Viewpoint: India needs another round of landmark economic reforms

After the economic reforms of 1991, India stood out from its peers. Its dollar GDP has increased 9.71 times, compared to 5.1 times for Thailand, 4.8 times for Turkey, 3.12 times for Brazil – and 38.44 times for the outlier China. Thirty years ago, India could barely pay for three weeks of imports. Today, India’s foreign exchange reserves have grown more than 100 times, topped $ 600 billion, and are the fourth largest in the world.

In India’s early years, we internalized poverty. In debates over whether grants or infrastructure should be the government’s priority, grants won hands down. Our views are more balanced now. But another round of era-defining bets is needed.

First of all, the reverse. Nominal wage growth in India has averaged 9% over the past decade, resulting in real wage growth of 5% and over 20% growth in disposable income. This surge, combined with the fact that most consumer sectors have limited penetration, has provided double-digit growth for decades for companies as diverse as automotive, telecommunications and insurance.

A report by Mirae Asset Management described how emerging markets contributed less than 15% to global consumption growth in the late 1970s. This figure has risen to 75% in the past decade. India has witnessed this history of consumption and will continue to be a powerful force. According to CLSA, in most consumption segments, Indian growth rates will dominate countries such as China, Indonesia and South Korea, mainly due to reduced dependency ratios and disproportionate growth in disposable income. .

This dynamism is amplified by seemingly opposing forces: rural demand and digitization. A recent Nielsen report showed that overall growth in Fast Turning Consumer Goods (FMCG), which had been 13.4% in March 2019, fell from a low of 20% in mid-2020 to 9, 4% in March 2021, before the second wave of Covid. to hit. The bursting of this increase was biased: demand in subways had increased by 2.2%, demand from small towns was up 6.9%, but rural demand had risen by 14.6%.

Add technology. The gross value of e-commerce goods has increased by 42% over the past five years. India has 57 unicorns. It leads real-time payments, with 25.4 billion transactions last year, compared to 15.7 billion for second-placed China. Such trends will be a game changer.

Maximizing this will require multiple initiatives, ranging from e-commerce and agricultural productivity regulations to the promotion of FinTech and infrastructure modernization, to expanding India’s tax net and deregulating trade. These will not fit perfectly in a left-right box. India needs to be more pro-business. Yet it needs more state capacity.

This leads to the next central question: individual heroism in the midst of institutional failure. Indian institutions generally respond to a range of conflicting demands. Regulators are often catching up with market realities. And many government policies have the crisis as their frame of reference.

Institutions, long neglected or treated as political vassals, are incongruous with our modern aspirations. The police generally mimic the fault lines of Indian castes. The backlog of 26 million cases is appalling. Regulators are trapped, less by ideology, more by vested interests. Over the past 50 years, India’s 4,817 legislators – MPs and MLAs – have spent less and less time in their elected office.

Contrary to popular perception, the Indian bureaucracy is not big and clumsy, but small and struggling. Compared to other G20 countries, it has the lowest number of bureaucrats per capita.

Traditional rigidities in public finances have spiraled. According to Moody’s, interest payments hit 28% of GoI income, further reducing degrees of freedom and crowding out productive investment. National elections held each year serve as a premature referendum. Short-term opportunism dominates. Inertia is accepted as a by-product of democracy, punctuated by an overreaction provoked by events. “Confusionism,” a term coined by Stephen Walt of Harvard to describe US foreign policy, often prevails.

Establishing institutions requires structural changes. Many are on the way. The policies of lateral entry into the Indian bureaucracy will modify its genetic heritage. Advancing federalism and delegating power to states gives them a sense of agency and increases their efficiency. If India drops some central taxes in favor of state-imposed ones, it will further strengthen the powers of states. Campaign finance, at the heart of India’s dysfunctional sponsorship networks, is undergoing a major overhaul. Slowly, but surely, a combination of rule of law, markets and incentives is being addressed.

India’s history in 1991 was written by a month-old coalition government trying to break India’s record of “playing with matches in a firecracker factory”. The story of India in 2021 is expected to fire people’s minds and must be written by a government with the strongest majority in India’s recent memory. He must use his political capital wisely. Playing to win cannot depend on the government alone. And that is not easy.

About Andrew Estofan

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