A country has started a massive highway construction project. The decision makers in the country’s government and key influencers in its media have all agreed that it is important to build world-class highways. Tragically, the country’s government has made it illegal to manufacture or import high-grade asphalt. Transport engineers use inadequate substitutes. The roads wear out faster, driving up maintenance costs, increasing congestion, and making driving unpleasant.
If a government which sabotaged its country’s infrastructure development in this way actually existed, it would be mocked by the world and thrown out by its citizens. Yet, the government of India, which has repeatedly failed to allow its financial infrastructure to develop, has not inspired any outrage.
Traditionally, India’s politicians have had little interest in infrastructure and public goods beyond grand but low-impact projects such as the Bhakra-Nangal dam and the Indian Institutes of Technology. Voter desires were couched as ‘roti-kapda-makaan’ (food, clothing, and shelter)—all private goods. It has only been in the past fifteen years that voters have begun to demand ‘bijli-sadak-paani’ (electricity, roads, and water)—public goods and infrastructure from the government.
Infrastructure reform has taken place in telecom, electricity and highways. Financial sector reform has taken place too—the command economy’s Comptroller of Capital Issues has been replaced by the Securities and Exchange Board of India. India now has some of the best functioning stock markets in the world. The private sector has set up successful commodity exchanges and private sector entrants into banking now have an impressive market share.
These successes should not distract us from the fact that India’s financial system is still quarter-baked, and that substantial financial sector reform is still needed. Every delay in pressing forward with this is therefore a lost opportunity to turn India’s small entrepreneurs into stable businesspeople, its savers into investors, and to protect its consumers from price fluctuations and inflation.