1991 is history: Where do we go now?

1991 is history: Where do we go now?

A new policy framework is needed to abolish mass poverty in coming decades
Twenty-five years have passed since one of the most momentous days in Indian economic history. Around noon on 24 July 1991, the government led by P.V. Narasimha Rao tabled a new industrial policy that essentially junked the perverse licence raj. The prime minister was himself in charge of the industries portfolio. A few hours later, his finance minister Manmohan Singh gave a budget speech that was a clarion call for overdue change. The transformational budget that Manmohan Singh presented in February 1992 was anticipated by what he said in July 1991.

Few realize that the radical 1991 economic reforms were preceded by around 15 years of internal debate on how India should change its policy approach. The Janata Party government perhaps made the first move by appointing a committee headed by veteran journalist Vadilal Dagli to examine the issue of subsidies that had already begun to weigh down on the budget. Then there was the committee headed by bureaucrat P.C. Alexander on reforming trade policy that was one reason why Indian industry was inefficient. The 1980s saw even more of such policy rethinking, from monetary policy to industrial competitiveness to trade reforms.

What now? The Narendra Modi government believes it is playing the long game. In that case, it should not only focus on executive action or pushing through unfinished reforms such as the goods and services tax, but also begin work on a new policy framework that will help India abolish mass poverty in the coming decades. Mint has here sketched out a few issues that need structured thinking.

1. Ending the inspector raj: The licence raj is thankfully now history. Businessmen do not have to trudge to New Delhi to get permissions to invest in new capacity. But they are still hounded by representatives of the inspector raj—from factory inspectors to tax officials. Much of this can come under the umbrella of increasing the ease of doing business.

2. Improving human capital: The most successful examples of countries escaping poverty in a few decades come from East Asia. Their investments in human capital cannot be ignored. India still has very high level of malnutrition. The public health system is broken. The same is the case of the education system. The government need not provide these services directly, but it needs to fund them at the very least. The state of the education system is a particularly serious worry.

3. Reforming factor markets: The 25 years since 1991 have seen a transformation of product markets. There has been far less success when it comes to the markets for factors of production such as land, labour and capital. Reforming the land and labour markets are politically tricky, but some state governments are taking the lead with innovative solutions.

4. Inclusion through jobs: Manmohan Singh as finance minister used to talk about the importance of the East Asian experience, where millions could escape poverty by shifting from the farm to the factory. As prime minister, the same Manmohan Singh led a government that banked on subsidies and entitlements as the primary tools for inclusion. The focus has to shift back to job creation in the modern sectors—though in a world where new technology is not labour intensive.

5. Rebuilding state capacity: There is no doubt that the Indian government machinery is creaky. It is low on capability, other than at the very top. Rebuilding state capacity is even more important at a time when power is flowing to the states, and later perhaps directly to cities and villages. India needs far better administrative, policy and regulatory abilities than it does right now.

This is not an exhaustive list but only an attempt by this newspaper to shift the debate from 1991 nostalgia to the more concrete task of charting out the road ahead. That requires structured thinking, political commitment and administrative capability. Just look at China, and the way it has changed its policy focus as the economy has grown. India needs to do the same.