In Part 1 of my letter, I analyzed four of your recent decisions to illustrate the sizeable expansion in the power of government under your administration.
In Part 2, I outlined the primary reason for your recent policy failures: focusing entirely on the immediate visual effects of a policy but ignoring the unseen secondary costs. For example, when we account for unseen costs, we find that every time the government hires people, it actually hurts overall employment. For every one job the government creates three jobs are lost in the private sector.
In this and the next Part, I identify the real cause of most of India’s problems and suggest policies to transform India.
Focusing on the cause and not the effect
A common mistake made by policy analysts is to confuse cause and effect. Indian policy makers have consistently failed to identify and target the underlying cause of most problems choosing instead to focus on the indications. This is akin to taking medicine for a fever without addressing its root cause. Whether it be poverty, corruption, ease of doing business, or Swachh Bharat, the focus is always on band-aiding the problem without zooming in on the underlying cause.
This approach will never solve India’s problems. Corruption, poverty, poor infrastructure, cronyism, over-regulation, fraud, waste, abuse, illiteracy, poor sanitation are all indications of a deeper underlying cause. A big wasteful bureaucratic government and excessive reliance on the state is the principal cause for many of India’s major problems.
Take, for example, corruption. Big government and corruption go hand in hand–they feed off each other. Several studies have shown a direct causality between big government and corruption. The only way to successfully reduce corruption is to limit the power and reach of the government.
Take excessive regulations. The cause is a big bureaucratic government. It is a historical fact that “the more rules and regulations there are the more thieves and robbers there will be.” There is a direct link between big government, excessive regulations, and corruption.
Take poverty. The cause again is a big government which sucks up massive amounts of resources for its maintenance. The government does not create any wealth–it merely transfers wealth from one group to another. The government’s only solution to reducing poverty is redistribution–robbing Peter and give to Paul. But the evidence from economic history is unequivocal–poverty can only be permanently reduced by creating wealth. And it is the private sector that creates wealth and a big overburdening government only impedes this process through excessive regulations.
Take fraud and abuse. The cause again is big government. Almost all scams originate in the government–either directly or indirectly through cronies. And we witness daily stories of abuse of power by politicians, whether it be the VIP culture, assaulting air hostesses, or toll booth attendants, or instigating religious lynchings.
There isn’t a shadow of a doubt that the underlying cause for most of the significant problems in India is the size and reach of the government.
And by government, I don’t mean a particular government, but the institution of government.
So Mr. Modi, if you want to transform India you should focus on reconstructing the institution you head –the government. I would urge you to stop wasting your boundless energy on gimmicks like demonetization and concentrate instead on addressing the cause of most problems–the size and reach of the government.
(1) Big government, small citizen
Most would agree that the average Indian citizen lacks discipline. Indians generally have scant regard for the rights of others–whether it be driving on the road, or standing in a queue, or littering on the streets, there is a strong tendency to disregard the rights of others.
Why is that so?
Because there is a direct relationship between the way a person views himself and others and the size and power of the state. The bigger the government – the smaller the citizen.
This connection may not sound logical at first but picture two households: Household A in which overbearing parents dictate decisions, there are hundreds of useless rules, and the children have little input into what they eat, drink, read or say. Household B is a more open and the children are independent and free to make their own decisions as long as they respect the basic rules of the household and the rights of others. They are free to make choices but they alone are responsible and accountable for their actions.
Studies in child psychology show that children in Household B are more likely to grow into caring, and socially responsible adults. There is an adage that “ nothing grows under the shadow of a tree.” That applies as much to citizens under a big government as it does to grass under a big tree.
The bigger the state, the smaller the citizen. As the government gets bigger everything about the people becomes smaller: Liberty gets smaller, individuality gets smaller, goodness gets smaller, human character gets smaller, sense of responsibility gets smaller, empathy and respect for the rights others get smaller. Since the government is expected to take care of things it makes people less caring. Why do reasonably educated people show no compunction about throwing litter on the streets? Their attitude is why care– the government is there to take care of the problem.
Big government is the major cause for the indiscipline that throttles social and economic life in India. Thomas Jefferson, the principal author of the Declaration of Independence and the third President of the United States was so prescient when he claimed 250 years ago, ” That government is best which governs the least because its people discipline themselves.”
It is very hard for people who have grown up in a system in which the government plays such a predominant role to imagine life without it. Which is why it is very difficult to convince people in India that the underlying cause of most of their problems is a big government. This is the perpetual trap that sociologist Max Weber referred to in his doctrine of the “ Iron Cage”. He argued that one’s life and thinking is shaped so strongly by the structure one lives in that it is impossible to imagine an alternative way of life. So those born in the cage live out of its dictates and in so doing reproduce the cage in perpetuity.
Mr. Modi, if you want to change the way people think, unlock the iron cage of big government, and allow the citizens to get big, to think big, to understand and respect the concept of rights and the rule of law, and in so doing they will make their character bigger. As a result, you will see a marked improvement in discipline, integrity, work ethic, corruption, efficiency, productivity, respect for the rights of others, etc. India’s dismal ranking on most social and economic indicators is evidence that stares us right in the face. And the cause is apparent: Big government.
If you want the citizens to behave more responsibly, give them more responsibility. Switzerland, one of the best countries to live in, is a good exampe of this. The country derives many of its laws from referendums in which the responsibility for major policy decisions lies with the citizens. It is no small wonder then that Swiss citizens are among the most disciplined and responsible in the world. Never in a hundred years would a wacky scheme like demonetization–a decision made by a few and coercively thrust upon millions–have ever seen the light of day in Switzerland.
The secret to America’s great success in the 20th century was largely a function of the freedom its citizens enjoyed as a result of a small, less intrusive state. The cage of small government that the founding fathers of that country created has so shaped the way the average American thinks that even today they are among the most caring people in the world. A small government that leaves its people to follow their own paths teaches them to take care of themselves and in so doing care for others. That’s why Americans give more charity than the Europeans, the Chinese, or the Indians. That’s also why Americans volunteer more than the Europeans, the Chinese, or the Indians.
(2) Size of government
To get a better perspective on the bigness of India’s government let’s examine its size. The central government currently has 51 Ministries and over 75 Ministers including Ministers of State. No other country has more than 24 ministries. China, with a population larger than that of India, has only 20 ministries. India has almost four times as many ministries as countries like USA, France, Germany, Sweden, etc. Even African countries like Nigeria and Ghana, known for their big bloated governments, have half as many Ministries as India. ( (https://contractwithindia.com/the-size-of-government-in-india/)
The Central government currently employs about 3.8 million people in these 51 ministries. (This does not include the 1.3 million people employed by the Railways and the 18 million working in state governments –each of whom also has on average about 45 ministries). The total cost to the taxpayers to run these ministries is around Rs. 280,000 crores or about 14% of the total annual expenditure of the government. In comparison, the total amount of money budgeted by the government for education and skill development is a meager Rs. 36,000 crores.
The government is not an employment agency. In fact, government employment actually hurts overall employment. When unseen costs are factored in, for every one job created in the government three jobs are lost in the private sector.
Mr. Modi, the first real transformational change you must initiate is to reduce the number of people working in the government by 50 percent.
And there is no better place to start than by cutting down the number of Ministries to a maximum of 20 and making that a mandatory limit for future governments. Ministries are largely a fiefdom for politicians, bureaucrats and unproductive employees whose raison d’être is to add more rules and regulations to throttle business.
It is time India started getting its priorities straight. The country needs more educated and skilled people to meet the demands of the modern workforce and fewer ministers and bureaucrats.
India’s bureaucracy is a huge drag on innovation and modernization and I welcome your government’s attempt to open up high-level policy positions to talent from the private sector. There is nothing better than a little healthy competition to shake the bureaucracy out of its lethargy. You can augment this with performance and productivity-based incentives at all levels.
(3) Regulatory Reform
The clearest illustration of the reach and power of big government in India is the cumbersome regulatory environment and the burden it imposes on social and economic activity. There is a joke that when an Indian bureaucrat is asked “ why do we need this regulation,” he always replies “ because we don’t have one.” The notion that the absence of regulation may be the natural and more desirable setting is anathema to these people.
Mr. Modi, your government must escape the mindset of trying to control the behavior of a few by imposing meaningless regulations on everyone else. Regulations are administratively expensive to enforce and are a source of restriction for the many people who don’t violate them.
Regulations hamper income generation, kill innovation and entrepreneurship and favor already-established businesses who know how to work the system. We can see this at play in India where a majority of new wealth is still generated by old business families. In contrast, in countries like the US, the majority of new wealth is being created by young, dynamic innovators with new ideas. India too has a young, educated and vibrant entrepreneurial workforce that is waiting for the government to get out the way so they can unleash fresh and creative ideas to generate wealth.
We have all witnessed the power of economic freedom at work. The wealth creation unleashed by the liberalization of 1991 lifted more than 300 million people out of poverty. No government scheme or regulation could have ever achieved that level of success.
In a free market economy with voluntary exchange, the primary role of the government is to make the rules in a manner that does not advantage one group over another. The government can and must ensure equality of opportunity–it cannot and should not guarantee equality of outcome. All regulations, therefore, must focus on meeting the twin objectives of protecting citizens against fraud and ensuring equality of rights and opportunity. All regulations that do not meet these twin criteria must be eliminated. The goal should be to reduce regulations by 50 percent by next year and by 90 percent by the year 2020.
If this is done simultaneously with reducing the number of Ministries and the number of government employees it will be a very positive transformational change for the country.
( 4 ) Government Divestment from Public Sector Undertakings
Corruption in India has grown almost simultaneously with the expansion of government into the economy. In 1951 India had only 5 public sector enterprises..today it operates and controls almost 230 companies. The government is involved in virtually every industry–banking, airlines, drugs, fertilizers, chemicals, steel, oil and gas, telecommunications, defense, and even in making bicycles, scooters, and yes condoms and photo film.
In 2016, the total losses of Public Sector Enterprises were almost Rs.30,000 crores including losses at giant behemoths like BSNL, Air India, MTNL. The government still operates the Hindustan Photo Films & Manufacturing Co. which lost almost Rs. 2100 crores (in 2012), and yet even a year after it stopped making photo film it had 700 employees and inventory and distribution departments.
When the government is bankrolling business, there is no need to be productive or efficient or to sell anything at a price higher than the cost of producing it. The vast majority of employees who work in public sector business are at best marginal. Had they been high-level performers they would have preferred working in the private sector where their compensation would be linked to productivity and not to a uniform pay scale.
This problem of unproductive and inefficient employees pervades every public sector company. The government owned steel producer, the Steel Authority of India Ltd. (SAIL) employs 82,000 people to produce 13.7 million tonnes of steel. In comparison, 60,000 employees at Nippon Steel of Japan produce 26.5 million tonnes– roughly twice the production as SAIL with 25% fewer employees.
What business does the government have running companies that are inefficient and lose thousands of crores of taxpayer money every year? It has much to do with the 51 Ministries and the 75 Ministers in the Central government. Every minister needs a few companies under his control to project power and to generate ‘party’ funds. Indira Gandhi nationalized banks in 1969 primarily to allow her party and cronies to have access to funds whenever required. Despite accumulated losses of over Rs. 50,000 crores, the government continues to run Air India so that Ministers, their families, and government employees can travel the world for free ( As of this writing the government has indicated a desire to sell Air India, a welcome move).
Mr. Modi, during your 2014 visit to the USA you very eloquently stated that –Government has no business being in business. Don’t you think it is time to stop the rhetoric and get the government out of the business of running companies? Free, unencumbered markets are the engine of economic growth and wealth creation. The government’s appropriate role in commerce and business activity is not that of an active player, but of an umpire that ensures compliance with the rules of fair competition, and contractual obligations.
You should immediately appoint a team of reputed investment banking firms to liquidate the government’s position in all public sector companies. Done methodically, this should generate almost Rs. 15 lakh crores.
This money belongs to the people, so the entire amount should be sequestered in a Bharat Sovereign Fund which would co-invest with private companies in PPP projects related to infrastructure, education, skill development, and health. This fund will provide much-needed financing for infrastructure projects and kick-start hundreds of projects currently lying dormant. A team of investment professionals from the private sector should be picked to manage this fund–no bureaucrat should be allowed anywhere near this fund.
Continued in Part 4