Every Independence Day, India’s Prime Ministers have paid homage to the nation’s freedom fighters from the ramparts of the Red Fort. This year, Prime Minister Modi called on the nation to honor India’s wealth creators. Wealthy people, who were alarmed by the Finance Minister’s recent statements, and by Mr. Modi’s own actions (demonetization was designed to hurt the rich, he had said), were reassured that Mr. Modi seemed to have shed his socialist ideas.
The logic for lauding the wealthy people on top is the country needs them to create more wealth before it is redistributed. The assumption is, the only way to grow the economy is to first grow the top and then make wealth flow to bottom. Another way to make the economy larger would be to induce more growth at the bottom by spurring millions of small wealth-creators. This would change the shape of the economy while also increasing its size. Presently the debate within the economics’ policy establishment is focused on reforms to make the economy grow faster, to reach the goal of $5 trillion, which the Prime Minister has begun to dangle, like a carrot, for investors. Suggestions of reforms to change the economy’s lop-sided shape, to increase incomes and wealth at the bottom, are dismissed as ‘socialist’ (a bad word) and not ‘capitalist’ (good), even though this approach would create millions more capitalists, albeit tiny ones.
Dirubhai Ambani is, rightly, celebrated as a great wealth-creator. He required a whole sports stadium to assemble the thousands of small investors in the Reliance enterprise who he made wealthy beyond their expectations. The catch was this: they had to put in some money for Dhirubhai to increase their wealth. The Indian government’s challenge is to increase the incomes and wealth of the millions who do not earn enough, or save enough, to have any money to invest in the stock-market. Only 20 million Indians, out of a population of over one billion, invest in mutual funds and stocks. The remaining 98 percent must earn their incomes only from their own labor and skills, or their own enterprise. For them the gyrations of the stock-market create no sweat. To get onto the economic ladder and convert their labor and entrepreneurial spirit into wealth, they need jobs with decent wages, or finance and larger markets for their tiny enterprises. The structural problem of the Indian economy are the weak steps at the bottom of the wealth-creation ladder for 98 percent of Indian citizens to climb up.
Wealth must circulate within the economy for it to grow inclusively and sustainably. When the pace of flow of wealth upwards exceeds the pace of flow down, it accumulates in one part only, choking healthy circulation. Greater returns to capital than from wages, due to structural changes in capitalist economies, has caused the accumulation of more wealth at the top everywhere. This is the principal cause of the increase in inequalities of incomes and wealth around the world in the last thirty years.
Those with more wealth in a society always had greater power in influencing the rules of the game. In medieval times, rulers needed financiers’ money for national ventures—for supporting their armies and building national monuments. In modern times, governments need the wealthy to invest in infrastructure and industries and, in capitalist economies, to build defense industries too. It is more civilized to pander to vested interests than to expropriate their wealth; and it is more statesmanlike to persuade than to pander.
Mahatma Gandhi supported capitalists. He wrote in his journal Harijan, “Private possession is itself not held to be impure…Earn your crores by all means. But understand that your wealth is not yours, it belongs to the people. Take what you require for your legitimate needs and use the rest for society.”
Gandhiji, and his adviser in economics J. C. Kumarappa, advocated bottom-up wealth creation in small, local, enterprises and cooperatives. (For an excellent account, see The Web of Freedom: J.C. Kumarappa and Gandhi’s Struggle for Economic Justice, by Govindhu and Malghan). Jawaharlal Nehru, the first Indian Prime Minister to unfurl the national flag on the Red Fort, had other ideas. He promoted large industrial enterprises, owned by the state, because in the 1950s only the state could marshal money to invest in them. 40 years later, Rajiv Gandhi and Narsimha Rao began to unwind the state’s role in the economy. However, their model of growth was top-down too; the difference was a shift in ownership of the commanding heights of the economy from public to private purses. Tucked within Mr. Modi’s speech was his appeal for a Gandhian economy. He said people should buy products made in their villages and districts. This will strengthen our micro and small-scale sectors, he said. ‘Buy local for a more prosperous tomorrow’, he urged.
Gandhiji had led the formation of collective movements to shift power towards small people. Cooperative institutions are necessary to shift terms of trade in favor of workers (to get better wages) and small producers (to get better prices), so that wealth begins to accrue faster at the bottom. Therefore, good unions of workers must be encouraged (think Sewa—the self-employed women’s’ union) and good cooperatives of tiny entrepreneurs (think Amul). Rather than promote more wealth at the top with the hope of its trickling down faster, reforms must stimulate an inclusive capitalism with the growth of better, and many more, cooperatives and unions.
The question is, what kind of economy India should have; not merely how large it should be. Rather than being driven by numerical goals of the size of the economy, policy solutions must be inspired by a new vision of a reshaped, inclusive economy. Perhaps, while celebrating the stalwarts who brought India its political freedom—Patel, Gandhi, and Nehru—we should, in this 150th anniversary year of Gandhiji, recall his vision for India’s economy, as Mr. Modi tantalizingly seemed to.