T C A Srinivasa-Raghavan: Reforms: The real lesson

OKONOMOS/ Coalition politics has actually helped maintain the direction of reforms

The past few months have seen the publication of two detailed papers on the causes of economic growth in India. One of them was by Arvind Virmani, which has gone largely unnoticed perhaps because Virmani is not a "foreign" economist.

The other one, by Dani Roderik of Harvard and Arvind Subramaniam of the IMF, has been fawned upon, precisely for the opposite reason: they are not from here. Truth to tell though, Virmani's paper is better in every respect.

Now along comes another paper* by Suresh Tendulkar and T A Bhavani on the same topic. "The Indian case of reforms throws up challenging questions for political economy as well as institutional analysis," say the authors and go on to exhaustively analyse these.

The result is a rich and multi-dimensional explanation. In a developing country democratic context, say the authors, reforms don't have textbook templates. They depend on "fortuitous circumstances of opportunistic supporters" and lurch all over the place but generally in the same direction.

Their analysis is far more convincing "" at least to Indians who have been following economic policy in detail at close quarters "" than what Tendulkar has elsewhere called a uni-causal one like Roderik and Subramaniam's. The latter's explanation merely says that growth happened because the government changed its attitude to the private sector.

Tendulkar and Bhavani focus on three major areas. One, the political economy of the context and timing of reforms; two, the continuance of reforms by different coalition governments with different ideological positions; and three, four case studies, so to speak, of reforms.

Indians do not often realise it but, considering the background against which they have been taking place, our reforms are truly amazing.

"Systemic economic reforms oriented toward liberalising markets and private economic activities and globalising economy...have been taking place in a democracy in a densely populated and still predominantly agricultural and low-income economy and in a society that is marked by mind-boggling diversities, along regional, religious, ethnic, linguistic and the Hindu-caste system-based dimensions. Systemic changes in such a daunting constellation are clearly a formidable task..."

That said, what have been the impelling factors? The authors identify and discuss external influences, the role of crises and the role of leadership. Their most insightful finding is that "a set of opportunistic supporters of reformer ministers and politicians "" reformers by convenience "" seems to be increasing as they have grasped the instrumental role of economic reforms for rapid economic growth which is widely accepted to be imperative for poverty alleviation at rhetoric level but in practice for reaching a new distributional equilibrium to accommodate the rising claims of growing number of economic and regional interest groups."

Thus, contrary to received wisdom, "the emergence of coalition politics with growing participation from regional parties seem to have helped maintain the direction of the reform process."

The analysis of the role of crisis leads them to conclude that the external payments crisis was only a proximate cause. It was the equivalent, if you will, of Marie Antoinette saying let them eat cakes.

Would there have been reforms without the pressure of the payments crisis of 1991? My personal view is no, not in the sense that reform is understood, that is, as having a clear and dramatic impact on some of the most fundamental aspects of managing things, whatever they may be. All we would have had is tinkering a la the 1980s.

Tendulkar has also long been of the view that what cost India growth was the fact that it was "the most comprehensively regulated market economy". He is absolutely right, but what India lost in terms of GDP, it gained in terms of political maturity.

Economic regulation was, as I have mentioned to him, like bottling one end up when you are chasing a big total. It had to be done because the perceived risks of not doing so were too great.

The fact is that all countries have bottled up one end but usually it has been the political one. East Asia and China are obvious examples, of course, but the UK and the US as well. They didn't have universal franchise until 1920. The US didn't have trade unions till the end of the 1920s.

Given our post-colonial circumstances, we chose the economic end. That was the correct decision.

When it marvels at the continuity of reforms, this paper implicitly demonstrates my point, namely, the extent to which our political system has matured. We have mostly sorted out the hard part.

Economic reform, as the lowering of the interest rate on EPF rates shows, should be child's play now.

*Understanding the Post-1991 Indian Economic Reforms by Suresh Tendulkar and T A Bhavani
Available on authors' discretion
from suresh@econdse.org and
bhavani54@yahoo.co.uk