Context
With a paradigm shift in Economic model in 1990s, by which India transitioned from protectionist inward oriented closed economy towards more free liberalized economy (by facilitating freer trade, easy foreign capital flow, rationalizing working of PSU and reinventing role of government as a facilitator). A vast and diverse country, which started poor, was courageous enough to adopt a democratic government and economic structure and in the course has achieved spectacular socio-economic development. However the still persisting ambivalence towards private sector, inefficient state machinery which fails in effective redistribution, must embrace the path of reform with a broader social shift in ideas and vision.

A. Trade to GDP ratio: Export plus import expressed as share of GDP. It is a marker of economic liberty of an economy. The trade to GDP ratio of India significantly improved post 1990’s reform.
B. Retrospective tax: A tax levied for transactions in the past (which was either taxed at lower rate or was tax free owing to exemptions).e.g. Vodafone tax issue. A retrospective tax is considered to be regressive and anti market as it erodes government’s credibility and adds to policy uncertainty.
C. Twin Balance sheet problem: It refers to the poor economic state of Public sector banks at one hand (huge Non Performing Assets) and Corporate houses on other (due to low profitability and shortage of loan).In case of India both these problems are interdependent as a majority share of NPA with the banks are from the corporates and DISCOMS. This has created a vicious cycle whereby banks avoid lending corporates and corporates fail to repay their debt owing to lack of capital and profitability.
D. Competitive federalism: It refers to a tendency among states to compete and outperform each other in attracting more economic investment in their state e.g. newly formed state of Telangana and Andhra Pradesh rank in the top of the “Ease of doing business” list.
E. Exclusion Error: Deserving candidates do not receive benefits.
F. Inclusion error: Non deserving receive benefits.
G. Leakage: Benefits siphoned off by corruption and inefficiency.
H. Exit issue: The obstacles faced by firms, wanting to wrap up their business. Exit issue in India is one of the prominent reasons for its poor ranking in ease of doing business.

Introduction

Economic vision animating Indian policy can be divided into two phases, first socialism and then ‘Washington consensus’ phase starting after 1991 reforms.
During socialism phase,
• The guiding principles were economic nationalism and protectionism.
• Public sector occupied the commanding heights and
• Government intruded into even the most micro-decisions of private firms: their investing, producing, and trading.
This framework was rejected after 199 but what replaced it is still not clear. At one level one thinks that India has replaced its erstwhile socialist vision with something resembling the “Washington Consensus”: open trade, open capital, and reliance on the private sector. Reforms along these lines have carried by all governments. In past few years reforms like:
• Institutionalized a commitment to low inflation in the new monetary policy framework agreement
• Focus on improving Ease of Doing Business
• Passage of GST Bill, Bankruptcy code

Economic Transformation in past 25 years
As a result of these steps remarkable economic transformation has been achieved in last 25 years. This transformation can be measured using four standard measures: openness to trade; openness to foreign capital; the extent to which public sector enterprises dominate commercial activities; and the share of government expenditure in overall spending.
A. Openness to trade (measured in Trade to GDP ratio):
• India’s ratio has been rising sharply, particularly over the decade to 2012, when it doubled to 53 per cent (India has Trade to GDP ratio of nearly 15% in 1991, 26% in 2002). As a result, India’s ratio now surpasses China.
• India also trades more and has better trade to GDP ratio as compared to similar geographically sized countries like US, Brazil and Russia. (Small countries trade more with outside world, whereas big countries trade less with outside world because of large internal market).
B. Openness to foreign capital
• Despite significant capital controls, India’s net inflows are, in fact, quite normal compared with other emerging economies. India’s FDI has risen sharply over time. In fact, in the most recent year, FDI is running at an annual rate of $75 billion, which is not far short of the amounts that China was receiving at the height of its growth boom in the mid-2000s.
C. Size of PSUs:
• Going against the popular perception, the share of PSUs in market has been coming down in wake of liberalization and entry of private players in sectors like telecom, civil aviation, financial services etc.
• These have all served to reduce the share of the public sector even if there has not been much exit of the PSU enterprises themselves. In India PSUs sale constitute 17% of national sale whereas they constitute around 27% in China.
D. Share of government expenditure in overall spending
• If we consider government expenditure against per capita of GDP, India spends as much as can be expected given its level of development.
In sum, the standard measures suggest that India is now a “normal” emerging market, pursuing the standard Asian development path and has progressed well and has grown at about 4.5 percent per capita for thirty seven years. This achievement has been remarkable because India has achieved this under a fully democratic system. The only other countries that have grown as rapidly and been democratic for a comparable proportion of the boom are Italy, Japan, Israel, and Ireland. Other countries that have grown faster for as long have tended to be oil exporters, East Asian countries,

The Road To Be Traversed
Despite of these achievements there is a sense that India has not reached a desirable and optimal point, which can be explained as:
• There has been a hesitancy to embrace the private sector
• State capacity has remained weak ,
• And, redistribution has been simultaneously extensive and inefficient
A. Ambivalence about private sector and property rights
All states, all societies, have some ambivalence toward the private sector because of conflicting objectives of social concerns of state and profit maximization of private players. But the ambivalence in India seems greater than elsewhere as was found in World Value Survey. The symptoms of this ambivalence toward the private sector manifest in multiple ways, like:
• Difficulty to privatize public enterprises even for sectors which belong to private players, for example Air India in civil aviation, banking, fertilizer sector.
• In agriculture sector the compulsory requirement to sell in authorized markets through certain middleman under APMC (Agricultural Produce Market Committee) Act also reflects it.
• Moreover, policy reform in the sector has been interventionist reflected in restrictions on pricing.
• Ambivalence of past towards property rights, is visible in ‘retrospective taxation’ of present. This is true in a number of recent cases, including Vodafone and Monsanto.
• There is hesitation in taking decision for being seen as favoring the private sector, for example in debt write-offs by banks.
B. State capacity:
Indian economic model is characterized by the weakness of state capacity, especially in delivering essential services such as health and education. Indian state capacity has not increased as those of other emerging countries. The Indian state has low capacity, with high levels of corruption, clientism, rules and red tape.
Though Indian competitive federalism has focused on attracting investment and competitive populism, it has not focused much on issue of essential service delivery especially in health and education sector, except for few exception like PDS reform in Chhattisgarh, Kerosene free derive in Haryana and power sector reforms in Gujarat. This weak state capacity has created various problems like:
• It inhibits effective service delivery
• Constrains policy making in certain areas, as state do not want to be seen as favoring particular interests. It has further created problems like:
– Strict adherence to rules that may not necessarily be optimal public policy. For example auctioning cannot always be the optimal policy for selling all natural resources.
– Abundant precaution in bureaucratic decision making because of fear of four Cs, CBI, CVC, CAG and courts.
C. Inefficient distribution:
Indian state welfare spending suffers from considerable misallocation. This leads to: exclusion errors (the deserving poor not receiving benefits), inclusion errors (the non-poor receiving a large share of benefits) and leakages (with benefits being siphoned off due to corruption and inefficiency). Some plausible explanations for it are:
• India has followed a unique pathway to economic success, what might be called “Precocious, Cleavaged India” which explains these anomalies.
• Indian economic progress was achieved simultaneous to political progress. Whereas in other countries like developed economies, economic development preceded political development. Universal franchise and other political rights put extra demands on low economically developed Indian state, whereas such demands were not present for authoritarian states or states which benefited from industrialization of 19th century.
• Along with this India was a highly cleavage society, with more cleavages than any other society: language and scripts, religion, region, caste, gender, and class.
This along with shining example of USSR created a intellectual zeal for ‘socialism’ and natural distrust for private sector (especially because of failure of private sector under colonial rule in India and in other countries).Under these circumstances India adopted mixed economic model, which resulted into
• Strict controls over private sector.
• India adopting for redistribution early in the development process, when its state capacity was particularly weak.
• Low investment in human capital – for instance, public spending on health was an unusually low 0.22 per cent of the GDP in 1950-51 – because of low resources.
• Inefficient redistribution, using blunt and leaky instruments.
Though interventions began under compulsion, there is only partial explanation for failure to exit. Exit is difficult everywhere but it can be especially difficult in a poor, cleavaged democracy dominated by vested interests, weak institutions and an ideology that favors redistribution over investments
Normally states provide essential services (physical security, health, education, infrastructure, etc.) first before they take on their redistribution role, because unless the middle class in society perceives that it derives some benefits from the state, it will be unwilling to finance redistribution. Otherwise the middle class will seek to exit from the state, which is reflected in lower number of taxpayers relative to voting age in India. This exit will further shrink the state, erodes its legitimacy, further reduces resources and state will enter into a vicious cycle.

Conclusion
India has come a long way in terms of economic performance and reforms. But there is still a journey ahead to achieve both dynamism and social justice. One tentative conclusion is that completing this journey will require a further evolution in the underlying economic vision across the political spectrum which should focus on improving state capacity, trusting private sector and improving redistribution delivery.

National committee on Trade Facilitation