Go Big: Advice for India’s Budget Proposals

‘Tis the season when everyone has an opinion on the budget speech. The contagion has even spread to the U.S. and, like cricket and dosas, can be found in Texas. As an American economist, I see a need for deep institutional reform in India’s government while acknowledging the difficult road ahead.

There seems to be a consensus among most observers that Prime Minister Narendra Modi’s reforms have not yet gone far enough. It is not difficult to see why tinkering is the modus operandi: It’s unlikely to overturn the proverbial apple cart, and as such it will likely receive support from vested interests that want some improvements but fear true change.

India needs to upset the apple cart. The nation needs double-digit growth in order to attack poverty in a meaningful way. The present government system deeply forms the present economic structure and hampers growth in the most critical areas of the economy. Economist Ajay Shah made the point that mere tinkering with existing frameworks will hardly be sufficient to change the direction of the economy. Only major restructuring and bold moves in the budget speech will suffice to unleash India’s true economic potential.

When it comes to impactful reforms, much has been said about labor markets and land acquisition. Fortunately we have seen some small progress in labor regulation, but reform in this area will need to move much faster if Modi wishes to see an appreciable impact by the end of his term. As for land acquisition, any reform requires major follow-up on the state level to improve land records and liberalize land-use restrictions.

Business leader Deepak Parekh recently commented about the lack of improvement in the business-government interface under Modi. He specifically highlighted the need to get Cabinet Committee approval for individual ECB borrowings. Oil and gas exploration and production provides another example. India imported $150 billion of hydrocarbons last year. Rather than bicker about revenue- versus production-sharing contracts to protect $1 billion of tax revenue, the government should try getting out of the way entirely.

A more investor-friendly structure, outlined by former head of the Directorate General of Hydrocarbons R.N. Choubey, proposes a clean royalty program. Higher domestic production should more than offset any revenue loss.

However, addressing these two items would constitute mere tinkering. Addressing the government’s broader micromanagement mindset would constitute bold reform. The Indian government must totally rethink its approach to providing public goods.

As of now, India’s justice, education and infrastructure systems are woefully inadequate, and more money is not a solution. Modi’s team must rethink management, incentives and the government’s approach, and all of these issues need a good dose of institutional reform. By using a three-pronged approach to reform centered on accountability, privatization and civil service, India can seriously transform the way its government is run.

Accountability is the Achilles’ heel of the Indian government. Laws are drafted with little concern for the administrative capacity to carry them out, and agencies are often established with multiple vague objectives. Accountability requires clear lines of authority: This means reorganizing ministries and regulators to avoid overlapping responsibilities, while also instating clear objectives and regular reviews of progress.

Similarly, India’s Public Sector Undertakings — government-owned corporations — have always been problematic, facing excessive government meddling. It’s difficult for private sector firms to compete against those operating indefinitely at a loss or that receive favorable access to credit and permits.

Finally, India needs civil service reform to develop the depth of subject-matter expertise that modern governments require. Prominent observers like Pratap Bhanu Mehta and Arun Maira frequently lament the low capacity of the Indian government to impact the country it nominally rules. Key reforms in this area include increased openness to mid-career entry, more domain-specific career tracking and better matching of professional salaries to private sector counterparts.

Understandably, institutional reform is not an easy task. Modi appears to have been dealt a strong hand with a large majority in the Lok Sabha, but it is a weak hand compared to the task ahead of him. There are two main reasons why we should keep expectations low.

The first is that it is necessary to reform the very institutions needed to implement further reform. This means there’s a high likelihood of compromise that weakens the potency of reform. Only businesses, citizens and policymakers that take a very long view of the health of the country would support it. Ultimately, Indians should ask themselves: What would make the nation a better place — not for themselves, but for their children?

The second is that the layers of government outside the Centre’s control are central (pun intended) to the reform process. Labor, land, infrastructure, civil service and ease of doing business all intersect as much with state and local prerogatives as with the Centre. To date, efforts to change the nature of Centre-state interactions have not garnered widespread state cooperation.

But even within the context of the difficulties ahead, this is nonetheless Prime Minister Modi’s chance to show what India can achieve when it demands a functional government. The world is eager to see India transform into the next Asian miracle: We cheer on when we witness that India’s growth rate rivals China’s. Here in America, we hope that Modi’s upcoming speech will give us more to cheer about, and we wish you all a Merry Budget Season!

For more on this topic, see “Can ‘Make in India’ Make Jobs? The Challenges of Manufacturing Growth and High-Quality Job Creation in India.”

Russell Green is the Will Clayton Fellow in International Economics at the Baker Institute and a former U.S. Treasury attaché in India.

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