Capitalism and socialism are extremes on a continuum of economic systems. Almost all modern economies are a mix of the two. In capitalism, profit-motivated private entities, as opposed to governments, own and manage businesses, and demand and supply drive market prices.
In this post, I will use government versus private ownership as the salient difference between capitalism and socialism to chronicle and comment on the evolution of private ownership of business and industry in India.
In Socialism We Trust
During the late-70s and early-80s, when I was an undergraduate student in India, capitalists were painted as bad guys everywhere—in classrooms, politics, and movies.
The anti-capitalism sentiment in Modern India was seeded in 1947 when Indian political leaders and policymakers had a rare opportunity to shape the economic mindset, and destiny, of a newly freed nation.
Jawaharlal Nehru, India’s first prime minister (PM), saw rapid industrialization as central to India’s economic development. Toward this end, he nurtured a socialist-intensive economy. State planners decided what, how much, and where the government would produce in economic sectors insulated from private competition.
Several sectors were open to private enterprise but the government, through licensing, micro-regulated private sector activity, including production capacities, and, in some instances, prices.
When Nehru died in 1964, the government owned a swath of industrial enterprises and was in no mood to stop. The following year, in 1965, the government established a company to produce sliced white bread!
Indira Gandhi, who became PM in 1966, ran with the socialist baton handed to her and nationalized banking, insurance, and mining enterprises within five years.
We Have a Problem!
By the early-70s, 25 years into independence, the government, having helmed the biggest planned allocation of capital for the most extended period outside of the Communist Bloc, had created an industrial landscape dotted with inefficient and uncompetitive government and private enterprises operating in a heavily regulated and corruption-riddled environment.
The 70s were notable for private enterprise, though, with the Ambani business house flourishing and going public in 1977. Ideally, 25 years after independence, India should have produced not just one Ambani but several. However, given the hostile environment, it is remarkable that one emerged.
Course Correction
The first sincere effort to deregulate the economy was by Rajiv Gandhi, who succeeded Indira Gandhi in 1984. His consumerism-friendly policies were like a breath of fresh air and a tonic for private industry.
However, landmark reforms that expanded private investment’s scope occurred during PM Narasimha Rao’s tenure in 1991. These reforms largely happened under duress because of an IMF bailout of an India in acute financial distress.
The 1991 reforms were timely. They facilitated entrepreneurs to capitalize on communications and informational advances in a globalizing world economy.
A new generation of wealth creators, such as Narayana Murthy and Azim Premji, thrived.
There was a noticeable change in attitude among some sections of India regarding private enterprise. However, this change was not widespread, as evidenced by the ongoing effort to privatize hundreds of legacy government enterprises.
Privatization
Privatization gained ideological and implementation traction during PM Vajpayee’s tenure. However, it slowed from 2004-2014 under PM Manmohan Singh’s coalition government, which depended on communist support.
Since 2014, a majority government with a pro-business PM, Narendra Modi, has accelerated privatization. But its record during the first term was below expectations.
Only recently, 30 years after the 1991 reforms, the government explicitly committed to a complete exit from non-strategic economic sectors and a limited and capped presence in strategic sectors. However, the devil is in implementation and government continuity. We shall see.
Privatization Pace
The slow and bumpy progress toward privatization is telling about Indian political and societal attitudes toward private business ownership.
Three interrelated factors underlie the slow privatization pace.
In low-income India, it is challenging for left-wing governments to be enthusiastic about privatizing state enterprises.
The political will for privatizing state enterprises has been difficult to summon because the political costs are front-loaded, and the benefits are indirect and occur much later.
Even when ideology and political will are in place, India’s foundational socialist mindset is a big hurdle.
This mindset is resistant to change and easy to pander to. For instance, opponents of new laws to disintermediate government wholesale markets for agricultural commodities maintained that direct farmer transactions with private enterprises would destroy farmers and farming! The laws were repealed!
Blending Efficiency (of Capitalism) and Equality (of Socialism)
Because corporate excesses receive heightened media and public attention and are readily accessible to the mind, some believe the excesses to be far more representative of capitalism than they are and discount the tremendous economic value created via capitalism.
Capitalism has its flaws. The biggest problem is that it breeds economic inequality, a concern especially relevant in India.
Addressing inequality involves confronting the inherent tradeoff between economic efficiency and equality. I am against sacrificing economic efficiency for equality that comes with government and not private business ownership.
In India, I would rather have higher inequality with higher income levels for the poor than lower inequality but lower income levels for the poor.
However, within a capitalist system, I have no problem with the reduced economic efficiency that results from the government redistributing income through social welfare programs. Fortunately, India is doing very well on the welfare front.
Through part intent and part serendipity, the present government has, through what for me is among India’s most significant accomplishments since independence, established a wide, deep, and efficient social welfare system that uplifts and empowers the poor without them having to wait for the benefits of capitalism to manifest.
Are We There Yet?
Overall, reforms facilitating increased and efficient private enterprise have been slow but steady. More is needed to free up the high-opportunity cost capital from state-owned enterprises. The government can create much more value by deploying this capital in education, healthcare, and infrastructure.
As a child of India’s mishmash socialist era, I will take whatever progress there has been in furthering private ownership of business and industry. Bit by bit, this progress has put India on the right economic track.
Notes
That many Indians are wary of capitalism isn’t surprising, considering even in America, Bernie Sanders, during his presidential campaign, garnered considerable support, especially among millennials, by bashing big business and Wall Street and blaming corporate capitalism for America’s “problems.” It is a different matter that the millennials supporting Sanders very likely had no idea of how significantly Wall Street, the bedrock of American capitalism, has contributed to and continues to contribute to the average American’s economic well-being.
Ambani was underappreciated in socialist-minded India. That is not surprising, considering, Carnegie, Morgan, Rockefeller, Vanderbilt, and the like, were called robber barons in America. Fortunately, just like the robber barons did for America, Ambani also created lasting value for India.
The Indian political opposition frames privatization as selling the country and its crown jewels! That the charge restrains the government suggests it resonates with the public.
There are rich dividends in liberalizing the agriculture sector, wherein one-fifth of India’s economic output disproportionately engages half the population. As of now, this sector is a political hot potato.
Income inequality has different implications in the affluent United States and India. In the not-too-distant future, Americans will complain that the rich spend weekends on space stations and have next-generation mansions on the moon, while most Americans have never visited space.
2 Comments
Rightly pointed out
Thanks, Ujjal