India’s Big Government Read online

  India’s Big Government

  The Intrusive State and How It’s Hurting Us

  — Vivek Kaul

  Equitymaster Agora Research Private Limited

  Published by Equitymaster Agora Research Private Limited.

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  India’s Big Government: The Intrusive State and How It’s Hurting Us

  Copyright@2016, by Equitymaster Agora Research Private Limited

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  Cover Design and Cartoons: Manjul

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  Visit us at: www.equitymaster.com

  Dedicated to my Grandparents

  Rupa and Soom Nath Kaul

  Prabha and Triloki Nath Raina

  CONTENTS

  Foreword

  Introduction

  1. Those were the Days, My Friend!

  2. We have Spread Them too Wide and too Thin

  3. Perfect is the Enemy of Good

  4. Jobs, Jobs, Jobs!

  5. Why Engineers and MBAs Want to Become Peons and Sweepers

  6. From Son of India to Make in India

  7. India’s Hotel California Problem

  8. A Four-Letter Word Called Land

  9. Black Money—We Won’t Get It Back

  10. The Fiscal Deficit Fudge

  11. It’s Not the Interest Rate, Stupid!

  12. The Biggest Government

  13. The Right to Work?

  14. Conclusion: Of Gray Rhinos, and Not Black Swans

  Acknowledgements

  Endnotes

  FOREWORD

  I keep Vivek Kaul’s trilogy on ‘Easy Money’ on my desk. It’s all there: the fullest, most complete account of the rise of modern finance that I have seen anywhere.

  Of course, money is inseparable – at least in the modern world – from government. The state creates and controls the money system, and uses it for its own purposes. So, it was perfectly foreseeable that Vivek’s bold exploration of the financial world would lead him to the shores of politics. And it is not at all surprising that he should find there the same sort of illusions, larcenies and vainglorious ambitions that he discovered in the world of money.

  Similarly, he goes about his surveying with an open mind and great energy. And similarly, he leaves the reader with a fuller, richer understanding of his subject. He tells us about government-made condoms, job programmes that kill employment and educational projects that reduce learning.

  I can add nothing to it, especially since it concerns the Indian government, about which I know little. But while I can go no deeper, I can broaden the perspective.

  ‘Government’ needs to be understood in broader terms. It is not a fixed, well-defined thing, but a dangerous and volatile fluid that leaks into the economy and society and can poison them. First, the vapours make people giddy when thinking about the possibilities. With the government and its money behind them, they think they can do almost anything. Then, they go a little mad, undertaking projects that ought to be left alone and mismanaging those that should do well. And finally, they end up with a godawful mess and a terrible headache.

  And it doesn’t seem to matter what you call your government, or how many people you have involved in it.

  If you lived in a small island community that functioned as a genuine democracy – where everyone voted on practically everything – it might be an illustration of Hillary Clinton’s famous humbug, that the “government is all of us”.

  Normally, the number of people who actually govern is small. It is never “all of us”. If it were, it would lose its meaning, since the ‘governed’ and the ‘governors’ would be the same people; the governors would be governing only themselves.

  Instead, some people run ‘the government’. The rest are ‘governed’ by them. But, on our little enchanted island, since everyone participates in governing, you’d say that 100% of the population was governing. Thus, the yoke might be remarkably light; when people govern themselves, they tend to go easy. It would probably be essentially a consensual society in which people get along by going along, talking through differences and agreeing on compromises. The size of the governing class, therefore, may have little to do with the amount of governing going on.

  The standard deceit of Leftist revolutionaries is inclusivity. They say they aim to make the governing class larger, with a government which is under the control of ‘the people’, or at least the ‘proletariat’, not the few, powerful, rich insiders. Even the founders of the American republic promised a government “of, by and for the people”.

  Then, they discover that you can’t make an omelette without breaking some eggs. And when the eggs resist, you need to use more and more force to force your model society on the community. You start cracking the skulls of your opponents, and soon, idealism turns rapidly into totalitarianism.

  Heavy, totalitarian control can be achieved with a small, visible government. Imagine another little island, across the straits. It might be like an efficiently run prison. There may be only one prison guard for every hundred people on the island. He might be assisted by other prisoners, who did his bidding, hoping to get an extra crust of bread in return. The ‘government’, you might say, is only 1% of the people. It is small. Its rules may be very few.

  And yet, the guard would be backed by a whole brigade of enforcers – the police, the army, armed householders and the security industry – with the prisoners’ moves carefully regulated and tightly constrained. From these examples, we conclude that neither the form nor the size of government is directly or easily connected to the real amount or nature of governing. A dictator could be a hands-off, laissez faire, live-and-letlive kind of guy. A democratically elected assembly could attempt to govern every aspect of our lives.

  For these reasons, I propose to widen the description of government beyond the number of people employed in the public sector or the ostensible type of decision-making process. Instead, we should look at the extent to which the society and its economy are in thrall to politics as a truer measure of ‘government’.

  There are only two ways to get what you want in a community. Give and take; or just take. You either work, add value, negotiate and trade; or you pull out a pistol.

  It’s either markets; or it’s politics. People are all, to some degree or other, as capable of ‘politics’ as they are capable of murder. Some are prone to it. And sometimes, a whole society gets taken over by it.

  Government is the only institution that can pull out a pistol and get away with it. It asserts a mo
nopoly on the use of force within its territory; anyone using force – or fraud – without its authorisation is an outlaw. Politics determines by whom, and how, that monopoly on force is used. The more politics in a society, the more wealth changes hands without the give and take that characterises a market system.

  This helps to explain how governments that have been – on paper – relatively stable as a percentage of GDP or population have come to do so much governing. In short, in India, as elsewhere, the governors team up with local insiders and crony industries to extend the reach of politics.

  Today, if you run a business in the medical field – insurance, ambulances, hospitals, drugs, private practice, medical devices and tests – you are in a partnership, of sorts, with the feds. They can tell you what you can do and what you can’t. They approve your drugs. In many cases, they determine how much you can charge. They can put you out of business or make you rich.

  The whole industry has been politicised. If you want to enter the field, the first thing you should probably do is hire a lawyer and a lobbyist, not a doctor.

  When a business falls under the spell of politics, the interests of the customer or those of the owner are no longer paramount. Instead, satisfying the customer gives way to lobbying, bullying, pressuring, menacing, back-stabbing and seducing. The business turns inwards, with its primary mission to reward the insiders. But politics in business is self-limiting. In a free market, anything that takes your eyes off from providing better products and better services puts you at a disadvantage to your competitors. But when the feds control the economy, politics runs wild.

  Politics mean taking rather than making. As taking increases, making decreases. And as growth stalls, the relative pay-off from politics increases. We don’t know which is the chicken and which is the egg. Does growth slow first, leaving politics – taking – the best way to get ahead? Or does politics slow growth? We don’t know. Maybe both.

  In the case of medical care, for example, the share of US GDP that went into the medical industry increased from less than 7% in 1970 to over 17% today. How did that happen? Politics. Since 1970, the number of doctors has barely doubled in the US. But the number of ‘administrative employees’ in the medical sector has gone up 3,000%.

  The same is true in education. Teachers provide real value-for-money. Administrators play politics. Since 1970, in America, the number of teachers has risen by about 60%. The number of non-teaching administrators has gone up more than twice as much.

  You can see the same trend in the military. This is interesting, because the military is a ‘political’ industry, in the sense that it is expected to use force. And yet, even the military can be diverted from its real mission… by politics.

  An ideal fighting force is ‘lean and mean’. Fighting men need to be young and vigorous. So, as they aged, the Pentagon used to say it was ‘up or out’. Old soldiers were dead wood… unless they were destined for the top. And dead wood at the top was fatal. The old-timers slowed up decision-making. They got in the way. They always seemed to want to fight the last war.

  There was one officer for every 10 enlisted men when the US won WWII. Now, there are twice as many officers… and four times as many generals. We haven’t won a war since.

  David Stockman saw it coming 30 years ago. As President Ronald Reagan’s budget director, he saw how politics overwhelmed efforts to control federal spending. “The Triumph of Politics” he called it in his 1986 memoir.

  Now, politics has triumphed almost everywhere.

  Baltimore, Maryland Bill Bonner

  Wednesday, October 26, 2016

  INTRODUCTION

  There is nothing as practical as a good theory.

  – KURT LEWIN1

  This book was never meant to be written. In early 2016, I had committed to writing a book on real estate in India. While the idea had sounded very exciting, I somehow couldn’t get myself to start writing the book.

  I soon realised that there was nothing new I could write about Indian real estate over and above what I had already written in my regular columns. I had exhausted all angles in the more than fifty columns I must have written on Indian real estate over the last few years.

  Furthermore, there is very little data available on Indian real estate. And whatever little data is available comes from real estate consultants, who essentially make their money from real estate companies. Given this, they have a tendency to keep saying ‘All is Well’ even when it’s not. And I didn’t want to write a book without access to proper and sufficient data.

  Hence, I had more or less given up on the idea of writing the real estate book. One day, as I was daydreaming after a late afternoon lunch (of rajma-chawal, I think), the idea for the book you are holding in your hands came into my head.

  Think of the headline first, an ex-editor of mine used to say. So, this book came into my head with the title and around five of the fourteen chapters it has. The first thing I did was to search for a notepad and frantically take down notes, so as to ensure that I didn’t miss out on anything that my mind was throwing up at that point of time.

  A few days later, I discussed the idea with a friend, whose first question was: “What is this Big Government that you want to talk about?” It was the most basic question that anyone could have asked if I had discussed the idea with him or her. Nevertheless, as silly as it may sound, I hadn’t really sat down and thought about it.

  And it wasn’t laziness or anything, but basically the way I write books. I think there are two ways of writing a book (a non-fiction one). One is to be an expert on the topic that you are writing on (i.e., to have a PhD in it) and then to sit down and write about it. The problem with many such books is that they are written for a very limited audience. It’s like economists writing for other economists in a code language.

  The other way is to have a reasonably good hold over the subject that you are writing on and then to dig deeper. That, I guess, is the journalistic approach to writing; but, on the whole, this makes books more readable. Of course, the thing here is that you figure out things as you go along. You first make yourself understand what something is all about and then you get around to writing about it. Given this, in this kind of writing, no assumptions are made. One tries and writes in the way one has made oneself understand things. Hence, these books can at times be lacking in depth, but they are usually pretty readable.

  So, getting back to ‘Big Government’ and my friend. I had thought that I would get around to thinking about defining Big Government as I went along. And that’s precisely what I did after the question from my friend gave me a wake-up call.

  So, what exactly is Big Government? There is this very interesting American case (Jacobellis versus Ohio) where Justice Potter Stewart of the United States Supreme Court tried to describe his threshold test for obscenity. As he said on that occasion: “I shall not today attempt further to define the kinds of material I understand to be embraced within that shorthand description [hard-core pornography], and perhaps I could never succeed in intelligibly doing so. But I know it when I see it [emphasis added], and the motion picture involved in this case is not that.”2 Stewart was essentially judging whether a film titled Les Amants (The Lovers) was obscene or not. He said that the film wasn’t pornography because he would know it when he saw it.

  Big Government is a tad like that. While it is difficult to come up with a precise definition for it, one can immediately recognise it when one comes across it.

  In fact, the friend who asked me to define Big Government further asked, during the course of our discussion, ‘Is it the government employing too many people?’ While this fits into the vague definition of Big Government as being something which one is able to immediately recognise when one comes across it, this isn’t really true.

  The Indian government is not a very large employer, neither at the central level nor at the level of the state governments. Though this might sound rather surprising, the data bears it out. As the Seventh Pay Commission Re
port points out: “Available literature indicates that the size of the non-postal civilian workforce for the US Federal Government in the year 2012 was 21.3 lakh. This includes civilians working in US defence establishments. The corresponding [number of] persons in position in India for the Central Government in 2014 was 17.96 lakh. The total number of federal/ Central Government personnel per lakh of population in India and the US works out to 139 and 668, respectively.” This is discussed in detail in Chapter 1.

  So what is Big Government then? It is essentially the government trying to do many things. More precisely, it is the government trying to do things that it shouldn’t and in the process ignoring the things that it should be doing. As TN Ninan writes in The Turn of the Tortoise—The

  Challenge and Promise of India’s Future:3

  There is too little of government attention paid to core areas like law and order, education and health—too few judges, too few teachers who teach, too few hospital beds; also too few trade negotiators and too few policemen, especially those with proper training. It should be obvious that there are many things that the state does inadequately or badly, and many tasks that the state has needlessly taken on itself.

  Take the case of the government running Air India, which over the years continues to lose money. Between 2010-2011 and 2015-2016, the airline has lost close to Rs. 35,000 crore, and yet it continues to be run, bankrolled by the government. The losses are not surprising, given that the airline business is a very competitive business and the government clearly doesn’t have the wherewithal to run it.

  Of course, the government doesn’t have an endless supply of money. No government does. And the money that goes towards ensuring that Air India keeps running is taken away from other things, like education, healthcare and agriculture.