Economics and Policy Making for Uncertain Times - Sanjeev Sanyal | #SangamTalks

[Music] so what i'm going to do is give you a flavor of um the kind of thinking that you know goes into many of the policies that you hear you see in recent years and hopefully i'll try and convince you that we are not as crazy as many people may think so right in the beginning thank you very much sangam talks um for hosting me uh the topic as uh was just mentioned it's economics and policymaking for uncertain times and of course we live now currently in a very uncertain times but the point that i would like to make is that we always live in uncertain times because the future is always uncertain and how does one make policy under those circumstances now in order to explain what i mean i first need to give you some idea of how conventional thinking around many of these issues particularly economic issues has been over the last century and a half this is important because much of the economics that i will describe is very cutting edge economics some of it may sound completely common sense but evidently economists you know could not deal with some obvious things in their economic models and this has got to do with the fact that much of the field of economics is going through a churn not dissimilar to maybe what the field of physics went through maybe in the 1920s after the einsteinian revolution or the field of biology went through in the mid 19th century after the darwinian revolution economics as a field is going through a massive churn and old ways of thinking are being thrown into the dustbin and new ways of thinking are being brought in many of these are not yet in the textbooks but i hope to give you some flavor of it so first of all remember that economics as taught in the textbooks and much of the public debate formed in the early 20th century and late 19th century and therefore the intellectual basis of much of it is really newtonian mechanics this is why much of economics uses terminology that is derived directly from victorian steam engines so you have terms like equilibrium or you will have terms like levers of monetary and fiscal policy or liquidity which is a hydraulic term and so on and so forth why do you have this because the entire intellectual framework is derived from newtonian mechanics and this leads to a sort of economics where there is a great amount of thought and energy spent in looking for an optimal equilibrium so economics basically gives you the impression that there is a trend line you can call it the railway lines and the steam engine is running on it if the steam engine slows down too much then you shovel some more coal in you can call it monetary or fiscal or demand stimulus or whatever you like to call it and if it speeds up too much then you have to pull the brake and a lot of economics ends up basically sounding uh uh uh like as if you're running some sort of a steam engine and and how do you then you know people will experts will come and give you these long range and very confidently give you these very long range forecasts um about what the trend line is and whether you have deviated or gone back to the trend line and so on but the fact of the matter is we don't live in such a deterministic world in fact if you had asked any economist back in the end of 2019 about you know all the things that happened uh in 2020 and 2021 up you know the economic shock uh from uh kovid uh the unraveling of the geopolitics of the previous round of economic expansion and so on uh most economists will simply not be able to predict it you know it's not like these things were and have never happened it's a possibility but i don't think any economist really would have had this in their forecast now somebody i know at this point will say you know this is a you know i it's true that this is not an environment of in equilibrium that we live in now but these are very unusual times and surely we can discount this for most times in fact not if you go back 10 years were we in equilibrium no we had just come out of the the great financial crisis of 2007 eight nine and at that time also anybody who had any economist you had asked are we in equilibrium they would have said no so you go back another decade back to 2000 and were we in equilibrium then well we had just gone through the asian crisis and there was the dot-com blowout verbian equilibrium then well no then perhaps we go back another decade to 1990 were we in equilibrium then we had just seen the berlin wall falling and the soviet union had collapsed we ourselves went through a major economic crisis um and carried out huge reforms we were not in equilibrium then either and you can keep going back through all of history and you will decide you will find that in fact we have never been in equilibrium it's actually this idea of an equilibrium in economics or socio-political systems is basically a it's just a belief it's it's a superstition nobody has ever seen an equilibrium and yet all of economics is based on trying to find this optimal equilibrium and optimizing to this equilibrium so much of economics whether socialist or capitalist is basically based on this idea which nobody has ever seen the only difference between those who believe in socialist type policies and neoliberal market economics not all market economics but new liberal market economics is the following that the socialists believe that some wide wise men and bureaucrats sitting in the planning commission know where this optimal equilibrium is and they know how to get to this optimal equilibrium this is basically the main point that the social this is the basic idea of the socialists and the basic idea of the neoliberal market economists is that this optimal equilibrium exists and the market miraculously through the invisible hand takes you to it now notice that both of them are basically based on this idea that this optimal equilibrium is a reality what if instead you think of a world where there is no such optimal equilibrium that you are continuously buffeted it's a chaotic world where continuously buffeted by new technologies new social systems new geopolitics natural disasters of the kind we are going through right now and so on if this is what we are going through then the world is continuously in churn and there is no optimal equilibrium to aspire to now if that is the world we live in then much of mainstream economics is basically bunker and so how do you then make policy for this churning uncertain continuously evolving world and that is basically what i'm going to talk to you about now look at the policies that we have done in the last one year as an example of what you do when you're dealing with uncertainty how do you make policies in such an uncertain world and i can say this from the horse's mouth because i have myself done this is not something i've read about this is what it really feels like when you when you're dealing with uncertainty let's go back to march of 2020 what is the information that you had on the covet crisis basically what you knew was that something bad had happened in china and that it had spread to northern italy where it had killed a lot of people that is basically the sum total of all you knew about what was going on the who was totally unhelpful about what to do about this and more or less nobody knew what was going on so like every country in the world we called in the experts and they asked them what do you think is happening with this coronavirus and they gave us a whole range of outcomes some experts thought that this was just a bad flu and some experts told us that you know this is going to kill millions of people by within the next three four months you'll remember all these debates from that time now different governments took different approaches to this one approach was you choose amongst all these out possible outcomes um and you go with whatever you whichever of these forecasts you think is the most likely so this is how you ended up with say the swedish model or for example the uk initially saying you know we are going to go for herd immunity and so on and so forth this is all based on choosing the forecast of a particular expert which you think is credible now in here in india we knew that once we chose whatever we did whichever strategy we did we would end up in a bad situation because it would mean that once you go down that path you can't change it with 1.35 billion people you can't change path so what do you do so we took the view that we had no idea what was going to happen in other words we were dealing with complete uncertainty now if you are dealing with complete uncertainty how do you make policy so there are many strategies for dealing with complete uncertainty one strategy is known as the barbell strategy where basically what you do is you hedge for the very worst outcome on one hand and then you do a bayesian updating over time as more information becomes available so this is basically the context in which we did the first original lockdown what were we doing we were hedging for the very worst outcome in case it turned out that covet was just as the you know as dangerous as the very worst ex expectations of the most pessimistic expert then at least we had shut down the system now it's not like we didn't know there was a major economic cost to be paid from it of course everybody knew that but we had to do that because if the very worst thing was going to happen it was going to spread through the whole system and kill millions of people then the best we could do is to shut down the system right in the beginning while we did the second part of the barbell which is step by step gather more information so that first lockdown was about gathering more information putting in place some quarantining testing capability and so on and so forth now as time passed we had better information about it so we found out that it's particularly bad for a certain cohort people with comorbidities older people and so on we found out that it affects the lungs and uh and and and the and breathing and so on um and so we began to get a certain amount of information that's airborne for example that masks makes a difference so then you begin to begin to putting in place certain uh steps that then you begin to take and meanwhile you begin to open things up and so if you remember the cases peaked last year in september but by september we had substantially opened up the economy now people will immediately ask why were you opening up the system where in september when you had lots of more cases than if you when you had shut it down in the beginning well for obvious reasons because we had more information if you have more information we therefore knew that well while it was very dangerous it wasn't quite as dangerous as the worst case we also knew that there were certain things we could do to mitigate the risks so that is the context in which we kept things shut so now we did exactly the same thing with economic policy we basically and when we shut things down we knew there would be a a big economic price to be paid if you're shutting down an economy for several weeks at a time you know it doesn't take a genius to realize that there's a price to be paid but then if you will remember a lot of experts came and said you must reinflate the economy open it up and sort of pump it as fast as possible well wait a minute this is not a demand side problem the real problem is a supply one where you have shut down the system that is the real problem and you don't want to pump up demand too quickly because you have for health reasons shut things down so rather than go and you know do these trillion dollar reinflation packages with many countries did and at least in my view not very successfully we did much more controlled effort where just like with the barbell strategy we basically spent the money on the most vulnerable sections of society so the world's largest food program 800 million people were given food uh we put some money into the jandhan accounts this was not as many people said oh too little to kind of reinflate the economy we weren't trying to reinflate the economy we were providing a safety net same thing we did with the msme sector we provided liquidity we held the uh bankrupt insolvency and bankruptcy code in abeyance because we didn't want cascades of defaults going through the system why were we doing all of this well this is one part of the barbell you're providing a safety net this is not an attempt to reinflate the economy at all on the other side we recognize that we were in a marathon and not a sprint we therefore calibrated did a series of medium-sized packages while we opened things up and when you remember in october last year we then began to ramp up capital expenditure why capital expenditure well because it has many very strong multiplier effects on demand and we you saw the economy came back very sharply between october and march so much so that in the jan to october quarter we were back to where we were before covet it's a different matter that we got hit by the second wave but you can see that this is an iterative process where we are continuously updating ourselves with information this is not based on some grand model looking forward or our ability to predict forward we have accepted the fact that we do not know how to predict if and when a second wave bit come and by the way even when a third wave will come i know there are many iits and various experts who have all these models well it's impossible to tell ex-ante which of those models will tell you what is going to happen you see if any enough monkeys throw darts at the dart board one or two of them is going to hit the bullseye the problem is it's very difficult to tell which monkey is going to hit the bullseye so in those circumstances it is better to assume that we do not know so the premium here is not our ability to forecast but our ability to do two things one to hedge for the very worst outcome two to do continuous surveillance and respond quickly so this is a reactive model at its first instance in the short to medium term so you can see this is one part of the way we are thinking about it so the same approach was applied in the second wave we allowed to decentralize the response to covet because by this point we had better information and we decided that the state governments are able to respond much faster than the central government for obvious reasons they are closer to the ground so it makes much more sense to decentralize lockdowns and this is exactly what we did so although the health spike was much more severe in the second wave the health response did not have a national lockdown why for the very simple reason we took the view that if this is a feedback based system then this is clearly going to be much better run on the ground we had initially also thought that this was the case with vaccination incidentally but we decided later on that this was better run centralized again feedback loop we found that runs better from a centralized system and indeed that has been the case so this is one case where a centralized system works better and you can see that we have been able to ramp up vaccination dramatically and we are now routinely hitting as many as 10 million in a day of vaccination jabs so again feedback loop based system now this you may argue is all right in the short run um but how do you go forward well same situation for the response to covet i am a much bigger advocate of continuous testing and surveillance as opposed to great belief in anybody's models so do not believe anybody's models just do continuously keep a high level of testing going and you would have seen that we look at the testing numbers we after the first wave the testing level slowly drifted down we have tried to keep the testing levels as high as possible and by the way in other countries you will see testing goes up and down quite a lot in our case while there is some ups and downs but by and large the testing pace retains remains at a reasonably high level even after the number of cases have come down and that is an important part of our strategy because surveillance is an important part of asset approach similarly look making sure what is the positivity rate watching that very carefully is an important part of our strategy now the same thing is being done on the economic front we are opening things up gingerly maybe but we are opening things up and by and large except for things like international travel and other things where we have still some health concerns we have tried to open things up so of course you got a in the april to june quarter 20 gdp growth which on a year-on-year basis happened at least partly because of a uh the fact that you had a low base but remember this year's quarter in the second wave also had some lockdown so it's not an entirely open system that you're comparing it with nevertheless you have seen a significant part of the economy coming back into this quarter also you are seeing things coming back now our intention is to keep things as open as possible even if a third wave comes obviously keeping in mind various health restrictions that we may have to impose but keeping things as open as possible is an important part of our strategy and again it's important in this context to con to be the situation awareness is a very important part of what we want to do now what about then the longer term people say okay you know short term shocks you can deal with it what about the longer term strategy about economic policy what about the post code world so here also the same point is valid the postcode world is not going to be a reinflation of the pre-covered world i have no idea no matter what you know various experts may do on powerpoint and various consultants may do with nice colorful graphs i have no idea how thing how the world will be in 10 years time i do not know what technologies will have succeeded and which will have failed i do not know how the geopolitics will have evolved and you can see that these things can change overnight as happened in afghanistan i don't know how consumer behavior will be i have no idea about many many things so how do i make policy for a world which i do not know especially in the long term well in this context let me say two things matter one is resilience against shocks two flexibility an adaptation now i want to make this clear that this is not so different from the barbell strategy i was talking about earlier basically the point is adapt to as things as they happen as well as possible and have a safety net have resilience and be able to take the hit even when some big shock comes and hits you now those that hit could be natural disaster it could be external aggression uh it could be any number of other things it could be health emergency it could be any number of other things so the having state capacity to deal with that is important having industrial capacity and intellectual capacity to be able to do that is also important at the same time you need to flexibly move forward so let me show you how we have incorporated that into economic policy and importantly how does that fit with the idea of art minerva which as i will show you has nothing to do with pre-1991 import substitution and license permit raj which some people think it may be connected to it is not so if i'm dealing with such a lot of uncertainty the most important thing obviously is that our factor markets are flexible right uh labor force should be able to deal with the new exigencies are we should be able to reallocate resources land and state resources we should be able to open out and deregulate new sectors and be able to move forward so now you can see very clearly the kinds of policies we have done particularly in the last 18 months but even in the longer run why for example one of the important things that this government has done is insolvency in bankruptcy because this is a part of creative destruction keeping alive in efficient companies is a bad thing in the old days in the name of you know in the name of uh you know saving jobs and so on we would very often keep these dinosaur companies alive for um decades when in fact they were gobbling up huge amounts of resources which could be deployed and doing other things but we didn't do that because we didn't have a conception of creative destruction we had these ideas that giving out licenses would somehow uh you know the some bureaucrats sitting in delhi knew what kinds of outcomes and technologies were going to emerge and in fact you had the ironical situation of many industry bodies and this happens even today coming and saying you know the government should create a fund and invest in technologies you've got to be kidding me what one earth makes you think that a bureaucrat knows where the future is going to be if he knew why on earth is he wasting his time as a joint secretary in department of xyz he should be elon musk so this entire approach is fundamentally flawed so what you need here is to open things up and just in the last few months you would have seen we have introduced a drone policy a very liberal drone policy allows you to experiment now we know some things may go wrong but that's okay all experimentation is based on things going wrong same thing has happened with opening up the geospatial and cartography sector become it used to be a monopoly of the survey of india we opened it up completely now all kinds of people are coming and doing all kinds of interesting things uh in this sector we remove telecom regulations on the bpo and it-enabled services very heavy regulations were there for reasons that are entirely inexplicable they were there for some 20-odd years and were getting in the way of innovation we have gotten rid of those as well in the financial sector we have created something called bilateral netting that allows for the cds market to evolve now of course uh you know derivatives can be misused but on the other hand not having them means that an entire area of finance and risk taking doesn't get evolved whether it's corporate debt markets or derivatives so while you do need to retain certain regulations to be able to uh sort of hedge out the very worst behavior of people who deal with these instruments simply saying that we shouldn't allow them is a bad idea the same thing is true of uh you know trade invoice factoring we used to never allow this whereas it is an obvious way to get quick financing to the msme sector by allowing them to raise finances against their invoices but we didn't allow it till just about a month ago and the trade factoring bill has now opened that up the rules should be out any day now and an entirely new area of financing is open for our banks and nba students so you can see that this is a consistent consistent thinking about deregulation the same thinking is there about getting the labor laws done for you know when i was at university some 30 odd years ago labor laws were being discussed even at that time we didn't do anything until just a few months a year or two ago and now india has got completely liberal labor laws which protect labor where it needs to be protected and is flexible where it needs to be flexible so that you can redeploy our labor force exact same thinking behind our monetization and privatization if you've got resources that are stuck in old mill lands and say kanpur they should be redeployed it's about flexibility and adaptation just because you know a hundred years ago this real estate was valuable for running a textile mill in the middle of kanpur doesn't mean today it doesn't have better uses surely using those hundreds of acres which happen to be in the middle of kanto should be uses used to create new parks new hospitals new residential areas new offices and other urban amenities that that city needs instead those lands which are valuable are simply lying there this is true of uh you know old derelict warehouses along the hughle river in kolkata or the old port area of mumbai these need to be monetized and redeployed this is the point about continuous churn it does not matter what some great planner uh you know decades ago or thought because the world has moved on and the same mistake we do with urban planning so you can clearly see how this kind of thinking is different from the old thinking now let me show you how this fits with atma nirvana now obviously when you're living in this very uncertain evolving churning world you will get all kinds of shocks you should be prepared for them so if we are saying what we are really saying is that we need to leverage our internal strengths to create the ability to deal with um obvious threats to our economic security i'll illustrate this because there is an illustration is always better than any other any number of arguments we all know that we have a very competitive pharmaceutical sector yeah everybody knows that however during this last 18 months we discovered that this competitive pharmaceutical sector is extremely dependent on single source foreign inputs so there were these apis which which we are dependent on and if for whatever reason these these sources get disrupted then we can have the you know all this rest of capacity to do all these generics and other drugs but it doesn't matter because these apis are suddenly stalled now from purely optimization perspective it makes sense to import because it's cheaper but from a resilience perspective it is important that we have some capacity to do it in in-house if they are so important it doesn't matter i'm not just saying it's china and you know we should be suspicious of them etc it could be even an ally country which doesn't supply to you because you know a sudden shock hits them we or for whatever reason they their own politics don't allow you to export it has happened in fact with an input into one of our vaccines or for example the fact that we do not have um chips manufacturing capacity means that we have this huge automobile industry where we use 99 of the manufacturing but because we don't have chips now these this capacity has to be rolled back so this is a very good illustration where we need for at least for basic activities we need to be at manervar now notice this is not the conception of atman bharat as in licensed permit raj or going back to import substitution of the pre-1991 era because that neruvian view was based on a fear of the rest of the world ours is to actually compete in the next to the world we want to compete in global supply chains we may not have uh you know uh signed up to rsep but that doesn't mean we have an ideological problem with trade deals we are equally aggressively pursuing trade deals with australia with the eu with europe even with the u.s even as we speak so our purpose is to actually participate in global supply chains and compete and even here we are willing to do things which would have been anathema to an earlier generation of policy makers for example the pli scheme the pli scheme is quite a major intellectual break for indian bureaucracy because it essentially supports and encourages those who are trying to become ever bigger there is an inbuilt bias against expansion and clustering and scale in our policies uh because of mis direction of our idea that we need to help msmes yes we need to help msmes but we don't need to help them we want to help them to become big stopping msme from becoming a big as a way of helping msme is surely a bizarre way of thinking about the point about helping msmes is to make them bigger not to keep them as midgets so you will see that in the economic survey we in fact use those terms so this idea has been now become policy through the pli scheme where we actually reward companies and sectors for scaling up to global competitive levels and you can see that that has been quite quite successful in electronic type things we have now introduced it in uh textiles where just two days ago and many other sectors as well and let's see what happens now not all of them will succeed that's fine you know the kind of approach we have of creative destruction allows for some amount of failure which is perfectly fine but some of it must succeed and some of it will succeed and then we will make our way forward you can clearly see then how our policy making is based it's basically based on risk taking encouraging risk taking it is based on opening and deregulation it means redeploying of government resources away from things where it is stuck and is wastefully being deployed through monetization getting resources opened up one to allow the private sector to do its stuff but also giving us resources to do things that the government should be doing it's not like the government needs to withdraw all the time there are good things the government needs to do and this brings me to the end of my talk i'm going to just take out what are the next generation of reforms we should think about so the last 30 years of reforms have all been about withdrawing the government from things it should not do and while we haven't finished that agenda at least most of that has now been announced i would argue and i think with the exception maybe of direct taxes where we still need to really get our act together we have mostly done all the large framework reforms at least announced our intentions whether it's privatization where privatization may not have you know it's a process that has far from finished but at least you know where we are going with it labor reforms even farm reforms we may have held it in abeyance but you know that we are committed to a particular direction of movement but the next generation of reforms is not about withdrawal of the indian state it is about getting the indian state to do the things it should do so from getting away from things it should not do now the next 30 years should be about getting the indian state to do the things it should do so what are those things well very high up in that list has got to be the ability of our legal system to deliver justice and enforce contracts if you're living in an uncertain world then you obviously means that things will go wrong and if things go wrong you need to be able to enforce contracts for the situations where things go wrong so seen from this complexity and and uncertainty prism which is the economics i expose legal system reform is the single biggest issue that we need to pursue now you can debate on how to go about it and that's a different lecture but you can be clear that having 40 million cases stuck in the pipeline is not only a travesty of justice it is also deadly for the economic model that i just described so it must be fixed the same thing is true for administrative reforms with the economic model that i just described you cannot have a administrative system uh and bureaucracy of the kind we have not merely because um of all the you know endemic rent seeking that all of you probably have to face but also the sheer lethargy of a system that is based on not on principles but on precedent and blind following of outdated rules we need to update those rules in a routine basis through a feedback loop um we need systems where we encourage uh on our bureaucracy to be able to use their common sense and deal with situations in first principle basis rather than blindly perpetuating world ideas and this is an important thing because um you know very often the indian bureaucracy very proudly thinks of itself as the steel frame of india the fact is that steel frame is only a useful thing if you're thinking in newtonian terms and you're thinking of the world and of economic systems as rigid um frameworks and therefore you need a rigid system to deal with it on the other hand if you think in complexity theory terms as fluid systems then you can see that the bureaucracy far from being a steel frame is basically a rusting cage it needs to be you know opened up in order to be able to allow innovation risk taking and entrepreneurship that is should be the real driver of growth and i always say that we you know we don't have to wait for the gdp growth numbers uh from 10 years hence to know whether we succeeded we can very quickly tell whether we are succeeding and the system is moving in the correct direction from simply talking to our teenagers ask them what they want to be when they want to grow up if they want to grow up and want to be civil servants then you know we haven't made progress if they on the other hand want to be sportsmen entrepreneurs scientists writers then you know we are making progress because they want to do things that are risk-taking that means we have entered into an era well that is that the dominant culture of our society is one of risk-taking as opposed to wanting to join some sort of a rent seeking activity so that will be far far before we you know we get the gdp number read you will be able to see that whether or not our economy is moving in the correct direction from the feedback that you will get from our teenagers with that let me stop i'm sure there are lots of questions and i'm happy to answer them he's interested to know about the indian investments in the neighboring countries like iran afghanistan myanmar and sri lanka how are these investments going to help india and future obviously um you know when you are dealing with neighboring countries there are many reasons you want to invest there one of them is geopolitical obviously if you want influence in those countries and to build good relations with them then you need to spend some money especially if you have pretensions of being a regional part then you need to be able to demonstrate that so that is the context in which you may build for example a parliament for afghanistan and so on and the other reason is obviously the physical infrastructure i mean if you want to trade with these countries you need to build the physical infrastructure and if you are the stronger partner you are expected in some ways to build the roads or ports or whatever it is to do it third purely business i mean very often um building uh so many of these things is a commercially viable activity not always but it can be and it is uh it is worth a while to do it purely for commercial reasons so there are whole bunch of reasons why you may want to do investments in neighboring countries obviously i'm ignoring here private investments which are obviously purely a commercial nature now this is not to suggest that there aren't risks in this you know we put in a lot of infrastructure and spending into afghanistan it's very difficult to know right now what will happen to them so like with anything you invest all investments entail some amount of risk but the idea is that if you do enough of it and you manage it well and you pay attention to it and you know on the whole you will benefit this is from cs mandar karnik from thane he asked now that the global geopolitics is undergoing rapid change has the time for gradual reforms in india ended and rapid change in policy the need of the r now that's quite a amusing question because this government is mostly accused of doing too many changes so that may have been a fair question to ask previous governments i think we are very often accused of doing too much but if you look at the last five years and look at the changes we have introduced just in the last five years we have created an insolvency and bankruptcy framework which didn't exist which allows for a huge amount of churn in a as a matter of course in our economy we introduced a gst system we completely radically changed the way our indirect tax system works i don't think anybody will argue those weren't radical changes and in both cases while there were very niggling problems initially i think most people will agree that broadly they work quite well today and they were definitely a big improvement on whatever was there before we um we have done um you know i gave a long list of changes we did whether it's in drone policy or um in various kinds of science related policies we have done in recent times and opened up and now our enormous sectors to reform to um competition we are now entering into a phase where we have promised to do privatization and monetization um we have even attempted to do radical reforms in agriculture so i don't know what you're talking about um if we did more i think you would be the one complaining even the education system we are continuously looking for ways of changing and you know we have introduced a new education policy but i have a sneaking feeling that we may have to revise that too given the changes that are happening thanks to covet in terms of distance learning and how conversant it has become we have all become in terms of dealing doing teaching and other things online i can't believe that you know the very model of education radically has not changed worldwide and we need to adapt to that so absolutely we need to continuously adapt and change the important part however of complexity theory is and this is where you have to understand where we are coming from our our entire strategy however is not based on doing radical changes in say this you know the maoist you know cultural revolution way because we do not know we do not claim to know where the future is we are very much evolutionary uh reformers we will keep doing changes and tinkering at the edges all the time now it may people may find that disconcerting initially because things do not ever settle down but our purpose is to continuously change and now those who are in the i.t sector will know exactly what they are doing we are doing it's called agile yeah you can either introduce a system that is perfect or you can introduce the system and keep fixing it and this is how we have introduced changes uh you know gst initially there were lots of problems but eventually it was a good system it's a much better system than it is today i can assure you uh to the person who has the question that you know when they are running this system they will be using some version of the gst we have introduced hopefully they'll have gotten rid of more of the niggling problems we we are we have today but i can assure you even at that time they will be fixing things uh and there were many other changes where people keep doing that and that is true also of urban planning you know this idea that chandigarh is a perfect city and we should freeze it there is a bad idea great cities are cities that evolve continuously you know the great cities of the world whether london or paris or you name any city they have gone through radical changes continuously or singapore singapore is not the result of some grand plan it's not this it's singapore success is not planning it's management of change it has radically changed over the last 40 years whereas chandigarh has remained basically the same i mean the changes in chandigarh happen outside of the plan in mohammed but not in chandigarh so the point i'm making is is continuous ability to transition and change that is what this model is about radical changes yes but they will always be evolutionary uh before i go on to the audience i'm really tempted to ask this part about the gst right after the gst was introduced i saw your talk where you said how it was a really progressive reform i would like you to touch upon it okay see till we introduce gst india used to have an extremely complicated indirect tax system there were different kinds of taxes all over the country there's different states at taxes even different cities are taxes people have forgotten already but there used to be something called octroi and even you know goods going in and out of a city would be taxed at a different thing so you can imagine how confusing and complicated this was so it was so complicated that it was easier for mumbai to trade with shanghai than at first for mumbai to trade with delhi because if a product went from mumbai to delhi it had to go through all these state borders then trucks would get stuck there would be different rates there would be smuggling there this is a source of a lot of graft that used to happen because obviously tax rates are different in different states so i can imagine there was forget smuggling in and out of india they were smuggling in between states in india so all of this complicated stuff was going on and then we introduced gst that for most products i would say 99.9 percent of products we now across the country have the same tax system this is a radical change okay simply trashing the whole system and introducing a new system now it is something we had debated by the way everybody knew this problem by the way it's not a new problem we discovered in 2017 okay it's a problem we knew for decades and for decades we said we must do something about this then finally it was done now when it was done those who introduced it knew that it wouldn't work for many months now everybody says oh you know it didn't work for so long of course it won't work if you do any radical change of that kind it won't work it won't work partly because the website etc will have problems it won't work because you'll find unintended consequences in fact most of the things that went wrong weren't the things that people had predicted but were things that nobody had predicted you know nobody had predicted that the correction button in the form xyz whatever it was was going to be the major problem because it didn't work everybody had predicted 200 other things so the point is that the gst system could only be made to work through an agile approach you introduce a reasonable system i'm not saying introduce a bad system introduce a system that is reasonable then fix it along the way if you if we had waited for a perfect system we wouldn't have been able to introduce it even today and kicking and screaming it eventually gets done so that is generally true for most changes even i can tell you the changes needed in the farm laws you you ask any expert on farming will eventually have to get away from this business of growing large amounts of cereals which we don't need to eat we are expending huge amounts of resources to subsidize the growing of grains we don't need poisoning the earth with chemicals they should be pumping into them pumping out ground water which we you know climate change will probably mean that at some future date we will need this water and they're pumping it out this is a completely wasteful and then we put it into a marketing system that is also completely wasteful where neither the farmer nor the consumer benefits but there is a huge inefficient sub you know middleman system that um you know causes inefficiencies and extract trend clearly that system had to at some point change and everybody agrees it needs to be changed right even those who are now opposing these changes do not disagree that there is a problem problem now okay maybe the changes we made need to be tinkered at the edges to smoothen them okay that's fair enough but the only way you'll be able to make these changes is to introduce them start the political process start the debate and it through iteration smoothen out the edges and then finally get it done but if you do not push for those changes they will never get done we talked about the policy making like in this in this changing and fluid world which makes total sense just out of curiosity uh when the government announced demonetization what was the government was trying to do so this is something you should ask arvind subramaniam because this belongs to before i joined the government so i can't quite comment because i don't know the initial thinking you can you can have both exposed justifications and arguments so my entire approach as you can see is x and t i mean the whole point about the approach i'm talking about is an x anti-thinking process how do you deal with something that you don't know about so i do not know exactly what the ex-anti-thinking was because i wasn't in the government at that time but i my own thinking was that my own understanding from that time so this is from before i joined the government so there's no insider thought here this is my understanding is that one part of it was that there was a large amount of cash in the system that was sloshing around and distorting markets and political and social incentives more importantly there have there was also uh probably an un a lack of clarity about how much money was actually in the system remember that we had gone through decades um where all kinds of money had been pumped into the system in various ways for example telegi scan there had been pakistani counterfeiting in domestic counterfeiting and then there had you know uh many years you needed at least a one-time audit of how much physical cash existed in the system replace that cash with money that was not counterfeited and also force everybody to go it's like if you have no idea where and how uh supposing you had a system where there were no cars there were cars in the country but you didn't know who you who owned them let's say the you have no idea about the registration of cars in this country okay because for some reason all the registry registers have got wiped out okay and now eventually you want everybody to register the cars but very quickly if you wanted to do some way of getting a sense of what was going on you basically say that everybody has to go through some toll gate and you have a toll gate with a camera which kind of gets a sense of okay where is who owns the cars roughly where are the cars are they all in delhi are there you get a sense of this so i would say that that was what demonetization really was so get a sense of what the thing was knock out some of the worst aspects of it and essentially impose a sense of order you know if you're familiar with the broken window theory you will know simply imposing a sense of order on a system has its benefits when you have a system that is essentially broken if you go back to 2015-16 what was the situation we were in we had come off a stage where large numbers of scams had happened and the banking system was all over the shop nobody knew what was what was the assets they had and there was large amounts of graft going on and there was a general sense of things being out of control so demonetization quite apart from the monetary aspect of it it can be seen perhaps as a simply an imposition of state control on the system and a signaling that yes we run this place and we can impose our order on it now as i said this is my understanding of what was the thinking at that time i was not in the government so i you will need to talk to somebody who was in the government at that time to tell you what what was what was the thinking then it seems to me that maybe uh maybe we also need to look at some way of simplifying our messages uh our uh you know sort of mass communication of the narrative so that these things are sort of you know taken in the right spirit obviously you talking about it influence a slightly different set of people and i think most of us can agree that these are reformed in the right spirit and go in the right direction as just one suggestion that i wanted to make through this conversation so thank you very much for that feedback um obviously you know why am i spending my weekends doing these talks is to get the message out so but i i take your point that you know in the end maybe i have a limited uh audience of relatively better educated people who probably are uh you know but then there is some good hopefully that comes from it because in some ways you are the people who amplify it by talking to other people writing articles etc so this kind of talk that i'm giving here would not perhaps work with a audience on the street because it's perhaps a bit intellectualized but it is important to get that underlying philosophy out there because the the at the street level you can only explain individual policies explaining the underlying philosophy is perhaps a bit too difficult over time people will imbibe it perhaps unconsciously but that is a longer term process that will feed through you to articles through eventually into the education system and then become generalized but this is part of why i'm doing this but point taken about the wider communications and i i think that that point is well taken and incidentally you'll be you know that has been discussed at the highest levels even within the government that maybe some of this needs to be communicated more frequently and not necessarily by the prime minister himself because you know he should not be used all the time to communicate ideas i mean obviously during the covet crisis his personal uh communication is important for you know getting going through lockdowns and masking up and all that or vaccination but as an ongoing basis uh you know things like gst and explaining these things that has to be better done i agree with that i just want to quickly ask a follow-up question uh one did it achieve the objectives uh that it was set out to do and uh in terms of the price uh that we paid uh are we i mean you could you could argue but the price in terms of what we paid which is the economic downturn was it worth the benefit that uh it was thought the demonetization could bring in this is one question and the second one is more general question not in terms of any crisis but given the nature of sluggish bureaucracy in india in your personal capacity not as a technocrat but as a common man what what should be the balance that an efficient government should have between a liberal economic model capitalist and a restrictive one i.e the socialist uh what should be under the control of government and what should not uh if there is any specific model in the in the world that we can uh learn from uh what would that be so i think the first question i answered largely in the last round you know it did have some impact no doubt i mean for example digitization definitely took off in india because of that and digital payments and so on there's no question about that uh did it reduce black money well uh i mean anecdotally we don't have i don't have any good sense of whether it did or not in terms of a hard study but anecdotally i think high level corruption has definitely gone down in this country now it may have not may or may not be due to specifically demonetization but i think demonetization can be seen as part of a wider effort to shut down the problem of regular scams that were happening at that time and people forget the the the situation that was there immediately previous to that where we used to get a scam a day and so that has clearly got slowed down and you know we haven't had that kind of those kinds of scandals whether it is other scandal or or many other kinds of scandals banks and so on that has certainly improved i would argue most most people would agree with that whether demonetization contributed to or not i'll let you decide now comes the other question which is uh which is more in my line of thinking because i said i wasn't there at demonetization so i can't comment on the original objectives of it but certainly as far as choosing between capitalism capitalists and other ways of thinking and the role of the state let me first point out that i am i come from a third school which is uh derived from complexity theory so let me say a few things here in that context never confuse what benefits society with socialism and never confuse capitalism with what benefits capitalists right so for example the entire socialist period that you had interestingly when these socialist policies were introduced back in the 1950s some of the most enthusiastic support for it came from the business community of that time the bombay club why because effectively the the licensed permit raj was a good way of fossilizing their control over the business sector and even in 1991 when we began to introduce and liberalize the economy the biggest opponents of it were the bureaucrats and interestingly the capitalists of that time what happened as a result is quite interesting between 1947 and the mid-90s other than the one unique introduction of the ambani family into the business class essentially the same business class existed in 1995 or 1997 as in 1947. so you can you can clearly see that capitalism and socialism are not that separate from each other if you think of it in terms of who are the beneficiaries there and the point that i was making earlier was that both these systems are actually sister systems essentially derived from the idea of an optimal equilibrium they are only debating about the way to reach this optimal equilibrium i come from a completely different school of thought which is that i am debating whether this optimal equilibrium even exists and therefore the policies i will advocate are fundamentally different that is why i am far more interested in legal reform than maybe somebody in you know comes from either the socialist system or from the market system i'm much more interested in administrative reform i'm much more interested in deregulation and markets but the reason i am in favor of markets is not because i think markets are efficient i am quite convinced that they are inefficient but because they are flexible which is a different reason for being pro market okay i am pro market because markets are flexible simply because they allow if things go wrong they allow a correction somewhere down the line which may be drastic and painful but it allows that correction to happen okay so this is a very different reasoning for being pro market but the way in which i'm pro market is very different i do not allow for efficient market hypothesis for example i am much more interested in the insolvency in bankruptcy code because i think things go wrong the market will go wrong so you have to allow for things to pick up the pieces regularly from things going wrong so the advocacy of a complexity theory based system you can call it complexity capitalism or whatever you want to call it but this is a very different way of thinking and there by the way i am drawing on a very rich lineage of thinking by the way which is there even in the 20th century unfortunately not widely taught in indian textbooks but going to people like for example frederick hayek right frederick hayek one of the greatest economists of the 20th century in my view unfortunately if you can be a phd in economics in india never have read a line of hayek but hayek had in his nobel prize speech said something very interesting he said economists suffer from something called the pretense of knowledge which is basically what i'm arguing against that they pretend they know what the future is about when they don't so complexity theory is an anecdote to this and by the way now this is gathering pace and you can see writers for example like nasim talib sort of taking up some of these issues about black swans and things like that so this line of thought has begun to gather steam there are practitioners or i'm still a minority in the universe of complexity theory practitioners but there are some practitioners like myself who are coming through but in india there is a long lineage of thinking about these issues as well interestingly cortillia came from this even though he may not have thought about it actively in this way but it is quite interesting to even look at cortelia's thoughts cortellia if you read his economics he is not clearly not a socialist but he's also clearly not a libertarian capitalist he's very much an interventionist but it is quite interesting to see what he wants the government to intervene in and what is his view of the state so cortalia was in favor of a strong but limited state so let me contrast it with the neheruvian or ashokan weak but all pervasive state but notice while cortelia was in favor of a strong state he was not in favor of an all pervasive state in fact it's quite interesting you know many people know that cortilia talks a lot about spies and keeping controls and so on if you read it it's quite interesting you'll see that cortana is mostly suspicious not of the of the citizens but of officials in fact he says that just like it is impossible to tell how a fish is drinking water it is impossible to tell when a government official is skimming money and so you will discover that quarterly has considered continuously arguing for regulation over but at the same time strictly limiting the powers of this of the official so he's in for example not in favor of prohibition okay he's in favor of regulation of bads including prostitution right he says that if you ban it it's going to you know the the officials are going to make money out of it so cortillian state is a very different kind of from what many people think it is both of their proponents and his opponents cortillia is a proponent of the strong but limited state and i as a complexity theory man i'm also a proponent of a strong but limited state so therefore you can see where i'm going with this my proponent of all the deregulation i talked about comes from this line of the limited part of the state my propos my propounding for the next round of of reforms being on the state doing the things it should do is also comes from the same thinking process that you should need a strong state i'm not a proponent of a weak state i am a proponent of a strong state the state needs to invest in infrastructure hence when we are reviving this economy notice huge emphasis on demand management using capital expenditure our preference for spending on defense it's about the strong state so you can see where this entire thinking comes from it's a consistent set of ideas which have deep lineage in both western philosophy and indian thinking we talked about so many sources of uncertainty but one of those sources remains uncovered uh not only in your talk but in general i am talking about i'm not putting the point towards you it is in general those sources of uncertainty are from uh you know factors like uh factors like the geopolitics which we have seen in uh afghanistan recently at the root of which is uh basically uh terrorism right now we cannot rule out that these kind of factors these kind of social factors to affect the economics also uh there is a lot of research perhaps which has already happened and even documented there is a ted talk by loretta napoleoni the economics of terror you know i mean for that matter uh for that matter even the system of the halal economy as we all know so there is no point there is no question that geopolitics and evolving geopolitical equations have a huge role to play in economics i don't think anybody even in my talk i referred to that repeatedly there's no question about it and the rise for example of japan and germany after the war is a geopolitical event as much as it is an economic event the same thing is true of the rise of south korea taiwan singapore but also geopolitical events even the rise of china in the last 30 years as a geopolitical event because it is related directly to america's engagement with china in the 1970s so there is no question in my mind that geopolitics cannot be thought of separately and that is one of the points about complexity theory is that we do not think of various uh buckets separately the whole point about complex systems thinking is that everything influences everything else and it is meaningless to think about things separately so i agree with you obviously in a one and a half hour talk i can't get into everything but you can see that you know why this may have influenced the way we think about supply chains our participating participation for example in rcep would have been at least partly covered by certain issues relating to geopolitics not entirely though this doesn't mean that we will not trade with our sub-countries of course we will but or that we will create a block against it but it's an evolving thing in which we will evolve our strategies along the way and similarly it will influence the way we think about the people with whom we build geopolitical links but also economic and investment links trade links and so on and you will see a big influence of that into the near future the kinds of for example 5g um kinds of technology that we adopt will be will be obviously influenced by all of this so there's no question in my mind that there is an influence of all of this in the way we think and complexity theory by its very definition takes these things into account yeah gives you your question uh the books by you any books by the author he asks by books by me yeah you can look for them there are several of them you can go into amazon and have a look at them my recent my most recent book is actually a book of fiction which is a book of satire about modern india called life life over two beers yes but i have written on there's a bunch of my articles put together in something called india in the age of ideas which is a lot of it is about complexity theory i've got history books you can read ocean of churn it's a maritime history or you can read my book land of seven reverse both of them incidentally are history written with uh derived from a complexity theory perspective and then there is my very first book going back some quite some time back 13 14 years back um which is called the indian renaissance where i talk about the rise of india after a thousand years of uh decline um and of course my own thoughts have evolved from then but nevertheless you will get a sense of the basic idea of complexity theory that i was sort of building at that time 15 20 years back and arguing that flexibility will always trump strength and planning one topic he hasn't mentioned is history of india's geography he talks about and it's incredible at the towards the end of land of seven rivers and other talks by him where he actually talks how the geographic how the cities evolve in india thank you very much sanji sun algae nashkar in namaskar you

Channel: Sangam Talks

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Keywords: sanjeev sanyal, economy, Labor laws, Ex ante thinking process, broken window theory, Barbell Strategy, India’s COVID policy, Economic policy, India's economy, India's economic policy, policy reform, policy change, response to COVID, demonetization, Judicial reforms, farm laws, PLI Scheme, sanjeev sanyal indian history, sanjeev sanyal interview, sanjeev sanyal history

Id: fJ1PIXraZoY

Length: 71min 38sec (4298 seconds)

Published: Tue Sep 14 2021