India's 25 years of unfinished reforms killed a dream economy

It cannot be a mere coincidence that India set its ball rolling on its "transformational" tax reform Goods and Services Tax (GST) right after celebrating the silver jubilee of country’s tryst with economic liberalisation. GST, which took a decade to cross the first post, came to the fore in the same languid fashion as the country handled liberalisation in 1991.

The economic reforms of 1991, known as the second freedom struggle of India, undoubtedly transformed India for good, but one cannot deny the fact that even after 25 years, reforms in most sectors still look like semi-constructed sites, that is, incomplete, incremental, unfinished or works in progress. Had it not been the case, India’s reform feat would have been grander than ever.

A lot has already been written on GST’s decade-long trajectory and why it is too early to build a frenzy around the GST Bill.

Better to take a flight to another major reform that Modi government launched in June 2016, that is the ambitious and far-reaching aviation policy, immediately followed by the liberalisation of foreign investment in the aviation sector.

Aviation – still turbulent

The new aviation policy and bold FDI opening are exemplary and showed courage, with the government modernising obsolete rules that governed international flights and foreign airlines. However, the government still fell short of finishing aviation reforms that have languished since the pre-1991 era.

The liberalisation in the aviation sector kicked off in 1990 with the entry of private air taxi and charter service operators. Reforms accelerated after the government launched the open sky policy in 1994 and ended the monopoly of government companies such as Air India.

However, even after the varied experiences of these 26 years, the new aviation policy could not muster courage to complete aviation reforms by privatising Air India, listing Airports Authority of India on the stock market and by setting up an independent aviation regulator.

The aviation sector will now have to wait for a few more reforms to liberalise itself in the truest sense.

Power - darkness lingers on

The power and electricity sector is a grand example of incremental and inconsistent reforms. The first set of bold energy reforms was launched in 1991. The government allowed electricity production in the private sector in 1992 (with the independent power producers policy) and private companies received permission to mine coal for captive production use in 1993.

The next phase came with the restructuring of state electricity boards in the late 1990s and the new electricity acts of 2000s. Yet, the energy sector could not achieve the desired momentum.

Meanwhile, the government accelerated foreign investment in the coal sector and there were allocations of captive mines followed by scams and reallocation.

In spite of all the changes in policies, power reforms remained incomplete, complicated and unwieldy. The government did privatise power production, but electricity distribution remained largely under government control. Governments have been loathe to give up the politics of deciding electricity rates. That is why even independent regulators could not work freely.

On the other hand, despite private investment in electricity production, coal mining stayed under strict nationalisation and government monopoly.

Because of these strange inconsistencies, India’s power sector became a bundle of controversies, losses and scams. State electricity boards or discoms are still in deep, red losses despite repeated bail outs (UDAY being the latest) in the last 25 years.

Power production and supply of electricity has increased, but incomplete reforms in the areas of coal, electricity transmission and tariff have kept the power sector performance as erratic as power supply.

Telecom – jumbled wires   

Telecom reform is an incredible story of success and letdowns, in chorus. From the beginning of private mobile services in 1993, the sector witnessed a winding road of policy interventions, including bail outs for telcos in 1995, the birth of TRAI, corporatisation of government telecom services, CDMA, 2G licence, and liberalisation of foreign investment.

The next phase of change came with the introduction of the 3G service followed by the 2G scam, allocation of new spectrum and the launch of 4G services.

The purpose of telecom liberalisation was to introduce sufficient competition in the market and offer modern and low-priced services to consumers, but telecom reforms could not come up with apt sequencing. On account of the high-handed approach of governments and incomplete reforms, no transparent spectrum allocation policy could be crafted despite spectrum scams, nor has fresh competition been ushered in.

TRAI failed to become a successful and transparent regulator. As a result, by the time 4G came along, competition in the market (the number of operators fell) remained limited. The quality of services has declined while services have become costlier rather than getting cheaper.

Retail – no buyers

The liberalisation of retail business can be taken as the fourth case study. It had begun in 1997 with 100 per cent FDI in cash-and-carry and single brand retail. After a huge political brawl, 51 per cent FDI in multi-brand retail was allowed in 2012. However, due to political dilemmas, the reforms could not be implemented fully.

Meanwhile, the government allowed a 100 per cent FDI in e-commerce and food retail.

On paper, the entire retail sector is open to foreign investment, but because of procedural complications and political dilemmas, there is little investment.

As India’s reforms progressed, politicians have started slowing down the process driven by the fear of losing rent seeking opportunities. Despite India being an open economy the government (read netas) are still enormously empowered to meddle with the free market. Incomplete, unstructured and inconsistent reforms have seriously curtailed uniform market expansion.

This has led to benefits of an open economy being confined to only a few opportunitists and sometime even to the cartels.

The adage "Well begun is half done" holds true everywhere, but not with India’s reform experience. Economic reforms, indeed, have brought great bounties to India, but incomplete reforms have hobbled India.