Goa Chamber of Commerce & Industry (GCCI)

Another area where reforms have had a highly positive effect on growth and competitiveness is the removal of industrial licensing and price controls. The system of industrial licensing was introduced in the 1950s to discourage consumption of so-called “non-priority” items (such as synthetic fibers) and to encourage investment in heavy industries (such as steel). Both the maximum output of a company and the number of companies in an industry were controlled by fibers the government. The process of privatization-liberalization in this area began in the early 1980s, after a long period of slow growth (of only 3.5 percent annually). Licensing was eliminated in 1991. India also undertook substantial tax reforms. The highest marginal rate of tax on personal income was 97.5 per centpercencent percent in the early 1970s. This was a big cause of tax evasion and the growth of the black economy. The rate has been gradually reduced to globally comparable levels of 35 percent.

In these areas, reforms have been impressive. There is an equally impressive list of policy areas where reforms have been conspicuous by their absence or limited in their scope. These include privatization or disinvestments in public sector undertakings (despite high fiscal deficits), reform of the power sector, rigid labor laws, and, the multi-layered administrative system (which is a major cause of corruption and delays). The lack of reform in these and similar areas leads to the inefficient use of resources.

There is a line that divides what can be reformed and what cannot. This line is politically determined and controls the direction and pace of reforms irrespective of the parties in power. If the beneficiaries of a restrictive policy belong to a coalition of special interests – such as labor unions, civil servants, government ministers, and large farm owners – that policy is likely to continue. Privatization of public enterprises or reduction in farm subsidies adversely affects one or more such groups. Strong reforms in these areas are, therefore, politically unacceptable.

What about the future? My hunch is that the compulsions of current coalition politics are likely to prevail over economic objectives. In addition to the Congress party, the present coalition consists of several regional parties. These parties are powerful in their states. However, in several states, the Congress, with whom they are allied in the central government, is the main opposition. There are also bitter disputes among some of them at the state level, even though their leaders are members of the central government’s cabinet. Furthermore, the government is dependent on the support of the Communist Party Marxist (CPM), Communist Party of India (CPI), and some smaller parties on the left. These parties are ideologically opposed to dis-investment or privatization, in public sector enterprises, liberalization of foreign investments, reduction in fiscal subsidies, and outsourcing of public services.

As a result of earlier reforms and other factors, India’s economy is also doing quite well. Inflation is moderate, growth is good, external flows are strong and stock markets are generally buoyant. India is one of the fastest-growing economies in the world with a growth of more than 6 percent annually. The political will for pressing ahead with reforms in the face of opposition is therefore weak. India is likely to continue on its present path – with a bit of reform here and there. We are not likely to see any big reforms in crucial areas. This is a pity. India has the opportunity to lift its growth to 8 percent or more. It can also reduce poverty at a faster pace, and improve the efficiency and delivery of public services. However, a political consensus to achieve these objectives through reform is not yet in sight.

– Biman Jalan