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Reforms won't be easy or painless!

September 03, 2014 11:28 IST

Boy selling flags'Let us also not expect that there will be a clean break with the past much though the new government might like to think about it. In a functional democracy that is neither feasible nor desirable. But basic change it must be,' says Shreekant Sambrani.

In his Independence Address to the nation, Prime Minister Narendra Modi alluded to an old structure, having served some purpose but now dilapidated.

He said it is often better to replace it with a new one as the trouble and cost involved in repairing and renovating may be high. He was talking about the soon-to-be-replaced Planning Commission (more about this later), but he did provide a good way to define reform.

Ever since 1991, the term economic reform has gained great currency. The sweeping changes in the industrial licensing policy announced by then finance minister Dr Manmohan Singh were rightly hailed as momentous reforms of the Indian economy.

Since then not just policy changes but every economic announcement by the government of the day has been seen through the prism of reform. Unfortunately, not much clarity exists as to what constitutes reform and what is mere incremental change.

The noted economist and one of the chief economic architects of the United Progressive Alliance regime, Dr C Rangarajan, recently wrote, 'There is a need to evaluate and restructure every organisation as circumstances change... Restructuring an organisation can be of two types. One approach takes the functions of the organisation as a given and proceeds to restructure it to make it more effective to fulfill those functions. The second approach is more fundamental. It questions the very basis of the organisation and focusses on the relevance of the basic functions it has been performing.' (Needed, a growth commission, The Hindu, August 28, 2014.)

When Mr Chidambaram returned to the finance ministry two years ago, a series of measures were announced as steps to get out of what came to be known as 'policy paralysis' affecting the government. Dr M S Ahluwalia, then the deputy chairman of the Planning Commission, said in an interview that one of these, the creation of a Cabinet committee for coordinating project clearances and monitoring under the prime minister's chairmanship, was a true reform measure (It is altogether a different matter that nothing much came off it, and the good ship the SS Indian Economy continued to flounder between the Scylla of mounting Budget and trade deficits and the Charybdis of tapering growth).

Questioning the way of doing things and replacing it with a new, more effective way if required is the point of convergence among M/s Modi, Rangarajan and Ahluwalia. That is in effect the basic definition of true reform. Other changes are of the first type mentioned by Rangarajan, and are merely incremental.

Thus, when the new National Democratic Alliance government raised railway fares soon after assuming office, it did not usher in any reform. Nor did the first Budget of Arun Jaitley, the new finance minister, for much the same reason.

I have called it old wine in an old bottle with a new label on these pages earlier.

The two new big bang announcements in the Independence Day Address, the financial inclusion scheme imaginatively called Jan Dhan Yojana, and the proposed replacement of the Planning Commission by a new body, have the potential to bring about paradigm shifts in the economic landscape and fully deserve to be treated as reform steps.

When Dr Singh announced far-reaching tax changes in the 1993 budget or when Mr Chidambaram overhauled the indirect tax regime four years later, they were talking reform. But not so Mr Pranab Mukherjee when he announced myriad schemes with token allocations or tinkered with excise duty rates on specific goods in 2011 and 2012.

Mr Jaitley followed suit in 2014. The one major change that Mr Mukherjee wrought, the retrospective tax amendment, was so retrogressive that it deserves to be called a deform step!

The incantation of the reform mantra or a change of guard at the top with the new regime swearing its fealty to reform do not by themselves result in reform. The noted Polish economist Michael Kalecki had perspicaciously expanded on what he called intermediate regimes as far back as the late 1950s.

His basic point was that mere change of decision-making elites does not automatically bring in reform, as long as the dominant economic interests remain unchanged. The late Mr E M S Namboodiripad and the late Dr K N Raj argued persuasively from doctrinaire and economic points of view that the governing structures of Independent India were in effect intermediate regimes.

That situation has not changed much since Independence. Despite changes in government and even ruling political formations from time to time, there has been a remarkable political continuity. More importantly, business and economic interests have held their own all through the period.

If the Bombay Club of the 1940s effectively demanded protection from imports, the new Bombay Club of this century (some members of it being descendants of the original Bombay Club) has been no less effective in demanding level playing field against foreign competition.

Despite the many reforms of the last two decades or more, India is not exactly easy for foreign-owned firms to do business in.

The latest change of regime also does not represent as clear a break from the past as the new ruling dispensation might claim to be. For one, the decision-making structures including the civil service and processes as well as the legal framework within which the decisions are made have not changed as yet.

For another, at least so far, Mr Modi seems to be following a 'don't fix it if it ain't broke' policy inasmuch as he has tried to replicate at the Centre his Gujarat experience of the preceding 12-plus years, as I had observed recently.

In effect, even as we have had several different administrations so far, they are nonetheless revised editions of the basic intermediate regime.

But even as intermediate regimes continue, economic realities and compulsions lead to reform. The overhaul of land holdings and abolition of zamindari of the early years of free India and its subsequent transition to a planned, statist economy in which the socialist pattern espoused by the ruling party required the state to capture the commanding heights of economy (even if this meant state enterprises making not just virtually all capital goods but also soaps and bread) were reforms for those times.

And the dismantling of the more egregious aspects of what came to be called the license permit raj as the country found itself in dire economic straits due to those very constructs is a reform of more recent origin.

Yet the most urgent current priority is for more, not less, economic reforms and rightly so. Economies are all dynamic, evolving over time, at times rapidly so. These in turn demand matching changes in the processes and structures governing it. 

More importantly, the arteries of the governing beast harden over time, reducing its responsiveness and effectiveness. Interests of specific groups and individual entities push them into searching for spaces for own advancement. That in turn leads to seeking exceptions favouring them. Politicians and administrators facilitate this exercise, often, but not always for pecuniary gains. The once-transparent mechanisms become increasingly opaque as the exercise of discretion creates a veil of secrecy.

When decision-making by rules transforms increasingly into decision-making by exceptions, those who make exceptions enjoy influence disproportionate to their formal status. Exercising power is never a zero-sum game: your gain is someone else's loss.

Rank does not define one’s place in the hierarchy, but the power one wields does, especially the kind that constricts others. The unctuous bada babu was the presiding deity in most Calcutta offices. His counterpart today is the section officer who initiates notings in government files. That compleat entrepreneur Dhirubhai Ambani famously remarked that he was prepared to salaam anyone in the government as long as his work got done.

The much discussed policy paralysis was the most visible, but not the only, manifestation of turf battles within the previous government. A rogue telecom minister flouted the collective will of the Cabinet and the law of the land. The environment ministers were against everyone else, the highways minister against the Planning Commission and the Planning Commission against state governments, forcing down their throats tried, trusted and failed schemes as part of its belief in one-size-fits-all solutions.

So, as in the bad old pre-liberalisation days, individual-centric exception-making remains the decision rule even now, notwithstanding the greater availability of goodies. Belated and possibly inadequate correctives such as fuel price hikes and foreign direct investment in multi-brand retail are hailed as 'reforms'.

Creating the National Investment Board would have been a true reform, a different way of doing things, because it would have led to decisions based on dialogues on issues of the greatest concern, taking everyone along.

Narendra Modi as the chief minister of Gujarat shined by contrast. He brooked no contradiction in his fiefdom; his decisions were virtually engraved in stone. That offered immense comfort to investors, domestic and foreign, who flocked to him in droves. He drew enormous mileage from this and would like to continue to do so for a long time. But a bulldozer also leaves a lot of wreckage even as it clears a path.

True reform requires transparency in and demystification of processes. It also severely restricts discretion or the power to make exceptions. Expedient decision-making, but not at the cost of fairness and equity is an overarching consideration.

All these apply to all the interfaces between citizens, corporate entities and the government, be it the matter of taxation or the ease of doing business or preserving environment or the timely settling disputes.

That is why the direct tax code bill, a goods and services tax, a new national commission to facilitate investments and a review and streamlining of the laws and the judiciary all become integral parts of a desirable reforms package.

Let us not be naIve and expect that the reforms will be easy or painless. They seldom are. Let us also not expect that there will be a clean break with the past, much though the new government might like to think about it.

In a functional democracy that is neither feasible nor desirable. But basic change it must be. It cannot be just more of the same, a little nudge and a tuck here and there. Nor should dissenting voices be silenced in the name of expediency. That is the right measure of reform.

Growth and development, inclusive or otherwise, require the pursuit of win-win strategies and simultaneous abandonment of zero-sum games as preconditions. We need to look not to the next election, but to the next generation and perhaps the one thereafter, putting aside concerns of who comes out on top. That was beyond the UPA's grasp.

Hope springs eternal that this would not be the case of the new dispensation that has replaced it.

Shreekant Sambrani