Bibek Debroy on why there’s a need to reform the idea of reform – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-commentary/bibek-debroy-on-why-theres-a-need-to-reform-the-idea-of-reform/articleshow/84421510.cmsSynopsis

Yet, when agendas are drawn up for reform, typically by economists, the institutional setting is often ignored. I have in mind the other two (other than executive) organs of State mentioned in the Constitution — the legislature and judiciary. If those two don’t function efficiently, any economist-driven reform agenda will perforce be constrained. Yet, these rarely figure in any reform discourse.

Bibek Debroy

Bibek Debroy

Chairman, Economic Advisory Council to Prime Minister, GoIAs any admirer of Alexander Dumas will know, Twenty Years After, the 1845 sequel to The Three Musketeers, doesn’t possess the magic and mystique of the original. The musketeers aged. Thirty years after any reform will, similarly, lack the dazzle of 1991.

1991 represented a brave political call, a sharp break with the past, and an opportune confluence of circumstances. But for two reasons, those reforms were relatively easier. One, barring industrial delicensing, they were about border measures — quantitative restrictions, tariffs, exchange rate, export subsidies, foreign direct investment (FDI). Two, they were Union government domain, not about factor markets (land, labour), involving state governments. The political economy of resistance was weaker.

Consider a now-forgotten paper published by the Department of Economic Affairs (DEA) in 1993, optimistically titled, ‘Economic Reforms: Two Years After and the Tasks Ahead’. It spelt out the ‘2-G’ of reforms. The unfinished agenda of ‘2-G’ often continues to be the unfinished agenda of ‘5-G’ 30 years after.

Reforms are about markets and competition, the latter requiring both free entry and exit — not one without the other.

Markets are conceptual structures created by economists. They aren’t APMC (agricultural produce market committee) mandis. All markets function within a social and political institutional context. They don’t exist in a vacuum.

Yet, when agendas are drawn up for reform, typically by economists, the institutional setting is often ignored. I have in mind the other two (other than executive) organs of State mentioned in the Constitution — the legislature and judiciary. If those two don’t function efficiently, any economist-driven reform agenda will perforce be constrained. Yet, these rarely figure in any reform discourse.

Since 1991, across governments and their political composition, there have been reforms in the financial sector and taxes, as there have been in opening up of some services. As a country, do we agree that welfare gains from competition apply to all services (higher education, medical, legal, accountancy), and not just for some? If industry benefited from delicensing and liberalisation, why should agriculture not be subject to similar principles? Constable Dogberry had a point. Comparisons are odorous, not odious.

Before the Industrial Revolution, land markets were freed up in most of Europe, the enclosure movement being a case in point.

In the first flush of 1978-79, China reformed agriculture. For India, we get back to the Constitution, based on the Government of India Acts of 1935 and 1919. Are we agreed on what should be priorities for public expenditure, at what level of government that expenditure should occur, and how requisite resources should be raised?

Witness resistance to removing goods and services tax (GST) exemptions (or low rates), or removal of tax exemptions in general. There is reluctance to even mention any revamp of the Seventh Schedule, or talk about the efficiency of state-level expenditure and its decentralisation or devolution to the local body level. Contrast the attention devoted to the Union finance commission vis-à-vis that to state finance commissions.

Productivity stems from efficient land, labour and capital markets. Land titles are only now being cleaned up, that too, on a pilot basis. Exit of capital inefficiently used (read: Insolvency and Bankruptcy Code (IBC) and monetisation of all public sector undertakings (PSUs), not just Union government ones) faces enormous resistance, as does simplification and harmonisation of labour laws.

Reforms are never win win. They are win-lose —welfare gains to winners more than compensating losses to losers. Unfortunately, concrete compensation only exists in economics textbooks, and those who benefit from the status quo have loud decibel levels and clout, with an ability to influence policy inertia. Understandably, the mindset is: reform and introduce competition for others, let me be in my cosy alcove.

In 1991, the reform template had an economist’s toolkit, ignoring institutions. As ‘5-G’, we need to focus on this broad swathe — the Constitution, functioning of legislature(s), the judiciary, the civil service, Union-state relations, formation of states… the whole lot. In other words, the governance template for the 21st century cannot be one inherited from the 20th century.

This is a huge agenda and the clichéd metaphor of leaping across a ditch, and not stepping across one, holds. Pending that difficult agenda, there are areas where one can nimbly step across the ditch — the so-called reforms by stealth approach, without stoking too much controversy, and backing off if necessary.

At best, such reforms will amount to tweaking and be incremental, compared to the ambitious agenda. This is, indeed, what has happened since 1991. In an indirect democracy, governments reflect citizen aspirations, however imperfectly. If young India wants reforms, we will leap across the ditch, too.

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