Photo: Bloomberg
Photo: Bloomberg

Taking stock of India’s reforms

The Modi government has done a good job of implementing many ideas already in the system. Now it has to come up with some new ones and step up the pace

It is a little over 25 years since India’s liberalization process began and nearly halfway through the current National Democratic Alliance (NDA) government’s term in office. That’s a good time to take stock of India’s reforms.

In 1991, India undertook the reform process with its back to the wall and on the verge of a balance-of-payments crisis. Under the political direction of then Prime Minister P.V. Narasimha Rao, a team of technocrats led by finance minister Manmohan Singh began the process of dismantling the industrial licensing regime. One of the unsung heroes of that reform process was A.N. Verma, principal secretary in the prime minister’s office, who drafted many of the legislative changes and engineered the cooperation of the bureaucracy.

Also see | The people behind the Great Men of 1991

The government introduced value added taxes (VAT), slashed customs duties, secured legislative approval for the Securities and Exchange Board of India (Sebi) and introduced the National Stock Exchange of India (NSE). The opening up of trade and business introduced marketplace competition and in so doing lifted India’s trend growth rate from an anaemic 3% to more than 7%. India has been able to maintain that growth rate for more than two decades now. It is now running up against constraints from the lack of a second generation of reforms that should have been put in place six or seven years ago—in infrastructure, labour markets, formalization, inclusive credit, and in fundamental areas like primary education and healthcare.

The arrival of the new NDA government in May 2014 happened with India’s back to a very different kind of wall. A combination of inaction and crony capitalism had slowed growth to a crawl and India was fortunate to navigate the post-financial crisis period mostly due to an accidental fiscal stimulus. Many new reform ideas were generated in the technocratic ecosystem during the previous United Progressive Alliance (UPA) regime, but there was no movement because of a complete breakdown in political will and decision-making.

Even though the NDA government led by Narendra Modi has not shown a penchant for generating many of its own ideas, it has thankfully seized upon those ideas already in the system and begun to implement them systematically. The list of implemented steps is impressive and growing. The Aadhaar programme (now quietly merged with the National Population Register) has received legislative backing and is now being used in multiple areas to reduce the cost of economic friction—the public distribution system, cooking gas subsidies and in financial inclusion, to name just a few.

The goods and services tax was first mooted 16 years ago by the NDA government under Atal Bihari Vajpayee. It was announced by UPA finance minister P. Chidambaram 10 years ago and will likely be implemented during the next fiscal year. Bankruptcy law reform—codified last year—and the monetary policy committee approach to rate setting—implemented this month—were reform steps suggested by the Raghuram Rajan Committee and then co-opted by the Financial Sector Legislative Reforms Commission.

In financial inclusion, the introduction of new licences for payments banks and small-finance banks, combined with the successful introduction of the Unified Payment Interface (UPI), has dramatically accelerated the process. This government has begun to gently tackle labour reforms and has allowed some of that reform to make its way to the centre by first attempting it in the states. It has managed to modulate spending on programmes and redirect some of the budget to government-led capital expenditure. This will likely “crowd-in" private capital at a time when inflation is finally slowing.

The prime minister has also used his bully pulpit effectively—to “market" India to the world and in so doing reduce its risk premium and attract investments, to suggest to Indians that clean and hygienic surroundings are desirable and to persuade a male-dominated society that the girl child deserves protection and education.

Much remains to be done. Like many previous governments, the first phase of this one too has made no dent in improving the quality of primary education. The new education minister is more open and approachable—only time will tell whether he can buck the long trend of non-delivery. New experiments are being tried in skilling, but the effort appears to be as futile as before. The health agenda for the country has had no imagination or delivery for decades and still seems distant. While some progress has been made in financial inclusion, a real dent in the formalization of enterprise and employment is still on the to-do list.

India is a “normal" economy in a substantially abnormal (excess capacity, negative interest rates) world. The Modi government, with its majority in the lower house, has the opportunity to undertake bold reform in social and physical infrastructure and for formalization. It has done a good job of implementing many of the ideas already in the system. Now is the time to come up with some new ones and step up the pace.

India and Indians will prosper as a result.

P.S: “Your beliefs become your thoughts. Your thoughts become your words. Your words become your actions. Your actions become your habits. Your habits become your values. Your values become your destiny," said Mahatma Gandhi.

Narayan Ramachandran is chairman, InKlude Labs.

Comments are welcome at narayan@livemint.com. Read Narayan’s previous Mint columns at www.livemint.com/avisiblehand

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