To Become a Developed Economy, Four Reforms

Indian Express

Context and Central Thesis

The article addresses India’s ambition to become a developed economy by the mid-21st century and argues that growth alone is insufficient without deep structural reforms. It frames India’s development challenge not as a shortage of capital or ideas, but as a problem of inefficient capital mobilisation, weak financial intermediation, institutional frictions, and limited productivity transformation. The author proposes four reform pillars as essential enablers of sustained, high-quality growth.

Key Arguments Presented

1. Constraint of Domestic Capital Formation

The article identifies a central bottleneck: India’s growth is increasingly constrained by domestic savings and capital efficiency, not by entrepreneurial demand. Household savings are fragmented across low-yield instruments, while banks face maturity mismatches that prevent long-term financing of infrastructure and manufacturing.

2. Over-dependence on Banks and Short-term Capital

The author argues that India’s financial system remains bank-centric, with insufficient depth in long-term bond markets and institutional finance. Banks are structurally ill-suited for long-gestation projects, yet continue to shoulder this burden, leading to stressed balance sheets and credit misallocation.

3. Weak Capital Allocation and Governance Frictions

Even where capital exists, its deployment is inefficient due to:

• Regulatory uncertainty
• Slow dispute resolution
• Governance weaknesses in public and private institutions

This results in capital being locked in unproductive sectors while high-potential areas remain underfunded.

4. Productivity and Innovation Deficit

The fourth reform emphasises technology, deep tech, and productivity-enhancing innovation. The author stresses that India cannot reach developed-economy status through labour-intensive expansion alone and must shift towards capital-deepening, technology-driven growth supported by stronger research ecosystems.

Author’s Stance

The stance is structural-reformist and pragmatic. The author avoids populist prescriptions and places responsibility on systemic redesign rather than short-term fiscal expansion. Growth is treated as an outcome of institutional coherence, capital discipline, and innovation capacity, not merely policy intent.

The tone reflects concern that India may otherwise remain trapped in middle-income stagnation, despite headline growth numbers.

Biases and Assumptions

1. Capital-centric Bias

The article prioritises capital efficiency and financial architecture, underplaying:

• Human capital deficits
• Informal sector rigidities
• Social sector constraints that also shape productivity

2. Institutional Optimism

There is an implicit assumption that once financial and regulatory reforms are implemented, capital will automatically flow to productive uses, which may underestimate political economy constraints.

3. Limited Attention to Inequality

The distributional consequences of capital-intensive growth are not deeply examined, risking an elite-driven development trajectory.

Pros of the Argument

• Offers a clear structural diagnosis rather than rhetorical vision
• Correctly highlights long-term finance as a binding constraint
• Integrates finance, governance, and innovation into a single framework
• Highly relevant for policy-oriented UPSC answers on growth and reforms

Cons and Gaps

• Understates the role of education quality and skilling systems
• Does not sufficiently address centre-state coordination challenges
• Innovation is discussed more as an outcome than as an ecosystem requiring cultural and institutional change

Policy Implications

1. Financial Sector Reforms

• Deepening corporate bond and pension markets
• Reducing over-reliance on banks
• Improving risk-pricing and credit discipline

2. Governance and Regulatory Reform

• Faster dispute resolution
• Predictable regulatory frameworks
• Strengthening contract enforcement

3. Innovation and Productivity

• Targeted support for deep tech and R&D
• Academia-industry linkages
• Long-term policy certainty for technology sectors

Real-World Impact

If adopted, the reform agenda could:

• Improve capital productivity
• Reduce systemic financial stress
• Enable sustained high growth beyond demographic advantages
• Move India closer to durable developed-economy characteristics rather than episodic growth spurts

Failure to act risks capital misallocation, infrastructure bottlenecks, and a prolonged middle-income plateau.

UPSC GS Paper Alignment

GS Paper III – Indian Economy

• Growth vs development
• Capital formation and financial markets
• Infrastructure and investment constraints

GS Paper II – Governance

• Regulatory quality
• Institutional reform
• Role of the state in economic transformation

GS Paper I – Society (Indirect)

• Demographic transition and productivity

Balanced Conclusion and Future Perspective

The article makes a compelling case that India’s development challenge is no longer about whether it can grow, but how efficiently and sustainably it can convert savings into productive capacity. Its emphasis on capital efficiency, long-term finance, and innovation is analytically sound and policy-relevant. However, development outcomes will ultimately depend on how these reforms are integrated with human capital development, social inclusion, and cooperative federalism. For UPSC aspirants, the piece reinforces a critical lesson: developed-economy status is built through institutions, not aspirations alone.