Reflections on the art and science of Policymaking in India

Dr. Vijay Kelkar recently gave the CD Deshmush lecture organised by NCAER. The lecture was in news as Kelkar said there should be just one GST rate. The news agencies know shot ways to kill any interest in the lecture. This was barely a line in the whole lecture!

The lecture is based on the wide experience of the speaker in Indian policy.

My objective in this lecture is to emphasise policy and not programmes. The term ‘policy’ is used here in the sense of the interventions by government that reshape the incentives of private agents towards achieving desired social goals or objectives. It is relatively easy for the government to, say, build houses: this is a programme and not a policy. Policy is about influencing how private persons build houses. This is far more subtle, because people are rational and work for their own self-interest. This involves complexities such as short-term versus long-term, valuation of social benefits and costs, distribution of gains amongst social groups and the consequent political economy. Economics has a lot to say about this endeavour, as economics is about the study of sentient beings who vigorously pursue their own self-interest.

There is a complex interplay between policy and law, but policy is not law. Economic policy thinking leads to the design of interventions. This then leads to the drafting of laws, which is motivated by two kinds of objectives. Laws are required when the State wishes to coerce private persons, as this can only be done with Parliamentary approval. In addition, the law must embed a variety of accountability mechanisms in order to address the problem of public choice, i.e. the behaviour of persons in the State apparatus to serve the public interest.

Why do we need policy thinking about interventions by the State? We need policies because markets sometimes fail to deliver the efficient outcome. This is readily visible in the microeconomic arena, e.g. growing levels of air pollution in our cities. Market failure is also the fundamental justification for macroeconomic policies. Business cycle fluctuations are, in some sense, a reflection of the failure of the uncoordinated decisions of private persons. In that sense, all policy thinking must ultimately be grounded in market failures.

Interesting reading.

 

 

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