Posted by Tanya Hutchens

I am totally tuned in to the incentives, rewards, labour and profit motives of capitalism. It is not perfect. But it is historically absurd to deny that price and profit signals under capitalism have done a far better job of allocating scarce resources and sustaining long periods of economic growth than any other alternative.

Communism proved itself to be a disaster wherever and in whatever name practised. Remember the USSR? East Germany? Bulgaria? Romania? Albania? And the devastation of Cuba under Fidel Castro that his ageing brother Raul cannot fix? Socialism, too, has had its innings in the west as well as in the east, and failed. State-sponsored capitalism — once the hot East-Asian model — saw too much of the state, and relatively less of private capital, resulting in overarching ambitions, needlessly grandiose projects and poor long-term returns. Go to Dubai and see for yourself. And the mixed economy with the state occupying the ‘commanding heights’ meant one thing: too much of command with little or no height worth the name.

So, if you were to closely observe the dirty, disordered canvas of economic progress during the 20th and 21st century, you should conclude that, for all its warts, capitalism has been the winner. It has sometimes caused pain; suffered from serious cycles; and often needed the clout of the state — such as we have seen from September 2008. It has also been quite resistant to sensible regulation. Even so, the basic institutions of capitalism have worked, not just in the US and the OECD (Organisation for Economic Co-operation and development) nations, but also many developing countries, of which India is one. And worked better than alternative mechanisms.

That brings me to India. As we move on to the second decade of the 21st century, here’s my core hypothesis: India is geared to have significantly more of capitalism than what we have had up to now. And the more the better.

Let us begin with agriculture. Nowhere is there a more intensely capitalistic venture than farmers choosing the crops that they sow, water, weed, harvest and sell. Since the late 1960s, economists have run thousands of regressions called supply response functions, which quantitatively determine what best explains crop acreage and output over long periods. What are the results? From the turn of the 20th century right up to now, crops were planted according to expected prices and/or profits — surrogated by the price signals of the previous few years. Of course, other variables mattered such as rainfall, irrigation and fertiliser use. But the driving force was profits. Capitalism, therefore, defines 17 per cent of India’s GDP, namely agriculture.

Now to services, which accounts for 55 per cent of GDP. If you deduct the share of government services, there is still some 40 per cent of GDP, much of it in the private sector. This is huge. And many of the activities are driven largely by profits. Whether it be mobile telephony, retail trade, restaurants, real estate, storage, hotels, road transport or finance, each service — big, medium, small or holes in the wall — rises, shrinks, falls, re-grows or disappears according to supply, demand, costs and pricing. Even earlier anti-market behemoths such as public sector banks and insurance companies have become more attuned to prices and profits than anyone could have imagined in the mid-1990s.

Thus, 57 per cent of India’s GDP is tuned to capitalism. What about industry, which accounts for 28 per cent of GDP? Some two-thirds of it is purely private. That is another 18 per cent approximately. Moreover, most public sector undertakings are more price-and-profit oriented than ever before.

So, hello capitalism! It accounts for at least three-quarters of our GDP. It may be higher still. But 75 per cent will do for now. Contrary to what the CPI, CPI(M) and some ‘don’t confuse me with facts’ professors tell you, India is awash with capitalism. Like China, you turn any corner, and you will meet someone who wants to start some business or the other: a photocopying shop, an STD booth, a local agency for Dabur, Godrej or Hindustan Unilever, automobile spare parts — the list is endless.

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