Two common threads run through all current discussions on the Indian economy. First, growth has been rapid since economic liberalization was initiated. Second, the benefits of this growth are skewed with reference to peninsular and western India in contrast to eastern and northern India.
Having seen how Andhra Pradesh in the mid-1970s and early 1980s was transformed from a backward economy to a relatively modern economy, I am persuaded to believe that there are two categories of markets: feudal markets and modern markets. Or more appropriately, markets in feudal structures and markets in modern societies. The responses of these two markets to external stimuli—be it funds and investment or softer skills such as education and health—are different. Feudal markets function on relationships, hierarchy and patronage. Patron-client equations in hierarchical structures set the tone for the functioning of the economy, ruling out the possibility of structural transformation. The approach is anti-change rather than of breaking conventions in sync with economic democracy.
These factors inhibit investment. There is inbuilt resistance to innovative methods that upset the apple cart, restricting the claims of equal rights of participation and of resultant gains. Modern markets, on the other hand, function on rules and transparency, and are open to innovative ideas. These factors attract investment with competition ensuring equal rights to all claimants. The implications of feudal markets and their regressive impact have not been addressed enough, perhaps on the assumption that markets are homogeneous, inanimate institutions.
Market classification into feudal and modern is based on the conduct of business in these two markets. Cartels are good examples to highlight these differences. They occur in all markets. Firms collaborate to form cartels and fix prices. As a result, consumers are denied the benefit of competition. Game theoretic framework, however, shows that firms follow business strategies that result in identical price structures even in oligopolistic market structures without the need to collaborate or form cartels. In their effort to detect and break cartels, competition authorities instead look for agreements that indicate collaboration. Alternatively, they encourage whistle-blowing with appropriate incentives.
In the case of feudal markets, game theoretic modelling is of no relevance. Collaboration is a non-issue. Entry is restricted with complete lack of transparency in all transactions as the Competition Commission discovered in its investigation into the onion trade cartel. Of prime significance in the onion market was the presence of strong kinship bonds among traders cemented over generations. The corollary condition of feudal markets was discernible in the patron-client relationship between peasant farmer and traders with predetermined prices and marketable stocks. The auction markets and bidding mechanisms of modern markets for competition remained a farce in the onion market. What is interesting and significant is that the commission could not break the cartel for want of evidence.
Of course, it could be argued that the onion market is a one-off case typical of vegetable mandis. The intent is not to delve into a discussion on cartel busting but to highlight features of feudal markets that deter private foreign investment in modern industry. Hierarchical structures based on personal relationships as seen in the onion market or the denial of equal rights and claims of all participants are hardly conducive for attracting investment. Current data on foreign investment shows that six states and Union territories—Maharashtra, Delhi, Karnataka, Tamil Nadu, Andhra Pradesh and Telangana—garnered a large portion in 2017.
What could be a catalyst? The new narrative currently doing the rounds is of foreign investment flowing into activities pertaining to agriculture in economically backward states. Foreign investment is agnostic but would it usher change in a short time frame? I would root instead for investment in business that disrupts existing structures on a large scale.
The Andhra Pradesh experience underlines foreign investment as a catalyst of change. Catching the tail wind of outsourcing, these investments in technology companies led to a “chain of events”, which, in my view, made the difference. The emergence of a host of services catering to upwardly mobile young people employed in these companies created jobs for low-skilled workers, many from rural areas, and exposed them to modern markets.
Digitalization and the spread of smartphones throws up several outreach possibilities. This has demonstrated the innovative and inclusive approach of digital finance. New finance companies are selling customized financial products online to clientele outside structured financial institutions and at minimum risk. In the era of “big data”, digital sale of data offers unexplored opportunities to farmers. Real-time data on cropping patterns; resistance of new seeds to pests; responses to new varieties of seed—it’s all information sought by international firms engaged in genetically modified seed technology and automation of farm equipment. This data business empowers small farmers. Negotiation with large business houses is now possible, unheard of within the feudal constricts of patron-client relations. The only hitch is resistance to rule-based modern markets ingrained in feudal societies.