Reforms can help realise India’s economic potential, provided there are ‘real’ reforms!
India’s economic reforms are at risk. The acceleration of GDP growth in the last decade has been nothing short of amazing, but the benefits are distributed very unequally across regions of the country and social classes. Intellectual opposition to reforms stems from justified concerns about these negative aspects of growth, from nationalism or anti-western attitudes, and in some cases nostalgia for the days of socialist ideological purity. Political opposition to reforms is partly for tactical reasons, but it also comes from states and groups that have fallen behind. The spread of violent movements adds to the risks. These developments can be serious deterrents to investors in India’s economy – both domestic and foreign ones. But stopping or reversing reforms is not the answer. What India needs is strengthening and extension of the right kinds of reforms. What are they?
This is hardly a recipe for turning away from markets; indeed, historical evidence shows that a state-controlled economy stimulates bureaucratic caution and inertia, not innovation and entrepreneurship. Nor is it a recipe for isolation from international trade; once again the evidence on the economic costs of isolation and the benefits of trade is overwhelming. However, it is a warning against letting markets rule unchecked. Adam Smith warned us about businessmen conspiring against the public good, and his warning remains just as pertinent in today’s world with its Enrons and subprime lenders. Unlike some other economists, Rodrik is not supportive of inflationary fiscal and monetary policies. Finally, and most importantly, he emphasises the need for social cohesion; if a significant part of the population feels that it has little stake in the economic progress of the country, that can lead to social disruptions, prevent further progress and wreck what has already been achieved. What does this perspective imply for India? Let us begin by identifying the binding constraints. In my judgment, the most important ones come under the category of “inadequate infrastructure.” I mean not just physical infrastructure such as transportation, communication, and power supply, but also, and perhaps more importantly, institutional and organisational infrastructure, especially the mechanisms for regulation and for contract enforcement.
India’s economic reforms are at risk. The acceleration of GDP growth in the last decade has been nothing short of amazing, but the benefits are distributed very unequally across regions of the country and social classes. Intellectual opposition to reforms stems from justified concerns about these negative aspects of growth, from nationalism or anti-western attitudes, and in some cases nostalgia for the days of socialist ideological purity. Political opposition to reforms is partly for tactical reasons, but it also comes from states and groups that have fallen behind. The spread of violent movements adds to the risks. These developments can be serious deterrents to investors in India’s economy – both domestic and foreign ones. But stopping or reversing reforms is not the answer. What India needs is strengthening and extension of the right kinds of reforms. What are they?
This is hardly a recipe for turning away from markets; indeed, historical evidence shows that a state-controlled economy stimulates bureaucratic caution and inertia, not innovation and entrepreneurship. Nor is it a recipe for isolation from international trade; once again the evidence on the economic costs of isolation and the benefits of trade is overwhelming. However, it is a warning against letting markets rule unchecked. Adam Smith warned us about businessmen conspiring against the public good, and his warning remains just as pertinent in today’s world with its Enrons and subprime lenders. Unlike some other economists, Rodrik is not supportive of inflationary fiscal and monetary policies. Finally, and most importantly, he emphasises the need for social cohesion; if a significant part of the population feels that it has little stake in the economic progress of the country, that can lead to social disruptions, prevent further progress and wreck what has already been achieved. What does this perspective imply for India? Let us begin by identifying the binding constraints. In my judgment, the most important ones come under the category of “inadequate infrastructure.” I mean not just physical infrastructure such as transportation, communication, and power supply, but also, and perhaps more importantly, institutional and organisational infrastructure, especially the mechanisms for regulation and for contract enforcement.
Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).
and Arindam Chaudhuri (Renowned Management Guru and Economist).
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