Make India first to “Make in India”

Let me tell you a story. It is about a friend who is building a school in India. Motivated by idealism to do something for India, some years ago he decided that he would build an excellent K-12 school. An expatriate for a few years in a developed nation, he thought it was time for him to “give back” something to his native land. Knowing of my interest in education, he asked me to advise him and I did as a friend without any pecuniary interest in the venture. I kept in touch. Just the other day he called me from India to tell me how things were going. Here’s what I heard. It is both instructive and depressing.

For around five years, Krishna (not his real name) has been busy building his school on the outskirts of a major Indian city. His aim was to educate students who would be able to meet the challenges of the modern world. Which is to say that he wanted the children to become capable of living and working in a rapidly changing world, a task that is not addressed by the overwhelming majority of Indian schools which operate on assumptions that have long become irrelevant. Putting his own savings in it and having persuaded his extended family members to invest in his venture, he got started on the arduous task of building a K-12 school from scratch.

It isn’t easy to convey the hard work that Krishna put into building the school. Land acquisition itself, to put it mildly, is a task that only the truly deluded or the supremely politically well-connected would undertake. But he did it by hook or by crook. Crook is the right word: the crooked deals involved in the otherwise simple matter of buying land is hard to comprehend for anyone who has not tried doing so in India. You’d imagine that it would be an uncomplicated transaction between a seller and a buyer. Not so. It involves the government, even though the government is neither the owner of the land nor the buyer. And that is the key to the rest of the story that I am about to tell: the government as a party to any deal in India.

There are literally hundreds of pages of rules and regulations. But it isn’t just rules that you understand and abide by. There are permissions to be obtained. There is a distinction between rules and permissions. India is a permissions based government. If it were merely rules, you would just consult the rules and do accordingly. But it is a matter of permissions. You have to obtain permission before you do something. And that is where bureaucratic discretion enters the picture. You have to obtain permissions from various institutions of the government — all of which involve some kind of side payment or the other.

Now the fact is that “the government” is an abstraction. In reality, there is no such thing. What is called the government is in practice a collection of individuals. People constitute the government. They are in charge of granting permissions. These are the people who hand out permissions without which you cannot move a muscle in India. For these individuals control (that’s the control of the “permit-quota-control” raj of India) is the operative word. They are in control and they permit you to do things at their pleasure. And their pleasure always involves a payoff.

Anything you do in India, or attempt to do, involves permissions from various governmental entities. And each permission involves some government official, an individual who has the power to deny you that permission that is required by law. They grant permissions based on how much you are willing to pay, and that depends on how desperate you are to get that permission. The larger the project, the bigger the payoff.

One morning a government bureaucrat shows up at the school. They are minor potentates in the Indian civil services. That structure was put in place by the British. During the British Raj, it was called the “Indian Civil Services”. When the British left India (note, the British left; they were not driven out), the new rulers — the brown skinned new rulers — changed the name to “Indian Administrative Services”, or IAS, but the function remained exactly as under the British Raj. It was British Raj 2.0. The natives were still serfs but it was subjugation by brown-skinned people. Anyway, let’s get on with our story.

Krishna had obtained many permissions, of course with suitable off the record payments to various government officials. Work on the school was progressing albeit slowly. But there always is something or the other that a government official could point to from among the hundreds of pages of rules and regulations. The bureaucrat demanded a pay-off or else he would shut down the work.

Krishna was at his wit’s end. He called up an influential politician one of the kids in Krishna’s school was related to. The politician ordered the bureaucrat to back off. In the permit-control-quota raj of India, what matters is who you know and you have to fight fire with fire — even if that fire could eventually burn you. You get protection from a mafia boss by appealing to an even bigger mafia boss.

We need not go into the details of the various problems that Krishna is facing in just running a school. Suffice it to say that there are easier way to make oneself miserable than fighting almost impossible odds. The government places hurdles to getting things done.

I wrote “the government places hurdles.” Let me unpack that. As I said before, “the government” is an abstraction which in reality is composed of people — ordinary people just like you and me. And just like you and me, these people are neither sociopaths nor psychopaths who disregard others’ rights or are devoid of a sense of what’s right or wrong, or of basic morality and decency. They don’t wake up in the morning with an evil glint in their eyes, intent on making others’ lives as miserable as they can.

What they are motivated by is plain old-fashioned self-interest. They want to get as much as they possibly can using the system that they are part of. The harm they cause is rarely intentional. The devastation and the destruction they cause is not their primary motive. They don’t intend the misery they cause. It is a by-product, a side-effect. I am certain that they would rather have others not suffer as a consequence of their actions. But their self-interest over-rides.

When I see the venal politicians make policies that enrich them and impoverish the country, I have to remind myself that they are not actually in the business of starving the poor. What they are mainly interested in is their own wealth, and the poverty they necessarily cause is not what they intend. They would rather that the poor didn’t have to suffer but since their gain is at the expense of the poor, the politicians are powerless to alter the outcome of the zero-sum (or even negative-sum) game.

As I mentioned before, I am convinced that most of the politicians are not sociopaths. They are rationally self-interested, just like you and I. What distinguishes them from us is that they have the kind of control that allows them to enrich themselves so immensely that they are unable to resist the temptation. Truth be told, if I did lust after billions of dollars (I don’t) and I had the opportunity to steal it from others (I don’t), I am not sure that I would not do the same thing. I cannot make a virtue of not doing something that I am neither inclined to do nor I have the opportunity to do.

I don’t know how the story of Krishna’s school will end. Perhaps he will be able to run the school, or perhaps he will acknowledge defeat and give up eventually. If he does give up, it would be a whole lot of wasted years and a cautionary tale for others. People are rational and can read the writing on the wall: that it is a fool’s errand to try to run schools in India.

The statistics about the Indian education system makes for really depressing reading. Most of the government run primary schools don’t provide education. Whatever is spent on them goes to waste. The majority of the students drop out before reaching high school and only a small minority graduate high school. Of these, a minority go on to college education. Then of the college graduates, only one out of four is employable.

The rich work around the scarcity of good colleges in India by sending their kids to study aboard. Time was when kids would go abroad mostly for post-graduate college education but now that is changing: the level at which kids are being sent abroad by the rich is gradually coming down. A few decades ago, I came to the US to get a PhD. I’d never heard of anyone going to the US for undergraduate studies. Then around the mid-90s, people started sending their kids to the US for undergraduate studies. And now they are sending kids abroad for high school.

Indians are not congenitally stupid. They are quite capable of getting things done. Creating schools and colleges is well within the capacity of Indians. The fact that the Indian education system is so worthless cannot be explained by the incompetence of people; it can only be explained by the fact that the government has a stranglehold on the system. Why would the government do that? Because of simple economics.

The economics of monopoly control explains the problem with India’s education system parsimoniously. If you want to make super-normal profits (what economists call “rents”), you cannot get it in a competitive market. You have to restrict entry of suppliers in the market and become the monopolistic supplier. Competition within the market always erodes rents. To capture the rents, the government can effectively shift competition within the market to competition for the market. Entry barriers is one way to effect this.

The government has entry barriers, major and minor. In essence, entry can be obtained by bribing the government. This reduces competition within the market and shifts the competition to “for the market.” One ex-chief minister of a major state of India is particularly infamous for controlling all entry into the education sector in the state and is reputed to have amassed a fortune valued at tens of billions of dollars. The high prices people have to pay to get a seat even in a worthless college in the state ends up in part in that man’s pocket. Rationally, therefore, some people make the decision to send their kids abroad if they can afford it.

Entry barriers guarantee low quality and high prices. Where there are no entry barriers, competition within the market guarantees a range of prices commensurate with quality and adequate supply. It also guarantees the absence of rents. These aspects of competitive markets make it particularly unattractive to the politicians. Rents are attractive to those who control. In this case, the politicians do the controlling and therefore collect the rents. That leads to high prices. Then there is the additional feature of a controlled market: low supply. When the supply is low, the politicians can ration out the limited supply to various favored groups in exchange for political support. This is where the caste- and religion-based quotas come into play. Naturally this is bad for the people as it fractures society along caste and religious lines. But it is good for the politicians.

The story is broadly simple. The constitution mandates the government involvement in the education sector. This is of course justified on the spurious grounds that education is a very critical sector and therefore the people cannot be trusted free-entry into providing that service. Government involvement in the sector politicizes education. The politicization of education corrupts the sector. In the end, the people suffer while the politicians enjoy the fruits of office.

The Modi government wants foreigners to invest and “Make in India.” Why would they want to make in India when people in India themselves are not allowed to make in India? I cannot fathom the logic of preventing Indians from doing things and then attempting to persuade outsiders to please do their business in India. It is time that the government removes all barriers to entry into the education sector. That will have the salutary effect of making education in India, lowering prices and raising quality. It will also save India a lot of foreign exchange that is lost to schools abroad. That will make India into a place where you won’t have to do a song and dance about “Make in India.”

Will it happen? I don’t think so. It is too lucrative a business for the government to give up.

15 thoughts on “Make India first to “Make in India”

  1. I liked this article very much and feel a little more educated about the “rent-controlling” role the government plays that adversely affects the quality of life of ordinary citizens.

    When a specific example-such as that of Krishna here-is provided, the concepts explained in the article feel more personal and real rather than abstract. This makes one pay closer attention!

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  2. One more thing Atanu. With recent breakthroughs in Deep Learning, the window of opportunity for labour intensive manufacturing seems to be closing very fast. So the earlier strategy followed by Japan, South Korea and China may not work for India in the future. So unless we invest in higher education and research, we may not be able to reap any benefits in the future. I was bullish about “Make in India” earlier, but not these days.

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    1. Thanks for that point, SudhirChukkapalli. I totally agree with you that labor intensive manufacturing is a game that is about to go the way of the dodo. As the labor content decreases, firms will not locate in countries that have low-cost labor (and therefore, low productivity labor). The shift will be towards those places where there is skilled labor available at low cost. India cannot compete in that world because what India lacks is skilled (and therefore high productivity) labor.

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  3. Hope Namo does something about it. I have another idea: What is the purpose of Government supported education certificates? Why not private education with their own certificates in school and college level (similar to ISB-Hyderabad) and bypass the government! I guess that day is not far off and when we reach tipping point, Govt would start recognising such initiatives.

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    1. Thanks for your comment, Sundara Rajan.

      The government has to get out of education completely. But it won’t because the people in government collect too much under the present system. That is of course because the constitution empowers the government (which is the same as saying that the constitution dis-empowers the citizens.) Colonial rule is not over.

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      1. Maybe each state could set up a SEZ focused on education? A bit like Panama’s Ciudad del Saber or Dubai’s International Academic City which started as a project called “Education Village”.

        Remember, corrupt politicians, mafia leaders and crooks don’t want their children to follow their career path. I imagine most of them dream that their offspring will go to study abroad and then become dentists, accountants and computer scientists.

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      2. Instead of convoluted schemes of SEZs, why not just liberate education from the clutches of the government? Radical idea, isn’t it?

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    2. I have a different viewpoint based on my experiences in US. I stay in school districts with 10 rated public schools and they are as good as any private schools in the area. I talk to my friends/relatives in UK/Canada/Australia and public schools (in good areas) are very good there also. So my question is why public education is bad in India?

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      1. Public education is bad in India because it is centrally controlled. Public schools in the US are decentralized. The school boards are local people, using local funding collected from local property taxes.

        All public school schemes are not the same. Comparing them without regard to their administrative and funding differences is problematic.

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  4. I do not remember the exact date but the first time I read about the difference between competition “for the market” as opposed to “within the market” it was a real eye opener. I thank you for that. I could not agree more in content and spirit with the title of the post. If the ecosystem is toxic no organism, native or imported, will want to or can thrive in it, let alone making a decent profit. Self-interest is indeed a formidable force. There is however a cynical but realistic logic to the Make in India initiative.

    Given the almost impossible task of expecting millions of politicians who are by now used to/demand such “rents” may be it would be better to bring in all “big ticket” investors under the umbrella of a new initiative and fast track approvals by placing efficient and honest bureaucrats in this project. Once the cogs start moving and gain inertia changes in laws for SMEs can be looked into. I guess what I am trying to say is the hole we find ourselves in, wholly and solely due to short-sighted and power-hungry socialist thugs, needs to be filled in before construction can begin.

    I dont think I am trying to rationalize the actions of the government for not taking bold and drastic measures but as another blogger put it we didnt vote in such numbers for a “goody-two-shoes” government, did we?

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    1. Thanks for your comment, VirtualPresence.

      As it happens, any successful economy is a connected network of self-directed people and firms who do what they have to do, mainly out of self-interest. It is certainly not a neat set of large “investors” working in splendid isolation, shielded from the rest of the economy. A modern economy is best characterized as an ecosystem of diverse people and firms. It is a web of interrelated and interdependent economic agents whose actions are coordinated spontaneously by the market without the intervention of any centralized planning authority.

      So you cannot have a set of rules that treat large firms differently from other economic actors. Why? Because every firm depends on the presence of other firms. If you don’t have small firms, you don’t have large firms. If there are missing markets, then all firms are affected. You cannot bring some firms under any umbrella without at the same time keeping out others from under that umbrella.

      A large firm like Google depends on firms of every size — large, medium, small — to provide it with goods and services that it should not bother producing in-house. It has to focus on its core competency. A Google can not arise and prosper in a place where it cannot rely on the presence of firms that have complementary competencies.

      Google did not arise from some government program that promoted the search engine industry or the advertising industry. It arose spontaneously because the economy provided all the innumerable inputs that are required for Google to do its job of combining them to produce its output. This is true of any large modern firm: it depends on every other industry. Google’s inputs come from every firm of the global economy, either directly or indirectly.

      You cannot mandate nor conjure up a Google in your economy. Wishful thinking and fanciful promotions about “Make a Google, Twitter & Facebook in India” will not work. If the conditions are right, if the ecosystem exists, these will arise unbidden. The job of the government is to figure out what are the barriers to any firm — regardless of size — and remove them. The ecosystem will grow. That’s the nature of the world.

      But if the conditions are not right, even if the government lays out the red carpet, nothing will happen.

      The economy is really an ecosystem. If you have a sunny mild climate, adequate water, fertile soil and the absence of pests, things will grow. Leave it alone and it will soon become a healthy, balanced system. It will not be a monoculture.

      If your field is not producing anything, it is best to take a bit of time and ask why your seeds are not growing. It is pointless to fund an advertising campaign promoting the idea “Our Fields are Great for Produce” and expect to reap a rich harvest. The seeds don’t care about ads; they only work if the conditions are right.

      No bold and drastic measures need to be taken. Make sure that you are not poisoning the fields and get out of the way.

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