Even as the world becomes more competitive, India’s star has dimmed in the last few months, as our governance is besmirched by corruption scandals and our macroeconomic health has deteriorated. Alarm bells should sound when domestic industry no longer wants to invest in India, even while eagerly investing abroad.
Why the gloom? The problem is that despite the tremendous success of the first generation of reforms, some of the key next-generation reforms have been stymied. Typically, these are the reforms that reduce rents and patronage, while increasing competition – for example, the bill on foreign entry into higher education, attempts to auction resources transparently, or attempts to transform public sector enterprises into more autonomous corporations. On the other hand, rent, patronage, or entitlement enhancing measures have sailed through. Clearly, there are many exceptions to this asymmetric reform process – the Right to Information Act and the setting up of the Unique ID Authority being important game changers of the right sort -- but I am talking about a central tendency.
Raghuram Rajan is Professor of Finance at the Booth School of Business at the University of Chicago and an economic adviser to Prime Minister Manmohan Singh. He has also been the chief economist of the International Monetary Fund. This is an edited version of a speech he gave in New Delhi.