Why a market economy remains India’s best bet even though the idea has taken a volley of Cold War II blows

After all, big government has plenty to its credit. India’s post-covid infra stimulus has been a growth aid, a factory subsidy has unlocked a few new export avenues and policy levers are trying to raise domestic demand and supply—all amid broad macro stability.

Since retail price flare-ups pose no threat and capital is far from costly even with a budget deficit in excess of 4% of GDP, it would seem our post-1991 ‘remix’ of policy in favour of market forces can safely be remixed with a larger state role in the allocation of resources than we had assumed. What began as pandemic relief, though also as a way to pick up the slack of weak private investment, has been all but normalized.

The state’s return as the economy’s prime mover, however, does not mark India out. As Cold War II thickens, it’s a global trend.

America’s dial-back of market forces by way of industrial props and trade barriers, even as Uncle Sam projects imperialist-style extractive power, signals a sort of pivot to autarkic statism. It’s not definitive, but a China scare is apparent in this dramatic tilt.

Sure, Beijing can plausibly be accused of gaming free trade by using statist tools for its export thrust. But, in response to China’s rise as a power, the White House seems ready to rattle whatever is left of the ‘post-war’ world order, and with it, the whole geo-political economy.

Washington has said it wants half the globe under its armed sway, but seems nervous about loss of Arctic control and may face a more choppy Indo-Pacific, whose waters carry the bulk of global shipments.

The long game of Cold War II rivalry, however, will be shaped by prosperity and innovation. Willy-nilly, this puts the best formula for economic success back in play.

Unlike the Cold War’s polarity, though, we now have a diffused economy on either side of the split. Recall that China’s stated plan was to deploy market tools for socialist aims. The first part has been such a big success that Beijing is trying to restrain market rivalry (‘involution’), even as it sniffs a tech lead over a US sliding into dirigiste mode.

Yet, broadly, it’s still one model versus another, so Fukuyama’s ‘end of history’ has proven premature. But does that cloud the free market’s claim to victory with doubt too?

Yes or no, our post-1991 rise argues that to optimize India’s mixed economy, we must keep policy free of ideology and focused on results. Central tech thrusts, AI spurs and other nudges are welcome, as an active state can indeed steer an economy for the better.

But let’s not read too much into US shudders over laissez faire. For our producers to be competitive, they need exposure to competition. For overall efficiency, the economy’s use of capital et al still calls for greater market direction, not less. Private responses to moves made by market participants, rather than rule-makers, should play a pivotal role.

And for such allocative efficiency to boost growth, we must keep economic policy flexible. Fiscal plans, for example, must not just keep public debt in control, but be ready to let the economy free-wheel its way up on the back of private funds, ideas and motives as soon as ‘animal spirits’ allow. A more market-oriented economy is our best bet. It’ll make space to go long on welfare as a demographic investment.