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Second generation reforms -- Implementation, the key

Kapil Sharma

TALKING about Second generation reforms has become the fashion among people who do understand some economics. It is a hard fact, however, that even the masters of the economy are not only not clear about the path of the reforms, they also have serious di fferences on the areas, the structure and the speed with which they should be carried out.

The first phase of reforms were thrust upon the country, with the economy in dire straits. In fact, if not for the crisis of 1991, it would have taken much longer for the managers of the economy to bring about the much-awaited change.

In a way the first generation reforms, though a total shift in the country's economic thinking, were easy to start as they did not require any significant process change. They were aimed at freeing the economy from state control and making it market-driv en.

In sharp contrast, the second generation reforms do not involve any change in economic thought; today almost all sectors are open to both private and foreign players. But their implementation would require harder work because they would involve crucial s tructural, legislative and administrative changes for all major sectors.

The ground situation has also dealt a blow to the next phase of reforms that aim at achieving a growth rate of 6-7 per cent.

The major internal factors affecting growth are the fiscal deficit, the uncontrolled government spending and the non-merit subsidies. These need to be controlled if the achievements of the reforms are not be wiped out.

Things are slightly better vis-a-vis reforms in the banking sectors though the Government is still unclear about the huge NPAs the public sector banks have accumulated.

There has been some move forward in the insurance sector with its opening up. Yet, the progress has been slow beyond that. This may give the state-run monopoly players the time to show up this operation and ready for competition.

The country has been trying to improve the flows of foreign direct investments. But foreign investors are wary of the fluid political situation and, more important, the poor infrastructure and red-tapism. Better FDI flows, especially in such sectors as p ower would give an impetus to the economy.

The cost of capital is still quite high in India. Norms for GDR/ADR issues need to be relaxed further so that Indian companies can tap the cheap funds available abroad. The tedious procedures do not allow the tapping of foreign markets at the right time. This is especially crucial for the exporting community which is priced out of the international market though the labour is cheap. High-cost capital and the cost of transaction are also to blame.

Despite being an agrarian economy, the agriculture sector continues to face major policy defects. There is a severe lack of a uniform agricultural policy in our country. The States and the Centre completely differ in terms of agricultural policies. There are restrictions on free movement of farm goods. Moreover, the Export/Import policy in relation to agricultural products also needs comprehensive study and change.

Another area crying for reforms is labour laws. As much as economic growth cannot be at the cost of social welfare, populist social welfare cannot be at the cost of economic development. A balance needs to be struck between the two. The extant labour law s are full of defects and require drastic changes, taking into account the changed domestic and global situation.

Implementation of reforms in all these areas requires considerable political will.

(The author is Academic Associate, IIM, Indore.)