Next Round of Reforms Should Come With a Rethink of India's Fundamentals

Reforms without structural rethink creates the problem of access and equity for the majority, particularly the poor

​It is widely believed that the reforms of 1991 did not address the issues of demand side while they removed supply side constraints. Most ideas for the next round of reforms are unmistakably more of supply side reforms. Must we do more of the same or reconfigure orthodoxy to ensure that the living standard of most improves and along with it demand too. Regardless of how marvelously free market operate, India needs rethinking the structure and tweak some fundamentals before it moves in virtuous trajectory.

India grew at 7% for 25 years post reform though of late the growth has started sputtering. Many millions moved out poverty, even if it was only destitution level. Interruption created by Pandemic means nearly 230 million people have slid back below the poverty line. Significant percentage of middle class got impoverished too. India is waiting for reforms not only for growth to perk up but change in the character of economic growth. Finally, the latter matters; who participates, which sectors are given priority, how is it achieved with new design andrelevant institutional arrangement are central to sustainable growth.

​The gross national income (GNI) per capita grew nearly 700% since 1980; but the growth dividends have majorly gone to a small segment. Providing basic needs and improvement of the living standards of majority section are still a far away , nowhere near as anticipated. The poverty reducing impact of high growth has been sketchy and the reduction of poverty has been significantly moderated by the rise in inequality. This level of growth would have ordinarily implied much larger reduction in poverty.

​We are probably seeing a low convergence stall proving our unwarranted optimism of Indian exceptionalism wrong. India’s growth happened with low structural transformation with labour moving from low-productivity informal sector to marginally more formal and productive sector so the group which would have driven consumption did not grow. Going by economist Rathin Roy’s data, the group that can spur consumption remains stubbornly at 150 million since global financial crisis. In that background, the country enters the vicious cycle of low number who can consume, low investment and output as capacity utilization at present level remains at 55%. Exports are stagnant for the last five years without preferential trade agreements and with strong autarkic tendencies.

​India is caught in the classic conundrum. Without structural changes, it is destined to remain middle income with large poverty and huge inequality and cannot grow rapidly. Existing 500 dollar billionaire even if ` they rise multifold , will not provide the silver bullet to growth. The essence is the bottom should rise and the middle should expand. The number of 150 million will have to grow rapidly to demand consumption. For that to happen, the Government will have to provide quality education and healthcare and nutrition by public intervention. Historically, we havemissed out on two interventions, one is creating broad equality by land reforms and the second is good quality universal elementary education. Land reform did not result in significant redistribution. Universal elementary education was forgotten in a whim till 2009.

​When more than 45% of the population depend on agriculture, the growth will have to start there. The gap between the share of employment there vis-à-vis the share of agriculture in national GDP is rising. We notice a widening disparity in agricultural and non-agricultural income while there is a steep rise in farming cost. Both together create a problem relating to agriculture and agrarian issues. Even the World bank report had given the guidance that growth arising out of agriculture is twice as effective in reducing poverty than growth elsewhere. Combination of insufficient public investment (versus incurring increasing subsidy bill), failure of Research and Development to address dry land and rain fed agriculture and poor availability credit have created this problem. This vicious cycle is to be broken not by cosmetic farm reform bills but deep commitment to help this sector. Increase in agricultural productivity will create a market for industrial goods. Rising demand from rural economy is the highway to create industrial growth. When that happens, subsidy, MSP etc. can be withdrawn progressively.

​High rate of economic growth has not been able to generate high employment growth. Instead there is stagnation of employment generation in both rural and urban areas. Employment elasticities have declined in most sectors including the export particularly in manufacturing exports. Indian industry moved away from labour intensive production to skill intensive production. Resultantly, we see low labour absorption capacity of industry now. If emphasis is to be put on labour intensive manufacture, loans for these exclusively from public sector banks will have to be galvanized. Now we see greater share of industrial earning going to profit than to the wages. As part of the architectural change lending from public sector bank will have to go entirely to small and medium producers . That will make millions of entrepreneurs blossom.

​We have witnessed reduced institutional credit flow to small producers and agriculturists. The public sector banks will have to eschew lending to capital intensive industrialization and no lending ticket should be more than Rs.250 crores. Then only they will be forced to lend to SSI and small farmers. This is the segment where employment can be created and the technically qualified manpower will become the driver of entrepreneurship in the country. This will energize a large mass of people rather than lending to a small body of big borrowers. Credit flow to small producers and agriculturists have dried up because of fear of NPA. But evidence shows that 51% NPAs of public sector banks and 71% of private sector bank’s are from the big ticket borrowers. In any case the big guys can always access bond market. This will be the beginning of solution to banking imbroglio.

​Pandemic time has shown how most of India can only afford and rely on public health care. Government investment on healthcare, nutrition and elementary education should be scaled up to deliver healthy, educationally and technically competent manpower. This may require completely thinking out of box and increasing Government’s capacity to deliver. But there is no escape from this obligation of the Government.

​Often reforms walk in the garb of necessity but conceal its plutocratic objective. Reforms without structural rethink creates the problem of access and equity for the majority, particularly the poor. Though in the short term the plutocrats will gain, there is a limit to their growth without the structural reform. Not only the social conflict will divide the society, new resistance will come up and the growth will reach the dead end to their dismay because the consumers with discretionary income will not be available to demand the products they produce. Transformational reform that the Finance Minister is advocating cannot come with more supply side tweaking but with change in the fundamental thoughts in favour of missing majority. Otherwise, we may grow (albeit slowly),the per capita income may rise, but distribution will continue to be skewed and there will not be expanded middle or improvement of bottom 40%.

 Satya Mohanty is Former Secretary to GOI. Views are personal.