Stop shirking reforms

Author - Baijayant 'Jay' Panda

Posted on - 2 July 2011

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This article was published on ‘The Indian Express’ on 2nd July 2011





Sometimes it is easy to forget that 20 years ago India was a basket case. Now,caught up in the hype of being a BRIC country and our growing international clout,it is easy to succumb to complacency on further economic liberalisation. Indeed,it is more than complacency: it is also hubris,the kind that wrongly believes that India’s resurgent destiny is inevitable,which has led to political torpor.

There are those,of course,who refuse to acknowledge the benefits of liberalisation. Nevertheless,as Professor Jagdish Bhagwati of Columbia University said in his speech in Parliament last December: “After a considerable debate,it is now generally accepted… that the growth which followed India’s liberal reforms actually pulled as many as 200 million (people) out of poverty. By contrast,consistent with common sense,the preceding quarter century with abysmal growth rate witnessed no perceptible,beneficial impact on poverty.”

Apart from the broad-brush impact that liberalisation has had on reducing poverty,there are lesser-known but very significant effects on specific target groups. Economist Amartya Lahiri and his colleagues have concluded that Scheduled Castes and Scheduled Tribes “have seen a sharp improvement in (their) relative economic fortunes.” This is corroborated by others,such as Lant Pritchett,Devesh Kapur,and D. Shyam Babu,who studied the fortunes of Dalits in Uttar Pradesh from 1990-2008: between 38 per cent (western UP) to 61 per cent (eastern UP) of them reported that their food and clothing situation was “much better”.

That is not to say that poverty is vanquished,nor that liberalisation has been without hiccups. India continues to have “more poor people than anywhere else on earth” (Bhagwati). But that is hardly a reason to denounce the course correction which has delivered the most improvement. It is,instead,the reason to persist with more liberalisation,not less.

Among the biggest hurdles to more reforms is the lack of widespread media coverage of such validating information. In fact,many people confuse the abuse of positions of power — “rent seeking” in economist speak,“corruption” for the rest of us — with liberalisation. Some of the leading lights of the ongoing agitation against corruption have clearly said as much. But nothing could be further from the truth. The essence of economic reforms is the replacement of discretionary powers with transparent,rule-based systems. Thus the biggest source of corruption 20 years ago,industrial licensing,is today a long dead curiosity.

Twenty years and considerable success should have convinced us as a nation to stick to the trajectory of reforms. Instead,we continue to grapple with it at every step,with much still remaining to be done. Contrast that with China’s unwavering commitment to see what sustained liberalisation can achieve. When Deng Xiaoping started opening up China’s economy in 1978,its per capita GDP was about the same as India’s; today,it is four times as much. In case you think China’s 12-year headstart can explain that,you’d be wrong: even in 1991,India’s per-capita GDP was still 90 per cent as much as China’s,as against today’s 27 per cent.

Of course,despite India’s relative decline vis-à-vis China,we have grown compared to almost everyone else. And in absolute terms,we are a much larger economy today,with commensurately increased respect in the world. Even more importantly,this growth has fuelled a sharp rise in governmental revenues,and expenditure,and has given our leaders the luxury to shirk from the unfinished agenda of reforms.

This complacence is compounded by the huzzahs from around the world,recognising and welcoming India’s ascendance. Earlier this year The Economist hazarded a prediction that India’s growth rate could overtake China’s by 2013. The International Monetary Fund has gone a step further and said that India has just done that,albeit beating China’s growth last year of 10.3 per cent by the proverbial whisker of an additional 0.06 per cent. As ephemeral as that may be,it is more than sufficient to reinforce the hubris that completes our vicious cycle of inaction.

There are real dangers to this mindset. Even those who cheer India’s resurgence warn that it is not inevitable; that it requires resolute continuation of reforms; that China’s plateauing comes after three decades of double-digit growth,which India has not experienced; and most importantly,that India’s oft touted demographic dividend of a youthful population is a double-edged sword,which could trigger explosive problems without the economic opportunities that can only come from sustained growth.

There is a broad consensus among economists about the unfinished agenda of liberalisation that India needs to tackle. Among the most important of these are agriculture sector reform; removal of sectoral caps for foreign direct investment; and the holiest of holy cows,labour sector reform. Undertaking these would result in the most significant boost to the economy till now,and provide the structure and means for more equitable opportunities for all Indians. Yet,mired in complacency and hubris,the political will is lacking. There is also an element of taboo: all three are remnants of an earlier era when the conventional wisdom was that it would be political harakiri to touch them.

Were it not for the NDA’s spectacularly ill-advised campaign in 2004 — “India Shining”,whose failure erroneously convinced many politicians that reforms couldn’t be sold to voters — these taboos would have melted away by now. Since then,the passion for reforms has cooled even among its original architects. But there is hope on two counts. First,at a regional level,several political leaders have kept on getting re-elected while simultaneously ushering in reforms and spectacular growth in their states. Surely this must now be obvious to Delhi.

Finally,India seems to work best when pushed into a corner. Now that the government has its back to the wall on other issues,perhaps it can at last dare to take its chances with the next round of liberalisation.