Demand for Liberalisation with More Rules | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

Demand for Liberalisation with More Rules

Scheme of the essay

Expositions: Liberalisation is demanding more rules.

Rising Action: It is implied in such a demand that the rules of the old system were not correct.

Climax:

(1) Corruption has increased due to the power of discretion given to politicians

(2) Predetermined rules reduce the flexibility of the government’s decision

(3) Rules may have an overdose of ideology

(4) Completely free markets provide perfect solutions.

(5) Search for rules could be superior

(6) Misuse of discretion cannot be checked by rules.

Falling Action: A formal structure is enough.

Ending: If public reaction to the decision is recorded the purpose is served.

In yet another twist to India’s liberalisation process, liberalisers are now demanding more rules. After years of seeking the dismantling of the old system of bureaucratic rules, liberalisers have welcomed the FIPB’s decision to formulate new rules, and want some more. Implicit in this demand is the belief that what was wrong with the old system was only the nature of the rules and not the fact that there were too many rules. Liberalisation then only calls for a shift from one form of bureaucratic control to another, without attacking bureaucratisation of itself. Such a view further reduces transparency in the decision-making process.

This contention may appear odd since the demand for rules has arisen precisely because of the lack of transparency. There is now little doubt that contrary to what Dr. Manmohan Singh predicted, the reforms since 1991 have not led to a decline in corruption. It may, in fact, have even increased it. Much of this increase can be attributed to the discretion given to politicians in a case-by-case approach to project clearance. Apart from the remarkable propensity for corruption that Indian politicians have displayed, there are several dimensions of the political process that encourage politicians to use discretion in a way that is not the most efficient.

A system that relies completely on discretion allows politicians to use information as political patronage. The very possibility of a project coming up in a small town, for instance, can completely transform land prices in the vicinity of the project area. Even before official clearance for the new airport at Devanhalli near Bangalore, land prices in that small town saw a dramatic rise. In such cases, the price of land can also be talked up or down by politicians supporting or opposing the project. Even if the politician has scruples about tapping this speculative potential himself, he may not be able to resist the temptation to other information, on the actual prospects of the project coming up, as patronage to political supporters.

The use of discretion could also be influenced by the constituency of the decision-makers. Very often a major project involves a conflict of interests among different sections of the population. There is a conflict between those who benefit from a project and those who are displaced by it. A project can also sometimes reduce access to a section of the population to resources. A wildlife protection project may suit the tourism industry, but it could reduce the access of tribal to forest resources. A major project near a small town could take away a major share of the water that would otherwise be available to the small town. The sensitivity of politicians, when faced with such a conflict of interests, tends to be heavily influenced by whether the affected people come within their constituency. This tendency for the use of discretion to be dominated by personal and political considerations has been a major reason for the present clamor for rules.

But a rule-bound system has its own problems. Working with a predefined set of rules reduces the flexibility that the government has when dealing with specific companies. At a time when there are a large number of similar proposals for foreign investment, the government would need to offer fewer concessions to attract the required investment. Conversely, at a time when there are few proposals more concessions may be needed. A common set of rules for both scenarios would lead to either offering more concessions than necessary or offering too few concessions than necessary or offering too few concessions to attract adequate amounts of investment.

Any attempt to frame a set of rules that takes into account all such hypothetical situations is open to being influenced by an overdose of ideology. When dealing with such uncertain situations in the past, policymakers have shown a performance for ideological thumb-rules. Just as the state-is-always-right philosophy tended to dominate bureaucratic rule-making in the pre-liberalization years, it is quite possible that the current situation could lead to a market-is-always-right approach to making rules. Such a shift from one extreme to another has its risks. While there is certainly a case for further exposure of the Indian economy to market forces, things can go wrong if the domestic market is distorted by factors like an increase in the degree of monopoly and the world market by factors like dumping. There is now widespread recognition among economists that markets can also fall. Indeed, even someone like Mr. George Soros, who should know markets, has now warned against the ideology that completely free markets provide perfect solutions.

But what makes a rule-bound approach particularly weak in the Indian context is that it can increase the scope for corruption. Rules are generally made with a specific context in mind, and this context can change over time and across specific cases. A 40 percent ceiling on foreign investment, for instance, can be enough to prevent foreign control in some industries, while in others, with a more dispersed shareholding, this would not be enough. The rule-bound approach to such diversity would be to create more detailed rules that will take care of each situation. But such a complex set of rules will only increase the scope for interpretation and, with it, the scope for corruption.

To make matters worse, the search for rules could itself be spurious as the government can frame a set of rules in such a way as to give itself complete discretionary powers. For instance, there is much excitement among liberalisers when the government announces that it will allow foreign equity participation up to 100 percent. But all that this clause translates into, in practice, is that the government is now free to allow whatever equity participation it wants. In other words, this rule increases, not decreases, the discretionary power of the government.

A new regime of a large number of rules is thus not the most effective remedy to the misuse of discretion. Rather than trying to reduce the scope for discretion to impractical levels, it may be more rewarding to concentrate on preventing the misuse of discretionary powers. In theory, a democracy guards against the misuse of discretionary powers. In theory, a democracy guards against the misuse of discretionary powers by ensuring that those who do so lose political power. But in the absence of adequate transparency, this process is distorted. Instead of finding out about the misuse of discretionary powers when the politician is in power, it is only investigated after he has lost power. There is thus no active threat of the misuse of discretionary powers costing a politician his job. The first step towards curbing the misuse of discretionary powers, therefore, is to improve transparency. This is often seen as a matter of providing greater media access to information. But while such access is important, it may not be enough. The media would concentrate on only those elements of information that interest its target audience. What is also needed is a formal structure where access to information is not only available but groups affected by that information are encouraged to review it. Decision makers would then have to explain in detail why a particular decision has been taken. And this explanation must be actively communicated to all those who are affected by the decision. Such an increase in transparency may not, in itself, be enough. Politicians could mix a few self-serving decisions with several socially beneficial ones and present a positive record. It is thus important to record public reaction to individual decisions. This may not be possible in all cases, but at least for the larger projects, there could be a referendum amongst the people affected. If such referendums are linked to elections that are already taking place, the additional cost of the exercise would not be high. These costs would be more than offset by the benefit of preventing the misuse of discretionary power.