Shruti Rajagopalan talks to Ajay Shah about when a market failure justifies state intervention

 

Ideas Of India is a new podcast where Mercatus Senior Research Fellow Shruti Rajagopalan examines the academic ideas that can propel India forward. You can subscribe to the podcast on Apple, Spotify, Google or the podcast app of your choice.

 

In this episode, Shruti sat down with Ajay Shah to discuss his new book with Vijay Kelkar, In Service of the Republic: The Art and Science of Economic Policy, and the challenges facing the Indian state today. Shah is a professor at the National Institute of Public Finance and Policy in New Delhi, India, where he studies economics, law, and public administration. His areas of specific focus are macroeconomics, finance, health, technology policy, and the justice system. This transcript has been slightly edited for clarity.

 

Read the full transcript:

 

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, aimed at bridging the gap between academic ideas and real-world problems. Today my guest is Ajay Shah, professor of economics at the National Institute of Public Finance and Policy in New Delhi. Over the years I’ve learned a lot from Ajay’s academic and policy-oriented research on India, written at the intersection of economics, law, and public administration.

 

His latest book, In Service of the Republic: The Art and Science of Economic Policy, coauthored with Professor Vijay Kelkar, is an excellent overview of their interdisciplinary approach to policy in India. An important theme in the book is that market failure in itself does not justify state intervention. And between market failure and government intervention, we must examine state capacity, the incentives of political actors, and the checks and balances provided by the larger institutional framework.

 

I was first introduced to Ajay through his work on financial markets, and I have noticed a shift in his thinking. He used to be more focused on technical aspects of economics and about where markets can fail. Now the focus is on working through the rules and institutional arrangements through which we govern ourselves. We talked about this evolution in Ajay’s thinking, his firsthand experience with policy making, his journey as an economist, his major influences, and much more. This conversation was recorded in person in February, before the COVID pandemic. But Ajay’s book with Vijay Kelkar is timeless in its insights and equally applicable, if not more, in the post-COVID world.

 

 I want to give the two-sentence version, my summary of the book, and you tell me if I’ve captured it. It’s a broader book than simply public economics, but I would say that there is the “public economics 101” that we are all taught in economics undergraduate and grad school, which is, when there’s market failure, the government must intervene and it must correct the market failure. Other than market failures, left to itself, the invisible hand works quite well. What you have introduced is a sophisticated public economics second version, which is, it is not just sufficient to say that there’s market failure and the government must intervene, but we need to ask a whole number of questions between market failure and government intervention, which is things like first accounting for incentives of the state actors who are self-interested, et cetera.

 

Second is to think about capacity constraints and administrative constraints, and in India we really suffer from very weak state capacity, very frail institutions which don’t have the ability to execute. Also information problems, knowledge problems. So just because there’s a market failure, you may not always lead to a government intervention. In fact, there are very small number of cases with a market failure that the answer would be government intervention. A part two of that is, very often the market failure corrects itself, à la Coase or Elinor Ostrom, which is, there is a private, voluntary solution for externality problems. Is that a good summary of the thought process behind the book?

 

AJAY SHAH: I would just add two things to that. The first is that in the book and in our intuition, we think of state capacity as a limited resource that you start at members of parliament, the prime minister, the cabinet, and you think, “I’ve got a limited resource. What are the few priorities I should squander that limited resource upon?” So I think that’s a very valuable perspective, and it’s actually economics. It’s about decision-making under constraints. So pick your battles wisely and do a few basics, and God knows there are many basics in India waiting to be done, such as building a criminal justice system.

 

The second intuition that we carry into this is that state capacity is very hard to change. It evolved very slowly, but it is something you learn. There’s a learning by doing for a republic to learn to achieve state capacity. So we would tell a more constructive story of saying,” Pick a few battles, do a few things, learn how to do them well.” Then maybe in the future you might like to creep out, while understanding that these are 20-year, 40-year, 80-year, hundred-year journeys. Don’t think that these things can be solved in two years. But imagine that if we learn how to run a criminal justice system, we’d have learned something great.

 

So think about each of these as a capability that can be acquired, and there’s learning by doing in acquiring these capabilities. So let’s not spread ourselves thin doing 20 things.

 

RAJAGOPALAN: Yeah, and one of my favorite examples of that in the book is when you suggest that we should free-ride on the regulatory capacity of other first-world countries, right? So if a good or a food or anything is FDA approved in the United States, we know that they have fantastic capacity, and there is no reason to squander our limited state capacity going through the same approval system.

 

Is India Using Markets by Necessity or Choice?

 

SHAH: There’s a quote in the book from Kaushik Basu where he said that we have libertarianism of necessity, and we have libertarianism of choice. In India, we have to do libertarianism of necessity because we every day confront the malfunctioning state institutions. We’ve always got to think, can this work? Would it go wrong? We’re surrounded by unchecked coercive power in the hands of very frail state institutions, and that creates limits on state capacity. So I think that’s the way our lived experience in India has brought us.

 

RAJAGOPALAN: I want to unpack from what you told me is the Kaushik Basu quote. I think that’s also very much at the core of this book. So to me, this book is a libertarianism by necessity, or I would say there is a presumption towards laissez-faire. The presumption towards laissez-faire is advocated on the back of the lack of state capacity and poor government incentives.

 

There is another part to laissez-faire, which is a genuine faith in markets and the decentralized actions, to a pattern which is actually socially beneficial. I feel like even those in India, all the public intellectuals in India who are now much more favorable to public choice thinking, who are actually libertarians by necessity, who understand that Indian state doesn’t have the ability to execute and has poor incentives—there is still a fear of markets in the sense that we don’t fully trust markets. So were we in Sweden, this kind of book wouldn’t get the same reception, because that constraint of state capacity goes away. What do you think about that?

 

SHAH: I think that there is an important ideological divide about the space for markets in a country where there is high state capacity. Okay. So if we were in Sweden, there would be important and legitimate differences between people on what is the most useful path. But at the same time, Kelkar and I feel that where we are in India today, it is possible to be nonideological and to agree on a position where for different reasons many people can come together on a platform of saying, “Look, let’s have the state do less.” So I’m happy to debate that other question with you, and I have my own views on it, but the remarkable thing is that when placed in a country like India, people of different ideological persuasions can come together on a platform. Some saying that “I think the free market works pretty well, and we should just leave it be.” Others thinking, “I’m not that pleased at how this outcome works out, but you know what? Given our limits on state capacity, we are better off doing nothing.”

 

I think, pulling that together, we can make a big tent and create a consensus around the evolution of the republic. So we’re trying to avoid that ideological fight. We’re trying to say, “Look, let’s not have illusions about the Indian state.” That helps to come together around a much more freedom position than would otherwise have been the case.

 

I want to pick up on where you left off a moment ago about private negotiations. Actually, that’s an important piece, which is not as much there in this book as I would like. I worry a lot about that, and I don’t know the answers to this. I’m actually shocked at the shriveling of the space for negotiation between private actors in India. I think that what has happened is, too many years of big state has created an infantilization of the people, where we turn to political action and state coercion to solve problems rather than having good-faith negotiations with each other.

 

So I think that there’s a much bigger battle in trying to look beyond state-led solutions. Deep inside the Indian political instinct, and also the behavior of most intellectuals in India today, is a presumption that we look up to the state. So when in doubt, we look up to the state; we don’t look at each other. While this book is a beginning on some of these arguments about creating space for private negotiations, I worry a lot about the extent to which we, the people of India, are willing to be adults and talk to each other and engage in sophisticated negotiations. Like, will we really get the fishery and the steel mill negotiating, or will we have the fishery running a demonstration and trying to get political action to clamp down on the steel mill? We in India are likely to veer towards the latter.

 

The Ideal Balance Between State and Market

 

RAJAGOPALAN: I share that concern with you, and I’ll tell you the two things which are not part of the book which worry me a little bit. So I’m completely on board with you that when there’s a market failure, the state shouldn’t automatically intervene, and there are many more questions in the checklist before we make that call. But when I look around the sprawl of the Indian state, usually it is not just market failure when the state intervenes. In fact, when there is a market failure, the state is often asleep. The case of air pollution in Delhi because of crop burning in the neighboring areas, or something like that. So some externality problems, and we see no state action. The state action we do see is of two kinds. One is paternalism, whereas you pointed out, there’s this presumption that the poor little Indian citizen has no clue on how to run her own life and must be guided and must be protected not just from outside elements, but from her own judgment.

 

The other is the classic socialist redistribution. This is not that the market didn’t allocate correctly and there was a market failure, so we need to intervene and fix the allocation problem. The market allocated just fine; we’re just not happy with it. So we need to put in price controls and quantity controls, and we need to redistribute. So a lot of the sprawl of the Indian state, especially where we call for structural reforms in the factor markets, it’s just rampant with paternalistic regulation and with this kind of distributive justice regulation. So I feel like until we have some kind of faith in markets—and it’s not just presumptive laissez-faire because the government is broken, but actual belief in private negotiations, voluntary solutions—how do you tackle that beast of that other regulation which has nothing to do with market failure?

 

SHAH: Yeah. So I think that you are correctly putting your finger on the lack of a theory of what is the state. Okay. So what is the idea of India? What is the theory of what we want the Indian state to do? This is a terribly important question, and I don’t think we have enough of that figured out. As you know, in the book, we tell a story that we’ve been through three paradigms in the evolution of the Indian state. What we call the Mark One is the world of Nehru and Mahalanobis. It’s a world of central planning and state-led development—a developmental state, which is the phrase used by development economists. It worked for some time, and then it petered out by the ’60s and the ’70s. Then in about the ’80s and the ’90s, we created a new paradigm around our concepts of the Indian state, which is led by people like Jagdish Bhagwati and Ashok Desai and T. N. Srinivasan, Manmohan Singh.

 

But it was inadequately thought through, and in a way, that paradigm has run its course. We are standing today in 2019 holding a real decline of about 60 percent in private investment compared to where we were in 2011, and there’s a huge loss of confidence and a sense of confusion about who we are and where we’re going. That—are we a market economy? What do we mean by being a market economy? We’ve instead built out a big administrative state. We’ve built out very high coercive powers. We’ve got criminalization of all sorts of little problems in commercial law, and private persons are scared and not comfortable investing in building organizations here, in building organizational capability. This calls for a fundamental rethink of the idea of India, of what is our conception of a market economy located in a liberal democracy.

 

This is the time for that kind of cogitation, and this book is our offering towards that grand question that—can we argue with each other? What is the role of freedom? As you look around the Indian landscape, as you were saying a moment ago, there’s just a whole lot of gratuitous intervention by the state, and most of it flounders and fumbles. So it’s just an embarrassment. The lack of theory, the lack of a conceptual framework, and the lack of feedback loops through which failure generates modification of your theory, because we go bumble into the economy, we make mistakes, and then we seem to learn nothing. The years go by and we seem to learn nothing. Kelkar and I feel that part of the problem is the walls that have come to separate the specialized disciplines of—first of all there is a development economics camp, which is more or less disconnected from most mainstream thinking in India.

 

Then there is the normal economics people in India. Then there is public economics, there is public administration, there is political economy, there is law. There are all these communities who are sitting separately from each other, who are barely able to talk to each other and who have not been able to agree on a framework and a paradigm. The closest you will find to a new paradigm in India is a bit of Nehru and Mahalanobis done afresh, which is a new bunch of engineers who want to build some new systems. Okay. So the old central planners wanted to build a steel mill in Bokaro, and the new central planners want to build a monopoly credit bureau or a monopoly payment system. So, not much has changed in some ways.

 

So this book is our attempt at trying to think through these questions on a bigger scale, and use our competitive advantage in having read and been plugged into all of these disciplines of public economics and law and public administration and political economy, and try to pull these together into one coherent narrative, and to write a book that will be read by all these pieces. So we think these grand questions should really go beyond the narrow community of economists to a larger thinking population of the country. So that’s our attempt in this book.

 

Ideas and Intellectuals Trapped in Their Time

 

RAJAGOPALAN: I think the book is very successful in that, in two, three aspects. First, as you said, you cover a breadth of issues. Second, it’s written very simply. The core of it, it is economics in every page. It is not technical, and it’s not using language that is difficult to understand. Even our policymakers and our legislators would be able to read this and understand something and get something valuable out of it. So in that sense, it wasn’t so much a critique of the book as much as it was a critique of the space that we occupy. Coming back to Mark One, Mark Two, Mark Three. One of the thoughts that I had, one of the themes that has influenced my own thinking is the importance of ideas on what finally emerges as policy or regulation. I think in one sense, Nehru and Mahalanobis get a bit of a bad rap now in hindsight, because they were really working on ideas that were the ideas of their time. Right?

 

Hayek was the outlier of that time. Von Mises was the outlier of that time, and it was really either Soviet planning thinking or it was Keynesian thinking. So in that sense, the model that Nehru and Mahalanobis might have picked was this closer to the Soviet system instead of the American progressive system, but it was still very much . . . they were intellectuals who were aware of what were the most economic ideas of their time.

 

SHAH: So it’s very easy to criticize them with the benefit of hindsight. I think that’s overdone and exactly as you say. I think they were great intellectuals. They thought about the world of their time, and they made calls about that world. To add to what you said, in addition to the questions about the Soviet model—which seemed to have worked well at the time, barring the disgusting stuff that was starting to become known in the West by the late ’30s—it is also true that the First World War and the Second World War were won in all countries by extreme mobilization of the economy to the ends of the state. So even in the UK and in the US you really suspended market economics at the time of the war. The war was won by extreme state domination of the economy, and it is easy to then slip into the metaphor that that kind of mobilization can or should be done in peacetime.

 

RAJAGOPALAN: Exactly. We also inherited that legacy because so quickly after the war—be it in independence, in ’47, I feel like I can see the same for Mark Two. By the time the reforms came about for the P. V Narasimha Rao. government through Dr. Manmohan Singh, there had been a growing literature by Jagdish Bhagwati, the great book by Bhagwati and Padma Desai, and Bhagwati and T. N. Srinivasan. It was in the air that this kind of industrial planning regulatory system needs to be dismantled. To that extent, even Dr. Singh and the reforms, they were very much in keeping with the times. I feel like that’s not what’s happening today. There seems to be an enormous disconnect between what economists and public intellectuals and lawyers and policymakers agree upon as an appropriate model of what works and what doesn’t work, and what the government thinks of as an appropriate model of what works and what doesn’t work.

 

So what do you think is going on in the last decade? There is a big elite criticism that the prime minister and the core group in the cabinet is not a very elite, educated, reading, thinking audience, like Dr. Singh and his Oxford education. So that’s one elitist view on what the problem is. Another view is we’ve had prime ministers who did not know any economics, but they surrounded themselves with and trusted the excellent technocrats and economists and regulators and actually took their advice, which is what helped them keep in line with the times. So what is your diagnosis of why we are so anachronistic in our thinking today? We’ve gone back to planning models, we’ve gone back to social engineering. Today in the newspaper, I read something about a call for a New Swadeshi movement with making India, which might very quickly veer out of control into import substitutions and export caps. So where do you think the problem is?

 

SHAH: I think there are two strands to this. It’s very interesting and important to understand the shift from Mark One and Mark Two, because that gives us insights into what comes next. Kelkar and I don’t think of ’91 as the decisive date. In fact, the ideas were shifting and the policies were shifting over many years before that. It takes many years of cumulative work to significantly move the battleship that is the Indian state. In terms of the economic performance, yes, it’s true that 1991 to 2011 is the golden 20 years of astonishingly good economic performance. But there is a long lag of many, many things that are done and many, many things that fall into place, and that story really runs further back. So ’91 was exciting and highly visible, but there was a lot of stuff, and we literally date the change in course as starting from 1977. It’s when the Janata Party came to power.

 

It is when H. M. Patel became finance minister and D. T. Lakdawala came to the planning commission that we started seeing new ideas coming, and you get a structural break in GDP growth right there at 1979, ’80. Increasingly, people started gaining confidence about doing things better. In that process, it’s important to also see the feedback loops from performance to changes in policy. So in my conversations with the great people of that period—and once again, it’s very easy to criticize those people in that community, but I think generations to come, we will give them enormous credit for having looked at the world of that time and made some remarkably good calls about the change of course. Okay. 350 million people got out of poverty in the period from 1991 to 2011, and that’s just an enormous achievement by that community. So while I often appear critical of the work of that community, it’s because we in India today deal with the momentum of their ideas. So we have to dismantle many elements of their thinking.

 

But in that time, in that age, these were enormous contributions. Now, that community had a very keen sense about how India started out looking better than many other countries in the postcolonial transition, while ending up looking much worse than many countries in East Asia. Okay. So the India of 1947 is the India of Ramanujan and Rabindranath Tagore and C. R. Rao and Jagdish Chandra Bose and S. N. Rao and C. V. Raman. Okay. So there was a capacity in India that you could literally not find anywhere else in those postcolonial countries. Starting in 1960, there was nothing in South Korea, whereas India seemed to have got its act together. It was deeply embarrassing to the folks who were doing economics in India, whether it’s policy or whether it’s government, that by the late ’70s and by the ’80s, a lot of countries in East Asia had done much better than India. It had evoked very important discussions that where did we go wrong? So that’s one part, that the sheer performance was a good prod to action, particularly for a generation that came of the freedom movement, that came out of the experience of Nehru and Gandhiji and Ramanujan and Tagore.

 

We can scarcely imagine people like Nehru walking in Indian public life today, but there they were. That generation remembered that, that generation understood what we had come out of, and it was just cold water on their faces to be told that the performance of India is abysmal. This was assisted by the ’81 IMF program and the ’91 IMF program. So having two balance-of-payments crisis was also bracing, and I think it sent very important messages to the political class that we are way off track as compared to where we need to be. So I think that was the performance side that generated feedback loops to push India in a better direction, and I think that was healthy and valuable. The second dimension was a world of ideas. We had that kind of vibrant intellectual community that was able to discuss and debate and diagnose and change course.

 

However, one of the main argument of this book is that the license-permit Raid Raj is alive and well, and that that community had the economic articulation that we need to do much more economic freedom but simply did not work through enough of the politics, the legislation, the public choice theory, the public administration, the detailed design of the machinery of state to which you could actually achieve economic freedom in India. A private person in India today is terrorized much more by the state than was the case in 1990. That’s the bracing truth of what was sought to be done in Mark Two, where some stroke-of-the-pen stuff got done. For instance, we have lower customs duties. You know, there’s a standard list of things that got done, but the lived experience of an entrepreneur in India today is worse than it was before. You have business model risk. The government can come up with some rule and put you out of business.

 

The government continues to create public-sector enterprises that destroy your business. The government can raid you. There is no rule of law. There is no check and balance. The enforcement directorate can lock up your property for 20 years. Cross-border transactions are still demonized, and so on. So there is more fear today amongst private persons today. That wasn’t the case in 1990, and that is the bracing reality of where we have come today. So I think that there was a lot of high ideas and rhetoric about India becoming a market-oriented economy starting from 1991, but where we have come to is just not that. Our hope in this book is to depict the reality that is there in India, that this has become an administrative state. This is the administrative state of the kind that readers outside India can scarcely imagine. That you cannot imagine a world where inspectors and officials have such power over private persons.

 

RAJAGOPALAN: And so much discretion.

 

SHAH: Yes. Just literally unbounded discretion, and it’s important to emphasize this is powers in the executive. It’s not in the legislature, it’s not in the judiciary. It is the executive that has non-rule-of-law powers over individuals, of so-called free persons. We actually don’t have those free persons in India anymore, because the executive has amassed all this power. This is a new realization, and I think it’s a novel idea, and that’s one of the key things driving this book.

 

Now, how can this matter? How can this change? Let’s first think about the performance aspect. In terms of performance of factor is now becoming increasingly clear in the data that we got great growth from ’91 to 2011, and we’ve hit a wall from 2011 to 2019. There is a great debate about GDP data. So we all, each of us should choose what statistics we wish to believe. But there is little doubt that there is a large deceleration in the performance of the Indian economy from 2011 onwards.

 

RAJAGOPALAN: Yeah, and whichever way you measure, we’re not reaching the potential that India must reach.

 

SHAH: You cut it any which way, and there is a new problem of trend GDP growth starting from 2011.

 

RAJAGOPALAN: It’s even more urgent now than it was in the previous decade, because the demographic is so much younger now. In that sense, we need to very quickly accommodate this new generation and employ them productively before they get old and we miss the boat. So one way of looking at it is, no matter which GDP number series you choose, we’re underperforming. Second, even compared to the last two decades, we should have performed even better given the demographic scenario we’re confronted with.

 

SHAH: Yeah. So in fact, the creeping rise of the administrative state has choked off growth. Now once again, I don’t want to imply that there was an event in 2011 that did it. 2011 is the event that jumps out of structural break econometrics in many, many different time series, but it reflects accumulation of many, many laws and actions by the individuals that make up the Indian state that ultimately led to disenchantment by private persons. 2011 is a turning point where private investment started declining. So that’s the end of the 20 years of growth of private investment. From 2011 onwards, we’ve been in a decline of private investment either in nominal terms or in real terms.

 

The data is clear and shows that there is a performance problem from about 2011 onwards, and there are two views that are available. Some people think you could do a few incremental things and change the ship around, or there is another view, which is the view articulated in this book, that there is a deeper problem. That you don’t get a grand phenomenon like a decline in nominal terms of private investment from 2011 to 2019. That doesn’t happen because of small things here and there that can be changed, that can be fixed up. So there is a performance problem, and we’re going to need to confront that.

 

The Need for a Vibrant Intellectual Discourse 

 

SHAH: Then you come to the space of ideas. If the next P. V. Narasimha Rao asks the intellectuals, “What would you like to do different?” frankly, many of us are not ready. So many of us will say weird things like “Let’s do some labor reforms,” or “You need lower income tax rates,” but I don’t think it adds up. That’s where this book comes into . . . This book is our attempt at telling a deeper story about what’s broken about the Indian state and how we need to change course at a deeper level.

 

RAJAGOPALAN: So you’re saying we need a bigger literature even now, like Nehru picked up Harold Laski’s book, which was brand-new contemporary book of that time. He read it and he thought of Democracy in Crisis, and he said, “We need to go in a different direction.” That kind of intellectual narrative doesn’t exist right now.

 

SHAH: So that’s the great debate about India, and a lot of conventional economic policy thinking is a bit about the epiphenomena. It is not confronting the deeper crisis of state coercion and private-sector disenchantment, and that is the heart of the story today. But creating a space of freedom about containing executive discretion, about bringing back the dynamism and the optimism and the innovation and the risk-taking of private persons. We in India need to confront these questions, we need to create an intellectual discourse around these questions, and we need to build the knowledge so that on the day when a political moment arises, we’ve got to be ready.

 

RAJAGOPALAN: Yeah. So I have a question about when the moment arises. So we have two ways of thinking about what is a great opportunity, and I think in large part because of the balance-of-payments crisis that we had twice, where we believe that reforms happen when there is a crisis. There’s a lot of great examples in your book and a lot of great ideas in your book which talk about how one shouldn’t make policy in a hurry, and one shouldn’t make policy just because it’s the opportune moment. There needs to be a lot more thought that goes into it. There should be discussion, there should be eclipse clauses and sunset clauses and revision three years or five years down the line. So where do you lie on this whole “never waste a crisis” as opposed to “never do anything in a crisis” policy thinking? We have both in India simultaneously.

 

SHAH: Yeah. My view in India is “be terrified of a crisis” because in a crisis, whatever little check and balance we have—

 

RAJAGOPALAN: Will collapse.

 

SHAH: —will collapse, and you will have extreme power to a few people who may or may not be great intellectuals, and then you never know what will be done in a crisis.

 

RAJAGOPALAN: So your idea is, we just got lucky in ’91 that when there was a crisis, there was some sensible . . . not people, but there was some sensible economic thinking at the time which got pushed through.

 

SHAH: As we emphasize in the book, what was great about that period was that there was an entire community.

 

RAJAGOPALAN: There was a community.

 

SHAH: I don’t think of a single grand moment when something changes, I think of 100 small moments. So when administrative law is being done all across the landscape, when one rule at a time is being written, can we bring greater intellectual capacity as a country? That’s the puzzle.

 

The Reasons for Absent Intellectual Community 

 

RAJAGOPALAN: So why do you think there has been this—there’s a missing intellectual community now? There’ve always been economists in India who’ve been foreign trained. At first, it used to be British universities; then it became American universities who always came back. They served at universities within India; they took turns in government either at the Ministry of Finance or various committees where they were called to serve. Now there is a disappearance of that.

 

So do you think it’s because the market has provided both India and abroad far better opportunities for these intellectuals to employ their services differently? Or do you think the problem is the demand from the government, which is, they simply don’t invite people who have done work or have a lot of domain knowledge in economics or administrative law, pick your area, to come in and serve? So which way do you think the problem runs? Because there is a disconnect between ideas actually latching on to the people who make policy. So what do you think is going on?

 

SHAH: I think there are several problems, of which I want to highlight two. The first is that the size and complexity of the economy has risen. So in the late ’80s and the early ’90s, as an example, consider the equity market. The problems were relatively simple then, and without extremes of specialization on a few first principles, you could go far.

 

Today everything has become way more complicated because it’s a $3 trillion economy. So for example, you want to deal with questions like spectrum allocation and Huawei and 5G, or do you want to deal with the collapse of India’s market share in the trading of the two biggest financial products, Nifty and the rupee. Today, large parts, more than half of the activity has left India, has gone abroad. Today more than half of the startups organize themselves as a Singapore corporation or a London corporation, so as to escape from the Indian legal system and Indian regulation.

 

The second part of the problem is that the boundaries between fields have become a bigger barrier. That earlier you could get by being some kind of vaguely development economists, and with a little bit of common sense and practical knowledge you could get by. Today, the boundaries between the fields have created bigger barriers to be useful and contribute. India’s growth has made development economics lesson less relevant for India. What you need is more normal economics, but the academic incentives around publication are pushing people, are encouraging people to look to what would be fashionable in the United States.

 

It’s hard to find people who are able to rise above those incentives and take interest in our own backyard, to write papers where the referee in America would say, “Who cares?” Okay. Those are the papers that need to be written. So these are the puzzles which are hampering the development of an intellectual community.

 

RAJAGOPALAN: So that’s the supply-side problems and distortions. What do you think is going on on the demand side, which is the demand for these academics to serve on committees?

 

SHAH: I think we’re doing fine on the demand side. There’s tremendous demand. There’s demand in government; there is demand in private firms for people on the academic side who are able to take interest in practical things to understand the world. The key barrier in my mind, at least amongst economists, is, do you live to serve the editors and the referees, or do you live to serve real people in your backyard? I think that if more of us will take interest in serving the people in our backyard, we’ll do a darn good thing.

 

Ajay’s Experience in Policymaking

 

RAJAGOPALAN: Your own experience in policymaking . . . so I want to pick up something like FSLRC, right? So you and the entire team, you put together a new way of thinking about regulating the financial sector. The idea was that you would write it as a comprehensive law, but it may get passed piecemeal and so on. What do you think is the roadblock in those situations, where there is the intellectual horsepower available? There is even an intention to put it together. There is a committee that puts it together. You write a great report, you draft a fantastic bill. You even manage to get some of it passed, and then there is a block. So what is going on in Indian political economy?

 

Is it just standard interest groups trying to block it? Is it the government getting nervous about trying to do too many reforms that it could get some backlash? Is it just lack of—they just don’t know how bad the fire is, so there’s no attempt to put it out? So what do you think is going on, either in the specific case of your experience or more generally what’s going on?

 

SHAH: So it took me a long time to understand that in India, the special interest politics centers around bureaucratic formations. So it is the employees of Indian railways who are the greatest barriers to the reform of Indian railways. It is the education establishment that is the biggest barrier to reforms of education. It is the health establishment that is the biggest barrier to health reforms, and so on. So we are in a peculiar position of a big administrative state, where there are bureaucratic formations that are the beneficiaries of arbitrary power and low accountability. That’s the puzzle that we’ve got to crack. We’ve got to get back to a more normal politics, where elections and legislation and legislators matter.

 

RAJAGOPALAN: So you think what’s going on is a Yes, Minister sort of parody, right? So you have politicians who are interested in pushing through reform, and you have experts who come and write it, and then you will have a whole host of people who are worried about losing their jobs and pensions and power and budgets—

 

SHAH: Arbitrary power, yeah. So we face situations all the time where some . . . there is a reform that is proposed, where there is some modification of some rules of the game. Typically, what bothers agencies the most is when you reduce their turf and you reduce their power, when you create more check and balance. Then they will come back and talk to the minister and say, “But if you do this, X will collapse.” Very often the ministers are not able to deal with that “risk.” So that’s the nature of the beast where we stand in India today. I’m optimistic because it’s broke, and it’s clear that it’s broke. So one of the Reserve Bank governors famously said that if it ain’t broke, don’t fix it. Well, it’s broke. It’s quite totally broke.

 

The edifice of Indian economic policy is not working, and we are not producing the kind of growth that is needed, and there is a need to go deeper and understand what has gone wrong. I think it takes us back to these foundational questions of what is the nature of the relationship between the state and private persons? How do we create conditions for innovation, entrepreneurship, risk-taking?

 

Public Choice Constraints on Grand Reforms

 

RAJAGOPALAN: You said you’re optimistic, and I’ll tell you, depending on what I’m teaching in public choice, I’m sometimes optimistic and sometimes I’m pessimistic. So if at one level of the public choice 101 message is extremely optimistic. So you understand that the entire game is one about incentives. We assume behavioral symmetry; politicians are the same as any other individuals doing anything else. So they also respond to incentives just like all of us. The public choice 101 message is if you could just change the rules of the game, everything would be fine, and that’s a really optimistic message of public choice.

 

Now, if when I start teaching further into the course, I become more and more pessimistic because then you teach things like transitional gains traps. So when you’re trying to go from system A to system B and there is large agreement that system B is more efficient than system A, there’s still going to be some winners and losers and moving from one system to another. The losers will block the change, which is exactly what you were telling me about the bureaucrats in railways who were really well organized, or teachers’ unions who were really well organized.

 

I think in one sense we don’t take transitional gains traps problems very seriously when we are studying policy in India, because there seems to be general intellectual agreement about reforms. But how we’re actually going to push through those reforms and how are we going to persuade people who don’t find it in their interest to actually go along with this reform? Are we going to compensate them for their losses, or are we going to bulldoze?

 

So there’s a whole conversation to be heard just about how we conduct reforms, not just if they’re necessary or not. So when I think of that aspect of public choice, I become extremely pessimistic and I feel like nothing is likely to change. So where do you stand on this?

 

SHAH: Let’s think about the Indian situation around these grand questions. First a little story. There is a very important policy thinker in India called Percy Mistry, and he has played a great role in our thinking and work on these subjects. When I was much younger and I would complain about the mindset that is seen in financial regulatory organizations in India and the Reserve Bank of India, it was Percy who would always stop me and say that you’re not allowed to complain about mindset, because mindset is endogenous. You change the rules of the game, the mindset will change. So go after the rules. Find out what are the elements of arbitrary power and lack of accountability that generate the observed mindset, and we go after the roots. It’s exactly a public choice optimistic view. So Percy was the person who had the ability to break heads in the worst World Bank bureaucracy and try to change the working of that organization. So he delivered this?

 

RAJAGOPALAN: Yeah, this in the book and I really enjoyed reading about his input.

 

SHAH: Yeah. So that’s the first element of this, that public choice theory gives us a very optimistic view that if we are stuck in the evolution of the Indian state, it’s actually not inexorably so. It is endogenous to incentives, and it’s our job to rethink those incentives. This is where I think that the critical divide in India is between the thought process of the politician and the thought process of the officialdom. We in the Indian elite tend to very easily slip into the notion that the officials are some good guys. The officials are people like us. The officials speak English. The officials are the guys who will always do the right things.

 

That’s actually a completely wrong way to think about it, because the officials are the incumbents to wield that coercive power and enjoy the gains from that lack of accountability. They have the least at stake when there is a collapse in economic growth, and they continue to enjoy their arbitrary power. In fact, their coercive power has risen year after year because they keep getting more and more arbitrary power to investigate, arbitrary power to arrest, arbitrary power to imprison. That just keeps on going year after year. It is the politicians who hold the key. It is the politicians who can, and I believe will, turn around this ship, because, first, they do not have job security. Every five years they have to face elections, and I think that creates a fundamental angst in the mind of a politician in a way that is absent in an official. Officials in India are comfortable with what’s going on.

 

The second aspect is that it is this nature of life and politics that makes politicians to be risk-takers. As Kelkar always says, politicians are entrepreneurs. A bureaucrat will never be an entrepreneur. An official will never play a leadership role. It takes a politician to do that risk-taking to cross the chasms, which you cannot jump in two steps.

 

There are some difficult things that need to be done, and it’s only a politician who can do that. We’re fundamentally optimistic that the vitality of Indian politics will continuously create opportunities for politicians to ask tough questions and achieve the changes that are required. As of today, we feel that it is we the intellectuals who are the weak link of the story. It is we who have not created the body of knowledge around the idea of India that will shape our way forward.

 

Civil Society Response

 

RAJAGOPALAN: In addition to the intellectuals being the weak link, one of the things I wanted to go back to was James Scott’s Seeing Like a State . It’s there all over the book, though mostly in the background. One of the things that he talks about in the book, I think it’s the fourth pillar, is the role of civil society. Is there pushback from civil society and the people towards—against a coercive state to claim back those spaces, or does civil society just roll over and . . . or find some other exit options like the jugaad that we have in India?

 

SHAH: The most important exit option is that private persons have stopped investing.

 

RAJAGOPALAN: Yes.

 

SHAH: The private persons are moving their business offshore. They’re moving their kids offshore. Trading in the Nifty and the rupee is moving offshore, and so on. So the most important exit option . . .

 

RAJAGOPALAN: Is migration, and it’s happening.

 

SHAH: Is just absolutely dangerous for the future of the Indian economy, and it’s happening all around us. So certainly, exit is an option that is taking place. On the voice of a bottleneck in India today is the political climate, is the theory of the Indian state that bestows legitimacy upon state action by default. We, the people, are willing to believe that by default the state is right. The state means well. So again, I think what all of us need to do is to be far more skeptical and challenge the presumption of good faith that is given to state action, that is given to officials.

 

RAJAGOPALAN: That’s music to my ears, but the question is, how does that translate to regular people? Like how do you make a third grader or a fifth grader who is reading history books and civics books skeptical of state power?

 

SHAH: I think the climate of opinion matters. I think the world moves. So look back at history. Okay, Gandhiji and Nehru came up with the mad idea of going up against the world’s greatest empire. You would have said to them, “You and whose army?” Gandhiji would have said, “No army.” You would’ve thought he is some kind of nutcase, and these things change. So I think that ideas matter, and ideas will percolate. Ideas will get around, but the bottleneck today lies in our construction of that ideas. So again, look back at Mark Two. While we call 1991 the flowering of Mark Two . . .

 

RAJAGOPALAN: Yeah, there’s a whole literature before that.

 

SHAH: In fact, it’s been around since the ’70s. So the climate of opinion shifted, and increasingly we started understanding that that socialistic approach was really not working, and we needed to move away. That our reflexive autarchy was a mistake, and over the years that had an impact on practice. So I think the practice will follow, but the ideas have to be there. Today I say that we the intellectuals in India are not ready to think through the idea of India and be able to offer a fully articulated philosophy and a theory that will help shape that evolution of the republic.

 

Is there Too Much State Capacity in Some Ways?

 

RAJAGOPALAN: This is going in a slightly different direction, more related to the book. So there are two themes in the book. One is that we desperately need to build more state capacity, and we can do that by picking specific areas where we choose to focus our energies. But those areas can’t just be anything; there are some very high-priority areas like criminal justice system, contract enforcement, and so on. So at one level, there’s a push towards high state capacity.

 

Are you ever worried about the China situation, where state capacity is so high that, given the existing set of Indian laws, it is going to become authoritarian as opposed to move towards liberty? So I feel like it’s not just state capacity, right? We need to completely reduce and remove executive discretion and simultaneously build state. Do you worry that the message that the powers, that we will take from this book is just, “Let’s build state capacity and enforce this even harsher”?

 

SHAH: Well, you’re absolutely right. This is an important concern, and I think that there is a race going on in India between building more civil liberties and building the state. Right now, the state is winning. There is an example in this book which is from Anirudh Burman. Actually, there are two examples which go back to back. He tells a story, Anirudh tells the story first about warehousing. So the Indian state enacted some Essential Commodities Act, whereby they will put you in jail if you hold inventory of more than 5,000 tons of wheat or some such numbers. Now, that was mostly harmless in the olden days, because the Indian state did not know what is all the wheat that has been held by you. So the lack of state capacity prevented that old law from doing a lot of damage.

 

Now you fast-forward to the 21st century, and you have sophisticated corporations that have warehouses that are able to face a subpoena request and give you an accurate statement of all the holdings by all the individuals of wheat at warehouses all over the country. Now suddenly that law is a very powerful coercive law, because it is enforceable. So nothing changed about the law, but it became much more important. That genotype got expressed when placed in the new environment of the ability of the Indian state to be able to ask a question and query an electronic record and get an answer to that.

 

RAJAGOPALAN: Then actually come down harshly using all its state power.

 

SHAH: Then the old law sense that they’ll put you in jail. So it was an old coercive law, but it is new computer technology that converted it into something that really bites. That’s one nice example. The other nice example is about surveillance. The old Indian frameworks of surveillance basically meant that the British would tap the phones of Gandhiji and Nehru, and we were about okay. That’s not so bad. But today, for the first time, that same surveillance law read with today’s technology gives unchecked capabilities to do surveillance without judicial oversight—indeed, to establish mass surveillance capabilities without any proportionality doctrine. And there is a need to scale back the ability of the state to surveil individuals, to bring back civil liberties that had been threatened when the old law was juxtaposed against new technology.

 

So this is a very interesting place where the genotype of the old law is expressed into new kinds of phenotypes, because of the change of the technological environment. I think this is an important metaphor to keep on our minds, that it doesn’t suffice to be careful about the new things that we do. The new technology that comes about will suddenly create new kinds of damage out of old elements of coercive law. Then of course, there is the new wave of information and power in the hands of the state. I think we need to think a lot more. We need to worry a lot more about putting information technology into the hands of the state, about creating new IT systems. It’s very fashionable these days in India to create a national system, a single national monopoly, one more national thing backed by state coercion, where state power is used to kill off private rivals and to force down one single national system.

 

I feel we should be much more contemplative about how these things work out. These innovations will have unintended consequences, and we need to think a lot more about their consequences. It’s much better to have organic evolution all around the country of different systems owned by different pieces of government, owned by many private players. When normal private negotiations generate discussions and contracting around interoperability, rather than having a heavy hand of a state creating one monopoly public credit registry, or one monopoly payment systems, or one monopoly account aggregator. This is all the 21st-century central planning that is done by the state, but there’s a different twist compared to the central planning of Nehru and Mahalanobis, where the foundational questions of civil liberties are also now at stake.

 

RAJAGOPALAN: Yes. In some sense that was a little bit more benign, not because the rules were more benign, but because everyone assumed that the rules will be enforced the way they were intended, and they won’t be enforced maliciously or arbitrarily to punish a businessman for something else that they did using the Essential Commodities Act or using a tax regulation. Just because we don’t like that businessman, or we don’t like what they said in public, or they went to a protest, or so and so forth. So there seems to have been that trust in the state, which I think is misplaced, but it was still there. There was some kind of a compact which has now gone completely missing.

 

I had a few other questions which have to do with policy, but not that much related to what was going on in the book. One of the things that I always worry about in India—other than this centralization, nationalization of capacity in areas that I’m not excited that the state has capacity—is that there isn’t enough good thinking on Type I and Type II errors when we design systems.

 

So for instance, if you take the most recent what is going on in India for the last few months is the CAA (Citizenship Amendment Act) and combine with the National Register of Citizens, people are really worried about what it could do to them. Now, we don’t know what the exact policy is. That has not been announced or very well communicated, but there are two ways to think about it.

 

There are some people who are very worried about illegal immigrants, and that could be valid or invalid, but there are some people who are just very worried about illegal immigrants, and they may require a lot of paperwork to prove that you’re a citizen. Then there are other groups who believe that there should just be a presumption. We’re not worried about illegal immigration. It’s just an issue in a few border states. So the presumption should be that we’re all citizens unless shown otherwise.

 

Depending on which way the system is designed, and we don’t know yet which way the system will be designed, you’re going to get enormous Type 1 or Type 2 errors, and they won’t be symmetric. I mean, the number of potential illegal immigrants is pretty small in India compared to other countries, but the number of false negatives you could get of domestic citizen Do you think there is any thinking that goes on in public policy while designing systems, or we just learn ex post and realize that we got a lot of false positives or a lot of false negatives? Is there any attempt to understand that any system will have error and that we must move towards error minimization? We can never be error free, and error minimization will have this tradeoff between false positives and false negatives.

 

SHAH: So I want to tell one story. This is around the operations of a welfare systems using Aadhaar system. Okay. So in the pre-Aadhaar world, when there were physical systems, there were lots of mistakes. So there were Type 1 and Type 2 errors. When Aadhaar was proposed as an innovation that would help improve the efficiency of this delivery, I think any reasonable person knew that there will be mistakes in the new system also. I don’t think anybody thought it would be perfect, but the idea was that (a) there would be fewer mistakes in a more electronic biometric system as opposed to some old paper-based system. But also (b), and I think not enough credit is being given to the early thinking of Aadhaar on the second point, which is that it is the responsibility of the manager of a public system to also design for some of those failure cases.

 

So if you’re running a public distribution system (PDS), which is a subsidy program for poor people to get food grain at a subsidized price, I think it’s a cop-out on the part of PDS to say that, “Look, I have introduced Aadhaar, and now I’m not responsible for what happens next. If 20 percent of the people are unable to get subsidized food grain because their Aadhaar system didn’t work, it’s not my fault.”

 

I think that was really unfair, and this goes back to the fundamental lack of accountability in the Indian state. The only reasonable position in my mind would be that it is the manager of PDS who’s responsible for PDS. Now when new technology has been proposed, called Aadhaar, use it if you will. Ignore it if you will, but you are held accountable for successful operations of PDS, which is you keep track of your Type 1 and Type 2 errors, and you’re held accountable for your Type I and Type II errors.

 

Which means that PDS should have always designed a fallback system for a person who says, “I don’t have an Aadhaar identity”, or “I do physical labor, and my fingers don’t accurately get analyzed by the fingerprint reader,” or whatever. I think that this is an important part of how we think about the downstream experiences with Aadhaar. I think that we’ve all been a little unfair on criticizing the Aadhaar infrastructure. It was not designed to eliminate all problems. It could never eliminate all problems. It was just a tool. So I feel that you could get a lower error rate, and what it required was better thinking by managers of public systems of, how can I use this better?

 

RAJAGOPALAN: Yeah, what the tradeoff is between the low error rate . . .

 

SHAH: Instead, we started thinking this is some kind of silver bullet. You do this and you’re done. I would criticize any proponent of a silver-bullet theory, and I would definitely worry about the wrong incentive structures surrounding PDS that left PDS in an electronic file system that does not work that well, because there are lots of exclusions. I fault Indian democracy on not creating enough check and balance on the manager of PDS. Ultimately the manager of PDS should be accountable to make PDS work, and he should not have the ability to blame a tool, saying, “I have 20 percent of the people who are not getting subsidized food grain, because the Aadhaar system did not work.” That’s really an uncomfortable way to approach this.

 

RAJAGOPALAN: I’ll tell you why I asked you specifically about the false positives and false negatives. I think it all goes back to the core of the book, which is we need to redesign the compact between the citizen and the state. If you look at PDS error minimization, you are saying that the presumption should be very few false negatives, right? If the PDS manager is if at all forced to make a tradeoff between false negatives and false positives and give away a few extra PDS entitlements, then it should always be in favor of very few false negatives because the power balance must lie with the citizen instead of the state.

 

SHAH: I want to interrupt you and go to a more basic point. I’ll come to coercive power separately, but first on PDS. I think our failure in India is that there is not enough accountability of PDS. That’s the heart and soul of what has gone wrong. PDS runs like a machine. They wake up every morning; they do the same thing every day. There is very poor measurement of error rate, and the error rates don’t generate feedback loops to fix the system. So we got excited about a magic bullet called Aadhaar, and then Mr. PDS threw his hands up and said, “You know what? I did Aadhaar. Now what more do you want me to do?”

 

RAJAGOPALAN: So is the design of the PDS system fundamentally was not accountable, which is the source of the problem.

 

SHAH: It’s the check and balance surrounding PDS, which is where the failure was. So this is my first case that we should be holding public systems to a high standard. We should be creating that check and balance that if you’re using public money, you should be held accountable that we will measure your Type I and Type II error rates and that this will have consequences. We’ve just not done that in India. That the PDS system runs on its own steam and is impervious to measurement and criticism, and there’s a lack of feedback loops.

 

When it comes to coercive power by the state, I think the message of the book would be that we should bring a mistrust of the official. We should bring a mistrust of the frontline individuals who man the state apparatus, and we should always give less power to the state machinery to coerce individuals. We should always prioritize freedom. So when we face the Type I and Type II tradeoff, we should always prioritize the freedom of individuals, and we should give less coercive power to the individuals that man the state machinery.

 

RAJAGOPALAN: I know you have a background in engineering, and so how did you go from being an engineer to an economist to then public policy, and then writing a book that is against social engineering?

 

SHAH: Well, my father was an economist. I grew up talking with him. So my father was an old style 19th century intellectual. He took interest in the world, so his version of economics was that unabashed mix of history and politics and philosophy and so on. He was part of the freedom movement, so I was with him. He died when I was 17. I was with him and talked endlessly about the world with him, but in a way he defined some of the questions that were running in my head. That’s how I was always interested in economics. Why did I land up in engineering? Because I grew up as a child with an interest in mathematics and science and attending an IIT [Indian Institute of Technology] seemed like a really good idea.

 

RAJAGOPALAN: Those were the years when if you were good at math and science, then you were supposed to become an engineer. What else?

 

SHAH: Yeah, and it worked, meaning I loved being at IIT Bombay. So I think I have two wings in my head that I am very steeped in the world of science and the world of mathematics. I unabashedly live in the two cultures, and I’m also a humanities person and I’d like to think about the world. So I think one part of my head is, I like to be sharp and clear and analytical, and another part of my head I like to think about the world and can’t help wondering what can be done better.

 

So there was always that interest in doing something more real world. So that’s how after finishing at IIT, I drifted on into a PhD in economics and then I moved back to India. At first, I wrote some more narrow geeky papers, then I got interested in doing public policy. I was lucky enough to be in the early stages of the great Indian equity market reforms, was part of the early thinking about the national stock exchange and the amazing things that happened in the equity market reform of those years.

 

In 2001, I was invited to join the Ministry of Finance at the time of the UTI [Unit Trust of India] crisis. So I spent four years inside the Ministry of Finance. So that’s been my life. It’s been a mix of doing academic economics and using my competitive advantage in playing with some questions or writing some code, and also increasingly learning to think about the world.

 

Ajay’s Path to Economics 

 

RAJAGOPALAN: I would imagine that the kind of economics training you had at USC is quite different from the kind of book you’ve written with Dr. Kelkar, In the Service of the Republic. I’ve also seen this transition in your other writing, a move away from more formal models and thinking. If I may say, some of your earlier work, especially on financial markets, was a little more sympathetic to market failure thinking and government intervention. I see this book as a— It’s a big departure in that sense. So I’m just curious about your own, the evolution of your own thinking on these matters. This book is steeped in public choice economics. So the evolution of your own thinking, what were the influences there? How much of it was an intellectual influence versus real world—you experienced policy and you changed your mind?

 

SHAH: As with other economists, I started out doing narrow, sharp technical papers, which all of us do, and they have their place. It’s interesting; it’s exciting. It’s nice to be able to get one clean answer to one question at a time. In parallel alongside this, of course, I was reading omnivorously. I’ve been reading all my life omnivorously. I sometimes joke about the place that is occupied in the minds of many people in India by an epic like the Mahabharata. It’s a defining, grand story, and we endlessly make analogies in the context of the great model choices and the little quirks and silly stories about the Mahabharata. I think that place is occupied in my mind by the grand story of the 20th century. So for me, the story running in my mind endlessly is about a world that went to hell in 1913, and we’re still figuring out what happened.

 

SHAH: I’ve always been interested in the world, and I have read extensively in the history, the economics, the politics of that period. I’ve been very conscious of the larger themes that surround our narrow economics. So that was always there. That interest in the world was always there. Of course, you go to grad school and learn how to play those cute technical games. I have also done that, but it was always in the context of the larger sweep of history and the whole 20th century trauma around concepts of a big state, concepts of nationalism, and all the extremism that went with these things.

 

In parallel, I also had my lived experience in India of understanding the DNA of the Indian State, of understanding the thought process of policymakers and all the things that go wrong. So in a way, there is a litany of the difficulties and the failures of Indian public policy, all of which have fed back into Kelkar’s and my experience. We’ve moved a large distance in terms of our optimism and confidence about what can be done and what can’t be done.

 

Again, I want to say that the world was different in the early ’90s, after the ’91 reforms for some time. A lot of us said to each other, and we believed in ourselves, that India will now become a more market economy, and a better-functioning liberal democracy. Yes, there are many problems and we’ll make peace with the problems, but over time it’s getting fixed. I think in the last 10 years we’re increasingly getting nervous that left to itself, it’s not getting fixed and we need to develop the intellectual and conceptual frameworks of thinking from scratch that, what does it mean to be a market economy located inside a liberal democracy? This book is an attempt at that.

 

RAJAGOPALAN: When we read the book and when we think about public choice ideas and the fact that ideas matter, somehow we treat all individuals as the same, right? There’s a prototype politician, there’s a prototype intellectual or expert, there’s a prototype bureaucrat. How much do you think specific individuals mattered in India’s economic trajectory? Do you think it would have made a difference if it was someone other than Nehru in the same spot, or someone other than Manmohan Singh in the same spot? Like similar, self-interested, well-read economic thinking politicians?

 

SHAH: So my read of the motive power is the power of ideas. The Republic of India was made by Tagore, Nehru and Gandhi. It’s without those people thinking in the ways that they thought, everything would have been different. So yeah, it is absolutely critical and essential to have the people at the right time in the life of a country, where there is deep thinking and they build a world view They build a philosophy, and a lot of people will then align around those platforms, and then many things will happen.

 

RAJAGOPALAN: At each stage of reform ideas really matter. You’ve written a lot throughout your career. You’ve written books. You’ve written— There’s a whole working paper series at NIPFP [National Institute of Public Finance and Policy], which is where you’re a professor. You have a blog, Law, Economics and Policy blog—LEAP, right? You write newspaper columns. How do you write? Do you struggle to write? Does it just flow? Is there a same spot you sit in every day? What’s the Ajay Shah writing process?

 

SHAH: So there is one ritual that is now established with me, which is the Business Standard column, and I’m happy to describe it. My column appears every fortnight on Monday morning, and so my deadline is 1:00 in the afternoon on Sunday, that I got to get it to them at 1:00 in the afternoon on Sunday. I try to think about it on Saturday night, and mostly I fail. I should at least have a rough idea of what I do. I send email to a few people saying, “Do you have an idea for what I should write?” Sometimes I get very good ideas from others and sometimes I don’t. Then by around 10:00—10:00 in the morning on Sunday—I have to have a clear idea for what I’m going to do. I always write it as the first paragraph, which is the abstract.

 

So I spend a lot of time getting the argument right, and that’s the first paragraph. That’s the summary, and then I flesh it out in 900 more words. That’s an 1,000-word article. Then I put it aside and I proofread it once. Then I put it aside and I proofread it twice. Then I put it aside and I proofread it a third time. And then I send it off. That’s by 1:00. So from 10:00 to 1:00, this is my ritual about how I do the Business Standard column.

 

RAJAGOPALAN: This sounds very smooth.

 

SHAH: Because I’ve been doing it forever. So this one is nice and well-established. It was not like that for the book. The book was a completely new experience. Kelkar did a lecture at the NCAER a while ago, which was titled The Art and Science of Economic Policy. He and I have been working together from about the early 2000s. He joined the Ministry of Finance and I was there. So we’ve been talking about these things forever. We’ve worked on many policy and research products.

 

After he did this at NCAR, he said, “Why don’t we do this as a book?” I said, “Sure, let’s work on it.” It morphed over time. So it started out as a much smaller and simpler book, and what would happen is that we would sit together for about half-day sessions every one or two weeks.

 

We would debate what was there, and we’d generally come up with an idea there should be one more chapter on this, and we’d just get the rough idea of what should be that story. Then I’d go back and build one more chapter. An embarrassingly large fraction of this book got written owing to two experiences of traveling to the United States, where I had like 15, 20 hours in planes. Thank God, there is no cellular telephony or email in planes.

 

RAJAGOPALAN: Do you write every day? Do you sit in the same spot when you write every day? Do you listen to music when you write?

 

SHAH: No, I write mostly when I’m sitting at an airport, I’m in a plane, or I write everywhere. Wherever I am, I write. I think I write every single day. I write code also, maybe every alternate day.

 

RAJAGOPALAN: Do you listen to music when you write?

 

SHAH: No, I can’t do anything else when I write. I need to shut up and write.

 

RAJAGOPALAN: Okay, and there’s— I know you have cats, so you have other companions when you write?

 

SHAH: Cats are welcome when I write, but no music.

 

RAJAGOPALAN: How did you coauthor the book? I’m very curious about the art of writing together. What is the production function that leads to this book?

 

SHAH: So Kelkar and I spoke about this early on. His writing style is very different from mine, and it would have been very jarring if there were two different voices in the book. So we agreed that I would do all the writing. Okay, so every single word here is written by me. The recipe we worked on was, as I said, that we spent a half day together roughly every week or every two weeks. Kelkar lives in Pune, frequently travels to Bombay, frequently travels to Delhi. So I met him essentially every time he was in Bombay or Delhi, and about 15 times I went to Pune. So we did totally about 30 sessions of a half day each.

 

Each time I would mail him my current draft, and he would read it and mark it up on his iPad. Then we would talk through it for about a half day, and then we do the next round. So we kept debating, and so at an ideas level, it’s very much a joint product, but at the wordsmithing level, it’s all mine.

 

RAJAGOPALAN: Every time I’m at NIPFP, there’s a new group of really smart young people, who then work with you for a few years and then go on to do other great things in policy. So one, what would you say to someone who wants to enter the policy space in India today? Two, how would you suggest they go about it?

 

SHAH: The first thing I would say is that there is a better space and role for individuals in the Indian public policy process today than ever before. This is becoming a democracy. We are prying open the locks of the state into a more participatory democracy, and there is more space for people to think, to write, to be part of action, and to be pebbles in avalanche. So I think I’m more optimistic about the working of Indian democracy and the working of the policy process than ever before.

 

In terms of the how, I think it’s important to emphasize that it is very hard to pull together knowledge and maturity and experience across many, many fields and be deeply grounded in the Indian backyard, and to be a useful part of the Indian policy process.

 

So there is a caricature that I want to describe, and not claiming that it’s always true, but there’s a caricature that I worry about and that I think goes exactly wrong. This is the kind of person that is steeped in blogs that are located outside India, that reads contemporary US and UK debates about some subjects and tries to transplant some of those things here. You know that will really not work. I think that we see this particularly with law students, with people in the law fraternity. There is an excessive conception that reading law blogs is sufficient to understand public policy. It isn’t.

 

RAJAGOPALAN: They should read your chapter on isomorphic mimicry and all the various traps posed by that in the book.

 

SHAH: So the challenge in doing public policy is to be able to simulate in your mind that if we designed a law or an organization in X fashion, how would it play out in the Indian setting? How would it play out in this backyard? So you have to be deeply grounded in this backyard. It is very costly. It is very hard to make these kinds of predictions. To think that under Indian conditions if I did this, and remember, everything else has to be held constant. So you have to know everything else.

 

You have to know all the adjacencies of the Indian policy environment and the legal institutional environment to be able to envision if I make this one move, will it work, will it not work? That’s the capacity that is required. So we have to be polymathic. We’ve got to cultivate knowledge across all the fields. So as you said, this book is unabashedly genre busting and drawing on many, many disciplines.

 

The notes at the end of the book draw on many literatures. I think that’s the kind of broad, interdisciplinary knowledge that is required to do public policy anywhere in the world. I think too often in India we are making the mistake of being too specialized. That we think that there is a subject called law. There’s a subject called economics, there is a subject called public administration. We think that to be very knowledgeable about any one of these pieces is sufficient to think about public policy.

 

RAJAGOPALAN: So read broadly. That’s the general message.

 

SHAH: Go deeply into the Indian backyard. Look inside your backyard—don’t look in the journals. There’s more knowledge out there. If we would just curiously go out, talk to people, meet people, we’d learn a lot about the world.

 

Book Recommendations *

 

RAJAGOPALAN: People should read these books while thinking about these problems. What are some of the books that have influenced you?

 

SHAH: I’m of course a child of books. As I said, my father was an economist. I grew up around 6,000 books. One of the reasons why this book came late is because I was always intimidated by the high standards set by those books in my house as I was growing up because that is what a book should be. I had never felt confident enough about reaching up to that bar.

 

There are books that are lost in the mist of time. In the class of the books that I read recently in the last 10, 15 years that really changed the way I think about the world, I would have to put James C. Scott’s books. I’ve gone back and read all of them. Sadly, I came to them late, but it’s an immensely powerful and novel way to think about the world, and it has really changed the way I think about lots of things.

 

RAJAGOPALAN: Yeah, and James C. Scott, I mean a lot of his ideas are all over the book, but Seeing Like a State is really somehow central to the book. Somewhere after I think Page 100 or so when I saw the reference, I literally jumped out of my chair. It just brought a big, big smile to my face.

 

SHAH: If I could go back in a time machine, I’d like to go back to all of us in the early excitement of building the UIDAI system, and I’d like to push all of us that stop and read this book.

 

RAJAGOPALAN: That’s great advice. Any other book, like not recently, but that you have read or anything you’re reading right now that you’re just, you’ve fallen in love with?

 

SHAH: I think that one of the most powerful books on my life was Capitalism and Freedom.

 

RAJAGOPALAN: Yeah. Again, that’s a book that is at the core deeply about economics, and all the economic insights are in there, but it is not an economics book in that it’s extremely broad. It thinks about individuals, individual freedom. It thinks about the contract between the individual and the state, between individuals and each other, and the voluntary nature of our interactions. So I can very much see that recommendation also in this book.

 

How do you waste time when you’re not writing and you’re not reading? Do you binge watch television, like other cool listeners of ours? Do you listen to a lot of music? What do you do?

 

SHAH: I have a low opinion of my self-control. So the only safe place to be is no Netflix. So I ration myself to two movies a year. Yeah, I won’t be able to stop. I love the mountains. I try to walk. I count my trail days a year as a good measure of how a year has been, and I’m pleased to tell you that I’m headed for the highest trail days of my entire life in 2020.

 

RAJAGOPALAN: How many is that?

 

SHAH: It’s going to be 28.

 

RAJAGOPALAN: That’s fantastic. Yeah, so you mountaineer for fun. Do you listen to podcasts, now that you’re on one?

 

SHAH: No, I do not listen to podcasts. I do not watch lectures on YouTube, and I have a great reason why—because I’ve measured myself and I’m just way more efficient reading.

 

RAJAGOPALAN: Yeah, even I can read faster than most people can speak. So I prefer reading transcripts.

 

SHAH: I’ve carefully watched myself that I’d rather read the book, I’d rather read the paper. I’m at a place in my life where I can essentially read almost any economics paper fairly efficiently. So I don’t need the conversation. I don’t need the lecture. I don’t need to be in the room. So I don’t go attend seminars. I don’t attend conferences. I don’t go attend public lectures. I don’t watch lectures on video, and I don’t attend podcasts. I just read.

 

RAJAGOPALAN: I like that you have nicely justified your general misanthropic nature under the guise of high productivity.

 

SHAH: No, in this case I actually did measurements. So I actually took some examples where I would sit and watch paper talk by that person, and then I would read the paper. I just understood that I get so much more by reading the paper and I’m faster.

 

RAJAGOPALAN: Yeah, I didn’t say your misanthropy is suboptimal. Thank you so much for being here. I really enjoyed speaking with you.

 

SHAH: Thank you for having me on this show and would love to keep up this conversation in many other ways.