India's Reform Journey Revisited: Narayan Ramachandran, Takshashila Institution

India's Reform Journey Revisited - Narayan Ramachandran, Takshashila Institution

What is one reform that was overlooked in 1991?

The reforms should have begun earlier than 1991. Now, that might be somewhat difficult to accept given that the crisis was in 1991, but I do believe that the crisis itself had been brewing for several years before 1991, caused primarily because of the fiscal indiscipline, if you will, of India at that time in the context of a country that was still in License Raj, and where the currency was not flexible to choose its own level in the midst of duties and other things that we had at that time.

Actually, a lot of the reforms that happened were consequent to a near default situation or an actual default situation, whereas I think if we had heeded an early warning signal, what a bank would have before the loan goes bankrupt, for instance, you actually have an instance of an early warning system. I think early warning systems in India could have and should have functioned a lot before 1991. It may be a non-answer to the question of what reform was left out, but I do think that the reform could have begun in a manner in which the actual event was much less bad than it actually ended up being.

Now, there is some argument that in emerging markets only crisis creates opportunity for reform. Hopefully, and maybe this is a good segue into what I am assuming is going to be your next question is, as economies mature, you are able to actually do reform more as they are needed, rather than having to wait for a crisis in order to sneak a reform in.

What is one reform that India needs today?

India's in a very different situation today than it was in 1991. As everybody knows, but as just one simple statistic, we have $600 billion of reserves, which is way more than the number of months of import cover that you need. We are not anywhere close to a balance of payments crisis, which is where we were in 1991. This is not true of Pakistan, Sri Lanka, and Nepal. Pakistan and Sri Lanka are, if you want to use the term, in 1992, and Nepal maybe in 1990.

They're all on the verge of the same crisis. Given their political economies and the fact that the world has moved on so much, they are finding it very difficult to repeat what India did in 1991. The topic of reform in 1991 is difficult to talk about so many years later because the political economy of the moment allows some things and doesn't allow some things. In all of these countries, as we are discovering, the IMF-led rescue if you want to call it that, has been very, very difficult and prolonged, and it's taken a long, long period of time in Pakistan and Sri Lanka, and has not even really begun in Nepal.

Today's India needs something totally different. I'll speak about one aspect that really looks again now forward 10 years, so again on my theme of looking ahead a little bit, rather than reacting to crisis. I think India does middlingly well or well in this, what I call quantity regime, which is we will grow at, pick a number, 5%, 6%, 7%, and that will take us for the next 6, 10 years. After that, we are likely to hit the limits of the quantity expansion of the economy, and we will need to go into the quality expansion of the economy.

In order for us to get to the quality expansion of the economy 10 years from now, we need to sow the seeds. I'll just give you two instances of that. One, our primary education system and effectiveness needs to be dramatically different than what it is today. The ASER reports are not at all encouraging about reading and arithmetic levels in fifth grade, for instance, but pretty much across primary and middle school. Primary education effectiveness has to transform if India has to deliver on a knowledge economy 10 years from now.

Second, the structure of our innovation is broken. India is the only country that has now a Soviet system of innovation. Soviet Union is gone, and we still have a Soviet system of innovation. We will have to radically change that, so social Soviet-style to a much more contemporary style. There has to be a discussion about it. I don't want to say necessarily that one model is better than the other, but we have to get to a point where innovation is not being done by science bureaucrats.

Innovation has to be done by suitably incentivized "scientists", and I'm putting scientists within quotes, obviously, applies to multiplicity of fields, but that innovation will be required if we want to get out of what the economists call a middle-income trap that India will definitely hit 10 years from now if we don't invest today. To me, that forward-looking investment in primary education and structure of innovation is critical now so that we don't get stuck 10 years from now.

There is a little bit of an inevitability about growth for the next several years, purely from quantity, demographics, productivity, improvements, everything coming out of the fact that we are a reasonably forward-moving juggernaut that no government can really muck up too badly. We are trying hard, but we can't muck up too badly.