In light of economic growth slowdown it is important to remind ourselves that long term economic growth is a consequence of individual right to private property, and its protection from expropriation not only from other individuals but also from the most powerful entity that has monopoly rights over violence, namely the government itself. It is no surprise that past nationalizations, which were nothing more than expropriation of private property by the government, held India back to realize its true economic potential, and robbed hundreds of millions of people of the prosperity they deserved. Nationalization in the garb of socialism and poverty reduction created a complex bureaucracy - a sort of a tyranny without a tyrant - that further curtailed India’s economic potential. Eventually these flirtation with socialism and nationalization led to an unparalleled economic crisis in the 1990s, and we were compelled to initiate bold and courageous economic reforms. A major step was reduction in bureaucratic red tape by dismantling the “license raj”, whereby making it relatively easy for private players to enter and exit, and this led to unprecedented economic growth, creation of a middle class, prosperity, and poverty reduction. These reforms got a further shot in the arm in the early 2000s with the disinvestment drive. For example, the telecom and the energy sector that were plagued by shortages for time immemorial were partially privatized and very soon turned a surplus, this boosted the economy and laid the foundation for a “digital economy.” In many ways this was a smack on the face of those who believed that nationalization and socialism, were the answers to India’s poverty and social problems.
However, the specter of socialism and nationalization rose once again, and this became apparent in 2012-13 when the then Finance Minister (FM) of India much against the advice of his senior colleagues “amended the Income Tax act of 1961 with retrospective effect to undo the Supreme Court (SC) judgement in the Vodafone tax case.” The FM articulated in an interview that the SC did this primarily due to their concern for its effect on Foreign Direct Investment (FDI). In my opinion the former FM missed an important point which merits attention. The primary issue was not whether FDI would be discouraged or not but a much bigger question of whether private property is protected from expropriation by the state. In a long-lasting democracy, rights of an individual vis-à-vis the state are protected by an independent judiciary. This act of the former FM to undo a SC judgement was an assault on the individual right to private property. The Vodafone tax case went through the entire judicial process that is available to an ordinary citizen of the country. In its final verdict the SC agreed with Vodafone’s stance that its tax planning was legitimate and within the framework of the law. The court, while making a distinction between tax avoidance and tax evasion, made the following observation “Every person is entitled so to arrange his affairs as to avoid taxation, but the arrangement must be real and genuine and not a sham or make-believe.” Even though it became evident that the existing Income Tax act of 1961 had a lacuna which needed to be fixed and the sovereign had the right to do so, but to fix it with retrospective effect was when it became problematic. Had the law been applied with prospective effect it would have been a reform but to apply it retrospectively to undermine the SC judgement was a cruel joke on the independence of institutions to check the power of the state. The message was loud and clear that individual property rights in India are not well protected from the might of the state, a point that was clearly missed by the former FM. Perhaps he should have listened to the better counsel and advice of his more senior colleagues.
The second assault on private property came in quick succession in 2014, ironically from the SC itself, when it cancelled all the coal block allocations to the private sector from 1993 to 2012. In 2014 a public interest litigation (PIL) was filed in the SC, which questioned the arbitrary nature of the coal block allocations to the private players by the government. The SC accepted the petitioner’s plea and in one stroke cancelled all the coal block allocations from 1993 to 2012. Unfortunately, the highest court did not take into consideration the property rights of various stake holders, such as the creditors, investors, and the shareholders of these companies for whom it would have been practically impossible to know whether the government’s coal allocations to these companies were arbitrary in nature, and therefore, illegal. Considering that some of these allocations were made decades ago with no known discrepancy, it would have been natural for these stake holders to believe that these were genuine. It is also important to remember that the share of the power sector in bank credit to the industry was less than 1% in 1998 and by 2014 it had grown to 20% at more than five lakh crores. It was evident that other stake holders had significant exposure to this sector. Once again the message was loud and clear that property rights of individuals in India are not well protected. The coal allocation issue was not black and white, it merited careful consideration by the SC in terms of its impact on various stakeholders who were not guilty of the crime committed by others. Perhaps, Antonin Scalia was right when he wrote that “In the grand scheme of things, whether the right party won was secondary. Famous old cases are famous, you see, not because they come out right, but because the rule of law they announced was the intelligent one. Common-law courts performed two functions: One was to apply the law to the facts…But the second function, and the more important one, was to make the law.” The law that got made that day was that individual property rights are not well protected in India.
There are important lessons to be learnt. Though fiscal and monetary policy measures are being taken to arrest the economic growth slowdown but in my opinion they will not be sufficient to generate long term growth. Fundamentally, the government needs to give an assurance that individual right to private property is protected from expropriation not only from other individuals but also from the most powerful entity that has monopoly rights over violence, namely the government itself, and if I may add to the list the courts themselves. It is no surprise that large part of the Indian economy is informal, the reason for this is not that the tax rates and/or the cost of formalization are too high, it is primarily due to distrust of the government and other institutions for fear of expropriation by them. One would have imagined that Indian democracy would give it an edge over an autocratic country like China in terms of privatization and long term growth. However, this has not happened yet. It remains a puzzle how China with no tradition of free and fair elections, and independent judiciary provides more economic freedom and better protection to private property than India.