Raghuram Rajan on Strengthening Free Enterprise in India

Dr. Raghuram G Rajan, Governor, Reserve Bank of India was the keynote speaker at 13th Nani A. Palkhivala Memorial Lecture, Mumbai on February 4, 2016.

The topic he chose to speak on was Strengthening Free Enterprise in India; apt and in sync with the Government’s efforts to promote entrepreneurship through various incentives and Make In India.

Addressing the audience which was a mix of various demographies, he explained the idea of free enterprise in a lucid way, using simple words instead of jargon to ensure each attendee including college students get the context.

We have our weaknesses and our excesses, but our democracy is self-correcting, and even while some institutions weaken, others come to the fore. India’s is a dynamic society, ever changing, ever rejuvenating. Indeed, the possibilities for free enterprise in India today are probably better than ever before in its history.

Conditions which impact free enterprise have historically thought to be two:

  1. Level playing field with easy entry and exit, and
  2. Protection of property rights.

Dr. Rajan also stressed on two additional points he thought are important for free enterprise to be politically viable.

  1. Broadening access to capabilities, and
  2. A basic safety net.

The following are some excerpts –

1. Level playing field with easy entry and exit

  • Competition leads to efficient outcomes when anyone can enter, set up a firm, and compete. The best entity wins leading to economy wide efficiency
  • Free enterprise and competition combats prejudice and social biases – It’s better that money talks rather than religion as money doesn’t have any odour. Money plays the role of an equalizer – it provides an ability to create choice; one can choose various products, services and vendors irrespective of their background based on their ability and willingness to spend money. eg. Dalit entrepreneurs
  • Government and regulators are needed to set the rules of the game and enforce behavior. Government shouldn’t be biased towards any organisation, or the principle of setting rules in the first place will be lost and will lead to crony capitalism – rich getting richer and poor getting poorer
  • Extent of regulations – To the extent it doesn’t kill small companies. Eg. Italy had a lot of small firms but wasn’t growing as compared to UK. The reason was Italy had too many regulations to be adhered to right from the start whereas UK had regulations as per the size of the organisation, giving small firms time to grow and then be regulated by more rules.
    True job creators in an economy are small firms which grow big, not small firms who stay the same place – hence its important there be minimum regulations at entry level
  • History of India – We have advanced from various issues over the years to empower free enterprise
    • Licence-Permit Raj: Remedy: Liberalization of the 1990s
    • Resources Raj: Privileged access to mines, spectrum, etc. Remedy: Auctions and transparency
    • Inspector Raj: Remedy: Start up India, reducing red tape, entry barriers – Continuing clean-up of laws gives hope, especially as states compete for simplifying regulations
      Idea of free enterprise isn’t a dog eat dog world but right level of regulations
  • Main issues faced by new firms
    • Infrastructure & Logistics – Government needs to invest in power, roads, ports, airports, internet marketplaces to facilitate small firms; eg – large firms can self-generate power for their factories, but small firms can’t
    • Land – Competition between states to get more business and create employment is changing things. Chief Ministers are granting land for factories to entrepreneurs in consultation with farmers of the locality
    • Finance – Large banks do not fund small, new and untried entrepreneurs. That’s where changing technology and small banks and other institutions come into picture. Government planning to create a unique identity for firms too – this will link the credit default history of firms to their promoters, ensuring defaulters never get loan again
  • Uneven playing field when it comes to resolution of distress –
    • There should be an easy exit – so that the living dead firms are allowed to die and the allocated resources can be put to better use
    • Distress rules become very harsh on small entrepreneurs – often leaving them bankrupt
    • Distress rules not competent for large firms as court focuses on revival rather than resolution, promoters find a way out – banks end up taking a hit in their books
    • Anticipating possibility of loan default, banks already account for that in their interest rates, leading to high interest rates on loans – killing businesses; thus wilful defaulters have made borrowing all the more expensive for honest entrepreneurs
    • Operational and speedy bankruptcy code will level the playing field – ensuring separate firms get separate treatment based on their size
  • Emergence of Cartels and Monopoly – A huge threat to free enterprise – This is being well addressed by the Competition Commission of India
  • Reason for these political changes – To create employment which can be created only be small firms which start growing

2. Protection of Property Rights

  • Private property protection needed to incentivize activity
  • Moderate and predictable taxes and estate duties – Government has delivered.
    • Administrative steps to rein in unnecessary tax demands
    • Automation of significant parts of the tax process
  • Retrospective taxation: Clear government statement. However, base erosion and profit shifting – worldwide issue that large corporations need to answer – equal requirement of transparency on corporate side: Need for global agreements

3. Broadening Access to Capabilities

  • Aam aadmi attaches no value to free enterprise if he cannot participate
  • Increasingly, enterprises of the future require employees to have decent education and health
  • Malnutrition curses an individual for life, as does poor early education
  • Effective delivery of social programs so that everyone has the ability to compete is absolutely necessary – Capitalism doesn’t start at age zero, it starts at 21 when you know and are able

4. A Basic Safety Net

  • Need a basic safety net, not focused on firms but on individuals – unemployment insurance, basic healthcare, pensions
  • Should not be prohibitively costly for government
    • Cost entitlements and incorporate into budget liability projections
    • Charge reasonable premiums for insurance
  • Safety net can also encourage people to take risks they would shy away from otherwise

Conclusion

  • The Government is working in the right direction to achieve the above objectives
  • India has come a long way in encouraging free enterprise
  • From tiny shops to large internet start-ups, the spirit of entrepreneurship is alive
  • Doing business is becoming reputable, as is getting rich through entrepreneurship
  • But a lot more work is needed to improve the environment so that everyone has a chance. Rather than looking for special dispensations, business has to push for improving the business environment for everyone. Glad business associations are increasingly doing this
  • As Palkhivala said, India always seems to find the way, perhaps not quickly and not linearly, but in due course

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Image Source – Here

This blog post is inspired by the blogging marathon hosted on IndiBlogger for the launch of the #Fantastico Zica from Tata Motors. You can apply for a test drive of the hatchback Zica today.

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