Filling the 145;missing middle146;

The 8216;Political Economy8217; panel was moderated by Prof Roger Noll and included Yashwant Sinha, Abhishek Singhvi, Kanwal Rekhi and myself. Yashwant Sinha argued that 8216;the inside story8217; was the absence of any national consensus on reforms, that changes were less voluntary and more coerced by circumstances and that the appetite for the more difficult reforms across the political spectrum was weak.

Reforms are outcomes of complex negotiations, reflecting the personality of the prime minister and on which side his decisive preferences lie. Sinha also mentioned that three finance ministers, namely Manmohan Singh, Chidambaram and he himself had lost popular elections after pursuing an aggressive reform agenda.

Given endemic governance deficits in many states which will need time to repair, a bipartisan approach in implementing development schemes, particularly in backward states, would be to constitute a State Development Commission, like the Election Commission of India, to monitor and pursue development projects to be evolved by local panchayats and districts.

The somewhat despondent tenor of Sinha8217;s observations have a lot to do with the pangs of negotiations in coalition arrangements. It is, however, not clear whether the finance ministers lost their elections as a consequence of their reformist approach or of broader organisational and political failures. Election campaigns rarely feature economic reform.

However, since reforms mean different things to different people, and certainly, better roads, improved electricity, housing, and safe drinking water are sensitive electoral issues, success in these areas are part of the policy matrix pursued by governments and these are also integral to any credible reform strategy. It would be difficult for the present and successive finance ministers to accept an impending electoral debacle as an outcome of their reformist approach.

No doubt, many years of continued growth are needed to make a dent on the electoral psyche for economic policy options to occupy a larger space than at present. Similarly, while autonomous audit may have value, replacing the present system with a new entity could further erode the autonomy of states, already at peril, and may not be the most sensible path forward.

The paper of Anne Kruger, entitled 8216;The Missing Middle8217;, had some interesting conclusions and suggestions. While India8217;s growth rate had continued to gather momentum, 8220;the failure of manufacturing industries to grow more rapidly had left too many people bottled up in the rural sector. That has resulted in slower rate of farm consolidation than might have occurred, and in slower growth of overall labour productivity than would have taken place if the shift of low-productivity marginal farmers to unskilled-labour-intensive manufacturing jobs had been more rapid.8221; There was a 8220;missing middle8221;: rapid growth of unskilled labour-intensive manufacturing, which, combined with rapid growth of productivity in agriculture, would enable a more inclusive growth with accelerated increases in living standards in rural areas.

Thus, while the share of agriculture in GDP had come down significantly, absence of significant changes in livelihood patterns, more rapid urbanisation, and inability to create gainful semi-skilled manufacturing activity had left 58 per cent people still seeking livelihood from agriculture. This failure, and also the inability to seek the advantage of demographic dividend, had emanated from regulations covering both enterprises in the private sector and conditions of employment in the organised sector.

The continued low ratings by international organisations on 8220;the ease of doing business in India8221; and the onerousness of licensing, regulatory and contract enforcement was a major disadvantage for enabling nascent small private enterprises. This is coupled with an over-regulated labour market for the organised sector, which, along with small-scale reservations diluted significantly but still present, acts as a deterrent for the organised sector to hire more.

Changes in labour regulations, no matter how deleterious the impact on hiring of fresh labour, are on nobody8217;s radar screen. Earlier attempts by the NDA could not fructify and the present government has many ideological hang-ups. However, on regulations relating to the ease of doing business, namely licensing, contract enforcement, investor protection, or export facilitation, there are few political differences. These issues have come up several times and many committees have gone into them repeatedly. Our ranking in comparison with other destinations continues to be dismal. We need to have a fresh look and even modest success could re-kindle the urge to fill the 8220;missing middle.8221; Restructuring activity patterns along with inevitable changes in land use, relocating surplus labour from agriculture as productivity increases, enhancing the pace of urbanisation and creating gainful employment opportunities for the semi-skilled are all part of filling the missing middle. There is a much broader national consensus on many ingredients of this missing middle, particularly improving the ease of doing business. Even modest success can have a cascading effect.