India needs reforms if it is to industrialize and give jobs to its youths who yearn for a better future
Two momentous reforms were announced in Delhi on the same day in July 1991. One was the opening up of the Indian economy to foreign investments and imports by then finance minister Manmohan Singh in his budget speech in Parliament. The other one, made by prime minister Narasimha Rao, who was also the industry minister at the time, was to dismantle the edifice of industrial licences that had stifled the growth of Indian industry.
Jairam Ramesh, who was in the Prime Minister’s Office at that time, has written an insider’s account of the reforms in his recent book, To the Brink and Back. Ramesh says the more significant reform was the dismantling of industrial licensing which the wily Prime Minister slipped in with the financial reforms.
Over the past 25 years, those reforms have changed the shape of the Indian economy, albeit not in the desired way. No doubt, Indian consumers have benefited greatly from the opening of the economy. Whereas in 1991, only three brands of locally produced cars were available in the country—Ambassador, Premier and Maruti—soon, consumers had a choice of many more international brands. Moreover, with a greater variety of imported (and sometimes locally packaged or assembled) goods becoming legally available in India, it was no longer necessary for Indians returning from trips abroad to sneak in TVs and appliances.
However, the other expectation from the reforms package, the growth of more production in the country with the unshackling of industry from licensing controls, has been belied. Indian manufacturing remains at around 15% of India’s gross domestic product (GDP), as it was in 1991. Meanwhile, service industries have grown. These include businesses to import, sell, finance the purchase of and service imported cars and appliances, and import, distribute and retail inflows of other imported goods. While local manufacturers continued to be handicapped by the poor infrastructure in the country and byzantine regulations, thriving importers resisted any compensatory duties on imports and they received wide support from consumer lobbies. These and other strong forces in the political economy unleashed by the 1991 reforms, skewed economic growth towards services rather than manufacturing.
Young aspirational citizens want the goodies they see around them. They need incomes to buy them. They need jobs. A moment of reckoning has come. India may be among the fastest growing economies in the world but its pattern of growth has generated fewer jobs with each percent of GDP growth than other countries have. It has the largest youth population in the world that must be provided with dignified sources of livelihood or their anger can spill out with a force not seen till now. Therefore, we must “Make More in India".
What should be the thrust of policy reforms? What can we learn from other countries? China, the only other billion-plus population country in the world, is an obvious comparison. An equally poor country at the start, it began its journey of reforms just a few years before India did. Now its economy is five times larger; its manufacturing sector 10 times larger; and by some estimates, its capital goods manufacturing sector (which embodies the depth of manufacturing capabilities) 50 times as large. Throughout its reform process, China has been very mindful of the growth of capabilities, often resisting strong pressure of foreign governments and firms to open its markets before the Chinese were ready.
Calling for bold reforms, some economists are urging Narendra Modi to seize his “Thatcher" moment, and ride roughshod over the opposition. However, Modi will be better served to take the advice of Harvard professors Richard Neustadt and Ernest May. In their insightful book, Thinking in Time: The Uses of History for Decision-Makers, they have examined many decisions taken by US presidents and other leaders, some of which went right, such as John Kennedy’s in the Cuban missile crisis, and many did not, including Kennedy’s in the Bay of Pigs fiasco. They say that when decision-makers are urged by their advisers to do what some other successful leader had done before, the leader must reflect on what is the same and what is critically different in the context in which they must act.
Margaret Thatcher, the “Iron Lady," is celebrated for her tough stand against the trade unions. “Thatcherism" did revive the British economy with its thrusts for deregulation and privatization. The financial sector, tourism and other services grew. However, Thatcherism did not improve British manufacturing.
India is not the Britain of Thatcher’s time: a society in a post-industrial stage of growth and a historically established position as a global financial centre. Nor is India China. India has established norms and institutions for democratic governance. Though some economists wishfully suggest democracy should follow a long period of faster growth, not precede it, the moving finger having written in India must move on.
Diverse, democratic India needs many institutions to enable its inclusive and sustainable growth. It needs governments, business firms and also civil society organizations (and labour unions) to represent citizens. No doubt, there can be bad civil society organizations and unions along with good ones; just as there are bad governments and good governments, and bad firms and good firms. The thrust of institutional reforms must not be to eliminate any of them: governments, firms, civil society organizations or unions. It must be to improve all of them. In a large, diverse, democratic country with many tensions, as India has, solutions will be found by dialogue rather than by tweeting about each other.