Durable and robust institutions are amust for long-run growth

Source– The post is based on the article “Durable and robust institutions are amust for long-run growth” published in the mint on 20th October 2022.

Syllabus: GS3- Indian economy. GS2- Governance

Relevance– Importance of institutions.

News- The article explains the need for the right set of institutions to achieve economic growth in India.

Why are institutions important for economic growth?

Economic growth depends on the outcome of many factors. An important factor is institutions.

Growth depends upon the capacity and durability of institutions. The most cited example is the role played by resilient institutions in South East Asian economies.

What are the institutions?

Institutions are rules of the game in society. These rules of games are constraints that shape human interaction. These constraints are both formal and informal.

Institutions reduce transaction cost from imperfect and asymmetric information.

What factors should be considered while designing institutions?

Institutions are dynamic forces. They are continuously shaped by the environment in which they operate. Economic performance depends on efficient institutional design. States have a very important role in ensuring it.

Institutions have a high level of inertia to change and adapt to new environments. Hence, utmost care must be taken while designing and reforming institutions. Robust institutional design requires a level of reflexivity in terms of their ability to change and adaptation to shocks.

What is the way forward for India?

An important element for achieving the Vision for Indian Economy in 2047 is institutional design.

The unique aspects of the Indian economy must be assimilated while designing institutions. We must incorporate federal realities to achieve synergy between centre and states.

The challenges to achieve it are two folds-

First is related to the creation of new institutions to address rapid structural changes in the Indian economy. It requires clarity of vision and objectives.

Second is related to reforming existing institutions. It requires consultations and engagements with participating agents.