M Singh I made reforms respectable. Since then, politicians love to claim they are reformers. Anything can now be called a reform, and they do not miss a chance to do so. But what are real reforms?
Ashok V Desai
The writer was chief consultant in the finance ministry in 1991-93 under finance minister Manmohan SinghEvery nation has its holy days. Ours are Independence Day, when Jawaharlal Nehru raised the tricolour on Red Fort, and Republic Day, when the British queen was ousted and Louis Mountbatten turned into an indigenous president. Now they may be joined by Reforms Day, when M Singh I kicked out Licence Raj and heralded Moderate Economic Azadi.
Actually, it was P V Narasimha Rao who kicked it out. But he was a retiring PM and he pushed Manmohan Singh forward to take the credit. And then may come Flag-Raising Day, when M Singh II joined M Singh I, sometime after the crucial reforms were over.
What happened in 1991 has been related many times. The flag-bearers are the survivors. The story that those who have left this world would have told — I G Patel, Narasimha Rao, Amar Nath Verma — is buried deep. It was recorded for history in Volume I of the 1992 Economic Survey, and does not have to be retold.
The essence of 1991 was that a singular lesson was learnt — that a fixed exchange rate can lead to periodic balance of payments crises. Exchange rate flexibility was introduced. Consequently, no matter how clueless the rulers may be, there has been no payments crisis since 1991.
The rulers can still do damage, though — cause inflation or deflation, lower growth, raise unemployment, starve mothers, elders and others who do not earn a living, and so on. But they cannot finish off RBI’s kitty of dollars and euros and run to the Fund and the Bank for succour. Even the least competent of them would take some years to exhaust reserves.
M Singh I made reforms respectable. Since then, politicians love to claim they are reformers. Anything can now be called a reform, and they do not miss a chance to do so. But what are real reforms? They are policy changes that make the economy run better and faster with less interference from the politicians. This is what characterises well-run economies of northern Europe. Their people live reasonably good lives under governments they do not have to fear.
First, Reform Thyself
What have our recent rulers done to make our lives better, our economy more robust and dynamic? They would claim the reform label for privatisation of some State enterprises, the Insolvency and Bankruptcy Code (IBC), goods and services tax (GST) and lower direct taxes. If we read the budget speeches, every finance minister would seem to be a great reformer. If we look at measures actually taken, they have been only occasional, and some have been poorly designed.
Government is complicated, and its reforms can run into hundreds — some great, some good, and many eminently forgettable. But governance is sophisticated, and politicians are amateur at it. That is why the British left us a trained, professional civil service, and a tradition of consulting royal commissions of independent experts on more difficult issues. That tradition has more or less vanished. So has, largely, the independent civil service, except to an extent in defence services. India is well-defended, but has forgotten how to advance.
It is not rewarding in these circumstances to think of what reforms are required in the future. But just in case we get rational, honest, reformist rulers some day, some prior thinking about optimum governance may help them.
First, we need to replace the present financial system with a vibrant one that efficiently and competitively finances development. Indira Gandhi nationalised banks at the stroke of a pen, and M Singh I placed Sebi in charge of stock exchanges. Today, those banks are bankrupt, and survive only because the State finances their bad debts. Sebi, drunk with petty regulations, has virtually laid stock exchanges to rest, and there is nowhere that dynamic private companies can raise money for expansion. This sick system should be replaced by a combination of many local capital markets and finance companies that fund both debt and equity.
Second, the renewed system of petty, arbitrary protection should be ended. There should be universal free trade, and perfect competition of home-grown goods and services with imports. Capital should flow freely across the borders — in both directions. Indians should have the same right to invest in capital markets abroad as foreigners in our markets.
Third, the educational system should be opened to foreign entry and competition. Students should no longer need to go abroad to get good education, but should be able to if they want. India was on the way to becoming an international education hub, until restrictions were placed on student visas and money poured into dozens of third-rate universities. These ‘deforms’ should be reversed.
Rent-Seekers Turn Owners
The health system should similarly be opened to international competition, with enforcement of standards. Both systems continue to deserve State subsidy, but it should be based on merit.
Finally, our political system calls for a rethink and redesign. It has been considerably decentralised in recent years, but the party system has declined. Self-seeking entrepreneurs have entered the system in huge numbers, and the first thing they do is to collect money for a palace, for an army of followers and for undermining political competition. The elections still work fairly well. But those they elect neither represent us nor govern us well. Maybe it is time for a royal — sorry, presidential — commission of enquiry.
( Originally published on Jul 05, 2021 )(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)