What Ails Economic Reforms | Social Issue Essay, Article, Paragraph for Class 12, Graduation and Competitive Examination.

What Ails Economic Reforms

Scheme of the essay

Exposition: Gross inefficiency ails India

Rising Action: I confine to four specific changes

Climax:

(1) The government must infuse life into the reform process.

(2) Pay commission should give pay increases to civil servants and cut the size of bureaucracy.

(3) Instead of giving export incentives the government should advertise goods.

(4) The government should promote education to build up human capital.

(5) Globalisation can get a boost if labour welfare laws are made.

Ending: So economic reforms will have to be put in the correct perspective.

Gross inefficiency ails India. We build up infrastructure and capital and then fail to use them. We start elaborate programmes for the poor but ignore the fact that the benefits reach the poor only in driblets. “What should be done about this” is a big question and, in a sense, the entire economic reform process is an attempt at answering it. This is, however, too large a subject matter for a short essay. Hence, I confine myself here to four specific policy changes which the government ought to implement as part of the next stage of reforms.

The economics of both China and India seem poised for a take-off. Admittedly the odds are better for China than for India but the prognosis is good for both. If this happens, the rising living standards of two billion people would certainly be one of the most important episodes of world economic history. There are many who view India’s and China’s prospects as mutually exclusive. This is a mistake. On the contrary, there can be large positive spill overs between the two economies. Historically we have seen that geographic proximity usually leads to similar performance. Thus Europe is economically prosperous, Latin America poor, North America is well-off Africa underdeveloped. Hence in the rise of Asia, there is hope for India rather than reason for despair. But we must act to use the opportunity. In the name of complacency of what has already been done, our reforms have slowed down. The government must infuse life into the reform process. Here are some of the things that it can do.

I fear that the fifth pay commission report will turn out to be a status quoist. But it can do a lot. There has been so much talk of cutting down the size of government bureaucracy with its enormous waste of petrol, housing and telecommunication but nothing has happened on this score. The reason is, that we have been told, that the bureaucracy is too strong in defending its own interest. This is true but one can think of imaginative schemes which would pit the interests of the current civil servants against the future ones. For instance, what the pay commission could offer is (a) a large pay increase for the current civil servants coupled with (b) a sharp cut-back in the future size of the bureaucracy. In the long-run, such a package will be cheaper for the government and it will be in the interest of the incumbent civil servants to support such a change.

The commerce ministry has announced a new export initiative. I have misgivings about its theoretical underpinnings. The main reason that pushing exports was important to India earlier was that we had an artificially low official exchange rate. The dollar was underpriced so the exporters’ incentive to export and earn dollars was stunted. Hence the market tended to export too little. Therefore it was important for the government to give special incentives and subsidies to push exports. But it is important to realise that once the exchange rate is put on a full float, as it currently is in India, this original rationale for pushing exports disappears.

So if we want to push exports this has to happen for very different reasons and, therefore, calls for different kinds of policy initiatives. One such reason stems from an analogy between a company and a nation. Buyers in today’s open world look for several details in the product they buy and one of them is its country of origin. For this India needs to advertise. No company will want to advertise for India per se; it will advertise itself. Hence, this role has to be played by the government. And this is what our international commercial bureaus should have been doing, but did not do. What the government should do is to give contracts to private agencies to promote the “Made in India” label instead of relying on government bureaus. Giving it to hired agencies will have the advantage of the government retaining the right not to renew the contract if the services are not delivered, and be cheaper than setting up inefficient bureaucratic offices abroad.

In the long run the most important instrument for progress is education. The benefit of this takes years to mature and, hence, our political parties, with their eyes on the next election, have not had the patience to invest adequately in education. This has been one of the most shameful failures of modern India. We, the voters, must now insist that the government should take immediate concrete steps to promote education and build up human capital.

The fourth suggestion concerns our labour laws. We need to add provisions in our labour legislation, such as the Industrial Disputes Act, which allow for easier closure of firms and the retrenchment of workers. It is easy to misunderstand this recommendation. The problem in understanding this stems from a conflict between the workers’ ex-post and ex-ante interests.

Firms, in today’s world of fluctuating demand, hesitate to set up business if they feel that there will be no scope for exit, once they are in. Therefore making provision for such an exit will attract more firms being set up. This will create more demand for labour and, hence, greater labour welfare. With globalisation, there is a lot of free-floating capital in the world today searching for efficient for efficient labour. If India can provide such an environment, we can attract such capital and the benefits, for our workers, can be large, easily leading to the doubling or even quadrupling of real wages in a decade.

However, if the existing labour laws are to be changed, the government will have to explain the benefits to the trade unions and also simultaneously set up a social security system for the workers. The changes will then have to be announced as endorsed by a committee of government officials and trade union leaders. This is a politically difficult job but not impossible.