The 1991 Project: India's Reform Journey Revisited - Shruti Rajagopalan, Mercatus Center

What is one reform that was overlooked in 1991?

One of the most important things that happened in 1991 was dismantling the License-Permit-Raj system. The licenses that were required domestically and the entire thicket of regulation is well known, but one of the most important bottlenecks was actually import licensing. India didn't make everything that entrepreneurs and businesses and manufacturers needed for their production processes, and to import anything, because there was a huge crunch when it came to foreign exchange, they needed an import license, oftentimes issued by bureaucrats in Delhi, who may give them an absolute go around.

When the 1991 moment came, we actually liberalized a very large part of the import licensing system, but this was only done for capital goods and intermediate goods. Consumer goods were left out of that in 1991, but the consumer goods moment actually came a decade later in 2001, when the WTO actually forced India's hand, and India almost had to go through with delicensing import controls when it came to consumer goods. What we saw in India is now history: every kind of consumer good now became available to Indians really cheaply. I'm talking about everything from T-shirts and sneakers to electronics, the number of chocolates that young children can have, the kinds of baby formula someone can feed their child, to pharmaceuticals—pretty much everything you can imagine. Now, of course, we've also seen the revolution when it comes to mobile phones, smartphones, personal computers. All of this came much later.

And according to me, if we had liberalized this aspect of the economy in 1991—that is, if we had not lost an entire decade—there are two big benefits. The first is that the Indian consumer would have immediately had access to better goods, and there's no real way to quantify how large that loss of welfare was. But there's a larger, more strategic point here too. I don't think even Indian policymakers imagined the gusto with which Indian entrepreneurs and Indian consumers took to the Indian markets after liberalization. If we had also reformed consumer goods in 1991, it would have given a phenomenal growth impetus. Maybe by allowing the ordinary person, not just businessmen, to participate in the magic of markets and liberalization, we could have had higher growth rates. It could have also been a cultural movement in India's transition, where a much broader group of people would have been behind these kinds of market reforms.

Perhaps we could have pushed through labor reforms that many policymakers were waiting for. They thought that India wasn't quite ready, that we needed to have market reforms which would become more inclusive, where wages would go up before which we could even think of pursuing labor reforms. But if we had had the consumer goods moment a decade earlier, maybe the wages would have gone up sooner. Maybe the wages would have been able to purchase more and better goods much sooner, which means we could have passed other kinds of reforms that we simply didn't imagine doing until 2001.

What is one reform that India needs today?

One of the most pressing problems before us today is that half of all Indians are trapped in a very unproductive part of the country and a very unproductive sector of the economy. This is the agrarian/rural sector. A big reason for this is our land policy. It is fashionable to say that we need to have land reforms, but let's first understand what the problems are.

The first is that Indian farmers are actually trapped in very small landholding sizes, which is making them extremely unproductive in their use of land and their own human capital. A lot of Indians need to move out of agriculture, but having small landholding sizes is a consequence of land ceiling policies. What is meant by land ceilings is that the government has state-by-state regulations on the maximum size of landholding that an individual farmer or a family can hold. Because India does not have the rule of primogeniture when it comes to inheritance, with each successive generation, the landholding size keeps getting smaller and smaller, making Indian agriculture more and more unproductive. We can already see this, as most farmers actually want to leave the agricultural sector. None of them want their children to continue farming, yet they are trapped in it. Why would that be?

A very big part of that is that they can't easily change the existing farmland that they do own, one of the most important assets they have, for any use other than farming, very easily and without government permission. Almost every single state in India regulates land use, which sounds quite reasonable. However, changing land use out of agriculture in agrarian areas into any kind of industrial or commercial use requires government permission, and this is not a simple procedure in most states. Most states actually have multiple different regulatory authorities whose permission is required for this kind of land use change. The consequence of this is that any piece of land designated for agricultural use ends up having a very depressed price for sale because it's only agricultural land. The moment we have a land use certificate attached to the same piece of land, the value of that land actually shoots up. Depending on where you are, if you are a landholder in, say, the outskirts of Gurgaon, the price of that land could go up 30 to 40 times. In most cases, it's at least three to four times if you have any kind of permit already attached to the land that allows you to change land use. We need to make this system much more streamlined. In an ideal world, we would get rid of it completely and regulate land use very differently depending on what kind of industry or commercial use actually comes in, and we would do this in an ex-post way.

The third problem is in some of the best-intentioned policies to protect farmers - we are hurting farmers by having a massive number of restrictions that prevent farmers from changing agricultural land to non-farmers. This comes from some colonial baggage where the feeling was that if there was one year with a bad harvest or some difficult years for farmers, we didn't want a situation where they had to sell their land in a fire sale to some rich zamindars or industrialists. But the consequence of this well-meaning policy is that it has restricted the number of buyers for the same piece of land. Because if farmers can only sell to other farmers, that's already a smaller pool. If most farmers are already restricted in the maximum amount of land they can hold, then there are not going to be many buyers for a particular piece of land. Because of this, agricultural land prices are actually depressed. So what we've done is we've depressed the value of the most important asset that any farming family holds in India. We have this bizarre situation in India's structural transformation: farmers want to sell their land and exit agriculture, industrialists and the service sector, urbanized sectors, commercial use are desperate to buy land, but it's not easy for them to transact with farmers because of all of this regulation. Because the landholding sizes keep getting smaller and smaller, and they're already fragmented by the sale of agricultural land and the change of land use certificate regulations, it is very difficult for any industrialist to come in and assemble large tracts of land. 

To get out of this problem, we actually need to attack this at a state level. Every single state needs to have better land use policy. Every single state needs to remove the ceilings that it has on agricultural land. Every single state needs to remove any restrictions it has on the sale of agricultural land to non-farmers or farmers from another state. It is a thicket of regulation, and all of it needs to go because the core value is that resources need to flow to their highest valued use. We have trapped some of the best resources in India, agricultural land, in some of the most unproductive uses. And by consequence of that, we have trapped half of Indians in an unproductive sector of the economy that they can't exit, even though they wish to exit that sector of the economy and do something more productive, and actually reinvest the capital that they get into some other entrepreneurial venture.