Economic reforms have become quite the buzzword, with many describing them as a panacea for all ills. Several commentators are right in noting how past reforms were undertaken by compulsion, rather than as outcomes of conviction – whether it was the rupee’s devaluation in the early 1990s or the 1991 reforms triggered by a balance of payment crisis.
Post-1991, reforms were an outcome of the need to improve GoI’s revenue mobilization while putting in place policies that could swiftly accelerate growth rates. But political pundits have often decoupled economic reforms from electoral successes, some even positing that reformist governments in India are usually voted out of power. This belief could be one of the reasons for India’s reform momentum to have been inconsistent and patchy till 2014.
The difference in approach of a compulsive reformer and that of one with conviction is central to understanding the developments that have taken place over the last few weeks. While the 1991 reforms were indeed big bang, a lot of the — industrial licensing, trade policy, the value of exchange rates, etc. — were ‘simpler’ in the sense that they required the Centre to take decisions. Of course, there was a need for political consensus even for these reforms. However, this came by virtue of them becoming critical for securing the economic future of the country, rather than an active intention on the government’s part to build a consensus. In 2014, GoI undertook reforms by conviction, even if it meant undertaking structural and, at times, painful economic reforms. While these may or may not yield political dividends, that they will inevitably yield economic dividends. Many of the reforms that were pending since the mid-1990s were those pertaining to issues that required political consensus at both the central and state levels. The goods and services tax (GST), for instance, has been difficult to undertake for this reason.
Also, take rationalization of subsidies, which was viewed to be politically impossible in India. However, one of the early interventions by GoI in 2014 was its ‘Give It Up’ campaign. The voluntary campaign was an attempt to sensitize the affluent section on the need to give up their subsidies, such as that on LPG cylinders so that they could be given to those who genuinely need them.
Another difficult reform was the Insolvency and Bankruptcy Code (IBC), which reimagined the way banks look at managing stressed assets. For the first time, promoters started to lose their companies in the event of defaults. These were deep structural reforms that were undertaken despite the theory of 2 people voting out governments that push for bold economic reforms.
With a fresh and bigger mandate, the central administration had a greater political capital to push for some of the more difficult reforms. For instance, reforming agriculture has been a key item on the reform agenda for decades. Still, governments have continued to subject farmers to a monopolized system. A strong commitment towards strengthening the economic freedom of farmers, with the conviction that this would benefit them, is central to the three laws that have recently been pushed for agricultural reforms.
Another tricky area was labour reforms, which involve both central and state governments. The provisions of the Industrial Disputes Act led to Indian firms being small, inefficient, and uncompetitive in the global playing field. The new labour codes are an attempt to fix this and provide adequate flexibility to employers while also retaining safeguards for employees.
Criticism of reforms has, significantly, shifted from the merit of the measures taken to the timings of their announcements or the legislation. The preference for the status quo has given way to a proactive approach, where GoI seizes every opportunity to bring about reforms.
Note: Shri Vivek Singh & Shri Karan Bhasin wrote this for Economics Times, Delhi on Monday, 5th October 2020
Shri Vivek Singh is an additional Private Secretary to Union Finance Minister and Shri Karan Bhasin is a Delhi-based Policy Researcher.