Entitlements only create an army of slaves, depriving individuals of liberty and dignity.
When a large part of the economy is in the informal sector, it is very difficult to get an accurate measure of size and growth of the economy, because by definition the informal sector is unincorporated. Therefore, one is never certain whether the officially reported growth reflects ground reality or not. Nevertheless, it raises an important question so as to why, after so many years of liberalisation, do we have such a large informal sector?
I believe that this is primarily due to the slow process of reformation of the overbearing regulatory environment in the economy which politically favours entitlements such as protection of workers or the incumbents or domestic producers over liberty. In such a regulatory environment, a hidden cost is imposed on the economy, which is that the most efficient firms that generate growth and create jobs either do not enter the economy or are driven out by those firms that have the greatest capacity to manipulate the regulatory environment and seek entitlement. Many firms that still choose to participate in economic activity are pushed into informality in spite of high costs such as non-availability to government institutions to enforce contracts and secure property, non-accessibility to cheaper sources of finance and more importantly a constant risk of being hounded and harassed by the government.
Research in economics has supported this view, that an overbearing regulatory environment has a direct impact on lives of people by reducing level and growth of per capita GDP and it also lowers the well-being and welfare of people. Paradoxically, the regulatory environment that is designed for the uplift of the down-trodden has just the opposite effect of leaving them worse off. In contrast one needs to be thankful to the informal sector, which is outside the reach of the government, for their positive contribution to the uplift of the poor, the vulnerable and the down trodden by creating job opportunities. Any attempt to formalise this economy and impinge upon their negative freedom, through strict and honest enforcement of unjust rules and regulations, will only have adverse consequences in the economy in terms of lower growth and well-being because most firms in the informal sector will simply choose to shut down instead of becoming formal.
What is, therefore, needed is the design or conceptualisation of a regulatory regime that promotes and protects liberties of individual. From a firm perspective, this implies reforming the regulatory regime in three areas: (a) product market regulation: which implies easy entry and exit, access to international markets, access to credit markets, enforcement of contracts and bankruptcy laws, (b) labour market regulations, and (c) fiscal burden: burden of taxation and expenditure by the government. Of these three, product market regulation has the largest impact. It has been shown that reforms in these areas will have direct impact on entrepreneurship and innovation thereby leading to higher level and growth of GDP per capita. Interestingly this also leads to increase of the formal economy.
It is important to mention that in recent years some positive steps have been taken by the government in this direction and some early results do indicate a positive impact. The Doing Business Report of the World Bank that was published in November 2017 shows that India has made the most remarkable progress among 190 countries by improving its ranking by 30 places from 130 in 2016 to 100 in 2017. It is too early to comment on the overall impact of this on the economy, but when one looks at the registration of new companies we do observe a significant jump. For example, in 2015 on an average 8,300 new private firms were registered every month while in 2017 this number has gone up to 12,000, an overall increase of 43%. There are reasons to celebrate but one must exercise caution because the report also highlights that the reform process is far from complete and there are areas that require more work, such as reforms related to starting a business (ranked 156), getting construction permits (ranked 181), export and import of goods and services (ranked 146), enforcing contracts (164), tax rates and compliance (ranked 119), and property registration (ranked 154).
In broader context, the process of reformation should be viewed from the perspective where individual liberty is pitted against entitlements. When the regulatory environment favours entitlements such as protection of workers or the incumbents or domestic producers, it vitiates the atmosphere where individuals become dependent and subservient to the government and look to it to create and secure jobs, to grow, etc. In such a milieu, the only freedom one truly enjoys is the freedom to choose, with song and drama of free and fair elections, those political masters who promise and not necessarily deliver the most entitlements.
The hard truth is that entitlements only create an army of slaves depriving individual of liberty and dignity. It sucks growth out of the economy, makes the economy smaller than it should be, pushes firms into informality, and in general lowers welfare and well-being of people. The entitlement regime is a product of a manufactured myth of a weak, insecure, helpless aam aadmi, who needs security and entitlement, and Government (the power seekers) is the only hope. In fact, in such a regime a tyranny is imposed in the name of mythical aam aadmi on real ordinary people!
Interestingly, it is the entitlement regime that drives out pro-market policies in favour of pro-business policies. Take the case of the non-performing assets (NPAs), which in my opinion is the single biggest scam imposed on the ordinary citizens by the powerful and the entitled -- it has deprived the ordinary citizens of growth and development. Why is it the case that most NPAs are concentrated in public sector banks and how is it that these banks that were nationalised to eradicate poverty and serve the mysterious and mythical aam aadmi, have given a significant share the of the hard-earned deposits of millions of ordinary citizens to a handful of entitled industrialists? As always, no criminal intent or wrongdoing will be proven but what should be loud and clear is that in reality the policy of entitlement only benefits a select few while enslaving the majority. On the other hand, when one looks at the software sector, which was blissfully ignored by the government (for a long time the industry output was classified as “miscellaneous”) and not subjected to the tyranny of the mythical aam aadmi, has become a world leader in the software industry.
If there are any lessons one can draw from this, it is that we have to relentlessly continue with the process of reformation that promotes and protects the liberty of the individual. We will need to make a Ulysses pact so that we are not rendered incapable of rational thought by hypnotic sirens of entitlements.
(Informal sector is defined as all unincorporated proprietary and partnership enterprises.)
Dr Kapoor is associate professor, Economics and Planning Unit, Indian Statistical Institute, Delhi.