The institutional gap

Transforming institutions key to India's development

Several recent analyses of the differences in growth and development experiences across countries highlight the critical role that institutions have played in the process. While there is clearly no single model of institutions, the lesson from such comparative studies of development is that key institutions have to function effectively. They must have clearly defined goals in relation to development objectives, and they have to persistently meet those goals. An important insight from this approach is that growth begins to sputter when appropriate institutional transitions do not take place. Those that were successful in a particular context do not necessarily work well when the context changes and can become hindrances to sustaining growth. India's current development strategy is only about three decades old, which is a very short period in institutional history terms, but there is already widespread concern about the functioning of several institutional structures. Pre-liberalisation structures have not adequately adapted to new realities and requirements. Important post-liberalisation structures, meanwhile, clearly struggle to develop the capabilities needed to perform effectively in a rapidly evolving environment.

In the former category are the very foundations of a modern democratic system - the executive, the legislature and the judiciary. At both the central and state levels, the executive has come to be viewed with increasing scepticism on account of visible corruption, the promotion of narrow interests - family, community and cronies - and indifference to the policy issues in their domains. Yes, there are a few good men and women who embody the attributes necessary to make the system work, but are they enough to deal with incredibly complex issues and the system itself? As for legislatures, at the state level, they barely meet to carry out their critical function of debate. Parliament is not sufficiently productive. The judiciary rarely entertains basic economic considerations. This results in a vitiated business and investment environment, severely hindering growth prospects.

In the latter group are mainly the various regulatory agencies that were set up over the past couple of decades. While given appropriate and significant powers under the laws that govern them, several factors have worked to undermine their effectiveness. The power of appointment of chairpersons and members still rests exclusively with the government. This power and its occasional arbitrary use serve to undermine the perception of independence, which in turn dilutes the effectiveness of such institutions. In a few instances, there has been inordinate delay in empowering the institutions set up under the relevant laws, which represent lost opportunities for the sector concerned.

The simple point is that the nexus between the nature and quality of institutions and the performance of the economy is now beyond doubt or question. This is a matter of considerable public debate in the Indian context. But as the country prepares to bid goodbye to 2014, it becomes even more clear that a strategic perspective on the roles that different institutions need to play, the structures that are best suited to these roles and on a transition road map is sorely needed.