As talk of second-generation reform gathers steam, it is appropriate to review the patchwork quilts to onions framework that has characterized Indian policy making for the last five decades. The quilts came from socialist patches to competitive instincts of ordinary human beings. The patches were deemed necessary by the we-know-better economists and wannabe policy makers in the sixties and seventies. Courses were taught, and theorems proved, on the advantages of central planning and budget deficits. Leading international institutions like Harvard, MIT, World Bank and the IMF recommended interventions against human nature, and freedom. To our blame, we willingly lapped it all up because it suited our wretched political economy favouring the BLIPs – Babus, Left-intellectuals, (major) Industrialists and Politicians.

In the BLIP order, all policy making had to be of the patchy variety. Want to increasecredit for the so-called poor (read political parties) - then nationalize banks. Want toincrease agricultural production - ban movement of foodgrains between states.Want to help a particular industry - raise tariffs. Want to help fund management -guarantee returns on equity products produced by the state (whose guaranteedlosses could then be subsidized by the taxpayer). Want to increase use of fertilizersby the farmers - ban imports and subsidize the production (but not use) offertilizers.

When the reforms started, the quilt was transformed by the ugly state witch into anonion. The reformers started unpeeling the layers, but no matter how many"reforms" were undertaken, the citizens wept. No matter how many layers removed,the story was the same - more layers to go, more crying left. The first principleargument would have required cutting to the core, but surgery does not occur tothose who believe in band-aids. Tinkerization gained respectability, but only amongIndian policy makers as they moved from one layer to another.

Most of the genuine reforms that have occurred to date (during the nineties) havepertained to the industrial sector. Controls have been hesitantly removed, and tariffsdecreased from obscene 150+ percent levels to still obscene 30-40 percent levels.Even here first principles have been eschewed i.e. why not announce a rigid time-path to a decline in tariffs to the low teens level and stick to it ?

But industrial reforms have been near perfect compared to the so-called reforms inthe financial sector. Financial market changes have been unashamedly of thecontrol variety. In the name of much-needed regulation, the government set up alicensing body called the Securities and Exchange Board of India (SEBI). Thiscontrol body ensures that there is very little competition in the equities market. Lackof competition in the fund management industry is mandated by requiring that eachof the 200 odd equity mutual funds (US has about 4000 for approximately the samenumber of investors) routes its investments through at least 20 brokers, andprohibits regulated portfolio managers (all 21 of them) from accepting performancefees! So the investor pays high fees for transaction costs and mutual fundmanagers get rich.

What is tragic is that when the someone actually finally decides to embark on a firstprinciple non-onion path, it is severely criticized for doing so. Take the example ofprivatization. The Finance Minister, Mr. Sinha decides to sell shares of GAIL in atransparent manner. The price received through an open market process isapproximately Rs. 70 a share. What's wrong? Two major errors. First, Mr. Sinhawent against the Disinvestment Commission's recommendation not to sell inNovember/December because markets at such times are low because ofredemption pressures! Has anybody wondered as to why one needs aDisinvestment Commission to make recommendations on selling after the politicianshave already decided to sell? In a quilt-onion world, this is due diligence.

The second criticism, also from a wannabe trader, came from the former financeminister, Mr. Chidambaram. He refused to sell GAIL shares for Rs. 120 to Rs. 140on the grounds that the price was too low because of the Asian crisis. Obviously,having missed that opportunity and believing in a BLIP price, Mr. Chidambaram nowfinds the price of Rs. 70 as "too low" as do the traders from the opposition Congressparty. Since it is so easy to make certain gains, the Disinvestment Commission,former finance ministers and Congress politicians should go into the fundmanagement business and make zillions on sure-fire methods of selling at the top,buying at the bottom, and selling in August and buying in December.

But beware - they need to have four cats, and two dogs, along with 500 MB of diskspace (albeit of an obsolete 286 machine) to qualify under the SEBI regulations tobe a licensed fund manager. Not to mention Rs. 2.5 lakhs in fees per year for fouryears for the luxury of doing so. Ever wondered why the portfolio managementmarket in India is mostly non-existent overground and flourishing underground ?

But one should not be overly critical of Indian reformers. The new buzz words beingtouted by international experts (replay of the we-know-better interventionist era) arethe mumbo-jumbo of corporate governance and the jumbo-mumbo of"competitiveness". If capital markets are inefficient, one should endeavor to makethem more transparent. Transparency is ensured through competition and strictdisclosure norms, not through requirement of what the Directors should do. If a firmdoes not deliver profits to investors, its shares get sold. The price of Infosys is nothigh because its CEO believes in corporate governance - nor the price of Bajaj atlows because its CEO is universally acknowledged as a great corporate governancechap.

What is even worse is the jumbo-mumbo of "competitiveness" the new buzz wordfrom the same politically correct Western economists and organizations that soldhapless LDC's the virtues of government intervention decades earlier. Macropolicies do not matter - the "inner workings" of a firm do. Incentives do not matter -the correct strategy does. Comparative advantage is obsolete - competitive policy isthe future. Sounds a bit like Deepak Chopra? Yes, and why it is likely to succeed ina non-first principle world. But there is hope - Deepak Chopra isn't half assuccessful in the third world as he is in the first world.