Who will reform the idea of reform?

The missing reforms are many but the main ones are electoral reform, judicial reform and administrative reform. Without these, economic performance will always be patchy, as it indeed has been since 1992.

TCA Srinivasa Raghavan | July 19, 2016


#PV Narasimha Rao   #Manmohan Singh   #25 years of economic reforms   #1991 liberalisation   #economy   #India   #reforms   #Narendra Modi  
Prime minister PV Narasimha Rao  presiding over the planning commission meeting in 1991
Prime minister PV Narasimha Rao presiding over the planning commission meeting in 1991

For the last one month, India has been wallowing in a cool, scented pool of self-congratulation over the 25th anniversary of economic reform that began in July 1991. But as has been well said, what you see depends on where you stand and that’s pretty much true of India’s self-congratulation over ‘reforms’ as well.

 
Thus, if you ask the Congress party it will give credit to everyone except the then prime minister PV Narasimha Rao, who actually allowed the reforms to happen. If you ask Yashwant Sinha who was the finance minister between December 1990 and July 1991, he will tell you that much of it had been devised and decided upon by the six-month government of his prime minister, Chandra Shekhar. 
 
If you ask the officials who ran the finance ministry between 1992 and 1996, they will say they did it all, and that nothing much has really happened after 1996. If you ask the RBI governors who held office between 1992 and 2008 they will say but for them the government’s initiatives would have failed. And so on. 
 
This self-congratulation is all very fine till someone points out that, in reality, all we have really done so far is to reform the financial sector. It is rarely pointed out that practically nothing else has been reformed even after 25 years. Our mistake has been in thinking that if we changed some rules about the inflow of foreign capital, built a few highways, ports, airports and IT companies, it amounts to a major achievement. But history shows that every country that has increased its GDP by a substantial margin over a period of three decades or more has also reformed its tools of governance, China included. Deng Xiaoping’s China has been governed very differently from Mao Zedong’s.
 
Truth be told, India needs to reform the idea of reform itself and a major step towards that would be to delink the political fortunes of governments from their control over the economy. This is easier said than done because since 1945, the combination of Keynes and democracy has led politicians to use the Keynesian idea, which was intended to solve a specific problem relating to industrial over-capacity after the Great Depression of 1929-38 to spend on all manner of things that should ideally be left to private spending. Even Narendra Modi has not shown any inclination to break away from this. The result, not just in India but in all democracies in the world, has been disastrous. 
 
But since this tendency to use public funds to ensure re-election – which doesn’t always happen – is unlikely to disappear any time soon, we can only try to ensure that this doesn’t get completely out of hand as it did in Southern Europe.
 
The missing reforms are many but the main ones are electoral reform, judicial reform and administrative reform. Without these, economic performance will always be patchy, as it indeed has been since 1992. These three things – political, judicial and administrative reform – comprise what I call the soft infrastructure as opposed to the hard infrastructure on which we have been focussed. Political scientists refer to these things as institutions. On these three elements of soft infrastructure, we have failed totally. Even Narendra Modi has not touched them with any firmness. 
 
Political reform
Over the last four and a half decades, reform of the Indian political system has become synonymous with the reform of the electoral system. This is understandable because, after all, no other country in the world has as many voters as we do, more than 800 million. Nor does any other country have as many illiterate people voting as we do. No other country uses money and muscle in elections to quite the same extent as we do. No other country has so many persons with criminal charges against them being elected to parliament. The list of shortcomings is long.
 
But India needs political reform that goes deeper than electoral reform, comparable in its impact to the reform of the political system in Britain in the 19th century. One of the key issues here which we have been refusing to face up to is this: how can one MP (or MLA) represent so many millions of people who fall in his or her constituency?
 
If he or she can’t do the job effectively – as indeed we have seen – we are left with two solutions: one is to have more MPs and MLAs; the other is to empower the state assemblies far more than at present. These are not mutually exclusive options. Both have to be done.
 
At present India has 544 MPs in the Lok Sabha. This number must be at least doubled if we want to have adequate representation. That is, we need at least 1,000 MPs or what is the same thing a near doubling of the number of constituencies. One must hope that this happens when the next delimitation happens in a few years from now.
 
The other deep political reform, of genuinely empowering the states, is to abolish the Concurrent List of the Constitution as also Entry 97 of the Seventh Schedule. The Concurrent List creates confusion and must, at the least be drastically pruned; Entry 97 is a list of all things on which the Centre can legislate which is not there in the three lists – central, states and concurrent. These two reforms will increase accountability and the Centre and the states will not be able to blame each other for their collective failures.   

Five steps that heralded the change

1. One pervasive feature of Indian economy was ‘licence quota raj’, that is, the industries had to seek government nod at each and every step. The first budget of Manmohan Singh heralded industrial delicensing, unleashing the growth potential of industries.

2. Once upon a time, nationalisation was the watchword. But in 1991, the state admitted its limits, and reversed the direction: now privatisation was the keyword. The 1991 budget launched PSU disinvestment though it was couched in cautious terms.

3. Rules for non-resident investments were liberalised and mutual funds were opened up to the private sector – channelising funds into the capital markets which were soon going to witness a never-before boom. There was a gradual reduction of import duties, allowing foreign investments – once seen as a red flag but now as lifeline – to slowly start flowing in. The Foreign Investment Promotion Board (FIPB) was established to clear direct foreign investment proposals.

4. The Monopolies and Restrictive Trade Practices (MRTP) Act was reformed. As a result, companies did not require the government’s permission to issue shares, extend their area of operation and establish a new unit. It also led to emergence of competition and productive industries.

5. The Securities and Exchange Board of India (Sebi) was given statutory recognition in 1992. It became the sole markets regulator and all listed companies had to comply with its rules and regulations.

– GN Bureau

 
Administrative reform
The government makes policy, parliament makes the laws and the bureaucracy implements them via rules which it alone makes. A combination of two factors makes Indian public administration nearly useless: India’s huge population whose varied and several needs have to be taken care of; and the virtual immunity that a public servant has against zero performance.
 
The large numbers who have to be governed requires that we should either reduce the number of rules that have to be followed or quadruple the number of persons who administer those rules. In India we have increased the number of rules while keeping the number of those who administer these rules more-or-less the same over the last 20 years. The result is a chaos which is overcome only by bribery. 
 
Few people outside the bureaucratic system know that there are two major reasons why it increases the number of rules: to protect itself and to reduce the need for quick decisions. You can see this whenever you come into contact with a government department. This is one of the inherent problems with a permanent bureaucracy: it can make rules at every level of government without reference to the overall objectives that the government and the legislatures may have had. The need is to reduce the rule-making power of the bureaucracy because it can, and does, subvert the intention of the government and the legislatures. No government so far has tackled this problem.
 
As for accountability, once again the problem lies in the Constitution, in Article 311, to be precise. This article says that no government employee can be dismissed without a proper enquiry, which is fair no doubt, except that the enquiry rarely leads to dismissals. In any case no enquiry is possible if an employee doesn’t work, or does his work badly. Inefficiency is not a ground for taking action. We can see the consequences of this Article all around us, at every level of government. Quite simply, it allows government employees not to work or work very little if they so wish.    
 
Judicial reform
Of late we have been hearing a lot about the banking crisis. What has not been talked about is the role of the judiciary in it – the extraordinary length of time it takes in India to get a case decided. Thus, if a bank files a suit for recovery of unpaid debts – the Vijay Mallya case is only the shiny tip of the iceberg – it has almost virtually no chance of getting justice. And, mind you, this is just one example of justice delayed, justice denied. There are a million other cases, of all kinds, where this happens.
 
There has been a lot of debate on the backlog problem that the courts face. But no one sees it fit to ask for the real reasons why the arrears are so massive. The problem lies not just with the paucity of judges – something that moved the chief justice of India to tears in the presence of the prime minister a few months ago – but in two structural flaws in our civil justice system. You will never find a lawyer acknowledging this because if this flaw is removed, it will reduce their income very substantially. After all, the more the number of times they appear before the court, the more money they make.
 
One of the structural defects is that our system insists on hearings instead of written submissions as is the case in, say, the US. Another structural defect is the government’s insistence on appealing every case until it is decided by the Supreme Court. Seventy percent of the pendency there involves litigation by the government. No government so far has thought it fit to tackle these two problems. One fails to understand why.  
 
This is not to say that other reforms are not needed. But these are the most important reforms needed to alter the structure of the system so that it delivers justice and not just generates income for the lawyers. They are also the hardest to do because of the vested interests involved, which is exactly similar to the case of electoral and administrative reforms. They will always make a strong case against it – just as the vested interests had done when economic reform was being contemplated in 1990.
 
Overcoming these vested interests is the main challenge for India over the next decade. If it can, it will become a super power; if not, well, we can bumble along pretending that all is well.
Raghavan is a veteran economic commentator
(The article appears in July 16-31, 2016 edition of Governance Now)

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