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India after the reforms

, June 13, 2016, 0 Comments

Growth India MarketExpress-inIt is a quarter century since the reforms of 1991. I have written earlier about what difference the reforms made. First, there has been no payments crisis since the reforms, against one roughly every decade before. Second, the average growth rate has risen, and been high by international standards. Third, the growth has been mainly in services, and has been poor in industry. Finally, here have been some years of record high growth in the past decade. Beyond this, it is difficult to say much. Having helped in the reforms, I have a vested interest in them, and have sometimes thought of writing down how it happened and what we did. But then, I did not find much to say beyond what I wrote in the Economic Survey of 1992 and the OECD paper; I was bored and gave up.

So I admired Vijay Joshi for writing an entire book, which will soon be out, called India’s Long Road: the Search for Prosperity.  Admittedly, he has plenty of experience; he has churned out two books on Indian growth with Ian Little before. And he is so well placed to write. He can sit on a college lawn – of Merton or St John’s in Oxford – and write on his tablet; if it turns cold or wet, he can retire into Bodleian or one of the other college libraries. He is old enough not to have to teach; he has no distractions except perhaps for an occasional Arctic tern or an undergraduate in a dervish skirt. Still, India does become a bit boring for those familiar with it; it is patriotic of him to continue to observe it. What he does in this book is to give a short introduction to every economic issue and follow it up with an even shorter exhortation to India on what it should do about it. It suggests a touching faith in India’s ability to listen or to do anything rational. But one never knows; I guess it is better to hope than give up.

The book has three parts on growth, stability and inclusion, and political economy, which I found replete with good and boring economics. It was the last part, on the long-run future, that held my attention.

India gives dozens of price subsidies, many of which are conditional; the public distribution system for food grains is the prime example, Joshi would like all these subsidies to be abolished; instead, he would like to see an unconditional subsidy to all households, which would give them all a minimum income. It would not be conditional on their income or on anything else; just the fact that there is a household in India (which may be an individual) would entitle it to a subsidy. I have always favoured an unconditional subsidy. By expanding targeted subsidies like PDS and MGNREGA, the Manmohan Singh government created the world’s largest corruption programme. The way to remove that corruption is to remove the conditionalities, each of which has to be certified by a corrupt official.

That leads Joshi to reforms in seven areas. Labour laws should be amended to remove the ban on dismissal and introduce severance benefits and schemes for job search and training. General sales tax should be brought in, and price controls on electricity, fertilizers and water should be removed. Land acquisition law of 2013 needs to be amended and price discovery made more transparent. Public enterprises should be privatized unless they are natural monopolies, in which case they should be regulated. Agricultural subsidies should be abolished; they would be replaced by investment in rural infrastructure, and income subsidy. Environmental policies need to be made more effective; a tax should be introduced on fossil fuels, and gradually raised.

Joshi points out that no country has grown rapidly which also did not expand its exports rapidly; India’s export performance has been undistinguished, and in recent years, terrible. It has signed many bilateral trade agreements, which have no serious economic content. Joshi thinks that India should continue unilateral trade liberalization, continue to support WTO initiatives, and join plurilateral agreements within WTO such as Trade in Services Agreement. And it should strive to join all relevant regional trade agreements such as the Trans-Pacific agreement.

Joshi is in favour of the school voucher system which gives children choice of schools, and of contract teachers who can be held accountable and dismissed if they do not deliver. He is against governments’ interference in universities. There should be public health insurance, but the public and the private sector must compete in service delivery.

These are only some of Joshi’s ideas; the book is full of reforms and suggestions in so many areas. There is only one problem with them: they require the government to implement them, and as it happens, Joshi’s opinion of the government’s competence is extremely poor. So at the end of the book one is left asking: what is the point of all this clever thinking? Joshi should work instead on Colombia or Uzbekistan. He may have as little chance of success as in India, but he will enjoy visiting and working on those countries.

I too once dreamt all kinds of dreams on behalf of India. I implemented some of the ideas, and was frustrated in the implementation of many more. I took the frustration badly; it left me depressed for a while. Ultimately, I came to the conclusion that government reform is chaotic business. It happens accidentally and discontinuously. But a reform cannot occur unless the reform proposal is available; so imagining all kinds of reforms is not an entirely pointless activity. The return on such thinking is very uncertain, and often modest; so working on reforms is not very rational. But if your mind is so inclined, and if you enjoy imagining reforms, there is no harm in doing what you want. There are worse things to pursue than reforms. And reforms can happen only if the ideas are ready just when the chance comes; so it is better to be early than late.

And coming to Joshi’s other concern, India’s long-term prospects, so many things that have happened in the past were an utter surprise – the oil crisis, the boom of the 1980s, Japanese capital falling in love with India, the information technology boom, and the fantastic growth rates chalked up more recently. So I think that no one is going to be great at forecasting – not even Joshi.

What matters, however, is not his forecast, but the thinking and reading he has done for the book. His bibliography consists of some 500 works; as one turns the pages, one comes across new ideas all so often. Reading him enables one to economize considerably on reading his sources; for more energetic ones, it also points to new directions in reading and thinking. To sum up, there has not been such a comprehensive book on the Indian economic performance for a long time; for macroeconomists, it is a good way of cranking up the levers of their minds. Much of the economic writing in India is narrowly focused; broad-stroke economics is difficult to come by. That is where Joshi scores.