The Art and Science of Economic Policy in India

The Political Economy Seminar Series is a monthly seminar series that provides a forum for academics, public policy researchers, and practitioners to discuss a new piece of original research and provide their insights on issues related to India’s political economy.

In India, there is now a growing emphasis on economic reforms, while development planning was emphasized in the past. The public sentiment still points to unfounded optimism and perception that a few figures can figure out methods for economic growths. Meanwhile, policymakers are seeking expedient methods instead of exercising careful deliberation and considering unintended consequences in crafting economic policies. In their recent book, In Service of the Republic: The Art and Science of Economic Policy, Ajay Shah and Vijay Kelkar present a comprehensive framework for addressing economic policy problems in India, given the context of relatively low state capacity.

Carnegie India hosted Ajay Shah to discuss how economic policies should be evaluated and implemented in India, based on the book. This discussion was moderated by Suyash Rai. 

DISCUSSION HIGHLIGHTS

• The Current Market Distortions: Participants discussed India’s market structures and listed the different types of market failures: asymmetric information, market power, and negative externalities. In particular, negative externalities create a misleading concept of perpetrators and victims, participants observed. This kind of paradigm justifies government intervention, they noted. They stated, in reality, policy makers need not frame such situations as involving perpetrators and victims, but can empower parties through property rights to resolve the conflicts and perform their activities. Participants discussed the perpetrator-victim framework and agreed that this framework enables a fragile political system as it leads to a heavier reliance on the government. Participants agreed that this reliance leads to polarization of groups and a lack of social cohesion. Given that market distortion is the root cause of India’s economic challenges, it is imperative to address it from institutional perspectives, participants observed. 
• Addressing the Market Distortion Through Policymaking: Participants felt that it is important to account for unintended consequences in different scenarios. Participants suggested private negotiation as a viable method to address the market distortion, also known as coasian bargaining. Participants noted that coasian bargaining has several notable advantages. In lieu of the government’s intervention whether it is tariffs or quotas, it nudges people into negotiation to come up with a consensus, they stated. Furthermore, participants noted, it promotes liberal democracy and free exchange of opinions on public policy since it is based on multilateral approaches, as opposed to unilateral approaches by the government. Lastly, participants observed that coasian bargaining has the potential to address root causes of economic challenges such as protection and development of property rights since multiple parties discuss various outcomes. Participants stated that it is a system that facilitates social consensus with no cost. 
• The Importance of Gradualism: Participants discussed the various aspects of policymaking. Participants highlighted the importance of presenting methodological and evidence-based arguments. Participants then discussed a metaphor from mountaineering: the siege style assault and the alpine style assault. The alpine style policymaking characterizes one or few leaders dictating policies, whereas the siege style policymaking highlights various participants discussing and going through many steps to create comprehensive policies. Participants agreed that in creating this constructive environment, the siege style is a preferred model, as today’s complex political economy puzzles require collaborative processes by policymakers to ideate and implement economic policies. Participants concurred that the alpine style is an outdated model. The siege style also guarantees the adherence to gradualism, since it requires multiple steps to craft public policy, participants noted. Participants highlighted that successful policies stem from careful consideration by stable communities and cited India’s civil service reform as the results of years of analysis and discussion among various entities. 
• Enhancing State Capacity: Participants noted four variables that can determine the difficulty of policymaking: transaction intensity, discretion, the degree of stakes, and secrecy. Participants observed that more interaction among policymakers indicates more difficulty of policymaking as such policies require further scrutinization among various stakeholders. If policies require stakeholders to practice a high degree of discretion, it is challenging to create successful policies since policies need to be comprehensive enough to consider multiple situations. Furthermore, participants noted that policies that involve high stakes will be more challenging to design since it inevitably entails more risk. Similarly, high secrecy conveys high risk to execute policies. Participants observed that a majority of the economic policies that are implemented successfully go through a challenging and robust process that is characterized with high transaction frequency, high amount of discretion, high stakes, and some secrecy. Participants agreed that building state capacity is essential for successful policymaking. Participants also noted the challenges that the state faces such as limited amount of time, capital, and human resources. Therefore, it is imperative to allocate scarce resources efficiently, participants agreed. Some participants felt that the Indian government has tried to implement too many reforms. Participants noted that given the effort in carrying out each reform, India should cherry-pick the most urgent, essential reforms. 

This event summary was prepared by Byung Oh Jang, a research intern at Carnegie India.

Speaker

Ajay Shah

Ajay Shah is a professor at the National Institute of Public Finance and Policy (NIPFP) in New Delhi, where he also co-leads the Macro-Finance Group. Shah conducts academic and policy-oriented research on India, at the intersection of economics, law, and public administration. His areas of focus include macroeconomics, finance, health, technology policy, and the justice system. Previously, he has held positions at the Centre for Monitoring Indian Economy, the Indira Gandhi Institute for Development Research, and the Ministry of Finance. He holds a BTech in aeronautical engineering from IIT, Bombay, and a PhD in economics from the University of Southern California, Los Angeles.

Moderator

Suyash Rai

Suyash Rai is a fellow at Carnegie India. His research focuses on the political economy of economic reforms, and the performance of public institutions in India. His current research looks at the financial sector, the fiscal system, and the infrastructure sector.