The Indian Economy Blog

March 22, 2006

Microeconomic Policy Reforms Needed in India

Filed under: Business,Growth,Regulatory reforms — Naveen @ 2:36 pm

Much policy reform debate in India is often focused on the BIG issues like macro-stability, privatization and capital markets. These are only the tip of the iceberg of desirable policy reforms. The real action of enabling markets is often at the microeconomic policy level.

The report Industry -level Analysis: The way to identify the binding constraints to economic growth by Vincent Palmade captures this succintly. Their abstract points out it all.

There are many economic diagnostic tools available which are trying to identify the constraints to economic growth in a given country. Unfortunately these tools tend to provide inconclusive and often conflicting answers as to what the most important constraints are. Even more worrisome, they tend to overlook the many industry specific policy and enforcement issues which, collectively, have been found to be the most important constraints to economic growth. This is the key finding from more than ten years of economic research by the McKinsey Global Institute (MGI). The MGI country studies have been uniquely based on the in-depth analysis of a representative sample of industries where clear causality links could be established between factors in the firms’ external environment and their behavior, in particular through the analysis of competitive dynamics. They showed in details how industry specific policy and enforcement issues were the main constraints to private investment and fair competition – the two drivers of productivity and thus economic growth. This finding implies that governments and international financial institutions should rely much more on in-depth industry level analysis to uncover product market competition issues and set reform priorities. These analyses should include the often overlooked but critically important domestic service sectors such as retail and housing construction.

They point out much-needed reforms in these arenas in order to jumpstart product market competition. Non-tariff trade barriers; Licensing restrictions; Price/ Product restrictions; Inadequate regulations of quasi-natural monopolicies and social sectors; Land market issues and the Unequal enforcement/informality trap. The last one is especially relevant for the distortions it introduces in markets to the disadvantage of both informal and formal enterprises: underdeveloped informal enterprises and absence of fair competitive field.

Once you start talking of microeconomic policy reforms, you cannot ignore legal reforms in the economic arena. There are studies in selected sectors in India which show that 20% of the selling price is incurred as additional transaction costs imposed by legal and infrastructural ones. Of course the true cost is what they deter in the long-term. For a rare study in this regard do read Bibek Debroy’s Reforming the Legal System. He argues that market-oriented reforms cannot succeed without legal reforms and points out glaring loopholes in a host of laws. His analysis clearly brings out a paradox afflicting India: over-legislation and under-governance. The last 16 pages in fact are a collection of laws that show how over-regulated is India. For a more fundamental understanding of legal reforms this post of mine may be helpful.

Both studies are recommended for their high IP (Insight/Pages) ratio!

1 Comment »

  1. I like your blog. However, your posts normally are a few thoughts revolving around an article cut and pasted from elsewhere.

    Anyone economically inclined can do that.

    I see an illustrious line-up in the contributors list…

    Why not a few original ideas without a C&P of a piece from the media?

    Comment by Shrini — March 23, 2006 @ 12:35 am

  2. Shrini

    For now, we’re mostly C&Ping excerpts w/ comments. That’s what most blogs do, BTW…

    Longer pieces/ essays will come — sooner or later, in a separate section.

    Comment by Prashant Kothari — March 23, 2006 @ 4:33 pm

  3. In the short run, I am very skeptical we need serious legal changes.
    If we get one change thru the short term benifits are a good deal
    But i dont see any political will anywhere
    The benifits are increasing an export led manufacturing boon, which will increase
    domestic production too.
    India dont make good fly swatter, ball point,ink pens etc, but it can and all these items
    unlike SW have a large and underserved market.
    The only changes would be to the beurucrats like industry inspector
    We have no real industry inspectors.
    an industry inspectors real job in india is to enforce manufacturing quota etc,which they dont really do.
    {Hell no one follows any law, as the recent resignation shananigans are about..even our politicos were not aware of the laws they alleged others were not following apply to them. but that is a long term curse that we are stuck with}
    In most other societies industry inspectors do jobs like monitor contaminants being dumped and environmental laws, yet in india its all about widgets produced, people hired,
    classification of industry as cottage, small scale,medium scale junk.
    You know its the inability to lay off people in factories over 100 that is keeping
    manufacturers away from investing in india
    Well that and ChinesePartyofIndia(CPI-ML)’s ability to cause a strike in india.
    Isnt the venue interesting of all places it happened with a japanese collaborator. {This is as good of a counter point to those who talk bout softpower of Indias Bollywankers, well real power can cause strike in your home, while all you have to show is a poster of akshay khanna in xinkiang}

    Any ways there is a complete overhaul of the constitution needed that we keep ignoring
    as well as implimentation of common sense things like an identification card
    But the more immideate need is dismantling of industry inspectors and other gazeted officers….

    Comment by Guru Gulab Khatri — March 23, 2006 @ 11:29 pm

RSS feed for comments on this post. TrackBack URL

Leave a comment

Powered by WP Hashcash

Powered by WordPress