A newspaper report has raked up an old split among economists. Can governments allocate an economy’s resources better than the market? Since economics is essentially about how to get the best results from scarce means, that question goes to the heart of this discipline.
According to an Indian Express article on Friday, of the ₹2,192 crore worth of easy-term loans approved under India’s new Research Development and Innovation (RDI) Fund, a chunk was earmarked for startups with links to the selection panel, a few members of which even owned equity in awardee firms.
Disclosures were made, the Centre has averred, and linked individuals duly stayed away from those decisions to keep conflicts of interest out.
For a fund with a corpus of ₹1 trillion that has a long way to go, the sums involved are too tiny—and this moment too early—to reflect on the role of India’s RDI incentive package in its economy. It aims to boost private research and development (R&D), on which India’s record is abysmal, and we cannot pre-judge how it will perform.
Yet, even if the RDI Fund’s reported choices make nobody squirm, any whiff of an arbitrary approach weakens the case for an active industrial policy.
That markets pick winners efficiently while panels are constrained by the net wisdom around a table (vulnerable to groupthink) has long been argued by free-market advocates.
Friedrich Hayek, for instance, held that the sheer knowledge needed for efficient resource allocation was too widely dispersed for a central allocator to discern what works best. It was why Soviet central plans in the 20th century were no match for US market dynamism.
Since Cold War rivalry also saw an autocracy trounced by a democracy, the ‘wisdom of crowds’ arose as the favoured success formula for both governance and economic policy.
The rise of a statist China this century appears to have sowed some self-doubt in this camp, though, as seen in America’s recent shifts on both those scores. A review of East Asia’s record of industries and firms picked by the state to back, meanwhile, has lent weight to the proposition that central guidance and financial spurs could catapult an economy.
A few good leaps in high-tech fields could pay back enough to justify a pile of dud bets. This may be so, but the state must be able to identify worthy projects.
As Harvard’s Dani Rodrik said in a 2010 column, “What determines success in industrial policy is not the ability to pick winners, but the capacity to let the losers go.”
The RDI Fund was set up in the spirit of ‘self-reliance,’ a slogan revived amid the pandemic.
From production-linked incentives for manufacturers, a success so far in one field among the dozen-plus selected, to a large outlay for a domestic semiconductor industry, India has enlarged its bet on an active state role in driving up private investment.
As we await results, this policy gear-shift must avoid familiar pitfalls. If firms start vying for central favours instead of acquiring a market edge, as Anne Krueger warned, it would end in regret.
Our pre-1991 economy was riddled with telltale signs of that. Granted, today’s low market-entry barriers and free-floating prices limit how far rent-seekers can bloat India’s cost base.
However, to the extent that capital must be employed optimally for our economy to perform at its peak, the question of a panel’s wisdom versus the market’s will hover over a ‘venture capitalist’ state. Some cherry picks may prove to be winners, but let’s also count the cost of those that go sour.