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CHAPTER ONE WEALTH CREATION

INVISIBLE HAND SUPPORTED BY HAND OF TRUST
Historically, Indian economy relied on the invisible hand of the market with the support of the hand
of trust

- Invisible hand, of the market reflected in openness in economic transactions.

- Hand of trust appealed to ethical and philosophical dimensions.

IMPORTANCE OF WEALTH CREATION

- WEALTH CREATION: In general, wealth refers to your basket of assets; cash, land, property,
gold, shares, bonds all added together. For investors, wealth is created by buying or investing in
these assets with an expectation that the price will move higher. This rise in price over a period
of time is what will lead to growth in wealth. At macroeconomic level wealth creation is another
word for Economic Growth

- WEALTH CREATION BENEFITS ALL: When firm creates wealth —> earn profits —> growth in
salary of employees —> Raw material supplier also benefits —> Foreign exchange revenue —>
More people pay direct taxes —> Government receipts increase —> More resources at
disposal in short win win situation.


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INDIA’S ECONOMIC DOMINANCE THROUGHOUT HISTORY

- Historically India has been dominant economic power and significant contributor to world’s
GDP so a major wealth creator throughput. Our old age traditions have always commented on
the wealth creation for example -

• Kautilya’s Arthashastra: “The root of wealth is economic activity and a lack of it brings
material distress. In the absence of fruitful economic activity, both current prosperity and
future growth are in danger of destruction”. Kautilya advocates economic freedom by asking
the King to “remove all obstructions to economic activity”

• Thirukural, a treatise on enriching human life, written by Thiruvalluvar: “Wealth, the lamp
unfailing, speeds to every land, dispensing darkness, at its Lord’s command”. He advocates
Make money – there is no weapon sharper than it to sever the pride of your foes.” Needless
to say, Thirukural advocates wealth creation through ethical means

- Despite such a rich tradition of emphasising wealth creation, India deviated from traditional
model after the Independence. India focused more on socialism, closed economy, self reliance,
licence raj, red-tapism in industries. India returned to this model in 1991, GDP, Sensex grown
after 1991.

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WEALTH CREATION THROUGH INVISIBLE HAND OF MARKETS

- Freedom of choice —> wealth creation i.e. Invisible hand helps in wealth creation.

- Invisible hand is philosophy of Adam Smith.

- Invisible hand —> Free hand —> Economic Development —> Wealth Creation

- LPG reforms in India 1991 —> Enabled invisible hand —> Economic openness increased

- Liberalised sector grew significantly faster than those remained closed

- Free Market Economy = Optimal allocation of resources. The freedom to choose is best
expressed in an economy through the market where buyers and sellers come together and
strike a bargain via a price mechanism.

- Unlike in command economies where prices are determined by the government, in a market
economy, price of a good is determined by the interaction of the forces of supply and demand.
The survey finds that unshackling the economic freedom for markets augments wealth creation.

- See the graphs - Exponential rise in India’s GDP and GDP per capita post-liberalisation
coincides with wealth generation.

- Survey shows that the liberalised sectors grew significantly faster than the closed ones.

- In open sector, citizen can choose among various producers unlike closed sector

- As discussed earlier, when entrepreneur creates wealth —> salaries paid to employee correlates
—> employee create wealth —> raw material suppliers reap benefits —> also supplementary
industries grow

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THE INSTRUMENTS FOR THE WEALTH CREATION

- Provide equal opportunities for new entrants against old bosses or already established
enterprises (Discussed in chapter Pro Business vs Pro Crony)

- Enable fair competition and ease doing business. The ease of doing business has increased
substantially in the last five years from reforms that provided greater economic freedom.India
continues to trail in parameters such as Ease of Starting Business, Registering Property, Paying
Taxes, and Enforcing Contracts.

- Eliminate policies unnecessarily undermining markets through government intervention.

Kautilya advocates economic freedom by asking the King to “remove all obstructions to
economic activity” As we discussed earlier post LPG liberalised sector grew significantly faster
than those remained closed

- Enable trade for job creation. Since resources are limited, a nation has to make choices. For
example, given its demographic dividend, should India focus on labour-intensive industries or
on capital intensive industries? The Survey calls for integrating “Assemble in India” into “Make

In India” to focus on labour-intensive exports and thereby create jobs at large scale.
- EFFICIENTLY SCALE UP THE BANKING SECTOR The support of the U.S. Banking system in
making the U.S. an economic superpower is well documented. Similarly, in the eighties during
the heydays of the Japanese economy, Japan had 15 of the top 25 largest banks then. In
recent times, as China has emerged as an economic superpower, it has been ably supported
by its banks—the top four largest banks globally are all Chinese banks. The largest bank in the
world—Industrial and Commercial Bank of China—is nearly two times as big as the 5th or 6th
largest bank, which are Japanese and American banks respectively. India’s banking sector is
disproportionately under-developed given the size of its economy. For instance, India has only
one bank in the global top 100

- SHADOW BANKING: The practice of banking like activities performed by non-banking finance
companies, which are not subject to strict regulation. However, these institutions function as
intermediaries between the investors and the borrowers, providing credit and generating
liquidity in the system.

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THE BREAKDOWN OF TRUST

In a market economy too, there is need for state to ensure a moral hand to support the invisible
hand. As Sandel (2012) argues, markets are liable to debase (degrade) ethics in the pursuit of
profits at all cost. Trust contributes positively to access of both formal and informal financing -
Trust can be furthered by appealing to ethical and philosophical dimensions. Philosophers such
as Aristotle and Confucius (implicitly) viewed trust as a public good by explaining that “good laws
make good citizens.”

- Friedrich Hayek, who advocated not only economic freedom but also a set of general rules and
social norms that applies evenly to everyone.

- Wilful defaults, Audit failures, NPAs, Fallout of events like Global Financial Crisis can trigger
panic among investors and trust deficit in long turn —> Investor confidence erodes —>

- WILFUL DEFAULTERS: Large corporations wilfully defaulted - Credit boom and bust -
Business, Banking institutions, someone from govt and auditor are at fault etc. When corporate
intentionally misreports financial services —> trust deficit increases —> negative externalities
—> malpractices etc.

- THE BREAKDOWN OF TRUST IN THE EARLY YEARS OF THIS MILLENNIUM: State should
ensure moral hand supports invisible hands, trust contributes positively to access both formal
and informal financing, Trust is public good.

- Bank should check on defaulters and recognise corporates who pay their interest and principal
in time in non- monetary ways, use Artificial Intelligence and Machine Learning to track and flag
market malpractices, wilful defaults, malpractices such as financial mis-reporting and market
manipulation needs to be detected early because these are termites that eat away investor’s
faith in financial markets, diminishes portfolio investments and crowd-out important national
investments. Such malpractices drives away investments, law abiding market participation and
therefore jobs in the economy.

- The government needs to support the hand of trust by being a good referee of the economy.
government’s role as a referee is to ensure fair-play for all wealth creators.

- Significant enhancement in the quantity and quality of manpower in our regulators (CCI, RBI,
SEBI, IBBI) together with significant investments in technology (to use AI and Machine Learning
to track malpractices) and analytics needs to be made.

- The Survey suggests that policies must empower transparency and effective enforcement using
data and technology to enhance this public good.

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