Rakesh Mohan argues that the Indian economy is in trouble once again and it is time to usher in a third generation of economic reforms.(REUTERS)
Rakesh Mohan argues that the Indian economy is in trouble once again and it is time to usher in a third generation of economic reforms.(REUTERS)

A third-generation strategy for accelerated growth and development

The study has been authored by Rakesh Mohan, Ex-Dy Governor of RBI; former Chief Economic Adviser, & President, CSEP.
By Centre for Social and Economic Progress
PUBLISHED ON JUL 14, 2021 03:04 PM IST


In India’s growth and development journey, two major policy departures stand out from previous long epochs. In each case, there was a marked acceleration in sustained growth over time, which then petered out.

In this Working Paper, Rakesh Mohan argues that the Indian economy is in trouble once again and it is time to usher in a third generation of economic reforms. The paper presents India’s development journey as well as key failures, through a closer look at health and nutrition, education, manufacturing and industrial activity, among other sectors.

The first generation of economic reforms took place soon after Independence. This involved the introduction of a comprehensive approach to growth and development through planning and import substitution. Indian growth witnessed a notable acceleration from the early 1950s to the mid-1960s. But this was followed by policy sclerosis resulting in a growth downturn till the late 1970s.

The much-delayed second generation of economic reforms finally began in 1991. India was finally catching up with the prevailing global predominant thinking on development strategy: an open economy market-oriented framework. Fuelled by higher savings and investment, the economy ascended to a higher growth path of around seven per cent annual Gross Domestic Product (GDP) growth over the next two decades. Industrial and export growth accelerated, along with a comfortable and stable external sector, and poverty reduced significantly.

But, once again, the development engine started sputtering from the early 2010s. The slowdown is broad-based across all the sectors, agriculture, industry, and services. The Indian economy needs a major reboot. The time is now right for India to initiate the third generation of economic reforms to elevate its growth trajectory to the next level of around eight to nine per cent, which is needed to ensure a doubling of per capita income in every decade. India’s economic strategy going forward needs policy emphasis on economic growth over other objectives, along with specific attention to enhancing health and education.

Key emerging issues for the next generation of reforms:

• There has been an inadequate generation of quality employment for the increasing Indian labour force — over the past 15 years or so, there has been almost no net generation of jobs.

• Manufacturing growth has not been labour-intensive nor adequately export-oriented, unlike the successful East and Southeast Asian countries. This has restrained the absorption of people needing to shift from rural to urban pursuits.

• The key development failure right through India’s pre and post-Independence history has been the lack of adequate attention to the population's nutrition, health, and education. This is hampering the employability of new entrants to the labour force as new economic activities require an increasing level of educational competence.

• The quality of life in our growing towns and cities leaves much to be desired. Existing institutions responsible for urban management are simply not equipped to deal with the emerging challenges of urbanisation and need an overhaul.

The way forward

India needs to tackle these challenges with some level of urgency and collective action. They cannot be resolved by the private sector itself. Hence the theme of this paper: the need for institutional development for improved governance in the country, constituting the third generation of economic reforms.

The main organising principle of the second-generation reforms was to free the private sector from the myriad government controls that had hobbled its performance for a long time. This process itself still has some distance to go, and needs to be pursued further. But similar attention has not been given to improving the performance of the government itself, thereby constraining the performance of the private sector.

Consequently, the third generation of economic reforms must focus on a similar empowerment of the government to deliver growth-enhancing public goods and services for the benefit of all segments of the public, private sector, and corporate entities alike. The “government” encompasses all levels of governments from the local, state to national, and their entities which deliver public goods and services, and includes regulatory and standard-setting authorities. They all need to be strengthened.

In the last 30 years, the private sector has responded to the increased demand for health, education and other services at all levels. The way forward is not to restrict this private provision but to improve the quality of public services significantly, leading to greater trust, and in quantity, to promote universal accessibility. This would free up money in the hands of the less well-off for other essential goods and services. There must be a renewed understanding that it is the government’s role to deliver public goods and services that only it can provide, and that such services cannot and should not be privatised.

This kind of quality improvement cannot take place without a significant enhancement of government’s own technocratic competence and implementation capacity. There needs to be a system change in the approach to public administration in India, away from the traditional colonial approach that continues to be in practice.

The first condition for sustained growth is an enhancement of investment levels, both public and private. This would imply an overall increase in fiscal expenditure along with a shift in composition towards higher public investment for the delivery of public goods and services. This, in turn, would crowd in private investment rather than crowding it out. But buoyancy in the tax GDP ratio does not reflect the sustained growth in GDP of the past three decades. Focused attention now needs to be given to increasing efficiency and compliance in tax revenue collection so that the Indian overall tax/GDP ratio rises to levels consistent with comparable international experience, to finance enhanced public expenditure.

The key departure made in this paper is to emphasise the role of the state in promoting economic growth. Countries that have successfully sustained high growth rates did so by setting up growth-promoting governmental institutions to coordinate public investments while also incentivising the private sector to make the kind of investments necessary for a growing, dynamic economy. However, in India, adequate attention has not been given to strengthening the government itself in performing key functions, directly or through public authorities. The third generation of economic reforms must address this lacuna in policy and direct attention to improving the government’s own competence, both administrative and technical, at all levels.

You can access the full study here

(The study has been authored by Rakesh Mohan, Ex-Dy Governor of RBI; former Chief Economic Adviser, & President, CSEP.)

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