions of lost jobs, and hopes dashed for millions of young people.

It is puzzling that India should offer astonishing religious and political freedom but fail when it comes to economic freedom. In a country where two out of five people are self-employed, it takes 42 days to start a business and the entrepreneur is a victim of endless red tape and corrupt inspectors. No wonder, India ranked 119 on the global ‘freedom index’ and 134 on the ‘ease of doing business’ in 2013. It is unhealthy for India to be reforming by stealth after more two decades of economic reform.

Fortunately, India now has in an outstanding salesman of ideas who could transform the master narrative of its political economy. When he talks about making vikas, ‘development’, a jan andolan, ‘mass movement’, he should go a step further and explain how vikas happens via an ‘invisible hand’ in a free market democracy. India needs to fill the empty political space at the right of centre in Indian politics. Modi must ‘sell’ his reforms--especially to the ‘cultural right’ in his party. It might help him if he used the language of the nationalist right and appeal to India’s great trading past.

Not speak about Adam Smith’s market but the famed market of Hampi. To explain the value of low tax rates, he should appeal to the Arthashastra where rajdharma dictates that the righteous share of the king is shatbhaga, ‘one-sixth’ or a fifteen percent tax rate.
Unlike the mood of diminished expectations in the West, it is an age of rising expectations in the East. History will remember this age by the rise of China and India based on the liberal economic idea of the market. But it is a work in progress. If these two countries want to truly become developed nations, China has to eventually fix its politics and India has to fix its governance.

Otherwise, both will get stuck in what economists call the ‘middle income trap’. Meanwhile, the rise of a third of humanity is good news in another sense--it proves once again that free trade and multiplying connections to the global economy are pathways to lasting prosperity.

(From :
Widgets Magazine