R Ravimohan: To market to buy a fat reform

While the jury may be out on prospects for reforms, they have unleashed enough strength for the market forces to take root.

In the past decade and a half, the various governments that have been in power have pushed forward the reforms agenda, net-net. Certainly as an economy, there is much more room for the market to play today than in the early nineties. Accountability and transparency in the system have certainly increased. The efficiency and productivity of the economy have also increased during this period. However, the cause, desirability, and commitment to the reforms process remain one of the most debated and contentious issues, raising constant bouts of uncertainty about the prospects for future reforms. As the transition to a market-based system is still in its incipient stages with enough constituents that resist changes, the cause of reforms has major challenges ahead. However, the reforms undertaken so far have strengthened market forces to such a level of potency that they are sustainable and will thrive, albeit in a meandering fashion.

The transition to the market-based system is incipient because the reforms have remained focused narrowly on the economic agenda. Markets are products of fear and greed. To make them work efficiently, there needs to be fair play, which can only be enforced and cannot only be "moralsuaded", as we do currently. An effective justice-dispensing system will enhance the players' confidence in the market-based economy. Shorn of that protection, a big segment of the economy is not participating, and indeed resisting it, as they believe that privileged players can control the play rather than fair play prevailing for all. This segment ironically has become an able ally of those very same privileged players in whose name they are able to intervene in desisting from the full, free and fair market system. As a result, we now have a partially open system where the gates close and open in a slightly arbitrary manner. A strong judiciary that settles disputes and redresses grievances in a timely and consistently credible manner will go a long way in improving the efficiency of the market processes.

Connected to this is the policy and regulatory regimen. Given the pulls and pressures, the regulatory and policy formations have been measured by the degree of consensus that is obtainable by various constituencies involved, rather than by the objectivity that market purists would love to see. This is often the cause for much of the 'iffiness' of the reforms process. While these processes are always inexorably winding their way to what is the right destination, they do so in an unpredictable timetable and through twists and turns that unnerve market participants. It certainly makes the development process uneven and sub-optimal. Would it not be better to find a way of accepting the gains of development for the entire nation and allow all to participate, rather than excluding some segments?

There is also a long way for consumer movement and protection to take root in India. Consumer movement is an important pre-requisite for any market-oriented system, as it mounts the necessary counter-pressure on the players. It also helps the regulatory system and compliance. For instance, the honest electricity customers in the country continue to subsidise electricity thieves, despite efforts by the regulatory system to bring about discipline. Nothing short of blatant activism on the part of the honest customers will bring about any market-oriented reforms in this sector. Similarly, though services in many other areas have improved, they also leave a feeling of frustration for the customers due to lack of accountability and consumer activism.

Lastly, there is the question that begs the ultimate answer: How free should the market be? Frankly, there is no major market that presents itself as a paragon of virtue and fairness. Every market needs constant monitoring and intervention. Good oversight and intervention are essential to counter the irrational greed and fear that move markets more than objective calculations alone. LTCM and the Barings bail-out are good examples of such interventions. Every central bank, as part of its monetary policy, has a significant role to play in the determination of the value of their currencies and the various interest rates. However, from a market process point of view, interventions through market instruments rather than through administrative fiats or measures will reduce perversion and promote market development and self-discipline. Our nation's progress to a market-oriented economy will depend greatly on the regulatory and administrative behaviour and the balance that they seek to establish with market forces.

While acknowledging the above challenges, it is also clear that the reforms have gathered the critical mass to survive and thrive. First of all, the reforms have unleashed the beginnings of a consumer society that is now difficult to control and reverse. In almost all product and service categories, the competitive forces that have been let loose by the various reform measures have now spoilt the nation with choices; Indians are unlikely to give up this freedom easily. Business has also come to terms with the market realities and seems to be confident about playing this game on a global basis. They need the liberal environment to be globally competitive and will resist any threat to that economic freedom that they are now enjoying for the first time.

The other reason why reforms cannot be reversed anymore is that they have been broad and have now planted enough buoys in the choppy seas for the market to hold on to. If a policy tries to stop an avenue there are several alternatives available for the economy to continue on an unhindered growth path. For example, when the Indian capital market was restricted to only registered foreign institutional players, the market invented "participatory notes" and exported the Indian markets to overseas players in their own jurisdiction. While this is causing regulatory headaches, it underscores the omnipotency of the market forces.

The success of the present reforms is also paying back the government big time in taxes. This will help the public finance take on its social mission more effectively. While this linkage has not yet been made, we are getting closer all the time. The earlier this gap is closed and the reforms start yielding market gains that can be used for social purposes, the faster the weaker sections of society, which are today sceptical about the market forces, will become a force of support. Our national prosperity will gain uninterrupted.

ravimohan@crisil.com