Ashish Arora

What should the government do? Are the policies and initiatives laid out in Mr Jaitley’s recent budgets the right ones? How can the government promote growth while also reducing poverty, protecting the environment, and empowering women?  I have an opinion on many of these questions, and in that I am no different from many others who have blogged or written about the topic or the budget.  

But the uncomfortable truth is that it is unlikely that anyone truly knows the ‘right answer’.  Debating opinions is fine to a point, but as every entrepreneur knows, there is only one way to find out - try it and see. As every entrepreneur also knows, planning helps, but mostly to maximise learning at the lowest cost in terms of time and resources.  

How can we learn which policies will work and what will not, and can we learn this more efficiently? In other words, how can we perform policy experiments, and implement policies that have worked (and in whom we therefore have more confidence)?

One way to do this is to take advantage of India’s federal structure.  India has states that are bigger in size than many countries. Give the states the opportunity and ability to try out different ways of encouraging industry, of targeting the poor or the disabled, of providing social services to their citizens. 

Fiscal decentralisation is a must. The Fourteenth Finance Commission has done the right thing.  The Economic Survey tells us that starting now, the States will get over 60% of the national tax revenues, up from about 54%.  The difference may seem small, but the potential significance is large. 

You do not have to take my word for it.  Or rather, not just my word.  Surendra Bagde and I did some research a few years ago on the rise of engineering colleges that have been vital for India’s $100 billion IT industry.  These colleges are almost all privately funded (they do not receive public subsidy), and started first in Karnataka (Manipal Institute!), Tamil Nadu, Andhra Pradesh, and Maharashtra.  

In the early 1990s, India’s engineering baccalaureate capacity was heavily concentrated in these states. As students streamed to these colleges from all over India, other states took notice and allowed private colleges to start locally. 

Today, engineering and management colleges are ubiquitous. We can complain about their uneven quality but let us keep in mind that without them, India’s IT industry would have been stillborn. The lesson is simple. States can be the laboratory of democracy.  A policy tried out by one will, if successful, be copied by others, and sometimes, improved in the process.  And there is nothing that prevents the Centre from also learning from policy experiments by States.  

There is another, less visible, lesson.  Official government policy on IT was heavily hardware-centric, with lofty aims of developing a world class electronics (as IT was referred to in those days) sector. (I have a vivid memory of a conference in Chennai in 2002 on how other countries could learn from India’s software success, where a secretary to the government of India proudly outlined plans to invest in semiconductor manufacturing, because a country as great as India could not simply provide coding services. Instead, India had to be a leader in technology and innovation.)  

There were a variety of policies, institutes, commissions, councils and programs to make that happen.  Unfortunately, but not unexpectedly, they did not succeed. Also unexpectedly, but fortunately, they were not able to thwart the development of the Indian software industry.  The less visible lesson is not to make good the enemy of best -- not to let hubris and soaring ambition get in the way of successful accomplishment.

And this is why I applaud the lack of ambition in the Atal Innovation Mission (150 crores is peanuts!) because when one is unsure about how to proceed, it is best to start small. This is why I am sceptical of the IITs and IIITs and various other advanced institutes that the budget has ordered up to the states -- they are unlikely to become much more than prematurely middle-aged and tired teaching institutes, instead of institutes of research and knowledge. And this is also why I am not a great fan of the 1000 crore for incubators for startups. 

Even with the best of intentions, institutions that get public money tend to become bureaucratic and ‘sarkari’ in spirit.  Startup incubators are unlikely to work well under such situations, and in any case, incubators are fashionable but work largely for products like apps.  What startups need are better prospects of being acquired.  In turn, that will happen when the established firms compete vigorously amongst themselves and with foreign competitors. The great enemy of entrepreneurship and innovation is the dead grip that established incumbent firms and business houses have on the Indian economy.  

This budget is unlikely to do much to loosen that grip.  Perhaps the next budget will talk about a serious competition policy and the danger, current and future, that dominant business groups pose for an economically vibrant democracy.  Better still, perhaps the next one will impose a serious inter-corporate dividend tax and other measures that will shrink business groups.   As the Finance Minister said, Kuch to phool khilaye humne, aur kuch phool khilane hai mushkil yeh hai bag me ab tak, kaante kai purane hai.

(Ashish Arora teaches at the Fuqua School of Business, Duke University)