India's Reform Journey Revisited - Ajay Shah, XKDR Forum

What is one reform that was overlooked in 1991?

There was an economist's vision about doing many things, maybe removing industrial licensing, maybe cutting customs, maybe opening up to more cross-border activities. These were done in a superficial way that is not amending the laws. Now that has had many implications. I want to focus on what happened because we did not fix the laws at a deeper level.

As an example, in the case of industrial licensing, the law to do industrial licensing was never repealed. It is still in the books. Then there's always the threat that tomorrow industrial licensing can come back. These kinds of booby traps are all over the landscape. As an example, on the movement of cross-border money, the FERA was not fixed quickly. It was replaced by the FEMA only in 1999. The FEMA basically has the same repressive structure that was there in the FERA in substantial extent.

Within a few years, all the repressive provisions came back into the capital account. We used to say that we removed criminal clauses when going from FERA to FEMA, but the criminal clauses came back shortly. If you think something like recently, there is a 20% tax on credit card activity across the border. This is the same old spirit of restrictions on cross-border activity.

I have an article where we argue that while India says that there is convertibility of the current account, that's actually not true. There's no reasonable definition under which current account transactions in India are convertible. They are subject to an array of restrictions, and that's because that FEMA was not done correctly. The second dimension in which things had not been thought through was around public choice theory.

The laws are replete with executive discretion. The laws are filled with the idea that executive officials are good people and are well-meaning proponents of Ram Rajya, so they should be given all kinds of power. Whereas, what laws need to be is about checks and balances. They need to be about defining procedure, limiting power, creating multiple layers of checks and balances so that bad decisions are not made. This whole knowledge, this whole culture, was missing.

I feel that 1991 was an economist-led story, and it did not have depth in understanding laws and the machine of the state.

What is one reform that India needs today?

It's a target-rich landscape. I'll just give an idea that reduce the arbitrary power of the state. Now this is there everywhere. It's there in criminal law. It is there around the CBI, which is based on a sketchy 1946 law. It's there around the IB, which is based on no law. It is true of SEBI. It is true of Reserve Bank. Wherever you look, it's target-rich. We, in India, are in the grip of the administrative state, where unelected officials wield arbitrary power over the people without separation of powers. If there's a single sentence that you want to do, it is reduce executive discretion.