Monday, October 6, 2014


T N Srinivasan is one of India's brightest economists; I often had lunch with him and other bright boys of Mahalanobis in my brother Mahendra's room in the Planning Commission in the 1960s. When an intellectual blight descended on Delhi after the sudden death of Lal Bahadur Shastri, T N left for Yale. This column in Business Standard of 26 June was a review of lectures he came and gave in India in 1998. 


Nehru made Professor P C Mahalanobis deputy chairman of the Planning Commission in the mid-1950s. To give the Planning Commission an intellectual underpinning, Mahalanobis set up a planning unit of the Indian Statistical Institute in Delhi and housed it in the top floor of the Planning Commission. He put Pitambar Pant in charge of it.
Pitambar Pant was a remarkable man. He was a politician and had been an active Congressman; he knew Nehru well. But he was extremely intelligent, articulate, and quick on the uptake; he had none of the intellectual insecurity of a typical Congress leader. He attracted to the planning unit a set of the brightest young economists available at that time; Jagdish Bhagwati, Mrinal Datta Chaudhuri, Suresh Tendulkar, all spent time in the unit. One of the brightest was T N Srinivasan. Sitting on the top floor of the Planning Commission, he had literally a bird’s eye view of the march of socialism.
Unfortunately, Pitambar Pant died early, and the planning unit was orphaned. The birds flew away one by one. Srinivasan went to Yale, where he is chairman of economics department today, and teaches a highly regarded course on development economics amongst other things. In 1998 he came to India and gave eight lectures, which have now been published (Eight Lectures on India’s Economic Reforms, Oxford Paperbacks). For a layman who wants a flavour of the argument on reforms, this short book of a hundred pages, shorn of equations and tables, is just right.
Srinivasan refers copiously to the international experience of development and advances in its analysis; and this is where his strength lies. Reading him advanced my own understanding on a number of points. Let me indicate some.
·       Whilst all liberals plead for a change in Indian labour laws to make dismissal easier, all realists know that this is a pipe dream. Employees of the governments – and many large firms – regard their jobs as fiefdoms; not only do they keep their jobs for life, but they secure jobs for their kin and friends. In the circumstances, Srinivasan resuscitates Mahalanobis’s idea of a labour reserve: surplus employees would be paid out of it, and would be absorbed in new jobs being created. The basic idea is to remove the incumbent employees’ fear of unemployment. It has two elements which need to be promoted: first, that every employee – especially government employee – should be subject to redeployment, and that the cost of retrenching an employee should not fall on the employer alone. It is an alternative to the idea of paying off the employees once and for all, embodied in the National Renewal Fund and the voluntary retirement schemes. Is it better? I do not know. But at least the idea that anyone who expects permanent employment must be prepared to be redeployed is very valid; and the larger the set of organizations within which he can be redeployed, the better for him and for organizations.
·       Srinivasan points out that even if agriculture is to be subsidized, input subsidies are the worst way to do it. If one wants to increase output, it is better to subsidize production. If one wants to help poor farmers, one should do so directly. To my mind, one remedy would be to extend income tax to farmers, and to have a negative income tax below a certain income limit. An even simpler remedy would be to give all adults a lump sum every year equal to the average of all subsidies being given today. I reckon it would come to Rs 3000 a year. It could be treated as a negative income tax below a certain income limit – say, the current income per family of about Rs 20,000. It would mean nothing to middle-class people, but a lot to the poorest. It could equally well be used to give a flat rate subsidy to children and old people.
·       Srinivasan correctly points out that with the coming of wireless telephony, telecommunications have ceased to be a natural monopoly, and the old arguments for its regulation no longer hold. Licence fees are no longer a way of appropriating its monopoly profits, but are simply a lumpsum tax on expected revenue, collected in advance. The question to ask is, how far does such a tax reduce the demand for telecommunications? Did it do so to such an extent as actually to reduce the revenue? He suggests complete abandonment of licence fees, and proposes instead a sales tax on all phone calls; to prevent it from becoming regressive he suggests exemption of public pay phones from the tax. And he proposes that entry into the industry should be left completely free, and the setting up of integrated companies providing service all over the country should be encouraged. He is in favour of transferring all powers to TRAI. Whilst I agree on the eventual passing of monopoly, it will be many years before a number of companies come to provide parallel nationwide service. In the meanwhile, it is important to ensure interconnectivity; for that, TRAI will have to fix interconnexion charges. There will also have to be enough investment in switching and thick enough pipes between nodes. Thus I think there will be a transitional need to distinguish between the central network which must be run as a common carrier and which must charge a fair price in some sense, and the peripheral extensions where full competition can prevail.
·       Srinivasan points out that the weak finances of the state electricity boards make them unreliable buyers from independent power producers, and welcomes the fact that competitive bidding has been made mandatory for new private power projects. However, the logic that Srinivasan applies to telecommunications must be applied to electricity as well. There is no wireless power transmission, which remains a natural monopoly. It must be separated from the rest of the power business, and must be run as a cost-plus common carrier. A number of states have done this under the World Bank’s prodding. But the World Bank does not see the corollary: that the grids must buy from the cheapest source, and that distribution must be divided up between many local companies to create competition amongst buyers.

Srinivasan’s thirty-year absence from India gives his lectures a certain Rip Van Winkle quality. He refers in some detail to the personages of the past – Dadabhoy Naoroji, Sir M Visvesvaraya, Sir Purshottamdas Thakurdas, Prashanta Chandra Mahalanobis, Pandit Jawaharlal Nehru, etc. He thinks that the perversities of government policy cannot be understood today without going to its intellectual roots in the writings and speeches of these great pre-independence figures. To me, this is like saying that the present troubles of Colombia cannot be understood without harking back to Simon Bolivar. That small-scale reservations reflect Gandhi’s preference for small industry is a fact, but it is boring and irrelevant. Reservations persist today because small industrialists’ lobbies have politicians in their pocket. Political economy is a better guide to present Indian reality than intellectual history.