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Photo: Bloomberg
Photo: Bloomberg

Individuals vs institutions

A fundamental dysfunction mars India: individual discretion is privileged at the expense of a rule-governed institution

The fracas over the proposed Indian Financial Code (IFC), and in particular the monetary policy committee (MPC), gestures toward greater fractures in the Indian political economy which have significance far beyond the particulars of the current turf battle, between (and within) the finance ministry and the Reserve Bank of India (RBI).

I will not rehearse the many arguments, for and against, the MPC as mooted, as that ground has been well trodden in the pages of this and other newspapers. (For the record, in Mint, economist Rajeswari Sengupta and I argued in favour of the MPC, “In defence of the financial code", 28 July.) Rather, I will point to the fact that what ought to have been a nuanced and technical debate on the fine-grained details of the IFC, including the MPC, has been widely portrayed as an attack on the autonomy of the RBI—this is a canard, but a useful debating point for some—if not an outright assault on the bona fides of the RBI governor himself.

What has been most bizarre in the current spectacle, at least for this observer, is to be struck that individuals whom one presumes to know better argue vociferously in favour a non-system which privileges the incumbent who happens to sit in the big chair, and, by extension, oppose reforms which would move toward institutionalizing best practice. In other words, while one may legitimately debate whether the MPC should have five or seven members, or whether a majority should rest with those appointed by the RBI or not, it should be incontrovertible that a system which forces transparency and accountability on decision makers is, ipso facto, preferable to one which rests upon individual discretion, opacity, arbitrariness, and lack of accountability.

As I have suggested, this reflects, I believe, a more fundamental dysfunction, or malaise, in the Indian political economy: individual discretion is privileged at the expense of a rule-governed institution which functions reasonably well regardless of the individual who sits in the chair. (Of course, brilliant individuals can make a difference, but they should not be indispensable for the system to function at all.) This characterizes not just the RBI, obviously, but every government department and agency and lower levels of government, too—to say nothing of many non-governmental institutions such as universities, think tanks and private sector firms—which function well, or not at all, depending on who happens to be leading them.

Recall a few years ago that Belgium was without a national government for almost a year? Did the country collapse into chaos and ruin? No. Rather, it hummed along, reasonably well, as policies and procedures which were hard wired into the Belgian political economy ticked away while the politicians bickered. Needless to say, no major political initiatives or policy reforms could be instituted in the absence of a government —but this did not make too much of a difference over the period of a year. By the same token, politics in the US is notorious for frequent legislative gridlock —thanks, in part, to the intricate system of checks and balances written into the US Constitution by its founders, and hobbled, also in part, due to the power of special interest lobbies—yet few credible observers would contend that the US polity is about to implode.

What is sorely needed in India—and what has not been on the agenda of any political dispensation, of any particular ideology—is an overall, architectural process of regulatory reform, which distils global best practice through ex ante design and which is instantiated in ex post facto procedure. Whether it is criminal justice, the conduct of monetary policy or assessing food safety (on the last, see my earlier column, “The Maggi and Modi affair", 22 June).

The by now sterile debate on whether the Narendra Modi government is one constituted of economic reformers or not —they clearly are in some areas, less so in others—misses altogether that the greatest lacuna in the government’s reforms agenda is one which cannot be neatly subsumed under one or the other sectoral rubric—such as labour, land, or other factor markets, improving sanitation and public health, bolstering the ease of doing business, and so forth. For none of these sectoral or thematic reforms captures the need to recode the DNA of the Indian political economy at the cellular level—to build systems which work, and work in an accountable, fair and transparent manner, which do not depend on the great good fortune of having sagacious individuals at the top, which build in safeguards to keep venal individuals out, and which create and lock in self-reinforcing, incentive-compatible mechanisms that ensure that, by and large, everyone behaves as they should, delivering efficient and fair outcomes for all.

As Adam Smith observed more than two centuries ago, the market system does exactly all of this in the world of quotidian economic interactions, through what he famous dubbed an “invisible hand". Uncoordinated action by individuals, rather than top down planning, characterizes the market system.

For good or ill, the state cannot spontaneously so constitute itself, and, therefore, requires intelligent design. That Herculean task awaits us.

Every fortnight, In the Margins explores the intersection of economics, politics and public policy to help cast light on current affairs.

Comments are welcome at views@livemint.com. To read Vivek Dehejia’s previous columns, go to www.livemint.com/vivekdehejia-

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