The phrase ‘vasudhaiva kutumbakam’ (the world is one family)—enshrined in the ancient scripts of the Upanishads—holds more relevance in the present era of a globalised and interconnected world than it may ever have. ‘Yaadhum oore yaavarum kelir’, which in Tamil means ‘all the world is my world, all humanity is my fraternity’, is another embodiment of the same spirit. This concept reverberated in the new phrase ‘global village’ coined by Marshall McLuhan, a Canadian philosopher of communication theory, where he talked about the irrelevance of ‘distance’ and the shrinking of the globe as a consequence and the world becomes one family.
The driving forces towards this one ‘world family’, in today’s times, can be recognised as being trade flows of goods? and services; capital flows; information flows; and movement of persons. This interconnectedness of nations also forms the basis for scrutiny of each member of this family by every other member and international bodies of countries, in matters ranging from human development to financial stability to economic growth prospects, etc. This scrutiny then becomes an important building block for perceptions of international businesses looking to make investments in any country. This also provides a policy feedback loop to countries to identify weaknesses in their economy.
A plethora of such analysis is being done for India as well. Listed in the accompanying table are some of the main international reports which have focused on quantifying the level of financial and economic development; global connectedness; ease of doing business, etc. A first glance at India’s ratings in such studies by IMF, World Bank, World Economic Forum, etc, does not present a very rosy picture of India’s standing among its peer group. For example, the Global Competitiveness Report of the WEF ranks India at a competitive disadvantage in terms of macroeconomic environment, infrastructure, institutions and labour market efficiency. The Financial Development Report of the World Bank points out that the country’s institutional environment is considerably weak following its lower levels of financial sector liberalisation and low degree of contract enforcement. India’s business environment is also affected by the absence of adequate infrastructure and high cost of doing business. The most sighted and debated Doing Business Report of the World Bank again places India low in ranking in terms of ease of starting business, dealing with construction permits, registering property, etc. The DHL Global Connectedness Index states that in terms of the depth of global connectedness, i.e. international flows relative to size of the domestic economy, India is ranked low.
While these studies point to a disappointing performance of India on many fronts, they also bring out certain parameters in which the country has a competitive advantage. For example, Doing Business Report 2014 applauds India for making significant improvements in bringing in the needed reforms in the economy. It acknowledges that India is one amongst 50 economies that have narrowed the distance between themselves and the best performing economies, referring to 17 regulatory reforms introduced in the country since 2005 with the aim of making it easier to do business in the country. In terms of various ‘good practices’, India has been cited as an example on various counts, such as allowing out-of-court enforcement, distributing positive and negative credit information, allowing rescission of prejudicial related-party transactions, electronic filing and payment of taxes and so on. The report highlights that India is the only economy in South Asia that has successfully put in place a complete online system for filing and paying taxes.
In the Financial Development Report, though India is not ranked very high in its overall score of financial development, it is relatively well placed in terms of development of equity-related services (which the report calls non-banking financial services), where it is ranked ninth amongst 62 countries and financial markets (ranked 28th).
Within financial markets, India fares well in the development of its foreign exchange markets and derivatives markets. Some of the sub-indicators in which India ranks well are regulation of securities exchanges and currency stability. The Global Competitiveness Report places India at a competitive advantage amongst 148 countries, in terms of its market size (ranked third after the US and China), financial market development (ranked 19th) and innovation (ranked 41st). According to MGI’s Global Connectedness Index, India ranks 13th amongst 140 countries in terms of connectedness of services trade.
It is clear that wherever the country has made substantial progress vis-a-vis its peer group countries, it has been due to long-term and sustained policy action. A classic example of this is the development of India’s financial markets.
Over a long period of time, a variety of successful financial sector reforms have been undertaken, with the aim to align the regulatory framework with international best practices while keeping in view domestic needs. These reforms focused on liberalising the overall macroeconomic and regulatory environment within which financial sector institutions function; strengthening institutions and improving their efficiency; and establishing and strengthening the regulatory framework and institutions for overseeing the financial system.
Within the financial sector, reforms in equity markets stand out. The rather spectacular performance of Indian securities markets can be traced to a clearly-defined legal and regulatory framework for them and relatively low presence of public sector bodies as regulated entities. The approach of reforms in equity markets was through an independent regulator, Sebi.
Further, one finds that in India the pace of reforms has been the slowest where the government had a dominant presence. For example, government dominated the insurance and banking sector where the pace of reforms has been the slowest. The government had a lower involvement in commodity markets, and least in case of equity, where reforms have made huge strides in institutional development and change. Starting in the mid-1990s, Indian securities market has many ‘firsts’ to its credit, viz establishing the first demutualised stock exchanges in the world; using satellite-based communication technology for securities transactions; introducing straight through processing in securities transactions, etc. The growing number of market participants and volumes in securities transactions; reduction in transaction costs; significant improvements in efficiency, transparency, and safety; and level of compliance with international standards have earned for the Indian securities market a new respect internationally. In addition to these developments, thanks to massive liberalisation ushered in 1992, securities market in India has grown exponentially as measured in terms of amount raised from the market, the number of market participants, the number of listed stocks, market capitalisation, trading volumes and turnover on stock exchanges, and investor population. The government and Parliament effected these reforms with necessary radical legislative changes where necessary and through Sebi. It is important to note that a lot of these path-breaking changes were not done because ‘things were broken’. They were done because the authorities decided to implement global best practices.
The critical question, therefore, is why cannot India replicate the success story of development equity markets to other important areas of development for the Indian economy? Three of the most important issues facing the economy at present—also highlighted by various international reports stated earlier—are the poor quality of infrastructure, lack of adequate regulatory framework for bankruptcy proceedings, and the abysmal status on contract enforcement in the country. These issues represent an intersection of economics, public administration and law. They are in need of reform initiatives and need serious new legislation, new institutions and new approach to governance and economic regulation. This is identical in terms of the approach that was followed in the securities market and is, therefore, amenable to a similar solution.
KP Krishnan is from the Indian Administrative Service and Anuradha Guru is from the Indian Economic Service. Views are personal