India needs a third generation of reforms

ByRakesh Mohan
Jun 23, 2021 05:25 PM IST

In India’s development journey, two major policy departures in its approach to growth and development stand out. In each case, there was an acceleration in growth, which then started petering out. We are at a similar crossroads

In India’s development journey, two major policy departures in its approach to growth and development stand out. In each case, there was an acceleration in growth, which then started petering out. We are at a similar crossroads and it is time to usher in a third generation of reforms.

An equity advisor watches share prices at a financial consultants' firm in Mumbai. (File photo) PREMIUM
An equity advisor watches share prices at a financial consultants' firm in Mumbai. (File photo)

The first generation of economic reforms took place soon after Independence. This was based on planning and import substitution. India’s growth witnessed a notable acceleration from the early 1950s to the mid-1960s, a significant transformation from stagnation of the past. This was followed by policy sclerosis, resulting in a growth downturn over an equivalent period till the late 1970s.

The much delayed second generation of economic reforms finally began in 1991, and was again characterised by a growth-oriented approach. 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 7% annual 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. India’s economy is in trouble once again and hence needs a major reboot.

There has been an inadequate generation of quality employment for the increasing Indian labour force throughout the development process. There seems to have been almost no net generation of jobs over the past 15 years or so. What is needed now is a special thrust to promote employment-intensive export-oriented manufacturing, which will need continued openness and not increased protection.

But the key development failure, right through India’s history has been the lack of adequate attention to 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. Thus, the next generation of economic reforms needs a special resolve to deliver efficient public services, particularly focused on the long-neglected social needs related to nutrition and health services, primary and secondary schooling, a major quality upgrade of tertiary education, water supply and sanitation, other public infrastructure and urban development; all public services that need enhanced government expenditure and technical competence and ability to deliver. The absence of these services is hobbling the performance of the private sector.

The main organising principle of the second-generation reforms was freeing the private sector from the myriad government controls that had hobbled its performance. This process still needs to be pursued. But similar attention has not been given to improving the government’s performance.

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Consequently, the third generation of economic reforms must focus on a similar empowerment of the public sector to deliver growth-enhancing public goods and services for the benefit of all segments of the public, private sector, and corporate entities alike. The “public sector” 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.

The last 30 years have seen a clear private sector supply response to the increased demand for health, education and other services, reflecting the failure of their public provision in both quantity and quality. The way forward is not so much to restrict this private provision, but to improve significantly both the quality of public services leading to greater trust in the provision of these services, and their scale and quantity to promote universal accessibility. This would free up money in the hands of the less well-off for enhanced demand for growth, promoting other essential goods and services. There must be a renewed clear 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. The availability of economic competence enabled the formulation of reforms at the macro level in 1991, and then their implementation in the ensuing two decades. There needs to be a system change in the approach to public administration, away from the traditional colonial approach.

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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, which, 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, particularly the stagnation experienced over the past decade. Focused attention now needs to be given, to increasing efficiency and compliance in tax-revenue collection so that India’s overall tax-GDP ratio rises to levels consistent with comparable international experience, to finance the needed enhanced public expenditures.

The key departure from current received wisdom that I am making is to emphasise the role of the State in promoting economic growth. Countries that have been most successful in maintaining high sustained growth rates have done so by setting up growth-promoting governmental institutions to coordinate public investments, while also incentivising the private sector to make investments necessary for a growing, dynamic economy. Niti Aayog needs to be strengthened technically, and in its powers to perform such a role.

The current government structure is simply not designed to take India to the next stage of development. The third generation of economic reforms must therefore focus on improving the government’s own competence, both administrative and technical, at all levels.

Rakesh Mohan was the economic advisor to the government of India in the industry ministry in 1991. He has also served as chief economic advisor, secretary, economic affairs and deputy governor, RBI. He is currently president of the Centre for Social and Economic Progress

The views expressed are personal

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