The last few days have been peculiarly interesting on the global economic front, beginning from the concerns over a new coronavirus variant, stellar GDP figures back home in India and the usual punditry on economics by commentators.
One must concede that economic punditry is much easier than spending countless hours thinking about economic problems and working towards finding solutions in the form of a series of mathematical equations. Nevertheless, many Indians seem to be inclined to know more about the economy and many are viewing it as a career option too. No surprises, given that we have had such successful global economists from India, one of whom is now the first deputy managing director of the International Monetary Fund (this is the second-most senior position within the IMF bureaucracy).
The success of Indian economists globally is appreciated by all. Equally important is the work done by some of the world’s best policy economists in India, who work consistently to help implement better policies in areas ranging from education, health, law and any other issue of development (even macroeconomic management). It is only natural, then, to ask why it is the case that there are frequent missteps by governments in India—both in the past and some even in the present. Take the example of the continued focus on Nehruvian socialism long after we realised that it had failed. Or take the recent example of the Punjab government, which did a U-turn on the existing power purchase agreements. There is a near consensus that the decision was bad and reminiscent of the UPA’s retrospective tax amendment. Yet, the law stands and there has been limited effort to push against it, though it will have implications for the growth of Punjab, thereby condemning another generation into low productive agricultural jobs.
The reason why the proposed law is bad policy is straightforward. Think of yourself as someone who wishes to invest in a particular state. The investor will do so only when they are sure of some level of returns on their investment. This return is assured by way of ensuring property rights. That is, if you invest in a shop, you are assured that the shop belongs to you and you may generate a stream of revenue from it. Now suppose there is a dispute regarding the shop, then there must be a mechanism for resolving it and ensuring that you get the return as per the original contract. This is known as contract enforcement and is one of the areas where India has consistently performed poorly over the last several decades.
Essentially, by renegotiating the existing power contract, the Punjab government has empowered the executive to violate any existing agreement within the purview of the state. Thus, in the example highlighted above, if you own a shop, the state can take it away from you at any time as per any cost determined by it. Would you still be willing to invest in the shop in such a state?
Your answer to the aforementioned question is what is wrong with this particular law. The sad reality is that many of Punjab’s problems are an outcome of a lack of adequate non-farm jobs. However, the response to this problem has been on the lines of proposing a law to reserve jobs within the state—a move that again restricts labour mobility, thereby disincentivising investors (Haryana is another example of such a law). An outcome of such policies is that the situation will continue to deteriorate, which will impact the state’s resources and its ability to invest for further productivity enhancement.
There is a need to recognise that the existing policies have resulted in low diversification of the economy, which has had implications for the environment and resource base of the state. A course correction on the policy front is therefore warranted so as to ensure that there is an improvement in the lives of the people of Punjab.
Punjab’s policy missteps are also a lesson for various other states that have been relatively more developed. A lead in socioeconomic indicators cannot be treated as destiny and consistent good policy is necessary to continuously improve lives. One hopes that other states recognise this and avoid such policy errors going forward.
Karan Bhasin
New York-based economist
(karanbhasin95@gmail.com)