Economic Survey (2020) Chapter – 03 (Pro – Business Versus Pro – Crony) – Economics

Table of Contents

INTRODUCTION

India’s aspiration to become a $5 trillion economy depends critically on promoting “pro-business” policy.
Pro-business policy helps in 2 ways:-

It unleashes the power of competitive markets to generate wealth.
Takes away from “pro-crony” policy that may favour specific private interests.

Economic events since 1991 provide powerful evidence supporting this crucial distinction.
Viewed from the lens of the Stock market, which captures the pulse of any economy,
creative destruction has increased significantly after reform.

The liberalization of the Indian economy in 1991 unleashed competitive markets.
It enabled the forces of creative destruction, generating benefits that we still witness today.
After the market reforms of 1991, Sensex has not only grown, but has grown at an accelerating pace.

This relationship is mirrored in the composition of the Sensex over the years.
For the first ten years since the Sensex’s inception in 1986, the firms that constituted the index barely changed.
Sensex of 1997 were steadily churned out over the next decade, so that the Sensex of 2006 had barely half the firms from the Sensex of 1997.

The years following 1991 liberalization saw the rapid emergence of new firms, new ideas, new technologies and new operating processes.
Had liberalization not occurred, a firm that entered the index in 1986 could have expected to stay on the index for the next sixty years.
Currently, a firm is expected to remain on the index for only 12 years

After Liberalisation, new sectors like banks and financials entered the index for the first time.
It eroded the predominance of the manufacturing sector on the index, placing the services sector on the map for the first time.

This churn in the Sensex represents a very real process of creative destruction that brought altogether new technologies, products and services to consumers.

Monopoly power in the economy is declining and making way for more competitive markets.
Consumers benefit from an increased variety of goods and services, lower prices and improvement in the quality of existing products.

There is a common misconception that people who are in favour of a free market are also in favour of everything that big business does.
Nothing could be further from the truth

Creative destruction brings new innovations into the market that serve people better than the old technologies they displace.
When creative destruction is fostered, sectors as a whole will always outperform individual companies within the sector in creating wealth and maximizing welfare.
Therein lies the motivation for India to pursue pro- business, rather than pro-crony, growth.
DISCRETIONARY ALLOCATION OF NATURAL RESOURCES
VIS-À-VIS
ALLOCATION VIA AUCTIONS

While pro-business policies increase competition, correct market failures, or enforce business
Pro-crony policies hurt markets, promote narrow business interests and may hurt social welfare.