Prime minister Manmohan Singh’s government has been blowing hot and cold on economic reforms. The present political and economic circumstances in India – a stable political coalition and a rebound from the global recession – give Mr Singh a chance to deliver real reforms, which are crucial for sustained growth that does not leave behind much of the population. Marginalism on reforms now would be a colossal wasted opportunity.
Why bother with reforms? After all, India’s economy has weathered the global financial crisis quite well. This is testimony to the country’s tremendous potential – exemplified by a young labour force, a dynamic entrepreneurial class and an improving financial system. But India will always punch well below its weight if it does not remove barriers that keep it from fully tapping that potential.
The list of needed reforms is long. India’s labour laws, which constrain large enterprises in particular, have hurt productivity growth. Shackles on the educational system are keeping India from reaping the full benefits of its young workforce. The dilapidated physical infrastructure is hurting growth in all sectors.
Above all, financial sector reforms will determine the pace and quality of India’s growth. Loss of momentum in this area could be very costly, for finance is the thread that runs through all other reforms and will determine their ultimate impact.
The reform agenda is about the basics of financial development rather than sophisticated innovations. It is tempting to draw the lesson from the global financial crisis that a closeted economy with a state-dominated banking system is the best and safest option for India. But the financial system should be evaluated against a broader set of criteria.
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