India is not the same country it was 25 years ago, and the economic reform process deserves much of the credit. What has been achieved? India’s growth rate has gone up, and the standard of living of the vast majority of its people—including non-income measures of well-being—has improved significantly. It is difficult to establish the counter-factual scenario of where exactly India would be now without economic reforms, but one can assert with some confidence that it would be much worse off.
The paradigmatic economic reforms were liberalisation of international trade and —later—foreign investment, and reducing the myriad controls on industry. This was a government versus market story, and one that was being played out in many parts of the world in the 1990s. Some other examples of reforms included introducing a modern stock exchange in a matter of months in the early 1990s, and overhaul of the income tax structure. The latter was part of what has been a 25-year process of modernising the entire tax system, hopefully, soon reaching one end-point with the introduction of the GST. Another key reform was in telecoms, where the nascent software industry benefited from the liberalisation of the sector, although its genesis lay in benign neglect from the government, rather than reform or support. The upgrading within the software industry, along with the various spillovers into information-technology-enabled services, belied early derision from leftist academics that this would be a sector of “techno-coolies.” Indeed, this was the first time in the modern era that India was doing something world-class on a large scale, and this changed attitudes and perceptions at home and abroad.
There are many more economic successes associated with the reform period, but also many unrealised gains. Banking, electric power, and agriculture and manufacturing very broadly, are examples of incomplete or insufficient reforms, so that the progress in these areas has not only been well below potential, but has created bottlenecks and constraints for other parts of the economy. For example, electric power remains erratic and expensive for small businesses, and they have difficulty getting bank finance for growth, especially in the form of working capital. The lack of true industrial dynamism has meant that job creation has been far short of potential throughout the reform period.
Perhaps the area where progress has been the most limited is in governance. This issue goes beyond the government versus market balance, to the quality of government action and public service delivery. In many ways, the inner functioning of government has resisted change, whether it is accounting and budgeting, internal communications and decision processes, or hierarchies and promotions. Again, there are bright spots, but the fundamentals do not seem to have changed. The reform period saw massive national efforts in public health and school education, as well as a massive increase in employment-based income support. These were necessary initiatives to make growth more inclusive, but the implementation was far short of achieving the avowed goals.
In the context of governance, the parallel process of decentralisation through empowering local governments has been another aspect of reform, this time political, and motivated by different factors than economic reform. Again, the implementation has left decentralisation short of its potential, although there has been much progress. Essentially, the structure of the decentralisation did not ensure enough fiscal capacity for local governments, and the development of organisational capacity has also been relatively slow. Here, the change in approach taken by the 14th Finance Commission—along with the winding up of the Planning Commission—by giving states more flexible funds, opens up space for them to do a better job of decentralising to the local level. Ultimately, however, this process will require a fundamental shift in how citizens engage in the political process at the local level, particularly in towns and cities.
Political and social change can take time, but there are many smaller economic reforms that can be implemented quite quickly. Some of this is possible because there has been a significant shift in thinking in India. My conjecture is that this is not so much a change in thinking among a given set of people, but rather that a new generation of Indians have grown to adulthood with the sense that they have choices, that they can shape their lives outside existing pathways, and that they can express themselves more freely than before. In this context, the vast multiplication of media outlets and information sources, both conventional and those based on the Internet, represents a potent new avenue for communicating new ideas. Of course, the proliferation of content does not guarantee quality or depth. This brings one back to modes of citizen engagement, and the process of education, both for imparting general and specific skills, and for giving young people the tools of critical thinking and the values to guide them.
Looked at from the perspective of what needs to be done and how it is to be achieved, the prime minister’s recent guidance to NITI Aayog on the need for innovation, harnessing of technology, bringing in more talent, and transformative policy reforms is a good starting point. What needs to be added to that perspective is the need for greater organisational innovation as well, especially in governance.
The author is professor of economics, University of California, Santa Cruz
