India's Reform Journey Revisited - Shubho Roy, Prosperiti/University of Chicago

What is one reform that was overlooked in 1991?

The 1991 reforms were forced to some extent by the IMF, and the track history is not very good in the sense most IMF reforms usually do not lead to success. One of the countries that succeeded was Korea after the '97 reforms. One thing that Korea did was actively and aggressively privatized the banks. Capital allocation is one of the big decisions in a macroeconomy. Once you get that wrong, undoing that through other methods is almost impossible.

Getting the right capital allocation, one way to do it or probably the only way to do it is through market mechanisms. When banks are nationalized, and they do not have the incentives of following the market or being exposed to market risks, the mistakes in capital allocation do not get corrected over a long period of time. Maybe that is one thing that should have been done at the financial sector level.

What is one reform that India needs today?

Labor and land. In some ways, the '91 reforms allowed India to succeed in the high skilled industries which were largely service-oriented. One of the reasons was also service sectors are exempted from a large number of labor laws because labor laws apply to workmen and factories. When you are running a service sector, an IT sector, these laws do not apply to you because the people who are working are not workmen, and the organizations where they work are not factories.

There is a possibility that India can become as successful as it is in services sector if the labor laws are changed. Similarly, the East Asian countries changed the land laws also in the late '80s, early '90s where they gave absolute property rights to farmers after redistribution or whatever economic policies they had taken in the past. Giving full property rights to farmers allows them to sell it and exit out of farming and move to an industrialized society.

In India, we have a big problem. A large number of farmers don't own full title to the land they have been farming for generations. They are technically tenants of the state, and they do not have right to actually sell the land, aggregate the land and move to an industrialized economy. That may be holding back a large number of people who are well-known to have been operating in an industry or a sector which has a lot of hidden unemployment. Probably there's a large number of productive workers just waiting to be able to get out of agriculture. That path out of agriculture into industry and services is still very messy in India.