When there is a global storm, the house with weak foundations will shake the most. In the 1990s, the Washington Consensus unleashed a global storm across all economies, demanding an end to protection against globalization to let the winds of global trade and global finance blow freely. The benefits for less developed economies would be new products, new technologies, and investment coming their way. When money flew out of these countries in the late 1990s, creating the Asian crisis, the Washington pundits said the flaw lay not in the absence of protection against globalization, but in weaknesses of the damaged countries’ institutions.
That institutions are the foundations of sustainable growth is an idea Nobel Laureate economist Douglas North had propounded decades ago and Harvard University’s Dani Rodrik has supported in his brilliant accounts of how the foundations of the industrial strengths of Japan, Germany, Korea and the US were built. Indeed, when the Asian economies were berated for their weak institutions, South Korea, Malaysia and Thailand went back to developing “industrial policies” along with the dismantling of “crony capitalism”. Thus, they restored economic growth. The impressive growth of China is another example of a country following its own “industrial policy” and building its institutional strengths in the midst of the sweep of globalization since the 1990s.
India has adopted the strategy of joining the global economy from the 1990s and it must remain on this course. Unfortunately, it has not attended to its institutions, the weaknesses of which are causing its economic growth to tremble now. Moreover, its rusty institutions are unable to deliver services efficiently and equitably to its citizens.
The institutions that India has neglected for too long are regulatory institutions; institutions of administration, policing, and justice; and institutional capacities for implementation. These need to be refurbished and built anew.
When economies are opened up to the “animal spirits” of free enterprise, they must simultaneously build strong institutions to protect citizens and consumers from greedy animals and from monopolies destroying competition. India has created many regulators but, barring a few, their effectiveness has been very poor. Regulatory agencies are not well designed. In some arenas, there are too many of them with overlapping responsibilities. And they are mostly stuffed with retired bureaucrats instead of competent professionals.
The origins of India’s administrative services are legendary—the iron frame that kept society in order. That iron frame has become rusty. It must change its orientation to develop innovative policies and deliver services efficiently. Paper files which meander slowly around government’s innards and cannot be found when required must be replaced with electronic communications. The judiciary is creaking under the burden of too much litigation.
Several commissions have recommended improvement of police organizations. The second administrative reforms commission (ARC), in its 15 reports, has covered the gamut of reforms required in administration, police, and judicial services. Its reports were made after examining India’s realities and best practices of other countries. The reports have been accepted by the Union cabinet. They have been barely implemented.
If India as a country has a special weakness, it is poor implementation. We have great ideas. We appoint committee after committee to study the same problem. But we don’t implement what we accept must be done. The second ARC’s hard work seems to have met the same fate. The Planning Commission, while preparing the 12th Five Year Plan, looked into the root causes why the country’s plans never fully achieve what they intend to. It found that contention amongst stakeholders, between different ministries, and between citizens’ groups and businesses, holds up implementation of policies and projects. Also, planning as a discipline is noticeable by its absence. Therefore, there is confusion about what has to be done by whom and when, and very little follow-up until the deadlines appear when there is a mad rush, or a new deadline is fixed.
Thus, even the Five Year Plans have not been ready before the start of the next plan period when they should be.
The Cabinet Committee on Investment is busy expediting projects that have missed deadlines because they have been embroiled in contention and confusion rife in the system. It is swimming against a tide. A solution must be found to improve abilities, to collaborate and coordinate throughout the system—in the states and in the Union government. Japan, Korea, China, and Malaysia have, in the course of their development, systematically improved capacities for planning, coordination, and collaboration. The Planning Commission has conceived the India Backbone Implementation Network as a solution for India. Now we must also focus on implementing this.
Finally, India needs to implement a comprehensive manufacturing plan to encourage manufacturing. Twenty years after the liberalization of the economy, which enabled growth to touch 9% per annum, manufacturing continues to languish at 16% of gross domestic product. Manufacturing must grow much faster to reduce the current account deficit and to create 100 million jobs in the next 15 years, without which India may face an employment crisis with severe social and political ramifications.
