Reforms and Indian capitalism
Crony capitalism is entrenched, regulation is weak, and inequality is high. Reforms need a new imagination
India marks 30 years since the 1991 reforms at a moment when its economy is on the precipice of another crisis. 1991 ushered in an era of high growth, declining poverty, a burgeoning, aspirational middle class and the very real possibility of a seat on the global stage. By the early 2010s, those heady days of high growth were fast becoming history and long ignored fragilities within the Indian economy, of cronyism, structural inequality, regional concentration, were increasingly visible.
India has reached the end of the road of the gains made from the 1991 moment and the ravages of Covid-19 have thrown this into sharp relief. Finding our way out of the crisis and on to a growth trajectory requires an honest appraisal of the past, a debate that goes beyond Gross Domestic Product to focus on the real economy and a reform imagination that is willing to confront the realities of our political economy.
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Nurturing Indian capitalism by breaking it free from the shackles of the licence-raj through de-licensing, market competition and opening up was the dominant framework of the 1991 moment. What has emerged, as economists Michael Walton and Rohit Chandra have argued, is capitalism with two faces; partly dynamic, competitive and productivity-oriented, but coexisting with an increasingly visible, dark side entrenched in rent-extracting cronyism that privileges political deals over rules-based business.
Corruption scandals under the United Progressive Alliance regime, the twin balance sheet problem, the consolidation of capitalist oligarchies and increased opacity in electoral finances under the current government are illustrations of this entrenched cronyism, notwithstanding reforms such as the Insolvency and Bankruptcy Code. India’s path to capitalism is yet to credibly create markets that embrace competition and create conditions for widespread prosperity. And it is this lack of credibility that lies at the heart of the scepticism and resistance toward deeper factor market reforms in land, labour, and agriculture that impact the everyday economic prospects of ordinary Indians. The fears and anxieties of losing bargaining power when confronted with an entrenched State-business nexus are far more genuine than our debates on economic reforms have cared to admit.
The credibility deficit of Indian capitalism is partly due to the weaknesses of the regulatory regime. Author Gurcharan Das’s famous quip, India grows at night while the government sleeps, encapsulates the animating spirit of 1991. But in the rush to get government out of the way, scant attention was paid to ensuring we had good government where we needed it. India’s regulatory regime, despite initial investments in institutions such as Securities and Exchange Board of India, mirrors the very infirmities of government that the 1991 reforms hoped to escape. Robust regulation required building technical skills, creating an enabling legal regime, instituting checks and balances against unrestricted power and ensuring public accountability. Instead, we enabled a weak and politically vulnerable institutional landscape. Sustainable growth requires credible institutions. Investing in the State and its regulatory institutions rather than wishing it away will ultimately be the real driver of growth.
Weak regulation, however, is only part of the challenge. Markets in India operate in the context of deep structural inequalities. Our 1991 economic imagination responded to these realities by framing the debate in false binaries of growth versus inequality. This gave India comfort in its unusual structural transformation, one that skipped manufacturing, despite abundant low skilled labour, growing instead on the back of a far smaller high-skilled services sector. A trend economists Arvind Subramanian and Rohit Lamba have called “premature deindustrialisation, precocious servicification”.
The distributional consequences of this became apparent even before the pandemic. Informality, under-employment and low inter-generational mobility persisted through the heady days of growth eventually contributing to the pre-pandemic slowdown. Economist Sam Asher and colleagues have shown in a recent paper that mobility is highest in places that are economically better off — southern, urban and with high education levels. Poorer regions and poorer people have failed to catch up. There is no trade off. Inequality has hampered growth. The pandemic has only exacerbated this trend.
Addressing structural inequalities requires a radical shift in our frameworks of economic policymaking. While there is widespread consensus that India needs to change direction and focus on employment-intensive manufacturing, the policy tools, framed by 1991, remain focussed on de-regulating factors of production, visible in the rush to push farm laws without addressing structural vulnerabilities which fuel market scepticism. To make markets work for the poor, the State needs to invest and build markets even as it clears the regulatory maize. This includes physical market infrastructure, supply chains, and risk management through safety nets. Small towns and rural areas, which contribute to half of India’s manufacturing value addition and non-farm employment (Census 2011), have to be the priority and not just “smart” cities. None of this is viable without decentralised, local economic planning. Strengthening local governments for better governance has to be at the heart of the agenda.
Finally, the colossal failure to invest in human capital, health, education, nutrition, worse, treating these as an afterthought, a luxury of high growth. This is both an economic and a moral failure. There can be no sustainable growth without first investing in people and enabling them the opportunity to be active participants in the economy. If there is only one lesson to be learnt from the 1991 moment, let it be this.
Yamini Aiyar is president and chief executive of Centre for Policy Research
The views expressed are personal