Ideating 3rd Generation Reforms

irca July 2008: In a path-breaking move the Union Government allows select private players to manage public pension funds. The entry of private sector players, albeit only marginally, was a clear hint that the Manmohan Singh government had not shed its belief in reforms, something that appeared to have been put on the back-burner after it joined hands with the Left.

But while everyone is again talking of reforms, the issues that appear to be getting put on the sidelines are: What are the types of reforms the government must go for? What has been the progress on the oft-talked about first and second generation reforms? What is the unfinished agenda?

As former finance minister Yashwant Sinha said in a recent interview with Inclusion: “The first generation reforms were initiated by Dr Singh in 1991 while the second generation reforms were initiated by the BJP-led NDA government. But, today the need of the hour is to step on the third generation of reforms even as the government moves beyond the unfinished agenda regarding the earlier reform measures.”

But is the time right for stepping up on reforms. The outlook for growth appears to have taken a beating, a slowdown seems inevitable, the overall deficit has ballooned; and farm loan waiver, inflationary pressures and the rising government salary and wage bill all point to a certain slowdown in the pace of reforms and eventual economic growth.

This again raises the question whether the reforms process will again be put on the backburner and if not, what are the types of reforms that are urgently needed to retain the growth momentum, both economically and socially. So then how does the government go about pursing its agenda for insuring inclusive growth? And what can it achieve given the fact that the next general elections are round the corner?

Here, the general viewpoint that is gaining ground is that the government should use the rest of its term to brainstorm on the next generation of reforms, setting in place an agenda of action for the new government.  The list of pending reforms is known to all; after all major economic bills relating to banking, insurance and pension await passage. What the government more importantly has to do is to initiate steps on the third generation reforms, which are an essential element of its aim to ensure inclusive growth.

Key to taking the reforms further in India is reforms at the state level. That undoubtedly will require considerable brainstorming as it not only involves considerable political management but also change management. This should not face the kind of opposition it did in the eighties as today there is an environment and the willingness to reap the benefits of reforms. Today, there is general consensus on many economic issues, notably the need to improve physical infrastructure (to ensure availability of electricity, water and improved roads) as well as social infrastructure (basic health-care and elementary education).

The first phase of reforms, which started in 1991, essentially concentrated on reforms at the Central government level. The second round (though still incomplete) looks at infrastructure, financial and labour reforms. And, these have to be taken to the level of the States and district local bodies. At the same time, the government must begin to ideate on the third generation of reforms.

Echoes Wajahat Habibullah, the Chief Information Commissioner, “third generation reforms can help to remove every remaining impediment to freedom, including lack of communication, which comes from deficient material facilities, exchange of ideas and flowering of thought based on easy accessibility to knowledge.” (See Box above)

So what are the third generation of reforms? The terminology is neither fictitious nor something coined to describe current policy directions. Globally, the IMF, the World Bank, the US Treasury and G7 institutions have spearheaded a movement for reforms on the premise that the: “stabilisation and structural adjustment programmes of the past, while successful in jump-starting economies, have been unable to ensure the quality and sustainability of renewed growth… a broader set of reforms is needed to sustain high-quality growth in a globalised environment and to close the disparity between the rich and poor countries.”

At the outset, it must be remembered that a major stumbling block to most development efforts in India is poor decentralised planning and implementation of schemes at the state level. Here, it is important that fund flows from both Central and State governments are linked to devolution of power to the third tier that is the Panchayati Raj Institutions (PRIs) and the Urban Local Bodies (ULBs). This is essential for the success of participatory democracy. Simultaneously, the government must start focusing on capacity building, linking education to employability and skill enhancements. This will also enable the government to ensure that the pending labour reforms receive greater public acceptance.

The first phase of reforms, which started in 1991, essentially concentrated on reforms at the Central government level. The second round (though still incomplete) looks at infrastructure, financial and labour reforms. Now these have to be taken to the level of the States and district local bodies. Almost 40 per cent of our revenue and fiscal deficit are because of poor State finances. A number of reforms are required to improve the delivery system, too, since all social services such as education, health, and so on are delivered at the State level. The State-level reforms are of particular importance to promote regional equity, which is a matter of fundamental significance for a federal polity like India.

It has been widely seen that wherever the third generation of reforms have been introduced, these have had the underlying backbone of information and communication technologies, both for bringing in transparency, speed, ease of governance as well as a solution for taking extension services of the government to the larger public. This is needed all the more in third world countries, where the infrastructure is sorely lacking and the government’s reach into the hinterland is limited.

As this issue’s cover story highlights, there have been several examples of ICT-based services bridging the gaps of outreach and infrastructure and it is time that the government upscales such success stories. If the third generation reforms are about strengthening delivery systems, then ICT and e-governance efforts have a crucial role to play.

It is not that the government is unaware of the steps needed on the reforms front. As the draft report of the high-level committee on financial sector reforms headed by economist Dr Raghuram Rajan noted that there are deep linkages among different reforms, including broader reforms to monetary and fiscal policies, and recognising these linkages is essential to achieve real progress. The Committee submitted its report earlier this year when the political canvas had a different set of colours.

The Committee had three major conclusions. Firstly,that the country’s financial system is not providing adequate services to a majority of retail customers, small and medium-sized enterprises, or large corporations. Government ownership of a majority of the banking system and hindrances to the development of corporate debt and derivatives markets have stunted financial development. This will inevitably become a barrier to high growth, it says.

Second, the financial sector – if properly regulated but unleashed from government strictures that have stifled the development of certain markets and kept others from becoming competitive and efficient – has the potential to generate millions of much-needed jobs and, more important, have an enormous multiplier effect on economic growth. And lastly, financial stability is more important than ever to keep growth from being derailed by shocks hitting the system.

And as a recent Goldman Sachs paper notes, some of the most important reforms that India needs are improved governance; higher basic education levels; a credible fiscal policy and liberalised financial markets. Of these one of the most important and one that is integral to most other reforms, barring the financial sectors reforms, is improving access to and quality of education.

Says Sam Pitroda, Chairman of the National Knowledge Commission, India has the potential to become the workforce supplier to the world. Here, education and skills development are critical if India is to reap the benefits of its demographic dividend. Pitroda says it is necessary to scale up the pace of development, both in education and vocational training. “We can no longer look at growth rates of 5-10 percent, a quantum leap is what is required.”

In a more philosophical vein, third generation reforms have to be based on pursuing rules of the world economy, realising cooperation and mutual confidence between the state and the citizen. The citizen’s confidence is in that the state will provide him with services in the framework of justice, equality and a real interest in assisting him to face life burdens. Moreover, the state’s confidence in the citizen is as being a partner, who shoulders the responsibility of assisting it in managing the resources of its public budget and in monitoring its expenditure.

State reform is much talked-about, but seldom clearly defined and even more rarely implemented. When it comes to poverty-alleviation, the tendency has been not to reform existing policies and institutions, but to bypass them.