In praise of a more free market India

The freedom India most evidently lacks on the eve of its 78th Independence Day is that of its markets. Three decades of reforms initiated and executed by New Delhi have pushed the state back from most productive activity. The need now is for the economy to free up its factor markets for labour and land. This particularly tough bit of reform cannot be pushed through without bringing the states on board. Cooperative federalism is the necessary stepping stone in this direction, but it has been elusive. The fallout is India’s recent burst of economic growth is stacking the gains in some parts of the country and among a section of the population. Uneven development adds to India’s pre-existing conditions of low income and high unemployment.

Factor market freedom is vital on two counts. It would allow greater mobility of labour to cities that have become the engines of economic growth. It would also bring down logistics costs that dull India’s export competitiveness. Once these internal constraints are addressed, the economy can set its sights on the larger objective of employing its immense workforce to make goods for the rest of the world. That is, if China and automation have not already raised the drawbridge on low-skilled labour-intensive manufacturing.

Indian producers cannot reach scale through domestic consumption that’s limited by persistently low purchasing power and chronic lack of jobs. Exports are the only available alternative and India needs to push for free trade and investment. Bilateral trade treaties deliver bigger benefits, but need more work to create a patchwork replicating the scale of market access regional blocs provide. They also come with expectations among trading partners of a freer capital market in India. New Delhi still has its work cut out to unify the Indian market by coaxing states to whittle down land and labour immobility. It also has to prise open foreign markets for Indian producers in order to overcome their competitive disadvantage. This calls for a ‘freer’ India. Happy Independence Day!