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Economic Reforms needs a Paradigm shift

, March 26, 2015, 4 Comments

Economic Reforms MarketExpress-inA few months back there was a World Bank Report, inter alia, highlighting that India slipped to the 142nd position in the ranking of 189 countries in respect of ‘Ease of Doing Business’ which prompted the present article by the author.

As is well known, the report by the World Bank is the 12th sequential report brought out by the Bank on this subject and largely reflects the findings of a detailed professional survey conducted without any perceived bias or favour. Hence, the report needs to be taken seriously, for the findings have wide international acceptance and impacts on the flow of investible funds

As has been reported repeatedly in various fora, India embarked upon a set of economic reform measures since early 90s, primarily out of compulsions emanating from the then deteriorating economic situation. The most significant reform measures initiated at that time included dismantling of the all-powerful Secretariat of Industrial Approvals (SIA), which was symbolic of the license and permit raj, thereby easing the flow of foreign investment (both direct and portfolio) into various priority sectors while retaining controlling interest with the domestic entrepreneurs; a number of procedural simplification for facilitating investment; phased disinvestment of selected PSU shares; and phased abolition of the items listed for reservation for production in the erstwhile SSI (now micro and small segment of the MSME) sector. The other important policy reforms included monetary reform measures to enable the Indian banking sector compliant to Basel norms accepted internationally.

A number of sectoral reform measures were also initiated for key infrastructure sectors such as transport, energy, petroleum, and natural gas, etc. Further, a significant initiative was taken with the enactment of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003, which, inter alia, laid down a road map for key fiscal parameters such as reduction/elimination of revenue and fiscal deficit, which was sought to be achieved through phased reduction of subsidy, control on unproductive public expenditure and fiscal profligacy.

Seen in the context of the then prevailing political and economic situation, the steps taken were perceived as significant reform initiatives by the international community and consequently the economy recovered much earlier than expected. The flow of foreign direct investment (FDI) began to spurt, remittances by NRIs into the country increased manifold, and the foreign exchange reserves reached unprecedented levels. Today this appears like a fairytale, nevertheless these are facts of economic reality which helped India attain high growth rates next only to China and helped break the shackles of historically low rate of growth of the Indian economy, often sarcastically referred to as the ‘Hindu Rate of Growth’.

Unfortunately, faced with continuous social and political compulsions of coalition politics (a fact admitted by the previous Prime Minister on record), forcing rollback of the decisions taken by the Government many times, notwithstanding the economic imperatives for their implementation. Consequently, the momentum of economic reforms began to slow down and in certain cases even reversed.

This was reflected in the absence of a continuous and time-bound action-plan to carry out the unfinished agenda.While compulsions of coalition politics and social turmoil are a reality of the Indian socio-political dynamics, they cannot be used as alibi for not pursuing the reform agenda. The international community, in particular the foreign investors, are unlikely to be enthused by such a rationalisation for the slow, tardy and at times negative pace of reforms.

There have been continuous slippage on the timelines set for fiscal parameters under FRBM Act, the health of the banking sector has deteriorated as reflected in the higher levels of NPAs, and in the compliance of various prudential norms set under Basel III, which are likely to be delayed unless RBI exercises strong control on the banks for strict and timely compliance of the norms. The progress of labour sector reforms understandably remains slow and tardy and administrative reforms is as illusory as ever. There is little public debate on the more complex issue of judicial reforms for the perceived fear of committing a possible contempt.

Last, but certainly not the least, is the fact that being a federal polity, a good number of reform issues need extensive consultation with the States. While such consultation is certainly desirable, there is inordinate delay, particularly in case of contentious issues. A classic example is the consultation process, which is still on for several years, for devising a common goods and services tax and removing the interstate variation in tax rates and removing barriers to entry. Needless to state, this is one of the key reform issues concerning the Government for a long time and is yet to be implemented.

It may be noted that the issues listed above are only illustrative and not exhaustive. Indeed, a compendium of the pending reform issues makes one exasperated and sceptical whether we are anywhere near end of the tunnel.

However, the picture is not as gloomy as it appears. For one thing, a sincere beginning has already been made by the present Government with the Prime Minister announcing an impressive agenda encompassing a number of administrative and legal reform measures within a definite timeframe.

This augers well for speeding up the pace of economic reforms. For a country like India, with burgeoning skilled and semi-skilled workforce entering the job market every year, Government has rightly been focussing on Manufacturing Policy as the key development strategy for reaping the advantages of what is often referred to as ‘Demographic Dividend’. However, the target of enhancing the share of manufacturing output to 25% of GDP by 2025, and the object to make India a manufacturing hub in south Asia, necessitates that the complex reform issues are addressed within a definite timeframe. This, indeed, is a tall order and requires consensus cutting across party lines.

Recently, the Prime Minister has announced a set of key reform initiatives pertaining to the labour sector under the comprehensive banner of Shramev Jayate Karyakram. These initiatives include universal portability of EPF Accounts; a uniform labour portal; a transparent, responsive, and accountable Labour Inspection Scheme; a demand responsive vocational training scheme; and a revamped Rashtriya Swasthya Bima Yoyana (RSBY) for the unorganised sector workers.

However, it needs to be kept in mind that the announcements reflect broadly the intent of the Government while the challenge of implementation remains. Further, a number of complex labour-related issues, which include the illusive issue of major labour-law reforms, necessitate tripartite consultation among all three social partners viz. labour, management and the Government, within the framework of ILO conventions. This will also need to be investor friendly and meet the expectations of the international community. Similar action-points will have to be identified for other key sectors and implemented.

A silver lining which is often lost sight of even by the discerning observers is that there is no need to reinvent the wheel every time and that considerable documentation already exists on various issues, most of which of which are in the public domain, what is generally referred to as ‘Institutional Memory’. This needs to be productively utilised.

It should be remembered that notwithstanding the desirable need to have extensive consultation and building consensus, we do not have the luxury of time any longer and, therefore, need to come out with a clear and unambiguous timeline for pushing the reform agenda. The political leaders cutting across party lines should see reform issues as a national agenda and not use it for scoring points. The international community is watching the fresh initiatives taken by the Government with a sense of keenness as never before and the opportunity should not be allowed to go astray, as happened so many times in the past.

Detailed analysis of sectoral reform issues will follow in subsequent weeks.

  • PVRajeevS

    The last budget was notable for small bang reforms. As Padhy mentions the international community is looking forward to something big coming out of India. In the past we have witnessed the big bang reforms of the Rao-Manmohan period and incremental reforms during the time of Chidambaram. Modi came with a promise and created a lot of expectations which as yet remain un-fulfilled.

  • pramodpadhy

    PVRajeevS I agree.This is the time to give reforms a big push.Only time will tell!

  • KolamkarDS

    I am optimistic that whatever measures have been taken would take India into higher trajectory of growth. We need to appreciate that the present government is in minority in the upper house. In a democratic polity of India’s vintage, political considerations outweigh national interest, which is not new. Judiciary, media and civil society may have different take on reforms and could play activist role and apply brakes on the reforms. Cooperation of states is necessary, but they are also ruled by political parties, which may believe in competitive politics rather than the idea of cooperative federalism. The trade-off involved in the political management of opposition, states, media, judiciary etc. may help the government to push reforms, but may weaken it politically. Non-transparent manuvouring is not the price worth paying for reforms, which are even otherwise perceived as pro-rich. The government is taking steps in right direction, even on GST, within political economy constraints. It is however true that the expectations from the new government were high and the patience for change on the ground is low. There is even less appreciation of the so-called small bang reforms, like JAM trinity on the economy. However, I am myself growing impatient to see faster improvement in the health of our public sector banks; it is critical for achieving growth higher than China in a sustainable manner.

  • pramodpadhy

    KolamkarDS I broadly agree with your comments.How ever, for a variety of reasons (I am not listing them though),I am less optimistic about India moving to a higher growth trajectory in the short run.I am also less sanguine about the reform agenda getting a big push in the near future.For one thing, the political compulsions as well as the compulsions of federal polity are given facts  in the Indian context.How ever, cutting across party lines, we need to build up a national concensus on some of the critical reform issues which should be accepted by all and non-negotiable.The time is just right for pushing some big ticket reforms and history will not forgive us if we fail the test this time.