India's Reform Journey Revisited - Vidya Mahambare, Great Lakes Institute of Management, Chennai

What is one reform that was overlooked in 1991?

Any country reforms or does liberalization to improve the standard of living of its people, and that is nothing but labor. The key reforms should be those who will benefit maximum number of people or maximum proportion of labor in the economy. Of course, all our leaders and whoever was involved in the reforms knew this very well, but perhaps simply the political economy was such that we could not carry out two things which are required to improve the majority of people’s chances of having equal opportunity because that is what you're trying to do, to give everyone equal opportunity of success. Those were to do with overhauling of our education system.

We have very top-class institutions in education, but the median quality of our education remains poor. If that is going to happen, despite we may have 800 million labor force, so on and so forth, people who will remain in demand are only the people who have skills.  If only few people get good quality education, of course, their price or their wage premium, skill premium, is going to get better, and they will earn much more.

We managed to pull off lot of people out of poverty, and that is a big success. Nonetheless, the gap between the incomes will continue to rise if you do not have the quality of education which is good for majority of the people. We now have a national education policy, which is yet to be implemented, but that was one. Second side on the labor was, of course, everyone talks about, which is labor laws. Since labor laws never got reformed, and it is to do with, of course, political economy, convincing labor is very, very difficult because as we say all the time in economics, what appears to be right is not right.

Unless someone really educates the labor that it is good for them to have flexible labor laws because then only the hiring can happen. The whole thing comes about, the whole focus is on firing, because we call it hiring and firing policy. That hiring gets left out, always got left out, the whole focus was on firing. If the labor laws are reformed, labor is going to get fired. What we could not convince the labor, and even now we are not able to convince, that if you do not reform labor laws, hiring itself does not happen in the first place.

Fortunately, all the service industry, including IT, ITS, and so on, was always out of the purview of labor laws. That's how they could grow because the firm has the flexibility to reduce the labor if their business is collapsing or there's a downturn. If we typically think, all of us employ some labor, all of us have households, we have families, so virtually everyone employs some labor. Virtually none of us will employ that labor permanently. If we need that flexibility as a household, of course, all the firms, especially manufacturing firms, need that. Otherwise, in the first place itself, they will not hire or hire only on a contract basis.

Essentially reforms related to the labor, two, which is, one, education, reforms and the labor market flexibility. These two perhaps should have happened at least when India was growing faster after liberalization, at least that time if they had happened perhaps the things would've been much better in terms of job creation right now.

What is one reform that India needs today?

It's still a process. There are many reforms yet to be done, but I will perhaps pick up something which we have reformed, but it has not gone the way it has gone. It is to do with environmental regulation and environmental laws. In India, originally the environmental, all the applications and submissions, whatever happens, used to be at a central level, then it was delegated to the state levels.

Now the things have evolved in such a way that the firm needs to appoint an external consultant and then they need to appoint another, some 10, 12 experts, and they need to do huge feasibility studies. After that, they submit the application. The whole process is so cumbersome, and it takes such a long time and the cost involved is so high. Whatever we are doing positive in terms of single window licensing, all that stuff, it is getting undone simply by the cost of getting a license for environmental regulation. Eventually, as far as I recollect, most of the firms get the clearances. It is a question whether you get the clearance within one month, two months, eight months, one year that makes a big difference and the cost involved in that entire process.

If I bought a plot of land to build a factory, and if you now suddenly tell me, "No, no, you have to keep seven feet here and seven feet here and seven feet here for a greenery,” it’s not going to work out now for that entrepreneur because it's a premium land. All the process of environmental clearances and the cost and the time involved and the kind of laws we have, the kind of feasibility studies we are asking them to conduct, I think it just makes investing in manufacturing-- even though we have--

This is supposed to be a positive step because it is supposed to be for sustainability, which is very much required, but the way it is working right now it really appears to the detriment of most of the manufacturing firms, which is where our focus is. We slightly need to undo the excessive, or put in place a better mechanism to get the environmental clearances, which will reduce the cost and the time involved in getting those if we really have to push manufacturing.