For 18 years now, reform has been synonymous with liberalization. On the whole, liberalization has transformed India for the better. However, a series of recent events have taken a toll on the country: the Mumbai terror strikes, the Satyam scandal and the real estate bust. All this, on top of the usual litany of woes—endemic corruption, rapes in Noida, lawless road traffic, disappearing tigers and a Naxalite movement that holds large swathes of central India to ransom. It is striking that all these issues are different manifestations of exactly the same problem—a generalized lack of governance.
The first generation of reforms emphasized the withdrawal of an overextended state. However, the market economy can only function effectively in an environment where laws are clear and are enforced. This means that further liberalization will not work unless we fix governance. The next generation of reforms must be about reforming the state to play its rightful role in a market-based economy. There are two broad areas that need urgent attention—reform of the administrative and judicial systems.
The legal infrastructure is the key institutional framework through which the state provides general governance. It administers justice, applies laws and enforces contracts. These are absolutely critical for a market-based society. Further, in a common-law country such as India, the judicial system can be an agent for change because each judgement creates a precedent and thereby effectively creates a new law. In theory, this is a huge advantage as it allows the system to continuously update itself.
Illustration: Jayachandran / Mint
Unfortunately, India’s legal system is failing the country. The underlying institutions left by the British were quite good, but they have fossilized over time. At least 25 million cases are now stuck in the judicial process. According to economist Bibek Debroy, the conviction rate for criminal cases is less than 5%. The majority of people in jails are those awaiting trial. Meanwhile, people who can afford good lawyers continue to break laws with impunity. The result is that people are taking the law into their own hands.
Urgent changes are needed at two levels. First, the laws themselves need to be revisited. The system is overburdened by multiple layers of confusing and often defunct laws. In addition, there are a plethora of state-level labour laws and administrative directives. When the simple act of hiring an employee is so complicated, it is impossible to function without knowingly or unknowingly breaking a law.
Second, the judicial process needs to be speeded up drastically. Some efforts are already under way, but the impact has been patchy, especially in the lower courts. India has barely 13 judges per million population compared with 107 for the US and 51 for the UK. In addition, there are serious concerns about corruption and the quality of training of judges. We need to invest in quality judges even as we need to drastically simplify procedures as well as severely restrict the system of appeals.
The administrative apparatus that runs the country is essentially based on a framework left behind by the British. Of course, the civil service has been enormously expanded in the last 62 years. However, there has never been a serious review of the underlying framework. As a result, it no longer works even at the efficiency level of the colonial era. There are serious problems of accountability, corruption, effectiveness and transparency.
The need for administrative reform has occasionally come up over the decades. A few years ago, the government even set up the Administrative Reform Commission. Unfortunately, with the exception of the Right to Information Act, no serious effort has been made to change things.
So, what needs to be done? First, there should be a 360-degree review of all ministries, departments, schemes and projects. The aim should be to reorient the structure of the government (including the distribution of personnel and resources) to those areas that need them. Effectively, we need to go through a one-time “zero-base budget” for the whole government system.
Second, there is a need to standardize and simplify processes and procedures. Over the decades, layers of rules and procedures have been built up. This causes delay, distortions and corruption. From time to time, these procedures are arbitrarily changed and this causes further confusion. At the very least, all existing procedures involving public interface must be collected in one place and made accessible (at least on the Web). This will have two major benefits. First, transparency will reduce rent-seeking by those who know how to work the system. Second, transparency will also allow for improving and simplifying the systems over time.
These points have been made before, but institutional regeneration must be the centrepiece of second generation reforms. Indeed, judicial reform is probably the single most important change required for the next stage of economic development—far more important than public investment in highways and airports.
Sanjeev Sanyal is a fellow of the Institute of Policy Studies, Singapore, and economic adviser to Deutsche Bank. Comment at firstname.lastname@example.org