Forget the notion that the government has recently produced an avalanche of reforms. The word ‘reform’ is being misused to cover everything from irrelevant fiddling to minor changes, to selling the family silver (in the shape of spectrum or minority stakes in public sector undertakings). Raising the price of diesel by Rs 5 per litre is no reform at all, just an arbitrary revision with no underlying principle. Decontrol of petroleum products, supplemented with specified subsidies for targeted people, would certainly be true reform, but nobody is talking about that.
Many supposed reforms relate to increasing the equity share foreigners can hold in sectors like retail and airlines. But foreign investment is hardly 2% of GDP. This is a small fraction of the total investment rate of around 35% of GDP. Why focus on marginal improvements for foreigners when investment by Indians remains a difficult, corrupt obstacle race?
India urgently needs two broad categories of reform, neither of which is being highlighted by the media or politicians. One is economic reform for small and medium businesses, empowering the aam entrepreneur and not just big business. The second is governance reform to transform the delivery of all government services, of which police-judicial services are the most important.
The 2012 Doing Business report of the IFC/World Bank ranks India at just 132nd out of 183 countries in ease of doing business. The Economic Freedom Index 2012 of the Heritage Institute ranks India at 123rd position. On a range from free to unfree, India is ranked ‘mostly unfree’. If that’s the situation after 21 years of supposed reform, we don’t know what reform means. Leftist critics lambast India for going on the neoliberal path. In fact, all global comparisons show that India remains firmly illiberal.
New start-ups are essential for business dynamism. But India ranks 166th of 183 countries in ease of starting a business. Five years ago, India occupied 88th position, but has now gone seriously downhill.
A new factory or office requires construction. India ranks 181st of 183 countries in ease of getting a construction permit. This is no accident: construction permits are a huge source of kickbacks that politicians simply do not wish to give up.
Governance reform is even more important than small business reform. Studies across the globe show that governance is critical to rapid economic growth. India has indeed improved governance in some ways. The pre-reform era before 1991 had much corruption and red tape surrounding industrial licences, import licences and foreign exchange. Liberalisation has made these simple and easy, so there are no longer bribes for industrial or import licences, no black market in currency and the cut in import duties has killed smuggling in all but a few items like narcotics. The governance improvements have greatly helped accelerate GDP growth.
But things have worsened in other areas, notably real estate, natural resources and government contracts, where corruption has gone sky-high. However, misgovernance is not just about corruption. It is also about the delivery of every government service, including education, health and welfare payments. Above all, it includes the police and judiciary, who are supposed to deliver security and justice. In these areas, alas, there is no sign of improved governance. Huge increases in government spending have not improved educational outcomes. The police are as corrupt and ineffective as ever. Judicial delays are as bad as ever.
The pathetic state of judicial redress is first and foremost a moral and human issue. But it is also a huge economic issue. According to the Doing Business 2012 report, India ranks 182nd of 183 countries in enforcement of contract. Now, the whole edifice of market economics is built on the assumption that contracts will be honoured. India’s real miracle has not been 8% GDP growth but the ability to achieve this in the absence of contract enforcement through the courts. This is unsustainable, and is one reason for the current slowdown. The most important reforms needed are those that will produce honest, effective and speedy police investigations followed by speedy convictions. Today, crooked businessmen mint money while honest competitors suffer. That must be reversed.
The row over Robert Vadra’s land dealings and the overall public anger harnessed by Anna Hazare and Arvind Kejriwal show the time is ripe to tackle corruption and crony capitalism. A different priority is displayed by rating agencies and international institutions that keep harping on the high fiscal deficit. Indeed, India has come close to getting its credit rating downgraded to junk status because of its stubbornly high fiscal deficit. This deficit, say the rating agencies, is due mainly to high, unwarranted and unsustainable subsidies for oil and fertilisers.
That is true. But an even greater and more salient truth is that the fiscal deficit is mainly a governance deficit. If only the quality of governance improves, then tax evasion will drop and the government will get a tsunami of tax revenue. This will enable tax rates to be cut even while taming all deficits. Kejriwal and Hazare are not economists, nor are they interested in the fiscal deficit. Yet, if they are indeed able to check corruption and cronyism, they will (without realising it) have checked the fiscal deficit too, improving India’s credit rating and reducing interest costs for all business.