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Updated: June 24, 2013 20:46 IST

Lost in the sands of time

K. Subramanian
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Economic Reform in India: Challelnges, Prospectes, and Lessons. Edited by: Nicholas C. Hope, Anjini Kochar, Roger Noll, T.N. Srinivasan.
Economic Reform in India: Challelnges, Prospectes, and Lessons. Edited by: Nicholas C. Hope, Anjini Kochar, Roger Noll, T.N. Srinivasan.

When analyses take a pre-ordained course, the relevance of the underlying research comes into question

The Stanford Center for International Development (SCID) is a center within its Institute for Policy Research. The SCID focuses research on economic policies in developing countries. The idea is to advise and influence the policies. It has programmes on China, India, Latin America and the Caribbean. The SCID has so far held 14 seminars on India and the last was held in May this year.

This is a collection of papers presented at the SCID held in 2006 (May 31-June 3) when it debated the Challenges of Economic Policy Reform. Some of the chapters are updated versions done in May 2009. However, there is no evidence of updating to relate the future course of reforms to the traumatic developments that have taken place in the global economy. It is indeed tragic as the year 2006 marks a watershed both from global and Indian contexts. For the globe (read, the U.S. and E.U.) it marks the onset of the Great Recession. For India, it marks the high point of economic growth (or boom) buoyed by capital inflows, global and domestic demand, etc. Many economists and analysts with faith in the Washington Consensus (WC) and the gains by integration with the global economy had assumed that India’s growth story was firmly in place. Truly, it was a cathartic moment and the seminarists could not have visualised that at the next turn of the global wheel, ‘India shining’ story will fade.

Part of the reason is that SCID itself is driven by the WC and the neo-classical model of development and does not bring in alternative models like the East Asian and Chinese. Moreover, it is evident that all the participants are ‘born again’ reformers. It is also significant that some participants are invited year after year. The net result is that the analyses and the conclusions take a preordained course familiar to those who follow the IMF/World Bank papers. One may well wonder about the relevance and utility of such research for policymaking.

India and China

The first section deals with some aspects of macro-economy; the second with institutional reforms such as in agriculture and education; the third on industrial restructuring and employment; and the last on infrastructure. There is no coherence between these sections except that they share a common running ideology. There is reliance on allocative efficiency of the market. The argument is developed by T.N. Srinivasan, Arvind Panagariya, and Anne Krueger. They criticise severely the policy of reservation for small scale sector. Lastly, there is the lament about the rigid labour laws which prevent industrial expansion. Panagariya has a chapter which compares the performance of India with China.

While it is true that China opened up its economy and sought to gain from international trade by exploiting its comparative endowments, these neo-classical analysts ignore the enormous amount of state intervention to promote regional development and clusters which create the buildup of supply chains. They also ignore the massive direction of bank credit to promote world class infrastructure all across China. They also do not factor in the cheap credit which exporters and state-owned-enterprises (SOEs) get for their projects. Lastly, China’s policy of stable Yuan rate helped the exports very much. It was an integrated policy and the “market”, as conceived by the neocons, played a part. It was not an all market show! This also answers some of the issues raised by Panagariya.

T.N. Srinivasan relates the failure of India to redistribute resources to states in the federal context and compares with the success of China. As he says, “While the operation of democratic incentives has been weak in India, the better performance of Chinese subnational governments is not explained at all by conventional democracy.” He feels that it is more due to the alignment of incentives between stakeholders which binds them even as center-state relations turn adversarial in India. He suggests the abolition of the Planning Commission and the establishment of an Investment Fund in its place! Who will fund this fund and how will it be shared?

Rakesh Mohan’s chapter on Financial Sector Reforms and Monetary Policy is a smug story which had its run in the early years of the crisis, i.e. 2008-09. It explains how India was saved by the cautious, calibrated policy of reforms. Unfortunately, this story has been turned on its head with the deepening of the recession. Though India avoided the adverse impact in the early years, its performance has been stopped in its track by the deepening of the crisis. This has been brought out incisively in a recent article in the Economic and Political Weekly (India’s Dream Run, 2003-08, R. Nagaraj, May 18, 2013). As in other countries, including the U.S., the monetary tools have been blunted. Mohan’s analysis of capital control could have been avoided. Even the IMF has reluctantly accepted the need for capital control and it is no longer an issue.

Unemployment

Anne Krueger refers to the growing unemployment problem and the failure of the manufacturing sector to exploit the so-called “demographic dividend.” She blames it on the policy of small scale reservation and the failure to promote mass production as in China. Her assessment is that the growing BPO segment, however impressive, is unlikely to generate very much incremental demand for unskilled labour.

The weakest section is that on infrastructure. The chapter on telecommunications was written long before the publication of the Comptroller & Auditor General’s Report on 2G and the national debate on it. It is amusing when the authors say, “No one can seriously challenge the proposition that Indian telecommunications policy has been an outstanding success in the 21 century.” Based on the success (?) of private sectors, the authors plead for the removal of the protective cover and other advantages enjoyed by BSNL and MTNL! It would be advisable if the authors revisit the area, check the developments post 2006 and rewrite the paper.

This is a disappointing book though it carries the imprimatur of Stanford. Not all seminar papers survive the passage of time, especially those dealing with economic reforms in the background of the ongoing crisis. The placid days of stable trade and economic flows are long past and newer relations come into force. There is no single paradigm which holds good for all times for all countries. The IMF learnt this lesson after the crisis — it has not reached Stanford!

(K. Subramanian is a retired civil servant)

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