Home / Opinion / Where to after 25 years of reforms?

Until a few years ago, a favourite story I would tell about India’s economic reforms was based on the telecom revolution. It was that an entire generation of hundreds of millions had grown up in something akin to a parallel universe. Surely, not having to ever resort to contacts or bribes to get something as basic as a phone—in fact, having quite the opposite condition of being wooed by service providers—must have caused a sea change in the psyche and life views of these new Indians?

The subsequent scams and scandals that enveloped the telecom sector (among others) led me to stop citing this story of shifting attitudes to, say, corruption.

Of course, similar transformations from scarcity to plenty have impacted India in many other sectors, including automobiles, air travel and so on. But the ongoing transformation in public attitudes towards the role of markets and the private sector suffered a grievous blow from which it is still recovering.

This perceived ambivalence in public support for reforms has been mirrored among political parties, depending on whether they are in government or opposition. Which is why, even after a quarter of a century, India’s economic reforms are still very much a work in progress.

Until recently, reforms at the national level had either been compelled by crisis, as in 1991, or attempted stealthily by a few leaders in successive governments. In addition to many other hurdles, they had to battle their own parties and coalitions, often unsuccessfully.

The political dynamics surrounding economic reforms have been evolving. The past 15 years have already seen a metamorphosis at the regional level, with many state-level leaders repeatedly demonstrating that better economics leads to better political results. This was corroborated in a 2011 paper by Poonam Gupta and Arvind Panagariya, which documented better electoral results for incumbent parties in high-growth states.

At the national level, after a deadlock of a dozen years, there is traction once again. Parliament has recently passed several bills of consequence, with others on the horizon. A breakthrough on the biggest of them all, the goods and services tax (GST), is beginning to look feasible.

The economy has begun to sizzle again, being lauded worldwide as the fastest growing among the bigger ones. Investment has also picked up and foreign direct investment (FDI) is pouring in. India’s strengths in services holds great promise for the future, and in fact are already contributing immensely to growth.

But job creation remains far behind what is needed. The main reason for this is India’s relatively middling manufacturing sector. Despite having made big strides in some areas such as automobiles, India lags behind many middle income countries, with manufacturing contributing only 17% to the gross domestic product, compared to 30% in China and 28% in Thailand. According to Harvard University professor Gita Gopinath, “The fact that India has moved from an agricultural economy to a service-driven one with almost no growth in industry is not a virtue."

Some of the traditional barriers to manufacturing growth, like infrastructure, have seen much improvement. Though still behind countries like China, progress on highways, ports, airports and metro rail systems is palpable. But other barriers like obsolete labour laws still hurt job creation. I can speak with first-hand experience of how manufacturing companies bend over backwards to avoid hiring workers on their rolls, to the extent they can, in order to avoid regulatory headaches.

The Make in India campaign holds promise, particularly in its dovetailing with our defence procurement needs, with several related production ventures now on the anvil. Nevertheless, for manufacturing to truly take off, labour laws will need to be modernized.

Another critical area needing reform is banking, and not just because of the non-performing assets crisis. Ruchir Sharma, Morgan Stanley Investment’s chief global strategist and the best-selling author of The Rise and Fall of Nations: Ten Rules of Change in the Post-Crisis World, has said, “One of the biggest obstacles to faster growth is a state banking system that controls 75% of all loans, more than double the emerging world average… (and) privatising some loss-making state banks is seen as too heretical a step, despite the clear signs of mismanagement".

The longer we delay taking such heretical steps, however, the further we delay our arrival at the next staging post of development, that of a full fledged middle-income country. And there are many other areas that need reform, such as agriculture, which has long been a sacred cow of sorts. Here, the steps being taken now—restructuring fertilizer economics, expanding crop insurance, e-mandis, adding cold-storage facilities—will help. But if more of the 57% of Indians making a living on farms are to be transitioned to other livelihoods, which is imperative, much more will have to be done.

Finally, the nation is in desperate need of many reforms that, though not strictly economic, will also indirectly boost growth, and in any case are essential for transitioning out of developing country status. These include judicial, police and administrative reforms, and empowered urban and local governments.

That will require building political consensus, not just hoping for it. The government must both market reforms publicly—to opinion makers and voters—and negotiate behind the scenes with political holdouts. Most of all, it will once again need transformational narratives like the one about telecom growth and changing attitudes to corruption that can be unabashedly cited by anyone.

Baijayant ‘Jay’ Panda is a member of Parliament (Lok Sabha). These are his personal views.

Comments are welcome at theirview@livemint.com

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