Is India Beginning to Recognise the Power of the Invisible Hand?

Posted by: on Mar 23, 2020 | No Comments

 Indian Economy Survey Report

The Indian Economic Survey was released in January as a prelude to the Union Budget for 2020. In the report, Chief Economic Advisor (CEA) Krishnamurthy Subramanian has suggested several solutions to boost the Indian economy. This comes in highly challenging times. India needs to be wrenched out of a global economic slowdown and then propelled enough to become a $5 trillion economy by 2025.

One of the major solutions and indeed a bold prescription has been to steer India towards a more market-based economy, shirking off the old vestiges of the prior Soviet model of economic growth.

Subramanian stresses that this is how the country will create wealth and jobs, by ending its four-decade long “dalliance with socialism,” moving towards increased reliance on “the invisible hand of the market for wealth creation supported by the hand of trust.”

Reduce Government Intervention for Greater Wealth Creation

It’s ironical. Government intervention always comes disguised as being in national interest or welfare of society. It achieves quite the opposite by undermining the power of the markets to generate wealth. The report gives several examples of such instances. The Indian government imposed stock limits on basic commodities, like on dal in 2006, sugar in 2009 and more recently on onions in September 2019. Volatility of wholesale and retail prices of these items increased rather than prices getting smoothened out.

Such instances can be reduced only when the government strengthens the invisible hand of the markets. For that, Subramanian stresses on pro-business policies that will:

  • Enable ease of doing business, allow new market entrants and enhance fair competition
  • Eliminate government intervention that undermine the markets
  • Create jobs through increased trade and foreign investments
  • Efficiently scale up the banking sector to be proportional to the size of the Indian economy

The survey offers several suggestions on how to achieve this. For starters, the CEA elaborates on the importance of aggressively pursuing disinvestments, by transferring government holdings in CPSEs to a separate corporate entity. This will create more room for expansion of fiscal policies and enhance effective allocation of public resources.

Several areas where the government can change its role or completely withdraw from include the Land Acquisition Act, restructuring the role of the Food Corporation of India and the Essential Commodities Act. Pro-business policies will encourage entrepreneurship at the grassroots level, which will unleash the impact of competitive markets in generating wealth.

Overall, the framework of this year’s economic policy is bold. For the first time, economists have discussed politically sensitive topics to argue in favour of a pro-business environment. India ranks among the lowest on the Index of Economic Freedom, which is evidence of how economically restricted its citizens are and how this puts the nation at a competitive disadvantage.

What is the Invisible Hand That Governs the Market? 

So, when the government doesn’t control the markets how can it be regulated?

The answer comes from the concept of laissez-faire, an economic system developed and propagated by economist Adam Smith in the 18th century. It refers to a system where transactions between entities are free of any form of government intervention, such as tariffs, waivers, regulations or subsidies.

In such a market, the “invisible hand” is often used as a metaphor for unseen forces that guide the free market economy. These forces include the constant interplay between supply and demand, which guide the natural movement of prices and achieve equilibrium. 

There are two major benefits of the invisible hand:

  1. When businesses have freedom of production, they will produce what consumers have a need for and will buy. Driven by self-interest, businesses will work towards fulfilling the needs of consumers.
  2. Not only will businesses allocate resources according to what consumers need, but will ensure efficient use of these, as they are driven by a profit motive.

So, free individuals in a free economy will make decisions focused on their self-interest, but this will lead to benefits for the society as a whole, although these benefits are not the intent of their actions.

India is far from becoming such a free market economy. Yet, the latest economic survey report has stressed the many benefits of India going that route. That’s an action in the right direction.

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