Sanjeev Ahluwalia | Next-Gen Reforms: Could India Shed Its Reluctance?

India is a reluctant reformer for good reasons. First, the rational hesitation to fix what isn’t irretrievably broken. Second, there is much going right for India. Even without deep reforms, it chugs along in a band of six to seven per cent annual growth when the average growth in middle-income economies is around between 4.1 to 4.4 per cent and China is slowing from five to four per cent.

Why then the anxiety around the absence of reforms to improve incomes and well-being? Blame it on comparison bias. If China grew in double digits, at a comparable time two decades ago, why can’t we? This false equivalence ignores that the high growth period in China coincided with rapid globalisation of trade and investment. Also, to its credit, China took advantage of supportive geo-politics — the perennial US obsession with defanging Communism — to advance its own interests. It is sweet irony that New York — that iconic US immigrant town and headquarters of American capitalism — is now more “socialist” than China!

The dissatisfaction in India is two-fold. First, the revenues generated from economic growth have not been used to reduce disparity in opportunities. Instead, the focus is on comforting the poor and near-poor — around one-fourth of the country’s population — through government-provided food, cash handouts and free or highly subsidised, utility services. Higher growth and government revenues could similarly be wasted on placating vote banks and not generate any new jobs — the linchpin of household stability and dignity. It is also unlikely that the bottom two-thirds of 300 million families can be sufficiently placated with handouts. How do we know this?

There are only about 82 million individual income-taxpayers. Some families have multiple taxpayers. So, less than one-third of India’s 300 million families pay income-tax. GST coverage is comprehensive but designed to reduce indirect tax on consumption goods for the “poor” or “near poor”. The tax-free limit for income of Rs 4 lakhs per year sets the upper bound for defining the poor and near poor. The lower bound for a living wage is enshrined in the government’s flagship programme to alleviate rural distress — VB G RAM G, which assures up to 125 days’ employment at Rs 300 per day. Assuming a working year of 300 days, the “liveable rural income” for a family of two working adults becomes Rs 1.8 lakh per year.

The puny scale — about 100 million, or 12 per cent of the workforce in formal employment — generates dissatisfaction all around. Income disparity varies significantly across states, feeding work migration patterns within India — from the North and the East towards the private jobs-rich West and the South.

Is the answer then to unleash some “big” reform which could unplug India’s economic potential?

Sadly, the basket of “low hanging fruit” for “big reform” is meagre. The 1991 liberalisation was the last such reform. It added around two percentage points to the annual growth trajectory since. What remains to be tackled requires “deep” reforms, which comes with the attendant political cost of upending special interests and privilege.

The next wave of incremental two percentage points of steady economic growth is likely from two sources. First is deeper digitisation of the economy. This strategy is organically familiar for the Indian economy, which is simultaneously a lower middle-income economy and yet the most intensive adopter of digital payments built upon a locally created India stack of digital public infrastructure — digital identity, account aggregation and risk mitigation.

Indian Tech Bros are agreed that if India focuses on deepening use case integration of AI into enterprises, more jobs can potentially be created than destroyed, despite the personal cost for mid-life IT workers, unable or unwilling to upgrade technologically.

The digital economy in India employs about eight to 10 million people, which might grow to 30 million people by 2035 — still less than five percent of the working age population. But the benefit lies in boosting productivity and competitiveness and hence employment in the real economy. This dispersed impact will take time to spread.

Something else is needed to boost economic efficiency and create decent jobs. Reforming agriculture remains a yawning gap. We have yet to take the long-term structural decisions — corporate ownership of agriculture and increased labour demand from manufacturing — to absorb the surplus labour supply from rural areas.

Liberating large cities from the stranglehold of state government sovereignty is also a structural change we have shied away from. About eighty cities with a collective population of 230 million (about one-seventh of India) could be self-sufficient in revenues because they are large market towns, urban agglomerations, manufacturing hubs or pilgrimage centres. Some of these are also state government capitals.

Empower such cities politically and administratively to function independently, rather than feed off state government financial and administrative resources, which should be devoted to rural development. Cities freed from the control of state governments would resemble empowered Union territories or mini-states within existing states (like Chandigarh or Puducherry). The GIFT city in Gujarat is an early example of urban sovereignty on the pattern of Hong Kong. Adjacent rural areas might be tempted to merge with a sovereign city and that right should remain with the population resident there, creating voluntary urban agglomerations.

Why is such intrusive cartographic surgery necessary? For too long, India has ignored the explicit role of urban areas in efficient growth and development. China regulates access to cities. In the United States, a market-based solution is to clamp down on “vagrancy” in urban public areas. India must find its equivalent “invisible border” which lets in those who benefit city life or have relatives to visit, but track down others who are planning to squat on public or private land.

Only an elected city government with policing powers, responsible to the local electorate and a dedicated judiciary would have the incentive and the capacity to regulate cities better. Difficult decisions on fair access to river water, compensation for cross-border pollution impact and open access for all Indian citizens and foreigners with valid visas would be necessary.

It is trivial to remain absorbed in fine-tuning what already exists, when the real opportunity is in redefining the future. A future, where the digital economy exponentially expands productivity, is essentially an urban phenomenon. We must capacitate our cities to cater to three-fourths rather than just one-third of the population. Only then would there be a level playing field for a meritocratic democracy to prosper.

The writer is Distinguished Fellow, Chintan Research Foundation, and was earlier with the IAS and the World Bank