What are the lessons to be learnt from Indian economic reforms? How do changing institutions require changes in policy? Over the past few decades, economic policy reform has focussed on increasing growth rates. Disagreement has occurred over the policy prescriptions to achieve it. This paper from the Indian Council for Research on International Economic Relations, presented at the Global Development Network conference in New Delhi January 2004, moves the focus from such a macro debate to explore specific policy change and institutions.
Over a time frame of decades, the microstructure of an organisation may change. Successful introduction of new policies may require new institutions. The degree of success may depend on the degree that institutions make modifications.
Successful economic reform requires knowledge, on the part of those driving reform, about how the country suffers distortion of policy in terms of its institutions. When this is recognised medium term goals can be reached. Lessons to be learnt from internal and external policy reform in India include:
- Institutions cannot be changed dramatically in a short period of time (microstructure). Often they cannot be changed over a longer period (superstructure).
- There is no unique path from a country experiencing institutional distortions to one having reached its reform goals. Timing, phasing and speed of policy reform is constrained by the existing structures and the states efficiency.
- Social-political factors play a role in a democratic system such as India. Parliament, the media, public opinion and political resistance all impact on the nature of reform.
- Decriminalising transactions considered legitimate in an open society can be beneficial. Lifting the ban on gold imports was an important element of the reform of external policies.
- Successful reform of the monolith infrastructure included separating policy from regulation, allowing entry of the private sector and setting up a regulatory framework, for instance in telecommunications and highways reform.
- Electricity reform was unsuccessful, suggesting that whilst the conditions above were necessary for success, they were not sufficient conditions for it.
Many factors influence the success of economic reform including taxation, the political economy, infrastructure, history, competition and international trade. Policy pointers for successful economic reform include:
- Policy adaptation and institutional innovations taking account of existing realities. There should be tactical flexibility in achieving the goals and direction of policy reform.
- The most critical role of the policy advisor is designing the transition from the old policy frame to the new. Successful transition requires the adjustment and adaptation of policies to institutional and political constraints.
- Wherever possible, institutional reform should accompany policy reform, overcoming bureaucratic inertia.
- Reform of the financial sector, removing policy distortions and limiting government control.
- Foreign Direct Investment (FDI) should be viewed as incorporating technology, trade and investment. Any FDI should be approved, shifting the bureaucratic mindset from control to promotion.
- Institutional innovation, for example setting up the National Stock Exchange.
