An Open Letter to PM Shri Modi

Justice Louis Brandeis in Olmstead vs United States 1928


May 26th, 2015

Dear Prime Minister Shri Modi:

I write this letter as a long-time supporter. I have had great expectations from you. Considering the importance of the matter I wish to address, this is very short; considering that you will probably not read anything longer than a powerpoint slide given your busy schedule, it is much too long. Therefore although addressed to you, it is meant for the ordinary citizen of India.

The opportunity for transformational change arises rarely. Rarer still are the times when these opportunities are actually seized and the nation transformed. We never get to know about those missed opportunities because history neither records nor evaluates failures positively. The potential for change exists rarely but actualizing that potential is even rarer still. So rarely do transformations occur that when they do happen, they are highlighted in the history of nations centuries after the events, often long after the entire population has been replaced many times.

Leadership Matters

India stands at a crossroads. India has the opportunity to turn towards prosperity; or it can continue on the road it has been on for so long and continue to struggle with underdevelopment and poverty. You have the responsibility to determine which way India will go.

It is painful to acknowledge that India is not a prosperous nation in this modern world. India is what it is today, and where it is today, largely because over the long past too many opportunities for transformational change have been squandered. The most succinct explanation must be that it was due to a failure of leadership.

Leaders have the job of recognizing the need for transformational change, and through their vision, wisdom, dedication and intense labor guide the nation through the transition. India has had leaders of course, some even highly praised for their real or imagined successes. But the fact of India’s lack of prosperity today suggests that they were not up to the task and failed to change the nation’s trajectory towards prosperity.

Failure of leadership is the only explanation when all other factors for a defeat in any struggle have been eliminated. If a sufficiently large army of well trained and well equipped soldiers suffers defeat against an inferior force, it must be due to strategic and tactical mistakes made by the generals.

You certainly appear to have the intelligence, the desire and perhaps the wisdom to make India truly prosperous — if you decide to do so. You can be that different, better kind of leader that India has been waiting for. India needs transformational change, not just marginal change that does not matter in the end.

Transformational Change

India is fairly well endowed with natural resources, a deep civilizational culture and history, and a very large population. India does not suffer major periodic natural catastrophes. Nature has been quite kind to India. It is not victim to devastating foreign armies laying waste to its people and its wealth. And yet India is desperately poor, severely under-educated, malnourished and suffers deep divisions along many social fault lines. If we have to change this sad reality, the first step is to look at it unflinchingly and recognize it.

To alter this reality into another that is qualitatively more acceptable requires not incremental but rather transformational change. Defining transformational change is important here. To take an engineering analogy, consider the external combustion engines – the steam engine. They powered the industrial revolution that started around mid-18th century CE. Incremental design changes improved their efficiency over time. But for transformational change, an entirely new engine had to be invented: the internal combustion engine. The internal combustion engine was not just a new-and-improved version of the steam engine; it was a beast of a different species.

Transformational change requires a different understanding of the world. It requires a different way of looking and a different way of doing things. It does not involve doing the same old thing in a better way but rather doing different things altogether. Change is inevitable, as the Buddha recognized 2,500 years ago while contemplating the nature of existence. Impermanence and change are features of all things. It therefore necessarily requires that we change with changing circumstances.

Creative Destruction

Transformational change is creative change. The most profound recognition of this fact was first made by ancient Indian sages and gurus.

Transformational change is eloquently represented by the great god Shiva in his Nataraja manifestation, the King of Dancers, dancing the Tandava, the dance of creative-destruction. The damaru in his upper right hand and the flame in his upper left hand connote creation and destruction, respectively. Without destruction of the old there cannot be creation of the new. Shiva’s eternal dance of creative-destruction keeps the universe in dynamic balance. That’s the universal law discovered by the ancient Indians — which we ignore only at our peril.

The idea of creative-destruction is an eternal law and therefore inevitably discovered by others. The celebrated economist Joseph Schumpeter (1883 – 1950) recognized the process of creative destruction and stressed that it “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Transformational change, not just mere change, depends on Shiva’s dance of creative destruction effecting change across time and space.

Freedom from Material Deprivation

Creation is a process, not an end state. It is powered by the will to create, a process that is most potent among free humans. Without the freedom to create, there can be no creation. That truth was also discovered by the ancients of India. They recognized that liberation in the broadest sense of the term is the goal. Their ultimate goal was mokhsa — spiritual liberation and transcendence — but the lesser goal of freedom from material want and deprivation is a necessary first stage.

Our Panchatantra wisely counsels that to be truly free, one should free of material deprivation because as long as one is forced to struggle to meet basic material wants, one cannot attend to more important matters of self-actualization and liberation. Material prosperity is certainly not the final goal but it is necessarily prior to all other higher aims. I will restrict myself to the transformation of India into a materially prosperous nation here since I am a student of matters related to economics.

Freedom is key to Prosperity

Over the centuries, competent thinkers and researchers have uncovered an unbreakable positive association between the prosperity of a nation and the freedom of the individuals in it. No society has become materially wealthy without its constituent members being free. This fact is both analytically and empirically valid. The materially rich countries are those whose people are free.

For India’s transformation the first necessary condition is for Indians to be free in the most comprehensive sense of the word. It is true that India became free of British political control in 1947 but it can be demonstrated that Indians did not become free. India became politically free but that is not the same as Indians becoming free. While the functions of the government of India were taken over from the British by Indians, the relationship between the government and the people did not change.

The government continued to be the master and Indians continued to be dictated to by the government. This does not contradict the fact that Indians vote to elect their government. Elections elect a government but whether the elected government constitutes a totalitarian state or a state that guarantees people comprehensive freedom is an entirely separate matter.

India Ruled by Dead Englishmen

The transformational change India must have is the transformation of the relationship between the people of India and the government of India. During British raj, the British government of India was the controlling master and the Indians were the servants. This is only to be expected and consistent with the purpose of colonialism. The British government was not in the business of serving Indians; Indians were expected to serve their rulers, the British colonial government. After 1947, that master-servant relationship should have changed but it did not.

The master-servant relationship between the British government and Indian subjects was comprehensively defined by the set of laws, rules and regulations that the British created for ruling India. It was precisely these rules that gave meaning and content to the idea that Indians were not free. However, since those same laws, rules and regulations continued to be in effect post-1947 (and they continue to be in effect even today), it implies that first, Indians are still not free, and second, that the master-servant relationship that the British so effectively instituted for exploiting the people of India continues unbroken.

That British tradition of Indians being ruled has not changed even though India is no longer under direct British control. Although Indians are supposedly ruling themselves, in actuality Indians are being ruled by dead Englishmen by proxy via the duly elected Indian politicians and the professional, permanent bureaucr. Nearly all of the laws that govern Indians today were made by Englishmen. Since the English were the rulers, the laws favored the rulers and at the cost of Indians who were the ruled.

British Raj 2.0

This master-servant relationship continued because those laws did not change. Indians continue to lack freedom just as Indians lacked freedom under the rules the (now dead) Englishmen had created. The only change is that Indian rulers have replaced the English.

India lacks material prosperity because Indians do not have economic freedom. Granted that Indians do vote in elections at various local, state and national levels but they are just choosing their masters whom they will have to obey. It’s the freedom to choose whom they will serve, rather than the freedom to choose who will serve them.

The license-permit-quota-control raj that the British created suited the new rulers who took charge after the British so well that they did not see any reason to change it. India suffered materially under the British and it should come as no surprise that Indians failed to prosper after independence from the British. Like the British before them, the new rulers prospered and gathered immense personal wealth at the expense of the people. Nearly 70 years of “self-rule” has not produced the prosperity to end the poverty of hundreds of millions of Indians. There are more Indians below the poverty line today than there were Indians in 1947. That’s a sobering realization and it should provoke debate why this is so.

In the past 60 years, numerous countries, large and small, many much poorer than India in 1947, have raced ahead of India. India has failed to keep up. Or more accurately and precisely, the Indian government has failed India. This is an inescapable conclusion because the alternative — that Indians are somehow incapable of creating prosperity — is untenable and unsupportable.

The alternative is that India’s failure is because Indians are collectively incapable of creating wealth; or that they are too stupid; or that India is the victim of external factors which cannot be resisted; or that India is doomed by nature; or that India’s enemies are responsible for India’s situation. The alternatives listed are patently untrue.

Indians are Fundamentally Capable

Fact is that Indians are as capable, as hard working, as intelligent, as honest, etc., as the peoples of other nations that are prosperous.This is clearly evident from the fact that Indians have prospered remarkably well wherever they have migrated to in search of opportunities. Indian migrants have done remarkably well, even compared to the native populations of rich countries like the United States.

This fact is celebrated in the many “Pravasi Bharatiya Diwas” but its implications are unfortunately neglected. Why doesn’t India do well if Indians do remarkably well outside India? We must ask this and related questions: What is the reason that Indians don’t do well in India? Why do they have to migrate abroad?

Anyone interested in making Indians and India prosperous has to ask those questions seriously and answer them honestly. Without that sincerity and honesty, all hopes of making any changes is futile.

When one finds that one is not able to reach a favored destination, the first step is to figure out a different route. It is futile to continue on the same route that did not get one toward the destination. Doing the same thing only yields the same result. Expecting otherwise is not just futile, it is worse than futile: it is wrong. What India needs is a change in direction, not merely a speeding up the pace without changing what has been done fruitlessly for the last 70 years.

India needs Leaders with the Will to Change

Transformational change is not about doing more efficiently things that did not work in the past in the hope that it will work now because the effort is more sincere. Outcomes change only when different things are done and things are done differently. What needs to be done differently and what to do to get the desired results is not unknown either. Every problem that India faces has been faced before by other countries and their experiences provide a readily accessible source of guidance and direction.

India does not lack the knowledge of what or how to change but the will to change. This will to change is lacking not in the people so much as it has been lacking in the leaders. India has a leader who for the first time in modern Indian history is willing and open to change. The significant segment of the population has entrusted you with the responsibility to bring about India’s transformation. To uphold that faith and trust, you have to make structural changes, not just superficial changes.

A better future requires understanding the failures of the past and a determination to not repeat them. Course correction requires an honest review of the past. A mechanism has to be created for this purpose.

(More about that below. See section “Task Force for Review of Government.)

Nehruvian Socialism has Failed

The most significant lesson the world has learned in the 20th century CE regarding economic growth is that socialism and central planning have failed to promote development and prosperity wherever it has been tried. The why and how socialism fails is too well known and documented extensively. We will only note the spectacular failures here. The most salient example is the former USSR. A land full of natural resources, very talented people and a rich cultural tradition failed spectacularly because of the constraints imposed on it by socialist centralized planning. It had the potential of being a superpower — and indeed it was one for a limited time — but socialism destroyed the USSR.

China is another example of the destructive nature of socialism. To the extent that China has changed its direction away from centralized socialist planning, China has progressed. It is an example of even a small degree of change towards a market economy can yield obvious benefits. China used to be as poor as India (in fact a little poorer than India) as late as 1978. It course-corrected under Deng Xiaoping. Today China’s annual GDP (income) is five times that of India; its wealth (durable assets such as infrastructure, factories, cities) is probably 10 times that of India. China’s story is one of change. If India refuses to change, in another generation China will be 100 times more powerful than India. That fact should keep Indians awake at night, even if India’s leaders are unconcerned about it.

Although India is now about 30 years behind China in making structural changes, it is not too late. If India loses another generation, the game will be over. The current difference between India and China is around the same as the difference between India and Pakistan today. Any further delay and in a generation the difference between China and India will likely widen to the difference between Germany and sub-Saharan nations — between a developed nation and failed states.

The command-and-control of Nehruvian socialism has brought India to this sorry state. The surprising thing is that command and control is against the very ethos of India. India’s ethos has always been of people making their own decisions regarding how to live, how to work, how to worship. Even India’s religious traditions emphasize the individual’s right to choose for himself or herself what to worship. This is in sharp contrast with the non-Indian tradition of worshiping only one all-controlling god. India’s civilizational ethos is consistent with economic freedom. But the irony is that India is chained to Soviet-style centralized socialist planning that is more consistent with worshiping a monotheistic, dictatorial deity.

India Requires Structural Changes

He that will not apply new remedies must expect new evils, for time is the greatest innovator.
– Sir Francis Bacon 1595

India needs structural changes because the present structure has failed to provide what Indians need. An analogy may be pertinent here. If a ship is structurally defective and keeps sinking in the ocean, the sailors or the captain of the ship cannot be faulted. Superficial changes such as painting the ship a different color, or cleaning it up, or trimming the sails, or even replacing the crew will not make it seaworthy; only changes to the way the ship is designed and built will. Of course, an incompetent crew could still sink a good ship but even a competent crew cannot sail a structurally poor ship. The Indian ship has been poorly designed and built, and not just poorly piloted.

A great leader’s vision is required for structural changes. No human is so wise and so knowledgeable as to fully understand what needs to be done to solve a problem as complex as a large economy poses. The leader’s job is to recognize that change is needed and to call for a thorough review of the present condition and take corrective measures. Diagnosis has to precede intervention — this is true of all problems whether medical, social, mechanical or economic. Refusal to seek a diagnosis first before recommending a treatment is futile and dangerous.

Some years ago, one particularly keen observer and an acknowledged expert on the matter of economic development was asked what policies he would recommend for India to become rich. He responded saying that one simple way would be to implement policies that are absolutely 180 degree opposite of whatever policies India had. Essentially the contention was that India’s failure was due to bad policies and reversing them would lead to avoiding further failure. Perhaps he was right. But what must be done is to figure out as best as possible the why of India’s failure. If we know the why, we have some hope of figuring out what needs to be done, and how.

Descent into Demagogy

For the major part of India’s existence as a politically independent nation post-1947, India has been under the control of what is now named the Indian National Congress (Congress.) While India started out as a constitutional democracy, under the Congress, the constitution (for whatever it was worth) steadily deteriorated. In keeping pace with that deterioration, Indian democracy descended into demagogy.

The wikipedia defines a demagogue as “a political leader in a democracy who appeals to the emotions, fears, prejudices, and ignorance of the lower classes in order to gain power and promote political motives.” A democracy descends into demagogy under the rule of demagogues such as India has had the utter misfortune to have so far. The first task therefore is to halt India’s further slide into demagogy. For that to happen, the government has to become more responsive to the real concerns of the people. Which brings us to the fundamental question: What is the proper role of the government?

The proper role of the government is to protect the rights of the individual from coercion and the arbitrary will of others — including most importantly the arbitrary will of the functionaries of the government. The stress is on the “individual” for the basic reason that if the individual is not free, the collective cannot be free.

Limited Government, Free People

The most successful nation in the history of mankind has been the United States, a nation that was founded just a little over two centuries ago. One of the basic reasons for its might and prosperity is that its founders recognized that a government, although necessary, can become a tyrannical master. To prevent that, they made sure that the people have the freedom to force the government to be an obedient servant and not become the master. This they achieved by framing a constitution that limited the power of the government (notably through the “Bill of Rights”) and ensured checks and balances on government power by distributing it among the three branches of the legislature, the judiciary and the executive.

A system that gave only limited powers to a small government while giving maximum freedom to the individual lies at the heart of what made the US the preeminent world superpower it became by mid-20th century CE. To the extent that the US government is deviating from that ideal of a minimum government, the US is becoming less powerful. The lesson is worth learning: an efficient, minimal state is a prerequisite for national prosperity. Conversely, a large, inefficient state is sufficient to block development and growth.

For India to prosper, the necessary (but not sufficient) condition is that the Indian government is a minimal government and that the people are free from coercion and the arbitrary will of the state. For this to happen, the British Raj has to truly come to an end.

During the colonial British rule, Indians were naturally not free of government coercion. After all, that was precisely the reason that Indians wanted freedom from the British government. Here we must remember that the system of government coercion of the individual (and therefore the collective) was effectuated by the rules, regulations and restrictions that the British government implemented.

Those rules, regulations and restrictions not only remained in place after the British left but were in fact added to, thus further reducing the freedom of the individual. Government today is more intrusive and controlling of Indians today than any time in modern Indian history. It dictates and controls every aspect of the individual’s behavior.

Government has no Business to be in Business

Government has no business to be in business, as you had so forcefully stressed in your election speeches. That principle has been central to our Indian ethos and finds popular expression in the Hindi adage, “raja vyapari toh praja bhikari.” To what extent has the government’s misguided attempts at running businesses harmed India needs to be investigated and admitted.

The proposition that the Indian government has been the most destructive force that India has suffered — more than its foreign enemies and forces beyond India’s control — is easily supported. That destructive power comes from the fact that the government of India denies Indians freedom.

Everywhere Indians are forced to seek permission from scores of government agencies to get even simple things done. This creates friction in the economy and prevents people from doing what needs to be done. Why this permission regime continues is not hard to explain: it gives the government functionaries immense power to exploit the population. With that power comes the power to extract bribes and the consequent corruption becomes endemic.

The fact is that the constitution of India mandates the government interfere in the economy. This is a colonial British legacy, as mentioned before. Government interference in the economy inevitably leads to the politicization of the economy. The politicization of the economy leads to the corruption of politics. Corruption and politics are so intertwined because political power gives the politicians to extract vast wealth — wealth that has to be necessarily taken from the people.

In a well-governed country, the people become wealthy and not the political leaders. In contrast to that, a poorly governed country has amazingly rich politicians and abjectly poor citizens. It is clear in which category India is. That needs to change. I cannot think of any major political leader of India — present company excepted — who has not become fabulously, impossibly, incredibly, astonishingly rich.

I follow up these general comments with a small set of recommendations. All of them have the single aim: to make India as prosperous as it is potentially capable of. The goal is not to make India “a superpower” of this or that. Grandiose sloganeering in the absence of even minor achievements only makes India appear pitiable, not respectable. The aim must be more modest and achievable: to make India as prosperous as it is capable of being given the endowments that it has.

The means to that goal of India reaching its potential is comprehensive freedom. And the first step in India gaining comprehensive freedom is to radically invert the relationship between the people of India and the government of India.

Task Force for Review of Government

Government is a necessary institution in every modern nation and state. It is worth knowing how effective a government is. This lends credibility to a government which is absolutely necessary for its legitimacy considering that India is a constitutional democracy. The citizens’ faith and confidence in the government is a crucial element in the success of the state. To that end, the simplest way is to publish how well the government has fulfilled the social contract that it implicitly has with the citizens.

My hypothesis is that India’s lack of progress is entirely due to poor governance. How an economy performs depends on policies that the government implements. Nobel prize winning economist Douglass North observed that “economic history is overwhelmingly a story of economies that failed to produce a set of economic rules of the game (with enforcement) that induce sustained economic growth.”

The Indian government has been not just in governing but also engaged in business enterprises for many decades, since even before independence. It is time to scrap the Soviet-style socialist “Planning Commission”, instead of just renaming it constitute a “Task Force for Review of Government Performance.” It should answer a few basic questions and publish them for citizens to judge for themselves how well the government has done. The unfortunate fact is that public discussion and debate about what the role of the government is missing entirely. To questions of interest would be:

    • How well have the public sector undertakings (PSU) done since their inception?

For each PSU, such as the airlines, railways, electricity boards, etc., we need to know how much have they contributed towards the national wealth (the profit) or subtracted from it (the loss). For instance, we could be told that by operating Air India/Indian Airlines, the cumulative profit has been Rs X crores since its nationalization, or the cumulative loss has been Rs Y crores.

Knowing these kinds of information would help us understand whether government is justified in being in business.

    • How much does the government cost the Indian taxpayer at district, state and central level?

This is essential information for citizens to decide how efficiently the government is working. For example, it would be instructive to know how much does a Member of Parliament cost India, counting both the direct payments and the indirect payments such as free utilities, free accommodation, free travel and pension payments. Another example: how much does the permanent bureaucracy cost?

    • What is the role of the government?

Innumerable tasks have to be accomplished in any modern, large, complex economy. Which agency — the private sector or the public sector — should be entrusted with any specific task is a question that must be seriously asked, convincingly answered, and appropriate action taken. Everything cannot be done by any single entity, even (or especially) the government. Therefore, the role of the government must be specified and limited to only those things that must be done but the non-government agencies cannot perform.

For those tasks that must be performed by the government, prioritization is required. For example, ensuring clean drinking water is widely available in all towns and cities is a task, and so is sending planetary reconnaissance missions. How should these two be prioritized? If resources are available for only one, which one should be chosen?

    • To what extent is India’s failure to prosper a matter of poor governance?

This is perhaps the most important question that any honest government could ask — and therefore the most neglected because rational self-interest on the part of those in government prevents them from risking an answer. It is not just a matter of an inability for introspection but also very dangerous in its implications. If India’s failure is traced to poor governance, it would call into question the wisdom of so many political leaders who have been elevated to the position of gods.

The findings of the task force must be made public and form the basis for a public debate on what the government should do. The total lack of this kind of public debate is an indictment of a nation that claims to be a democracy — “a government of the people, by the people, and for the people.” The absence of debate is based on the false presumption that those in government have an innate knowledge of what is good, true and beautiful, and people must have blind faith and trust in them regardless of the facts. This attitude is indicative of the worst kind of paternalism that contradicts the basic assumption that the people are competent and mature enough to elect their own government.

Three Specific Recommendations

Consistent with structural change that India needs, here are three recommended tasks. The background facts are:

  • About 60 percent of India’s labor force is engaged in agriculture and related activities
  • Around 50 percent of Indians are functionally illiterate
  • Only 9 percent of Indian labor force is in the organized sector
  • The manufacturing sector requires a literate labor force
  • In terms of time and effort, it is very costly to start a business in India

Task 1: Make India 100 percent functionally literate by 2020.

Functional illiteracy is generally defined as possession of reading and writing skills that are inadequate “to manage daily living and employment tasks that require reading skills beyond a basic level.” Thus functionally illiterate people are incapable of anything other than extremely low-level manual labor since even the most basic level manufacturing jobs require literacy.

If India continues to have such high levels of illiteracy — amounting to hundreds of millions of people — India will continue to be a low-production and low-productivity nation. Literate people produce enough and are self-sufficient, and don’t need handouts from others. Government schemes like the “National Rural Employment Guarantee Act” are palliatives that mask the real problem and create dependency.

The first step towards empowerment is being functionally literate. No country ever has achieved prosperity without first achieving universal literacy. This task can be accomplished in just a few years, provided the political will is there. That provides the foundation of the structural change that India needs — to move from an agriculture-based subsistence economy to a modern manufacturing and services economy.

However, while the benefits of achieving universal literacy are long-lasting and cumulative, they will not be immediately felt and therefore will not yield immediate electoral gains. This means that only a visionary leader — someone who can see beyond the next election — who is truly concerned with the public welfare can make this happen. So far India has not had such leadership as is evident from the fact that even after 70 years of independence, India has the world’s largest number of illiterates.

Task 2: Liberalize the Education Sector

This is closely related to making India 100 percent functionally literate. The government has limited resources and must use those towards functional literacy. Because of restrictions on the private sector participation in education — through the well-known license-permit-control-quota raj — India has unquestionably failed in providing educational opportunities for Indians. Evidence of that failure is very obvious: only about a quarter of the college graduates are employable, and Indians privately spend an estimated $25 billion annually for education abroad.

One important step towards the liberalization of the education sector would be to abolish the “Human Resources Development Ministry.” A competitive market can supply all the demand for education and do so efficiently. The idea that somehow only the government is capable of educating the people is patently false and pernicious.

Why is this structural change so critically important? Because the world is undergoing a structural change. About one 100 years ago, it was sufficient to be functionally literate to be able to work in basic manufacturing. Technology has progressed that it is no longer true that even basic literacy is sufficient to add value to manufacturing. Advanced industrial robots can do what previously required trained human labor.

Thirty or fifty years ago, the world did not have the sophisticated industrial robots we have today, and therefore China could become the manufacturing colossus it has become because it was more literate than India and its leader Deng Xiaoping was foresighted. But industrial production will in the next decade or so shift out of China, not to India even with its low unskilled labor costs but back to the advanced industrialized countries that have the trained manpower to use manufacturing robots. India, with its untrained labor force, has no chance of doing anything in manufacturing unless its leaders recognize the reality of a post-low-cost manufacturing world. This is very unlikely to happen.

Liberalizing the education sector is feasible but is unlikely because government controls allow rent extraction. The mechanism is through government licensing which restricts supply. Supply restrictions leads to competition for licenses. Those willing to pay the most in bribes obtain the licenses. Thus competition shifts from competition within the market (which is efficient) to competition for the market (which is inefficient.) Finally, the lack of competition in the market leads to high prices, poor quality and insufficient quantity.

Liberalization of the education sector can only be done if a visionary leader recognizes the harm that government control does and is willing to spend a great deal of political capital in making it happen. There are too many political leaders who benefit enormously from the present dysfunctional system to allow this change to happen, however beneficial it may be for the country. But if this happens, it will be the greatest achievement. It will change not only India but since India is such a large part of the world, it will unquestionably change the world for the better.

Task 3: Allow private enterprise and entrepreneurship

The wealth of a nation is what it produces. The most efficient means of production is private entrepreneurship in competitive markets. In all prosperous nations, the private sector is the major source of production and consequently of income and employment. Most significantly, it is the organized sector that creates the most remunerative jobs. The larger the private sector, the greater is the production and therefore fewer people are dependent on government assistance.

Large corporations certainly employ large number of people but a greater percentage of the labor force is employed in small and medium firms. It is worth remembering that large firms always start life as small firms created by entrepreneurs. Google, Facebook, Microsoft, Yahoo!, eBay, Intel, Cisco, . . . the list goes on, were all tiny at the start. They did not spring up fully formed as large corporations.

Allowing — or better still, encouraging — small firms to start matters. For every million startups, 99 percent fail within a year or two, and only 10,000 become small firms. Of these about 99 percent, or 100, go on to become medium-sized firms in another few years. Of these, only 1 in 100 achieve the spectacular successes we associate with the Googles of the world — mainly in the US. The US has large firms because it is so easy to start small firms there.

Indians are by their very nature excellent entrepreneurs — but only if given the chance. For example, Indian expatriates to the US are over-represented as business owners and successful entrepreneurs. The fact is that the license-permit-quota-control raj prevents Indians from starting small businesses in the organized sector in India. For India to truly achieve its potential, the Indian government has to stop being the most formidable barrier to Indian entrepreneurs. This one must admit is a colonial era legacy — when the British did not want Indians to succeed. The shame and pity is that the Indian government carries on this wasteful tradition.

The challenge for an Indian visionary leader is to, first, admit that the government is the barrier, and, second, to remove that barrier. There is a time lag between that recognition and action, and action and results. Which necessarily means that such a move will not yield electoral benefits. Not just that, by removing government interference in business, those in control lose a profitable mechanism for extracting bribes. This partly explains the persistence of the license-permit-quota-control raj in matters of business startups.

Other Important Matters

The distinction between the trivial, the urgent and the important is worth emphasizing. The trivial is what wins votes but it does not have any lasting impact. Examples of trivial policies are not hard to identify. There are many and all of them are those that win elections. They make the short-term benefit in exchange for long-term costs. Handouts and subsidies do make for headlines but in the long-term they are costly and impoverish the people. Implementing the trivial is cheap in the short run but expensive in the long run. The trivial win elections. They always incarnate as handouts that only increase dependency on the government, not as real empowerment.

Socialism is the ideological basis for the triumph of the trivial over the important. India has suffered the consequences of socialism and will continue to suffer until a different route is taken.

The next step up from the trivial is the urgent. Matters become urgent after too much energy has been expended on the trivial. Focus on the trivial shifts attention to the urgent, which of necessity has to neglect the important. Poor leadership focuses on the trivial, mediocre leadership on the urgent, and only great leadership focuses on the important.

Poverty is a trivial matter. It is not insurmountable since at one time all nations were desperately poor relative to today’s standards. Some nations were able to haul themselves out of that poverty — and certainly not because they got foreign assistance or foreign investment since there were none to go around. They raised themselves out of poverty through internal means — means that are still available to poor nations today.

The brute fact is that these nations actually focused on the important and not on the trivial or just the urgent. What distinguishes the successful from the failures is the quality of the leadership. People in general are basically the same. The leaders that they get is a matter of luck. It is a random draw from the lottery of life.

Here let us list a few important matters that go beyond the urgent. India needs a new set of rules of the game — namely, the constitution that defines the state and its relationship with the people. The most accurate description of the Indian Constitution is that it is British in nature and composition. Given that, it cannot serve as the guiding document of a free nation.

A Modern Constitution

The most important task is to create a constitution for a free nation. Here are a few guiding principles (non exhaustive):

  • It must situate the people as the principal and the government as its agent. That is, it must invert the current relationship inherited from the British where the government is the master and the people its servant.
  • It must treat all individual as equal before the law and not discriminate against any based on any criterion whatever — caste, religion, sex, etc.
  • It must prohibit the legislature from enacting any law that discriminates against any individual.
  • It must be of such length and in such language that it can be read by a functionally literate person without any legal training.
  • No candidate can contest any elections unless he or she has demonstrated an understanding of the constitution.

An Efficient Judiciary

Indian courts have millions of pending cases at all levels of the judiciary. How one can expect civil society function if cases take decades to resolve is a mystery. Reform of the judiciary is not trivial, it’s urgent and important. The government must institute a task force to determine why cases take generations to be decided. Judicial reform has economic implications. If contracts cannot be enforced in reasonable time, contracts will not be entered into. Essentially, a modern economy rests on the ability of people and firms to enter into enforceable contracts. Absent that, trade cannot take place and the inevitable result is poverty.

Summing Up

Dear Mr Modi, you have the opportunity to stop India’s further descent into demagoguery and socialism, and consequent continued impoverishment. This brief note is an attempt at listing what I as an economist consider both urgent and important. I harbor no illusions that it will be considered seriously. Common sense is not commonly taken seriously. Although this is an exercise in futility, nothing good is ever wasted. Somewhere someone young will read it and it will change the way they think about India and perhaps be in a position to make a difference sometime in the future.

The prosperity of a nation is neither inevitable nor impossible. The success of so many prosperous nations and the failure of so many other nations attest to that fact. What distinguishes the successful from the failed is not the people, nor natural resources or the geography or luck — it all boils down to the set of rules that nations choose to follow. The provenance of these rules may be accidental or historical but in the end they are what decide the fate of nations. Intelligent leaders understand the distinction between good and bad rules. Powerful leaders follow the rules that create prosperity. Visionary leaders make the rules that make the difference.

I trust and hope that you are a visionary leader, not just a powerful or an intelligent leader. And a word of warning: popularity wins elections but doing only the popular thing eventually guarantees popular contempt and irrelevance in the long run.

Atanu Dey, Ph.D.

Categories: Freedom and Liberty, My Favorite Bits, Why is India Poor?

17 replies

  1. Great post Atanu. One of your best. Loved every bit of it.

    But what I don’t understand is how the Modi Govt. can make these structural changes when there is so much of opposition and the BJP has less strength in the RS. The opposition also seems hell bent on not letting him succeed. You might say finding a way is the job of a true visionary leader. It may be true too but it will take time.

    I agree that a visionary leader has to think beyond the next election; but what happened to the Vajpayee Govt. which did bring about some changes-like the golden quadrilateral? People were impatient and wanted everything to change in five years and ABV lost. The country went back to a wicked witch Maino who destroyed it for 10 years. To prevent something like this from happening again, shouldn’t Modi focus on 2019?

    There are AK49s, Lalloos, Mullayams, Mamatas who are power hungry and are lurking despite their plans of grand alliance against Modi failed. If Delhi can vote someone like AK, and if the other states can vote equally incompetent gasbags or corrupt leaders, it speaks a lot about the Indian Electorate.


    • If Modi with the unparalleled mandate cannot make real changes, there’s little hope of anyone making any changes. Good leaders don’t make excuses for failure to do things that need to be done. That sort of spineless whining should be done by worthless appointed prime ministers like Manmohan Singh.


  2. great post Atanu.


  3. I do not agree that Indians are smart and I think they are kind of stupid. Education system in India with socialist ideas has made Indian even dumber. For example, many Indians I spoke to do not realize that government bureaucracy has too much power their solution to all the problems is more bureaucracy with more government!


    • While there certainly are differences among individuals in intelligence, large groups are generally not too far apart in intelligence. Meaning that the wide differences in material prosperity among various groups of people (for example between Western nations and nations of sub-Saharan Africa) cannot be accounted for by differences in group intelligence.

      What does make a difference is the different sets of institutions that different groups operate within. Americans are not vastly superior compared to Russians. The differences in the material well-being is because the Americans have more freedom compared to the Russians.

      India unfortunately has Soviet style socialist institutions and not surprisingly, India is poor like Russia.


      • Atanu, you simplify things a lot to freedom and no freedom. you mention, africa – many of the african countries have the weakest or smallest governments of any country in the world. surely, the people there must have the most freedom according to you. but that is not the case. i know, the free market supporters say that govt must exist to protect property rights. but a weak govt simply cannot do that. african countries intermittently have had some stable govts, but they were always weak and couldn’t withstand international meddling and degenerated into chaos that we see. why, take the example of india itself a couple of centuries ago. even 250 years ago India accounted for 25% of world’s gdp, it was an economic powerhouse. but in India as a whole the govt was weak and extremely decentralized. and because of that india was rapidly colonized with very small colonizing forces.

        the collapse of soviet union has many causes, communism was certainly one of them but not the only cause – the long cold war and the failed afghan campaign come to mind as some other major causes.

        you fail to mention the scandinavian countries (sweden, norway) when talking about socialist countries. they consistently rank among the very top in the whole world in most development and human indices. at the same time you also fail to mention failures of IMF enforced free market experiments such as chile, or russia during yeltsin’s time.

        lastly, you put it as if we have to choose between socialism or capitalism. a balanced approach is possible.


  4. It is a very lengthy post, so please forgive me for not reading it completely. So, I’ll just focus on some things – basically on your notions of limited government, freedoms and your supporting arguments for them. Again, please forgive me if I do a bad job of quoting you because the copy paste function doesn’t seem to work properly on this blog.

    You state that USA has been the most successful nation in the history of mankind and that one of the basic reasons for its might and prosperity are its limited government. I disagree – its might and prosperity are largely due to the fact that it is separated from europe by the atlantic ocean. europe destroyed itself with two world wars, while USA remained largely untouched and in fact profited a lot from arms sales to both parties in the wars.

    The other major reason is that specially in the lead up to and after ww2, there was a mass exodus of top scientists and engineers from europe to US, which gave it an unbeatable edge in technology after the war.

    both modern europe and US were built on exploitation in the form of slavery, colonies and so on. even now, europe and specially US look so squeaky clean because menial jobs are done by immigrants (who by the way usually have very limited rights and live in fear and end up being exploited) and by outsourcing many other menial tasks – from making their clothes to shoes to footballs in third world countries like india and bangladesh in poor working conditions with benefits such as death by burning and collapsing buildings, even their computers are made in china by people who work in slave like conditions (ex: foxconn).

    finally, USA’s big war machine ensures that there is a regular supply of recently devastated countries that can supply cheap labour.

    so moral 1 of the story: the success of the so called free market of USA is based largely on exploitation and requires continued exploitation for its sustenance. so if you adopt ‘free market’ principles be prepared to exploit or end up being exploited.

    moral 2: please stop being enamored by Hayek and neo-liberal ideas

    moral 3: orwellian usage of words and expressions, such as ‘freedoms’, ‘free market’, are not the sole purview of totalitarian governments but also of other entities such as big businesses.


    • Yours was a lengthy comment. Please don’t mind that I did not read it completely.

      Businesses that become big by being in bed with big government (crony capitalism) are a problem but the trouble begins with big government. Without big government, a big business is like any other in the sense they are big because they satisfy a large number of customers. It may be worth thinking about it.


      • “trouble begins with big government” – thats not necessarily true. By your own words, America has a relatively ‘small’ government. But many of the biggest businesses are also american.

        “a big business is like any other in the sense they are big because they satisfy a large number of customers” – again not necessarily true. You seem to be based (at least partly) in US so you must know how terribly unhappy people are with AT&T, comcast and TWC with the internet they provide. These companies essentially are a cartel. It is a well documented fact that among the developed nations, US has one of the worst internet service. There have been cases the past few years, where individual small towns started to invest their own money on high speed broad band. The bigger players have been trying to stop that by hook or by crook. Sure, google is entering the broadband market. But it is already a big business. So, it is not easy for a new small company to enter to correct the situation. Had comcast’s recent attempts to merge with TWC been successful, the situation would only have been worse.


  5. How many you think read this post ? I shared this elsewhere. 3 people shared it among 176 ‘friends’.

    There was another post – a chronicle of Modi’s performance and only 9 people read it.

    India SUCKS. It IS a third class race. Bottom of the rot. Scumbags or Pond scum as you refer sometimes.

    Equating Indians to ‘normal’ humans is a travesty.

    You are fighting a lost battle..


    • Loknath,

      My “letter to Modi” is really long. I don’t expect too many people to read it. That’s OK with me because my primary motivation is for me to express my understanding and interest in a subject by exploring it in writing.

      If Indian leaders — Shri Modi included — had been inclined to learn, think, understand before acting, India would not be in the dire straits that it is in, would it?

      Indians are who they are and what happens to them and to India is what Indians collectively do.

      It’s all karma, neh?


  6. There are tons of cases where the corporate sector has failed to
    sufficiently self-regulate – from banks, to oil industry, to
    pharma, to food and so on. then, whose job is it if not govt’s to regulate, to
    set minimum standards etc. an example – almost every
    product comes with pages and pages of terms & conditions. obviously, people do not read T&C. also, the T&C may change without notice. Would the industry ever regulate itself to streamline, simplify or standardize T&C? No.

    another example, cigarette industry had fought for decades to prevent any regulations on even labeling warnings. Recently, I came to know that some of the major cigarette companies are at it again, trying to overturn such regulations at least in smaller countries by threatening to sue them in international courts. how can small or weak governments have the strength to stand up to such things and regulate such things.


  7. While I broadly agree with you, it is also important to realise that Deng and China was able to do what it did because of powers with the authorities. It could acquire land at will, build infrastructure at will, create political and economical rules at will, it could kill demonstraters at Tianemen Square at will etc

    India is simply unable to move – too much democracy, parliaments can be disrupted by hooliganism, political parties that have no national interest at heart and only concerned with filling their own pockets etc. When you have political leaders like Rahul and Sonia who cannot be bargained with,

    If India wants to move fast, then it needs a benevolent dictator who can set basic framework up without being shackled. Something on the lines of Lee Kuan Yew in Singapore.


  8. I forgot to add above: the ability to impose one child policy at will


  9. Great article. From where can I buy your book. The link is defunct. Please suggest. Thanks.


    • Manish,

      My book Transforming India is out of print now. I will have a new set printed soon. But in the meanwhile, you can download a pdf free at anytime. Thanks.


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