by Arvind Subramanian, Peterson Institute for International Economics
Op-ed in the Business Standard, New Delhi
July 25, 2008
© Business Standard
The typical window of reform opportunity is early in a government's tenure. Having squandered the "honeymoon" period and beyond, the United Progressive Alliance (UPA) government and Dr. Singh personally find themselves empowered late in life. The question now is this: Assuming that Dr. Singh has acquired some political coinage, what should it be expended on? Or, what economic reforms should this government push with about nine months left to govern?
Somewhat paradoxically, Dr. Singh should—for reasons related to legacy and conviction—aim for ambitious rather than modest reforms. Shoring up his legacy requires a big entry on the credit side of the legacy balance sheet to offset the sizable accumulations—of stumbles, inaction, and reversals—on the debit side over these last three years. Moreover, the Prime Minister appears to have asserted his power and presence, albeit for the first time and belatedly, more out of conviction than electoral expediency: Nobody seriously entertains the thought that the next election will be affected by the 123 agreement. Having acted out of conviction this time, it seems only natural for Dr. Singh to continue in this vein, especially since his convictions on economic issues must surely run deeper than on nukes. And a collateral benefit of acting with ambition may well be electoral: If sufficiently ambitious reforms are implemented, this government could possibly dispel some of the aura of bumbling ineffectiveness that has clouded its tenure.
Conventional wisdom, however, points in the direction of other reform strategies. One such strategy is to focus on those reforms that would maximize this government's electoral prospects. The one economic issue that could resonate with voters is reducing inflation, and here it is not clear what levers the government can pull—short of a Volcker-esque monetary tightening—that could bring timely relief to influence the election outcome.
Another, not mutually exclusive strategy, and indeed one that the Ministry of Finance is gearing up for, is to bring to legislative culmination those initiatives that are already in the pipeline. This strategy would result mainly in financial sector reforms—increasing the foreign direct investment (FDI) limits in insurance, revamping the pension system, and reducing public participation in the banking sector—as these have seen the most preparatory effort these last few years.
But the desirable (tackling inflation) is probably infeasible. And the feasible (financial sector reforms) is not ambitious enough for the current circumstances and risks squandering, yet again, the Prime Minister's political capital.
There is, however, an alternative, ambitious possibility. Economic and political decentralization, combined with the rise of coalition politics, has sharply reduced the central government's domain of economic influence. But the one area where it retains influence—or rather strangling control with disastrous economic consequences—is higher education. This last bastion of the license-quota-permit raj is crying out for reform. There is political, administrative and regulatory interference in virtually every aspect of higher education, be it admissions policies, internal organization, fees and salaries, and the structure of courses and funding. In higher education, deregulation, liberalization, and globalization are the way forward. There may well be a continuing role for state provision, and especially state funding, of higher education, but a much greater role and freedom for the private sector are both desirable and unavoidable.
Reforming higher education will not be easy. First, the human capital resources that educational institutions will need to draw upon for teaching and research are globally mobile, posing severe challenges to India's ability to attract and retain these resources. Unfilled faculty positions—up to 30-40 percent even in our premier educational institutions such as the IITs—demonstrate how difficult it will be to create quality educational institutions on the scale that India needs. Second, there are few clear analytical criteria to the central question of what is "good" higher education. Consequently, a system that emphasizes diversity, flexibility and experimentation (and a lot of failure)—never the government's comparative advantage—is in the long run most likely to succeed.
But creating such a system will require as a first and necessary step breaking the stranglehold of regulatory bodies such as the University Grants Commission (UGC) and All India Council for Technical Education (AICTE), which have managed to restrict private sector entry into higher education. Within the next few months, Dr. Singh should focus all his energies and political capital on passing legislation that would create the conditions for liberating the sector from the clutches of the vested interests, and establishing the right of private sector entry, domestic and foreign. Of course, there must be sufficient checks to ensure that the sector attracts quality institutions rather than hucksters.
Improving higher education is the key to India's growth prospects. The "Precocious India" development model is based on leveraging skilled labor, which is increasingly becoming a binding constraint and the decade-long double-digit skilled wage increases are the flashing amber signs of serious scarcity ahead.
But higher education is also among the most difficult to reform. Vested interests oppose reforms but they are not unique to education. The real difference relates to political economy: The pressure for change from below is particularly weak in this sector. Financial sector reforms will always have their moneyed, articulate, influential, and sometimes over-the-top, champions. Roads too will eventually get built because the middle class, having acquired cars, will not tolerate keeping them idle. But "exit" by the influential rich and middle class, who increasingly send their children abroad or to private institutions, has attenuated the pressure for reform in education. Reform in this sector needs an external hand, the hand of an enlightened leader with the vision to recognize the importance of education, the will and capital to take on the vested interests, and the perspective to accept that results will take a long time coming.
The transformation of Dr. Manmohan Singh's image from that of a weak, hobbled leader to an effective, crafty tactician has been striking. In one go, he increased his leverage vis-à-vis Sonia Gandhi, outmaneuvered the Communists, and forced the Bharatiya Janata Party onto the backfoot. It is time to deploy these newly honed skills to outwit the one politician who has repeatedly stymied him, and that too on matters so apparently dear to his heart. Mr. Prime Minister, how about meting out the Prakash Karat treatment to Arjun Singh?
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