The important and interesting question in India is not necessarily the absence of major economic policy reforms. Rather, it is: what is the set of useful reforms that can be implemented while maintaining adequate opportunities for venality and criminality for key decision-makers?
Consider why reform languor is incentive-compatible for Indian politicians.
First, a crisis, actual or imminent, which would be a great and guaranteed galvaniser of reforms, does not loom over the economy. Yes, growth is slowing down — but at about seven per cent it remains impressive, whether compared to India’s past or India’s peers. Yes, inflation has been doggedly high — but the dirty secret is that inflation, while bad for the consumer, has been great for the government, facilitating a decline in public indebtedness away from “flashing amber” territory. And, yes, the sudden and rapid depreciation of the rupee spells trouble for companies that have borrowed abroad excessively without protecting themselves against downside risks — but this kick-in-the-pants depreciation courtesy of financial markets may be a welcome short-term boost that the economy needs.
In short, why should Indian policy makers reform when reform does not seem necessary to produce reasonable economic outcomes? Indeed, that is also the implicit response of the current Chinese leadership, which faces the same allegation of policy stasis at a time when a number of serious imbalances are building up in that economy.
Second, not only is the lack of reform not a problem, it seems to be compatible with sizeable rent extraction for those in power. Whether from land, spectrum or natural resources – or just the inevitable booty from economic growth – the status quo provides ample opportunities for politicians and their favoured private-sector cronies to grease their pockets. The cash stash, in turn, equips politicians to curry favour with their constituents, by dousing them with goodies as the former seek re-election.
The implication is that reforms that will undermine rent extraction are unlikely to happen. And by definition the major forms of rent extraction – whether of the 2G sort or the laundering of wealth that happens via Mauritius – will be undertaken or blessed by those at the very top. This is not to condone the government’s action or inaction for what are seriously damaging outcomes. It is simply to note that persisting with calls for reform smacks of naïvete or a misreading of political economy. It is like asking the scorpion to stop stinging.
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Free and unrestricted capital and labour mobility within India is likely to provide the most sustained basis for reforms in the country. India as an economic union will allow the competition-between-states dynamic to flourish, allowing reforms and good governance in one or two states to spread to others. If Nitish Kumar distinguishes himself by providing essential services in Bihar, Ms Mayawati in neighbouring Uttar Pradesh cannot be impervious to that development — in part because money and people are acquiring exit options.
Technology will be the chief instrument of reform as unintended consequence. The computerisation of railway bookings two decades ago dramatically reduced the corruption, delays and harassment routinely visited upon the average traveller. Similarly, mobile and internet technologies open up possibilities for e-governance that cannot be anticipated in advance. Being able to create an electronic registry for land records might do more for urban governance than any direct attempts to improve it.
Reforms by stealth are another means of improving outcomes. In banking, for example, instead of abolishing the directed lending requirements, which would elicit predictable opposition from current beneficiaries, India has chosen simply to expand the list of eligible beneficiaries. In the limit, if everyone is an eligible beneficiary, the directed lending requirement ceases to bite and be distortionary. In banking, and until recently in the airline sector, instead of privatising the incumbent public monopoly/monopolies, the government chose to leave them intact and instead allowed new entry to engender competition. Though not quite reform by stealth, the spirit was very much an attempt to minimise threats to the rents of powerful incumbents.
So, what does this imply for potential reformers in this government (if indeed there are any left)? Reforming governance or tackling corruption – whatever that might actually require – is better not attempted because that will simply not be allowed to happen. But even within the narrower, political economy-constrained set of possibilities, two items that might qualify for energetic pursuit are the Goods and Services Tax (GST) reform and the Unique ID (Aadhaar) project.
Both should be presented as essentially plumbing exercises, aimed primarily at improving processes. It is not that there will be no losers from the GST and Aadhaar efforts. In the case of GST, some states will lose revenue; but the political economy of that might be relatively easy to address, for example, through offers of compensation to the current leadership of those states as proposed by the 13th Finance Commission. Similarly, the hiccoughs in the Aadhaar initiative relate to personalities and turf rather than to any serious backlash from powerful vested interests.
History will, of course, not forgive this government for presiding over the epic levels of corruption attained during its tenure. History’s verdict on this government’s zeal in legislating equity-inspired outcomes – through the Right to Education and Food Security Bills – is also unlikely to be favourable: the tension, even contradiction, inherent in requiring the state to do more both financially and organisationally at the very moment when the state’s capacity along both dimensions has deteriorated substantially is going to be exposed.
It would be a pity if apart from these sins of commission, history were also to indict this government for sins of omission: failing to undertake the important reforms relating to GST and Aadhaar, which even our rent-addled politicians could probably live with and let happen.
The author is senior fellow, Peterson Institute for International Economics and Centre for Global Development, and author of Eclipse: Living in the Shadow of China’s Economic Dominance. He has been selected by Foreign Policy magazine as one of the top 100 global thinkers