The second generation reforms

By S. Ambirajan

Reforming State Governments' economic administration and improving the effectiveness of local self-governing institutions ... the next stage of the reform process has to take place in these tiers of administration.

THE YEAR 1991 is justly considered an important landmark in the history of the economic policy of independent India. It was in the July of that year that Mr. Narasimha Rao and Dr. Manmohan Singh gave a new direction to the Indian economy by making an attempt to reform the economic system so that it could function more efficiently. This may not have been the result of a deliberate desire to give a new orientation but could have been thrust on us either by the force of circumstances or due to gentle prodding from international economic institutions to whom we frequently go cap in hand for help. If it had been conviction on the part of our political leaders and bureaucrats, the path of our reforms would have been very different. The early reforms consisted mainly of easily enforceable policies such as dismantling the licence regime, reducing direct tax rates and cutting down tariff and customs duties. Once these policies had some positive effect and the economy moved away from the meltdown point it faced in 1990-91, the zeal for reform slackened considerably. From 1994 onwards, while there was much talk about continuing the reforms, very little progress was achieved. Now that the political dust has settled somewhat, and the attention of our political masters is veering slowly back to economic matters, the gravity of the situation is being felt. Hence the sudden popularity of the latest buzzwords ``the second generation of reforms''. Like many such catchwords that attain instant fame, this too is vague and hollow though it indicates a certain wish list that has not been specified with any degree of clarity. What then are these ``second generation of reforms''?

Many countries whose economies were not unlike ours only a decade or two ago have forged ahead, and in almost all cases the triggering factor has been the rapid introduction and determined execution of economic reform policies appropriate for their conditions. While there have been broad similarities, there have also been significant differences which meant that each country thought through the type of economic architecture suitable for its own requirements. As those countries carried on with reforming their economies in a continuous manner despite short- term setbacks, there was no question of splitting policies into generations. However, as India has taken up the thread of reforming the economy after a lapse of time, it becomes imperative to investigate what should be done next. In this exercise which will necessarily be done by official agencies and their advisers (for example the Implementation Review Committee and various task-forces), sustained and deep investigation of policies by objective academic scholars can provide valuable inputs. It is unfortunate that by and large, apart from casual essays and dogmatic statements, there hasn't emanated from our higher academic institutions any rigorous scientific studies with solid empirical content of the new generation reforms that can give a sound analytical basis to the kind of policies that are essential to take the movement further.

Among the very few academic centres in India that have focussed on the required ``second generation'' reform policies is the Madras School of Economics which has been collaborating with economists from Australian National University for the last three years to throw light on key aspects of the post-1991 state of the Indian economy. In a recent symposium held in Chennai, many contributions that came out of this collaboration, as well as the work by a number of leading Indian academic scholars, were presented.

These researches point out some clear conclusions. Naturally enough, much importance was given to the agricultural sector. Although there is a very high level of interdependence between agricultural and manufacturing sectors in India, on the whole the agricultural sector is at the receiving end vis-a-vis the manufacturing sector. This means that if the level of protection accorded to the manufacturing sector is lessened, it can lead to the agricultural sector performing more efficiently. Indian agriculture can also benefit by the trend towards globalisation but only if India takes a more pro-active role with respect to the WTO. If its negotiators succeed in reducing the existing high producers subsidy in the rich countries of the world, India can sharply increase export competitiveness. Another significant finding is the need for a sustained approach to agricultural reforms and for abandoning the stop-go approach to augmenting investments in the rural sector. It was shown that gains from investments in rural literacy and physical infrastructure (for example roads and irrigation) tend to cumulatively increase, which means that added investments make the earlier investments yield proportionately more benefits. Again the symbiotic nature of these two areas makes it necessary to increase investments simultaneously in both.

An important contribution was made by the distinguished Japanese economist, Dr. Yujiro Hayami, who pointed out, on the basis of recurrent household surveys done in a Philippines village over three decades, that while the Green Revolution made a positive contribution to reducing poverty and inequality, it was actually through expansion of non-farm employment opportunities. This conclusion is most relevant to India because of the prevalence of high levels of rural unemployment.

Reforming State Governments' economic administration and improving the effectiveness of local self-governing institutions received considerable attention. It became clear that the next stage of the reform process had to take place in these tiers of administration. At present, too many restrictions exist in the inter-State flow of both factors of production and finished goods for the country to take advantage of its size and reach. Similarly the ``subsidy and reservation raj'' is standing in the way of efficient use of resources. The key to the success of local bodies lies in the erection of an appropriate incentive structure and attention to the actual operation of the existing institutions, rather than in merely pouring in finances.

Legal reform, which is usually given short shrift by economists, was emphasised in the symposium in no uncertain terms. It was urged that while old and dysfunctional laws be removed, legislation had to be introduced in many areas that had become crucial to the rapid economic development of the country. It was claimed rightly that economics should no longer be treated as ``science of choice'' but as ``science of contracts''. Consequently, reform should concentrate on improving the administrative and legal institutional structure within which all economic activities take place.

Methodologically it was most enlightening. One was struck by the enormous data assembled by the authors from a variety of sources as well as the theoretical sophistication in the analysis of specific issues. There were the enthusiastic number crunchers, such as Dr. Kalirajan, Dr. Mythili, Dr. Thorpe, Dr. Warr and Dr. Ric Shand to name a few, armed with techniques ranging from traditional econometric workhorses such as regression analysis to more modern upstarts such as Granger-Sims Causality tests, vector auto- regression, unit-roots and co-integration, who dazzled the audience with complicated analysis (or ``torture''!) of time series data. Fortunately, there were also senior academics such as Dr. Thimmaiah, Dr. G. S. Bhalla, Dr. Panchamukhi, Dr. Robin Ghosh and Dr. Hayami, who were able to temper this pyrotechnic display with words of economic wisdom born out of serious introspection and study of economic processes both in India and elsewhere. Without contesting the need for reforming the economic administration of the country, they nevertheless urged the need for caution in adopting economic policies that either theory suggested or which had been successful elsewhere. The economists have said their piece. It is up to the Governments in Delhi and the State capitals to carry the reform process further instead of merely talking about it endlessly.

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