In India's development journey, two major policy departures in its approach to growth and development stand out from previous long epochs. In each case, there was a marked acceleration in sustained growth over time, which then started petering out. We are at a similar crossroads and it is time to usher in a third generation of reforms.
The first generation of economic reforms took place soon after independence. This involved the introduction of a comprehensive approach to growth and development through planning and import substitution. Indian growth witnessed a notable acceleration from the early 1950s to the mid-1960s, a significant transformation from stagnation over the previous century and beyond. This was followed by policy sclerosis resulting in a growth downturn till the late 1970s.
The much delayed second generation of economic reforms finally began in 1991, and was again characterised by a growth-oriented comprehensive approach. India was finally catching up with the prevailing global predominant thinking on development strategy: an open economy market-oriented framework. Fuelled by higher savings and investment, the economy ascended to a higher growth path of around 7 per cent annual GDP growth over the next two decades. Industrial and export growth accelerated, along with a comfortable and stable external sector, and poverty reduced significantly.
But once again the development engine started sputtering from the early 2010s. The slowdown is broad-based across all the sectors - agriculture, industry, and services. The Indian economy is in trouble and hence needs a major reboot. There has been an inadequate generation of quality employment for the increasing labour force throughout the Indian development process. There seems to have been almost no net generation of jobs over the past 15 years or so. What is needed now is a special thrust to promote employment intensive export-oriented manufacturing, which will need continued openness and not increased protection.
The key Indian development failure right through its pre and post-independence history has been the lack of adequate attention to nutrition, health, and education of the population. This is hampering the employability of new entrants to the labour force as new economic activities require an increasing level of educational competence.
The time is now right for India to initiate the third generation of economic reforms to elevate its growth trajectory to the next level of around 8-9 per cent which is needed to ensure a doubling of per capita income in every decade. India's economic strategy going forward once again needs comprehensive policy emphasis on economic growth over other objectives, along with specific attention to enhancing health and education. Thus, the next generation of economic reforms needs a special resolve to deliver efficient public services, particularly focused on the long-neglected social needs related to nutrition and health services, primary and secondary schooling, a major quality upgrade of tertiary education, water supply and sanitation, and urban development.
The government's own performance
The main organising principle of the second-generation reforms was to free the private sector from the myriad government controls that had hobbled its performance for a long time. This process itself still has some distance to go, and needs to be pursued further. But similar attention has not been given to improving the performance of the government itself, thereby constraining the performance of the private sector.
Consequently, the third generation of economic reforms must focus on a similar empowerment of the public sector, broadly defined, to deliver growth-enhancing public goods and services for the benefit of all segments of the public, private sector, and corporate entities alike. The 'public sector' encompasses all levels of governments from the local, state to national, and their entities which deliver public goods and services, and includes regulatory and standard-setting authorities. They all need to be strengthened.
The last 30 years have seen a clear private sector supply response to the increased demand for health, education and other services at all levels, reflecting the failure of their public provision in both quantity and quality. The way forward is not so much to restrict this private provision but to improve significantly the quality of public services, leading to greater trust, and in quantity, to promote universal accessibility. This would free up money in the hands of the less well-off for other essential goods and services. There must be a renewed understanding that it is the government’s role to deliver public goods and services that only it can provide, and that such services cannot and should not be privatised.
This kind of quality improvement cannot take place without a significant enhancement of government's own technocratic competence and implementation capacity. There needs to be a system change in the approach to public administration in India, away from the traditional colonial approach that continues to be in practice.
The first condition for sustained growth is an enhancement of investment levels, both public and private. This would imply an overall increase in fiscal expenditure along with a shift in composition towards higher public investment for the delivery of public goods and services. This, in turn, would crowd in private investment rather than crowding it out. But buoyancy in the tax GDP ratio does not reflect the sustained growth in GDP of the past three decades. Focused attention now needs to be given to increasing efficiency and compliance in tax revenue collection so that the Indian overall tax/GDP ratio rises to levels consistent with comparable international experience, to finance enhanced public expenditure.
The key departure needed now is to emphasise the role of the state in promoting economic growth. Countries that have successfully sustained high growth rates did so by setting up growth-promoting governmental institutions to coordinate public investments while also incentivising the private sector to make the kind of investments necessary for a growing, dynamic economy. However, in India, adequate attention has not been given to strengthening the government itself in performing key functions, directly or through public authorities. The third generation of economic reforms must address this lacuna in policy and direct attention to improving the government's own competence, both administrative and technical, at all levels.