The next phase of economic reforms
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The Narendra Modi government has done well to push ahead with key economic policy reforms that had been left on the table by the previous regime. The legal decks have been cleared for the new goods and services tax (GST) after the parliamentary vote last week. India now has a new monetary policy regime that is focused on inflation control. The new bankruptcy code will help deal with what Arvind Subramanian has described as the problem of capitalism without exit. The Fourteenth Finance Commission has given fiscal muscle to the idea of cooperative federalism. The Modi government has also dealt with the administrative tangles that almost ruined the Indian economy—ranging from the way natural resources were being allocated to the mismanagement of the food economy, to defence modernization.
The few men who matter in this government need to be asked a plain question: What now?
Deep policy reforms do not happen overnight. They are usually preceded by many years of preparatory work within government as well as outside it. The battle to introduce the GST has taken nearly 17 years. The transition from an eclectic monetary policy framework to one focused on inflation control was also preceded by almost a decade of intense debate; the Reserve Bank of India had set up a technical advisory committee for monetary policy in 2006. The path to new bankruptcy regulations that would help release capital blocked in failed enterprises was also not an easy one. Even the terms of reference were given to the Fourteenth Finance Commission in early 2013.
That is true of the 1991 economic reforms as well. The rethink on Indian economic policy began in the late 1970s with the setting up of three government committees—the first, headed by P.C. Alexander, on trade reforms, the second, by Vadilal Dagli, on controls, and the third, by L.K. Jha, on indirect tax reform. There was further work done on various policy fronts in the next decade as well. The Seventh Five-year Plan authored by a team led by Manmohan Singh argued in favour of a switch from a blind focus on capital investment to one that gave importance to higher productivity through the technological upgradation of Indian industry.
The Bharatiya Janata Party has now replaced the Congress as the hegemonic force in Indian politics. Modi would like his party to rule the country for several decades. The Prime Minister has also spoken about how India should become a $10 trillion economy by 2032. What are the next generation of economic reforms that India needs to achieve this goal? Can adequate jobs be created in the formal sector during this long transition? How can high growth be maintained in a sluggish global economy? What needs to be done to secure macroeconomic stability over the long run? How can new technology be used to rethink the contract between citizens and the state?
These are not questions for the next quarter or even the next phase of the business cycle. A lot of strategic thought needs to go into the issues before adequate policy is designed. One can find such strategic thinking in the Chinese system. The Planning Commission used to apply its intellectual capital to structural issues before it degenerated into an imperious watchman of spending programmes. The NITI Aayog is now tasked with the job. The Modi government now needs to look beyond its administrative achievements to focus on what economic policy reforms India needs over the next decade.
There have undoubtedly been some attempts. Modi had to backtrack on difficult reforms in the land and labour markets. The task has now been left to the states. But the Prime Minister deserves credit for at least putting his political capital to work in such tricky areas. The committee headed by N.K. Singh has looked at crafting a new fiscal policy framework. The Bimal Jalan committee has done the same with expenditure management. The impending introduction of GST should allow the government to focus on the other half of tax reforms—the shelved Direct Tax Code.
Planning is thankfully dead. But governments, like all organizations, need to think strategically for the long term. The introduction of GST will bring to an end an important phase in Indian economic reforms that began at the turn of the century. The government now needs to think about the next phase. Unfortunately, there is not enough evidence of such thinking as yet.
What should the next set of long-term economic reforms be? Tell us at email@example.com