Lockdown wisdom - on economy and governance

Random views on economy and governance shared during lockdown with my engineering batchmates:

Most governments, in times of global crisis, have attempted to stimulate the market with short-term sops which further aggravate the situation in the long run.  It’s like treating the symptoms and not the root cause.  Most banking challenges are due to Non-performing Assets (NPA) norms which are not in sync with the ground realities of different sectors and sizes.  This results in invoking Bankruptcy law without giving sufficient time for the businesses to recover which in turn depresses business sentiments.  Credit off take will happen naturally when businesses are optimistic about the future.  I see that the Government of India is not resorting to any knee-jerk reactions to the current situation and are still focused on fundamentals.  But a sector specific credit, recovery and NPA norms are the need of the hour.  This would mean delinking ourselves from globally accepted practices in the short run.

In India, decades of crony capitalism has made our animal spirits dormant.  Also, business models of many of the small and medium enterprises were not designed to pay taxes honestly and transparently.  When both these unfair conditions are being removed, businesses are whining.  This is a major mindset and system challenge at a country level.

Animal spirit is the term used to describe entrepreneurial spirit of people - ability to sense market opportunities and threats and ability to build & evolve capabilities to capitalize market opportunities and avoid impending threats on an ongoing basis.

Market economy or free enterprise is the term used to describe the environment provided by the government to unleash the entrepreneurial spirit of people to realize their full potential.  It is almost like a jungle wherein our animal spirits decide whether we prosper or perish.  Though there are no countries which offer 100% free enterprise environment, the degree to which they encourage free enterprise determines the degree to which animal spirits are unleashed.

Crony capitalism is the term used to describe the environment wherein there is nexus between politicians and business owners.  It’s match fixed environment wherein who you know determines your success instead of your animal spirits.

Though there could be multiple ways of nexus, let me highlight few here:

  • Let’s say there are scarce resources like spectrum, coal mines, etc. which requires government permission to be allocated.  Politicians and business owners collude to ensure that the scarce resources are allotted at a very low price to the business owner.  Obviously, politicians and the party that they belong to get a cut.  The real loser is the government exchequer.  When the present government took office in 2014, with Supreme court’s intervention, many of these allotments were canceled and fresh auctions were conducted.  Government received fair price for scarce resources.  The businesses which had borrowed heavily, counting on the allotment at low cost, were not able to repay their loans as their business model did not factor in the high cost of license.  Hence they collapsed and, in turn, pulled down the banks with them.
  • In certain instances like infrastructure projects, only few people were allowed to participate in a tender.  Even among the people who participated, few of those were proxies of the Minister who had the power to approve the tender.  Since the primary motive is to profit the politician or the party in power, either the prices were highly inflated to factor in cuts and inefficiencies or if the price flexibility was minimal,  the quality of work was compromised.

In such an unfair and corrupted environment, only those who have nexus with politicians can do business and succeed.  In the process, the animal spirits of real entrepreneurs become dormant.

The other point that I mentioned was about small and medium enterprises: 

  • For decades, many of the small and medium enterprises were running with dual accounts, one for paying minimal taxes - both direct and indirect, and another for doing business without paying taxes.  Obviously, to maintain dual accounts, they had to take care of tax and other related officials.  Pricing of the products and services were decided based on this duality.  Pricing was competitive which helped them get their business.  With the introduction of GST, all types of indirect taxes were subsumed under GST and input credit was introduced.  In this new environment, it is very difficult to maintain dual accounts.  Earlier pricing models don’t work anymore as their cost of doing business has gone up.  Hence many of the small and medium enterprises are struggling to adapt to the new reality.

Essentially, we are going through the transition pain of moving from an inefficient, opaque and corrupt system to an efficient, transparent and corruption-free system.  If we stay the course without buckling under political pressure, the mindset of people are likely to change; they are likely to learn to work in the new reality which will be hugely beneficial to all stakeholders in the long run.

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