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The rate of economic growth has been high in the first three years of the United Progressive Alliance (UPA) government. However, the scarcity of skilled and educated manpower may become a binding constraint. The government has, so far, played an important role in education. However, the private sector and market forces need to play a much bigger role in setting up and running educational institutions. Education has been financed, so far, primarily by the government or by parents of students. Educational loans are still limited. There is considerable scope for the use of loans but this requires some policy changes.

The banking sector needs reforms—both at the level of commercial banks and at the level of the central bank. First, recovery of loans is still difficult for banks. This discourages several business loans. Second, there are barriers to entry for new commercial banks. This leads to less banking than is optimal. The central bank has been more or less under the central government. It has done a commendable job. But, we also need to explore the possibility of a more independent central bank. The banking sector has helped with the government’s finances, but there is need for improved tax collection. This can help avoid cutting the subsidies that are actually required.

Housing has become even more unaffordable in many urban areas. The economic policy vis-à-vis housing still reminds one of the licence-permit quota raj. Furthermore, instead of a ‘save electricity and save water’ campaign, we need more investment to meet the rising demand for electricity and water. This investment can be financed by (high) domestic savings, or by foreign funds.

The corporate sector has performed very well in the recent past. This suggests that economic policy could further experiment with less protection for the unorganized sector—including agriculture. It is true that many farmers are facing considerable difficulties. In this context, liberalization may make farmers even more vulnerable. However, there is no escape in the long run from restructuring agriculture. There is considerable self-employment in agriculture. Given the size of self-employment, it is doubtful if all self-employed people are entrepreneurs. If they are not, then there is a need to restructure. The challenge is to manage the transition from the prevailing situation to one that fits in with a more competitive and globalizing world.

The UPA government has been active in promoting employment under the National Rural Employment Guarantee programme. However, this needs to be supplemented by expansion of employment in the private sector. This means increasing the number of employees in the private sector. So, obviously, there is a need to let the existing employers expand their firms, or encourage the entry of new entrepreneurs. Unfortunately, the UPA government is, in practice, not as keen on this as it is on increasing employment. This is a contradiction. So, in the interest of expanding employment, the government needs to make the freedom of enterprise more meaningful than it is at present.

An economy does not function in a vacuum. So, there is a need for law and order. This needs improvement. Furthermore, the judicial system is inadequate, and the procedures are lengthy. Ex-ante, fewer formal contracts are used. This restricts business relationships within familiar and ‘reliable’ circles. The result is less efficient outcomes than in the case where one is unconstrained in the choice of who one is dealing with.

Gurbachan Singh is an associate professor at the School of International Studies, JNU. Comments are welcome at otherviews@livemint.com

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