The Indian lesson:

Reforms essential for economic growth

By Gamini Warushamana

In 2004, the United People?s Freedom Alliance (UPFA) in its policy statement Rata Perata introduced policies opposite to that of the ‘Regaining Sri Lanka’ policies of the then UNP government.

Regaining Sri Lanka policies were labelled as extreme neo-liberal. At that time there was a strong demand for structural reform of the economy to accelerate growth by increasing private investment - domestic and foreign, infrastructure development, curtailing the budget deficit, reducing the role and size of the State sector and relaxing exchange control regulations.

The Regaining Sri Lanka policies catered to these demands and decisions taken to reform the economy fell foul and as a result the government of Ranil Wickremesinghe became unpopular. His controversial peace accord with the LTTE created huge public protest and his economic policies aggravated it.

The 2004 , the UPFA government was a coalition with Left parties including the JVP and, therefore, the perception was Rata Perata economic policies of the UPFA which were nationalist and against free market principals. When pro-market policy makers within the government, members of the business community and economists questioned whether the policies were practical, formulators pointed out the similarities of the United Progressive Alliance (UPA) government's economic policies of India.

The Indian Prime Minister Dr. Manmohan Singh too had a coalition government with Left parties and he too had to cater to the demands of the Left and nationalist forces in the government. These policies advocated by Oxbridge economist Manmohan Singh were used to justify Rata Perata policies hoping that it would work well. After two successive terms as prime minister of India, Dr. Singh stepped down last week after the humiliating defeat at the recent general election. Analysts said that his defeat was mainly due to failure on the economic front. Although he was a reformist he couldn't implement what India needed or what he wanted, due to the coalition with Left parties.

As he said before the election, “I have done the best I could under the circumstances. Historians will judge how successful it was.”

After the defeat of the UPA, analysts are assessing what really went wrong and most believe that Dr. Singh failed to bring in the reforms that India needed. As he admitted, he did everything that had to be done under the given circumstances.

A recent article in The Economist magazine on the Indian economy too point this out and said that reformist politicians such as the outgoing prime minister, Manmohan Singh - lacked the clout to implement their policies.

As renowned Indian economist of Columbia University, Prof Jagdish Bhagwati told Forbes magazine last week, the UPA government failed to bring essential reforms into the Indian economy.

“The UPA always put restrictions. They worried about which sectors should be opened. It was a half-hearted, weak-kneed opening” he said.

Economic growth is the main concern and during the UPA government's two terms, growth did not pick up.

From 2005 to 2013 the GDP growth rates were 8.4, 9.2, 9.0, 7.4, 7.4, 10.4, 7.2, 6.6, 4.7 and 5 percent and there was a slow down in growth. As Prof. Bhagawathi explained in his interview , “Policies that promote growth represent a double-barrelled attack on poverty”.

Strong growth brings more tax revenue to the State and with more revenue, government can undertake social spending to give additional benefits to the poor, such as health care and education, he argued.

Prof. Bhagawathi will be an external adviser to Prime Minister Narendra Modi and is hopeful that the new government would attempt to radically reform the Indian economy as Narendra Modi did in Gujarat as chief minister.

However, some analysts argue that reforming the Indian economy is not a simple issue that solely depends on the wishes of the ruling party, Prime Minister or Finance Minister.

Strong nationalistic perceptions in the Indian people always resist the idea of reform. One reason is the perception among Indians inherited from being in the Soviet block during the cold war era and as a result always resist what the West advocates on the political and economic fronts.

On the other hand, reforms that remain to be introduced in India are challenging and they include mainly the factor markets such as labour and land, removing barriers to FDI and removing trade restrictions.

Therefore, the task before the new government is not easy. However, Modi is recognised as a Hindu nationalist rather than a reformist.

India's economic growth may have a significant impact on regional economies and geopolitics in the world. India needs to catch up on the economic growth of East Asia and China and analysts point out that without structural reforms India cannot achieve it.

Thirty years ago, the per capita GDP of China and India were the same at around US $300. Today, China's per capita GDP has increased to US $6,091 while in India it is only US$ 1,503, less than a quarter of China's GDP and this clearly points out the backwardness of the Indian economy.

India's rise as a economic giant will definitely benefit regional economies.

What happened and is happening in India are lessons for Sri Lanka and other South Asian countries that are in a similar dilemma regarding structural reform.