The Hindu Business Line, September 12, 2014

By Pradeep S Mehta

The Planning Commission will not respond to tinkering. It needs to be disbanded for its replacement to be effective

When Prime Minister Narendra Modi announced the scrapping of the Planning Commission and establishing a new think tank, many were astounded.

He was responding to calls by many that the plan body has outlived its utility in a market-driven economy, while it was relevant and useful in our early years.

However, he recognised the need for a central think tank which would work closely with the Union Government and our states in pushing the reform and development agenda.

Plainly, Modi is a political entrepreneur who has marketed himself brilliantly in the last general elections. He aspires to see India become a developed country and will not do it walking down a beaten path.

Avoiding the beaten path

One of the major institutional reforms that he has been advocating is close interaction with the different states; he has emphasised that it is the Prime Minister and the chief ministers who govern the country.

That marked quite a change from the earlier pattern. One major hurdle in moving ahead on this count was the Planning Commission; it adopted an imperious, top-down approach to all development schemes and financial allocations. This was abhorrent to the heads of state governments. The constant refrain was that the states were aware of their priorities and how to allocate resources. The whole scheme of the Plan body went against the spirit of federalism.

We do need an overhaul of our institutional framework which will allow new ideas and federalism to flower. Modi, the entrepreneur, is willing to explore and experiment, though that would need better and leaner ministries.

Let us examine his vision through the lens of economist and political scientist Joseph Schumpeter, who said long ago that ‘creative destruction’ is a process by which the old ways of doing things are endogenously destroyed and replaced by new ways.

Schumpeter coined the word ‘ Unternehmergeist ’, German for entrepreneur-spirit, and asserted that “… the doing of new things or the doing of things that are already being done in a new way” stemmed directly from the efforts of entrepreneurs.

A familiar idea

The creative destruction of institutions is not new even in India. For example, when reforms were launched in 1991, the Monopolies & Restrictive Trade Practices Act (MRTPA) was amended to get rid of the albatross of size of firms, merger regulation and so on, and create a level playing field by extending its jurisdiction to the public sector.

But that was not enough to enable our firms to be able to compete in a globalising and liberalising world, particularly when faced with competition from foreign firms manufacturing in India or exporting their goods to India.

In February, 1999 the then Finance Minister, Yashwant Sinha, following advocacy by CUTS announced the need to enact a new and modern competition law, which came into being in 2002. The same argument as in the case of the Planning Commission were raised — that the MRTPA could be modernised rather than a new law adopted.

But that would have been an impossible task. The MRTPA was drafted and adopted in 1969 on the basis of the prevailing trade and economic milieu, and growth was throttled by imposing limits on investment and production. If a firm was licensed to produce 10,000 widgets, it would be penalised for any excess production.

Big was considered bad, and profit was a dirty word. In the 1990s, it was not only because of our own reforms but the arrival of the WTO that the whole trade and economic scenario underwent a sea change. All these changes meant that we needed a new competition law. This necessarily implied that one had to start with a clean slate.

Rejecting the old

Just after the new Competition Act, 2002 came into force, though with a limited mandate due to a court restriction, the old MRTPA went into a demise mode.

Even the staff of the MRTP Commission were not taken into the new Competition Commission of India (CCI), except in a very few cases. Most pending cases at the MRTPC were transferred to the new CCI and its appellate tribunal.

A large number of countries have scrapped their old competition laws and adopted a totally modern and new competition law.

In the area of economic planning many countries have also revised their approach based on the new realities of a market economy. China is a notable example. It has shut down its plan body and a couple of other institutions and created the new National Development and Reforms Commission.

As Narendra Modi said from the ramparts of Red Fort on Independence Day, one has to construct a new building as one cannot repair or remodel the old building, i.e. the Planning Commission. Ideas have also been invited from people at large to suggest a new name and what they think the new think tank should be doing. Let us get on with this creative destruction process.

The writer is the secretary-general of CUTS International

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