On furthering economic reform in India

Seven years ago, I attended one of the early US-based conferences on Indian economic reform and presented a paper titled ?Miracles and reform: policy reflections for India.? The paper was on how Indian economic and political reform, if done properly, could lead to East Asian-style ?miraculous? growth. We might be closer to that breakthrough than at any other time since the reform process began. But we can still go wrong. What are the key things that need to be done, or to be avoided? Ask different people and you will get different answers, all with some truth in them. Each year, though, I have a good place to ask, and listen to people who might know best.

Since 2000, the Stanford Center for International Development has organised an annual conference on Indian economic reform. In the beginning of June, senior academics from all over the world get together with top Indian policymakers in a small room and present ideas, abstract models, analyses, data, visions, complaints, suggestions and, this year, even a film. Influential Indian visitors have included finance ministers, chief ministers, MPs, CEOs, civil servants, think-tank heads and journalists. All around the same table, and participating in vigorous question-and-answer sessions, with none of the hierarchical flavour that tends to shape conferences in India.

What did I learn this year? Much of it did not surprise me, nor will it the readers. India has done quite a good job of financial sector reform, as far as the stock markets go. And this has opened the door for a great deal of further progress in other parts of the sector. Of course, if one starts to list all the remaining problems here, the list can be daunting. But, as a senior technocrat pointed out to me, India is doing a reasonably good job of collecting savings and efficiently converting these to investment. Doing more here will help, since higher investment is a key input for higher growth, but there is plenty of momentum.

Infrastructure is, of course, high on everyone?s priorities. At this year?s meet, the focus was on transport. Bar-ring the railways, the view seemed to be that progress can and will be made, sooner rather than later. The government is slowly figuring how to let the private sector in, so that competition and efficiency can take hold. An area not discussed this year was electric power. When I asked the same top policymaker what the most critical area for reform is, the answer was ?electric power.? The Electricity Act of 2003 was threatened with review by the new government in 2004. Luckily, the sector?s urgent needs have prevailed over interest group pressures and implementation seems likely, despite continued opposition from the Electricity Employees Federation of India. Who can blame them, though? Livelihoods in India are scarce and the prospect of losing a secure job is frightening. The railways are a huge employer and face the same problem.

One of the reform areas I highlighted in my paper, seven years before, was governance. In many respects, India is still struggling here. Government corruption and incompetence are major problems for India?s citizens, who are supposed to be served by politicians and bureaucrats, not exploited and bullied by them. Some surprisingly candid statements were made at the Stanford conference, about the need for administrative reform in particular. My own sense is that the bureaucratic mindset still has some way to go towards adjusting to a market economy. Our politicians and bureau- crats are often still feudal in their attitudes and prey on the fears of workers and citizens. Judicial re-form, which I remember being highlighted by Dilip Mookherjee at a conference in Berkeley in 1993, was also mentioned as a high priority.

On the other hand, a tremendous amount has been accomplished at a different level of governance, intergovernmental relations. The Finance Commission is now allowed to make broad recommendations on government finances, well beyond its artificially narrow scope in the pre-reform era. Tax reform is gathering steam and the benefits of improved tax administration are large enough for administrative and organisational inertia (even resistance) to be eventually overcome. The Planning Commission promises to start paying attention to how its money is spent. The leaders of (some) state governments are slowly realising the enemy has been themselves. State chief ministers, given new prominence after economic reform, see themselves as ambassadors for their constituencies, seeking foreign investment in Silicon Valley, though maintaining traditional hierarchical dominance at home. Even local government reform (another topic at the conference) is creeping forward.

What?s missing? What?s the secret sauce, without which the Indian miracle will not occur, without which corruption will blight citizens? lives, fear will rule the labour unions and feudal attitudes persist? Abhijit Banerjee?s documentary film, shown at the conference, was about rural health care in Udaipur, Rajasthan. One thing I took away from it was the extent of ignorance on all sides and the lack of information preventing people from making wise decisions, even when reasonable, low-cost health care might be available. Knowledge matters in all situations, whether basic literacy, new job skills, consumer decisions or bureaucratic performance. Seven years ago, I quoted Milton Friedman?s 1955 statement on the secret sauce: ?In any economy, the major source of productive power is not machinery, equipment, buildings and other physical capital; it is the productive capacity of the human beings who compose the society.? I think left, right and centre can agree on this and work towards policies that build this capacity for all of India?s citizens, in as many circumstances as possible.

The writer is professor of economics, University of California, Santa Cruz