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Setting reforms on track

Institutions, Incentives and Economic Reforms in India

Ed by: Satu Kahkonen and Anthony Lanyi

*Publishers: Sage, New Delhi

*Price: Rs 595 (Cloth)

THE old institutional approach for economic development was fully developed during the first half of the 20th century especially during the Great Depression of 1930s. But in recent years, it is widely acknowledged that for successful economic policies, t here must be the right institutional and political underpinnings to these policies. This approach represents a change from the earlier thinking that development depends most critically on the availability of natural resources and physical and human capit al.

The experience of recent decades, however, demonstrates that in certain countries growth rates have been low despite high rates of physical capital accumulation and rapid expansion of education. This experience has led economists to reconsider the determ inants of economic growth and explore the incentive structures that lead to physical and human capital accumulation and to technological progress.

The framework of the `new institutional economics' encompasses the fundamental legal, political and social rules that establish the basis for production, exchange and distribution. Understanding these factors implies a reform effort which is broad-based and multi-pronged and which takes into account, incentives for the stakeholders in both the private and public sectors. The 1991 economic reforms in India has, no doubt, created a new economic environment, but crippled the social sector dynamics thereby widening the disparities in poverty and unemployment.

Satu Kahkonen and Anthony Lanyi of the University of Maryland have collated a number of original analytical as well as critical papers by Indian scholars working both in India and abroad. The papers, on topics related to economic reform in India, examine the institutional underpinnings of reform within an inter-disciplinary approach. There are 15 papers grouped under five main headings -- Political economy of reform, Fiscal reform, Reforming public goods delivery, Reform issues in the agricultural secto r and rural governance and Reforming the industrial and financial structure.

In each of these areas, the papers indicate that a major reform effort must still be sustained, and that this effort must deal not only with the well-known straightforward policy prescriptions such as lower fiscal deficits but also with serious instituti onal impediments for carrying out those policy prescriptions and therefore achieving a more efficiently functioning and rapidly growing economy.

Among the issues discussed are the interplay of Centre-State relations and their impact on policy; the poor incentive structures faced by both tax payers and government officials; inadequate co-ordination among different levels of Government which result s in the poor delivery of services; outdated marketing strategies that impede agricultural growth; and strategies to improve the operations of the financial and labour markets. A major derivative is that a country cannot achieve economic progress and eff iciency simply by having the government not interfere in the economy.

A perusal of the Indian fiscal federation by Kenneth Kletzer and Nirvikar Singh reveal that there are several challenges to reforming India's federal structure of taxes and public expenditures. Co-ordination of tax systems among states and between the st ates and the Centre is needed for improving allocative efficiency in the economy. However, tax reform will be difficult to negotiate because states have a constitutional right to levy sales taxes, allowing taxation of inter-state trade. Base broadening s hould be a prominent goal of fiscal reform in India, although this too faces institutional impediments. In addition to rationalising indirect taxes and broadening the overall tax base, they suggest reducing `incentives for costly influence activities acr oss levels of government'.

Anand Gupta explores the incentives that influence the behaviour of Indian politicians and policy-makers while dealing with privatisation in the country. His recommendations include building and strengthening the constituency for privatisation; announcem ent of a properly structured and articulated privatisation policy; greater capacity building for enterprise management; and, after privatisation has occurred, careful evaluation of the impact of privatisation on efficiency, investment and public finances .

In examining the Indian income tax enforcement system, Arindam Das Gupta and Dilip Mookherjee found inherent weakness in terms of a poor information system; poor allocation and organisation of manpower in the tax administration; an increase in workload w ith limited manpower that leads to a fall in time allotted to tax assessments; and the tendency to punish `relatively technical violations' rather than serious tax evasion.

M. Govinda Rao, in his study, sees the influence of special interest groups as an impediment to State fiscal reforms on both the revenue and the expenditure sides. Similarly, reforming the sales tax system is essential to imparting competitiveness to Ind ian manufactures. This should be done by broadening the base, reducing the rate, lessening rate differentiation, simplifying the tax structure, getting rid of the taxes on inputs and capital goods and removing the taxes on inter-state transactions. Such a tax reform would need to be combined with a compression of unproductive expenditures and the privatisation of loss-making public enterprises.

Having studied the health and medical sector in India, A.B. Deolalikar and P.S. Vashishtha point out that better targetting of Government health expenditure to poorer states that have high infant mortality rates will not only improve equity but also rais e the internal efficiency of health expenditure. They conclude that unless deep-rooted changes in the medical curriculum, funding of medical education and structure of the pharmaceuticals industry take place, it will be difficult to reverse the strong bi as toward secondary/tertiary curative care in the Indian medical system.

Ashok Gulati, Kahkonen and Pradeep Sarma show that while food corporation of India (FCI) has succeeded in improving the overall availability of foodgrains, it has failed to target the foodgrain distribution to poor consumers and regions; its operations a re economically inefficient; and it has not maintained buffer stocks at levels stipulated by the Government.

In his detailed study of the Panchayat Raj institutions in India, Chandika Gulati remarks that the success of PR will depend on several key factors: political will of the centre and state leadership, the positive attitude of bureaucrats, adequate financi al resources and autonomy, and training and education for panchayat members. Further, without financial autonomy, devolution of power and responsibility to panchayats will be futile.

A well-functioning and efficient financial system is important for promoting rapid industrial development in a market economy. The banking sector in India has remained highly regulated since banks were nationalised in 1969. Pradeep Agrawal analyses the i ncentives created by the various policies of regulation and deregulation of the banking sector. He concludes that a controlled and gradual approach to deregulation would be safer and more likely to yield beneficial results.

Mrinal Datta Chaudhuri discusses the emergence of institutions -- social, political and legal arrangements -- that govern labour use in the modern sector of the Indian economy. The modalities of labour use in the organised sector in India are dictated pr imarily by the state, which plays a dominant role through labour laws, labour judiciary and administrative officers to `administer social justice keeping in view the power position and susceptibilities of workers to eventually lead to a just industrial s ociety'.

Indian economy is now in the throes of second generation of economic reforms. The book offers an insightful commentary of the first phase of economic reforms in India. The analytical findings and its prescribed follow-up package found in this volume woul d go a long way to set the wheels of the second phase of reforms on the right track. It is a timely referral source to economists, political scientists, policy pundits, sociologists and researchers in economic reforms.P. Jegadish Gandhi