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Can our best salesman sell us the free market?

Too many Indians still believe that the market makes “the rich richer and the poor poorer” and leads to corruption and crony capitalism. This is false, of course. Despite the market having generated broad-spread prosperity over two decades — lifting 250 million poor above the poverty line — people still distrust the market and the nation continues to reform by stealth. The blame lies partly with our reformers who have not ‘sold’ the competitive market as Margaret Thatcher did in Britain. But fortunately, we now have in Narendra Modi an outstanding salesman of ideas who could transform the master narrative of our political economy.

When the government decontrolled the price of diesel two weeks ago, Modi lost the opportunity to explain why the competitive market is far better at discovering prices than politicians. He could have reminded people that during our socialist licence raj, price controls pervaded our lives. Political prices did not allow producers to recover costs and this led to scarcities, black markets, and controllers. Our family home, I recall, remained half complete for years because my father was unwilling to bribe the cement controller for a few extra bags of cement. The mighty Soviet Union also collapsed partly because of political pricing.

Corruption is the inevitable result of tampering with prices. It has led to adulterating diesel with kerosene, a scam estimated at a shocking Rs 40,000 crore per year by KLN Shastri, formerly of the government’s Oil Coordinating Committee, plus the murder of whistleblowers who tried to expose the racket. In controlling food prices, the nation actually spends Rs 3.65 to deliver a rupee worth of grain through the PDS system — no wonder, half the grain ‘leaks’ out. In the case of power, theft is the natural outcome of price control. The Indian Railways actually loses 24 paisa per kilometre on every second-class ticket, which prevents it from from modernizing.

Modi must employ his considerable rhetorical skills to persuade Indians that an efficient, corruption-free economy does not allow politicians to set prices. It will also help him to convince people that direct cash transfers into Jan Dhan Yojana bank accounts is a more efficient, less corrupt way to deliver welfare. The market does a far better job of preventing corruption than even the Lokpal, a lesson that has escaped Arvind Kejriwal and Anna Hazare.

A few days after decontrolling diesel prices, the government announced competitive bidding in coal mining. It was a good decision as marketbased auctions are the right way to discover the price of natural resources. But it did not go far enough — it restricted open bidding only to users of coal, such as power companies. Had it opened coal mining for free sale, it would have brought much higher revenues to the state and led to a competitive coal market, breaking Coal India’s monopoly that is the root cause of the nation’s coal troubles. Allowing competition in airlines, telephones, and television has greatly increased choice and freedom in India. There is an irony here: Indians think they are free because of their proud democracy, but economically they are still quite unfree.

Modi has repeatedly said that the government’s job is not to run business but to govern. But such general statements will not help him to sell the tough decisions that are coming in the next few months. He needs to go the extra mile to persuade Indians that subsidies, price controls, and government monopolies create distortions and harm the very people they are meant to serve. Market competition keeps prices low, raises the quality of products, and increases the aam aadmi’s freedom. It is when politicians are allowed to make economic decisions that crony capitalism enters the system.

In the end, Prime Minister Modi will be judged for creating jobs, controlling inflation, and stopping corruption. All three of these happy outcomes depend on moving decisions that are still in the discretionary hands of politicians to the impersonal market. Like democracy, the market is imperfect but it is better than any other alternative. If Modi succeeds in changing the narrative, an aspiring India may finally shed its socialist hypocrisy and begin to trust the market.

Gurcharan Das, November 14th 2014

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