Expert Speak India Matters
Published on Jul 24, 2021
The three organs of the State, as laid down in the Constitution, are the executive, the legislature and the judiciary. Reforms are about examining these and their functioning.
Time to reform Institutions? The case for going beyond economic reforms

This article is part of the series 30 Years After: Review and Renew the Reforms Agenda.


Most people will not have read a book titled Reform and Progress in India. Since the author preferred not to reveal his/her name, it is credited to “An Optimist.” The subtitle reads, “A Few Thoughts on Administrative and Other Questions Connected with the Country and People” and may give away the vintage. This book was published in 1885. There are many books, monographs, academic papers and media articles on reforms, understandably more since 1991, and several more now, when we are in the thirtieth year since the 1991 reforms.

These articles will assert, “The government is reforming,” or, “The government is not reforming.” Implicit in that assertion is some kind of take on what constitutes ‘reform’ and by its very nature, that take is a subjective value judgement. Though one person’s “reform” may not necessarily be another person’s “deform,” a listing of “reforms” will vary from one person to another. The etymology of the word reform is from the Latin re — back + formare — to form or shape, with a sense of bringing back to the original shape. We will, therefore, have to take a view on which shape is right — the original one, the present one, or some alternative one. One may argue that there is a reasonable degree of consensus on what sectors reforms are aimed at — agriculture, industry, services, infrastructure, labour, land, dispute resolution, financial markets, taxation, public sector enterprises, subsidies and so on. At one level, this makes sense. But these are examples of ‘reform,’ not what ‘reform’ itself is.

Though one person’s “reform” may not necessarily be another person’s “deform,” a listing of “reforms” will vary from one person to another.

In foreign trade policy, before 1991, the Commerce Ministry used to have positive lists and negative lists. (Such lists still exist, occasionally, but they have become far less important.) A negative list is a little bit more liberal, so to speak, than a positive list. Unless an act, including an act of importing, is explicitly prohibited in a negative list, the presumption is that it can be undertaken. With a positive list, unless an act, including an act of importing, is explicitly permitted, the presumption is that it cannot be undertaken. Imagine a situation where one argues for nationalising a leading privately-owned bank in today’s India. Most people will shake their heads and say, “No, this is not reform.” However, cast your mind back to the late-1960s or early-1970s. Most people would have nodded their heads and said, “Yes, this is reform.” There are two points I am making. First, definition of reform is context- and time- specific. Second, examples of reform are like a positive list, which is the approach we have followed since 1991. The preferred negative list route involves taking a position on what government should do and should not do.

If we are going to use the expression “reforms,” presumably we are not happy with the way the present formation is delivering that objective. Several years ago, in the former Soviet Union and when Mikhail Gorbachev was important, terms like “perestroika” and “glasnost” were in currency. Perestroika means ‘reconstruction’ and was used for reconstruction of the political and economic system. Glasnost means ‘openness’ and was used to reassert the rights of Soviet citizens. These terms are important because there are a lot many facile generalisations about reforms.

There are villages in India, where, seven decades after Independence, government hasn’t existed. If that village now has electricity, courtesy the government, government may have become “bigger,” but shouldn’t those be called reforms as well?

For instance, the assumption that if Chapter V-B of the Industrial Disputes Act has been repealed, there would have been “big bang” reforms. If not, reforms have been a damp squib. This is a very blinkered vision of reforms; reforms are much more than that. If government has become “smaller,” there have been “big bang” reforms. If not, reforms have failed. Government becoming smaller — what does that mean? There are villages in India, where, seven decades after Independence, government hasn’t existed. If that village now has electricity, courtesy the government, government may have become “bigger,” but shouldn’t those be called reforms as well?

The Constitution and ‘reform’ 

Expressions like perestroika and glasnost have that broader nuance. The three organs of the State, as laid down in the Constitution, are the executive, the legislature and the judiciary. Reforms are about examining these and their functioning. Indeed, reforms are also about questioning the present Constitution. Reforms are about generating a consensus on what we expect the government to do and what we don’t expect it to do. Reforms are about deciding which level of government (Union, State, Local) should perform a specific task. Reforms are about agreeing on how that level of government generates resources to accomplish that task. Perestroika was about structures of party and government; glasnost was about citizens. Our reforms should also be about responsibilities of citizens, not just their demands. There is a very broad canvas.

A 2008 World Bank Working paper argued that “the main determinant of differences across countries are differences in economic institutions. To solve the problem of development will entail reforming these institutions.” If institutions enable reforms, then, today, India’s edifice behind all institutions is the Constitution. Everything else is a derivative. The Constituent Assembly adopted the Constitution on 26 November 1949, and it entered into force on 26 January 1950. There was a Constitution in 1950 and there have been several amendments to it since then.

Perestroika was about structures of party and government; glasnost was about citizens. Our reforms should also be about responsibilities of citizens, not just their demands. There is a very broad canvas.

A market-based economy operates on the basis of property rights. But the right to property is no longer a fundamental right. The Preamble to the Constitution now uses the word “socialist.” Let’s leave aside legal subtleties and nuances of different judgements about whether the Preamble is technically a part of the Constitution or not. Regardless of the technical answer, the Preamble shapes judgements. This is Dr BR Ambedkar, participating in the Constituent Assembly debates on 15 November 1948. He was opposing an amendment that sought to introduce the word socialist in the Preamble. “What should be the policy of the State, how the Society should be organised in its social and economic side are matters which must be decided by the people themselves according to time and circumstances. It cannot be laid down in the Constitution itself, because that is destroying democracy altogether.”

This was an endorsement of the living document theme. Nevertheless, the word is part of the Preamble now. There is the Representation of the People Act, 1951, about registering a political party. Among other things, the party will have to adhere to the “principles of socialism.” We can go round in circles trying to define socialism. The intention here is not to discuss the Constitution, Article by Article. Indeed, a National Commission to Review the Working of the Constitution was set up in 2000 and it submitted a report in two volumes in 2002. But it didn’t strike at the core. It tinkered incrementally. Reforms, however defined, involve a reliance on the market. Markets aren’t like Agricultural Produce Market Committee (APMC) mandis. They are conceptual notions used by economists, embedded in an institutional context; in this particular case, the Constitution. I don’t think there is much point to economists recommending efficient land, labour and capital markets (the so-called factor markets), without changing the socialist nature of the Constitution and the consequent jurisprudence.

Reforms, however defined, involve a reliance on the market.

The Rule of Law

Jurisprudence brings me to the rule of law. In our ancient texts, the king (the counterpart of today’s government) was expected to carry out some tasks. The core was defence of the realm, protection of the virtuous, punishment of the wicked and a speedy system of dispensing justice. Asked to prioritise the government’s tasks today, most people will also probably identify these — external and internal security and justice delivery. Yet, in listing out an agenda for reform, such items will rarely figure, probably because agendas are often drawn up by economists, who have a jaundiced view of the world.

Justice delivery is an area where the private sector cannot, and should not, step into the breach, notwithstanding employment of private security guards by the relatively rich and notwithstanding the reel, or real, model of local dons dispensing justice and ensuring security. Rule of law has two critical elements – the law itself and the institutions that help enforce it; mainly two institutions, i.e., the police and judiciary. In any reform agenda, this ought to be right up front. Despite the fact that the Constitution mentions three organs of State — the executive, the judiciary and the legislature — why is the exclusive focus of the reform discourse the executive, as in the Union government, not even State governments? Why don’t we talk about judicial reforms, a point I have just mentioned? Why do we never talk about reforming the legislature (Parliament and State Legislatures)?

Despite the fact that the Constitution mentions three organs of State — the executive, the judiciary and the legislature — why is the exclusive focus of the reform discourse the executive, as in the Union government, not even State governments?

What about States and administrative channels for delivering governance? We have had only one States Reorganisation Commission (SRC). It was constituted in 1953 and it submitted a report in 1955. For understandable reasons, State formation is an emotive issue. States have been formed for historical and linguistic reasons. The report of the SRC set out some principles. “The principles that emerge may be enumerated as follows: (i) preservation and strengthening of the unity and security of India; (ii) linguistic and cultural homogeneity; (iii) financial, economic and administrative considerations; and (iv) successful working of the national plan.”

These are rational principles and have almost never been adhered to in forming new States. What does “plan” mean? There is a “plan” element that doesn’t get junked simply because the Plan versus non-Plan distinction has gone and because the five-yearly Plan cycle has been broken. This “plan” element is about public expenditure on goods and services designed to improve human development several years down the line, something the former Planning Commission used to call ‘perspective planning.’ Depending on the specific public good or service, there is a certain optimum level of governance at which it is best provided. Above that level, diseconomies of scale and scope set in. Below that level also, diseconomies of scale and scope set in.

It does seem that some States are too large to govern efficiently, and some States are too small to govern efficiently, with governance now being interpreted in that economic sense.

For instance, defence or foreign relations can hardly be delivered at the local level. However, for most public goods and services that are likely to be delivered at the State level, were States to be created on rational considerations, most people will probably agree that there must be a range for population and a range for geographical area covered by the State. If good governance is defined as efficient delivery of goods and services, a population size of 200 million (Uttar Pradesh) is sub-optimal and so is a population size of 611,000 (Sikkim). A geographical area of 342,269 sq km (Rajasthan) is sub-optimal and so is a geographical area of 3,702 sq km (Goa).

A priori, one doesn’t know what the appropriate threshold levels are for either population size or geographical area. But it does seem that some States are too large to govern efficiently, and some States are too small to govern efficiently, with governance now being interpreted in that economic sense. In other words, my reform agenda will include a Second State Reorganisation Commission.

The thrust of everything I have said is that I have no problems with an agenda that talks about reforming markets.  However, that is a myopic and narrow agenda. I think the time has come to focus on institutions.

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Contributor

Bibek Debroy

Bibek Debroy

Bibek Debroy is the Chairman of Economic Advisory Council to the Prime Minister.

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