Thursday, November 27, 2014

REFORMS 2015-18



Reforms 2015-18

  I give herewith a short menu of economic policy and institutional reform measures that the Government can implement in the next four years (2015-18) to transform the economy and the polity. I would urge all to join the effort to persuade those active in Public life, politicians and voters.

Economic Policy Reform Menu

(1)    Tax Simplification & Integration and elimination of “Tax Terrorism"
a.       GST (uniform rate, -Octroi)
b.      Customs (e.g. Textiles ,Agriculture)
c.        Income Tax (original version of DTB)
(2)    Subsidies:  Replace all (price distorting) Subsidies by Transfers to intended beneficiaries. Modality: UID, Bank Act-SUPAY Debit card, Mobile Payments. This will reduce corruption and inefficiency. The level of transfers(/subsidies) that are needed and can be sustained by the fiscal system is a separable issue that can be dealt with separately
(3)     Sell all Loss making (non-defense) Public sector ;  Exit Public sector (PSUs, PSBs) from competitive industries, sub-sectors as there is absolutely no gain to society, but a loss arising from inherent impulse to corruption & inefficiency in organizations run & overseen by political-bureaucratic  masters
(4)    Infrastructure:  Support private entry and full-free competition in energy (Coal) & infrastructure (railway, ports, airports, electricity distribution/transmission; use open access for natural monopoly networks-eg distribution wires, rail track)
(5)    Labor/Jobs: Simplify, Integrate Labor Laws, Rules & procedures, promote portability & competition in labor benefits & remove exit controls.
(6)   Land: Purge Land Acquisition Law of bureaucratic-socialist provisions not found in market economies. Modernize-digitize land records, promote transparency in land use and freedom in land markets (buy, sell, lease, rent). 
(7)    Education: Purge RTE Act of distorting elements & suggest a modern regulatory structure for Private & Public education to create transparency on costs & benefits for students & parents and eliminate unnecessary-dysfunctional  controls on private & public providers. Govt expenditure should focus on teacher training & E-learning, e-education platforms to reach poor and rural & remote areas
(8)    Public Health: Build an end-to-end Sewage & sanitation (collection, transport, treatment, disposal, recycling), water & drainage (collection, treatment, purification, recycling) network. Eliminate communicable disease. Teach basics of cleanliness, nutrition & health through schools, media, public health e-portal). This should have the highest priority in Central Govt. fund allocation for health sector. Second priority of CG should be e-medicine, e-health platform to reach the poor & rural-remote areas.

Institutional Reform Menu

(1)    Legal: Eliminate all antediluvian laws and integrate & simplify remaining laws. Simplify & reform Civil Procedure code to facilitate expeditious disposal of cases. Similarly integrate & simplify laws relating to crimes like murder, violence, rape and kidnapping. There is no need to have a separate law for each type of murder (private, public, social, rape related) and each form of violence- these can be clarified/detailed in the rules & procedures linked to the law.
(2)    Police: States must be pressured by citizens to adopt and implement SC directions (in Prakash Singh case) on Police reform.  Priority to separation, empowerment and independence of investigation & prosecution wing and citizens oversight board. Central government should create model legislation, rules and procedures for adoption by States. This single reform can make a big difference in respect for law and public security & safety with respect to riots, political murders, social violence (caste, religion, gender), rape & child molestation
(3)    Judicial: Judicial appointment procedure must be reformed urgently to expedite the filling up of 35% vacancy in judiciary. Management of courts, cases load and cases must be modernized through use of Information technology and modern management practices. Funds & positions must be provided for this purpose.
(4)    Electoral: Change laws, rules & regulations to eliminate criminals from politics. Introduce contributory State Funding of elections (with part of funding given after the results are known) along with independent auditing of party accounts and filing of income tax returns by parties.
(5)    Bureaucratic: E-governance systems for transparent decision making, that make details of all expenditure/contracting decisions accessible to public. Introduce system of electronic records for organizations notorious for harassing the public (e.g. revenue departments) so that accountability is enhanced by the possibility of post outcome analysis (e.g. relating to excessive tax demands & % of legal appeals lost/won).  Require all transfers of personnel in less than 2 & 1/2 years to be electronically filed (with reasons & record of decision makers involved-CM, HM, secy) on a portal run under the judiciary and open to the public. The transferee or others would be free to file a review case in court.

Wednesday, November 19, 2014

Some Thoughts on Inflation & Monetary Policy

Q&A with Bloomberg News


Q1. Where does India stand on the growth-inflation trade-off? Do you think the central bank should now shift to a more growth-focused approach?
A1: There is no inflation-growth trade off in monetary policy at this point. Easing monetary policy will facilitate demand for consumer durables, encourage investment and facilitate recovery, without reversing the downtrend in inflation.

Q 2. With Finance Minister Jaitley now openly calling for a cut (even the technical advisory panel did in Sept.), do you think RBI should oblige and cut as early as the Dec 2 meeting?
A2: I have been arguing since September 2014 that inflation is firmly on a down trend and time for easing monetary policy has arrived. Two months later I am even more firmly of the view that Repo rate needs to be cut.

Q3. How beneficial would a rate cut at this juncture be for the Indian economy given that the decrease in oil prices is already acting as an indirect stimulus?
A3: Very. Both consume durables and non-durables show a decline in the latest availbale IIP data. Though the pass through of lower petrol price into household budgets will start having some effect on consumer non-durable demand soon, easier monetary policy is needed for reversing the decline in durables demand.

Q4. With RBI's 8% inflation estimate for Jan 2015 now expected largely to be met, do you think the 6% target for 2016 may also be undershot?
A4: According to me there is a 25% probability of CPI inflation in January 2015 itself being 6% or less, and a 51% probability of it being less than 7%. So, even though this puts RBI in a serious dilemma, I would predict that there is a more than even chance of it holding rates steady in December.

Q5. The RBI has been pointing at issues of structural inflation, especially around food. What part of these structural barriers are being addressed by the government, and which should be tackled most urgently?
A5: Inflation is down across all sub-categories, food, fuel and 'non-food, non-fuel' or core. So any talk of "urgency" is not credible. It is more important for govt not to forget the medium-long term need for agricultural policy reform to improve agricultural productivity, which is at 50% of global levels for decades.

Q6. How do you see the quality of fiscal consolidation by the Modi government? Do you think the 4.1% deficit target will be met?
A6: In my view the probability of the fiscal deficit meeting its target has gone up since it was first announced. Though the sharp fall in inflation traditionally reduces revenue growth more than expenditure growth, the reduction in oil prices will help reduce subsidies (e.g. fertilizers) and consequently total expenditures. The sharp increase in capital inflows also makes achievement of dis-investment targets easier.

Q7. What is your view on the Modi Govt's approach to reform so far...ensuring on the ground execution first rather than the big bang approach?
A7: The political economy of reforms is as important as the economics of reform. My reading of the government is that it is fully cognizant of both. Therefore it is likely to follow the approach that my reform experience suggests is the best for sustained & sustainable reform ( http://dravirmani.blogspot.in/2014/09/pm-modis-development-objectives-reform.html )

Q8. How do you see rural wages evolving in the coming months and what role will it play in the RBI's decision?
A8: Rural real wage growth rate has declined progressively over the last 12 months to around zero. There is now a danger of it becoming negative. It doesn't provide any support to RBI for retaining a tight monetary policy.
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Disclaimer: Bloomberg News designation of me as an "RBI Advisor," may be misleading. I am one of several members of the "Technical Advisory Committee on Monetary Policy(TAC)". The RBI has many such committees & groups on different issues. 

Friday, October 31, 2014

Indian Foreign Policy Under Modi



Introduction

    Prime Minister Narendra Modi has interacted with the leaders of four of the five countries/regions on the list of foreign policy priorities mentioned in the President’s address to the opening session of Parliament (SAARC, China, Japan, Russia, USA). He has also met leaders from several other countries. It is therefore an appropriate time to take stock.  In this note we focus on two questions: One, what are the underlying changes in the directions of India’s Foreign policy.  In other words, is PM Modi’s Foreign Policy likely to differ from that of Soni-Man Mohan Government‘s?  Two, what were the objectives of PM Modi’s foreign policy actions in first four months, to what extent have they been achieved and what remains to be done?  

Directional Change

     Every country’s foreign policy has, after a change of government, elements of continuity and change.  India under a Modi led BJP-NDA government is no different. What are these changes in direction and emphasis? These changes have not been explicitly articulated by the new government, but are implicit in their pragmatic actions and “view of the world.” There are five areas in which I see an emerging change in foreign policy: The centrality of economic & technological development, the integrations of domestic and foreign policy with respect to this objective, the emphasis on “national power” including “military power” and “Soft power” and a reduction in self-imposed constraints on actions that third counties may construe as inimical to their interests.

Economic Objectives

    The first change in foreign policy is a much greater attention to economic objectives. This is not merely a reiteration of the economic development objective that has been India’s mantra since independence, but a  recognition of the role of “technology” (broadly defined) in all aspects of economic development & economic power. This involves an implicit benchmarking of the technological capabilities of the Indian economy with respect to the global best practices and/or global technology frontier, a perception of large gaps across much of the economy and the goal of bridging these gaps through domestic and foreign economic policy.  How this is different from earlier regimes is reflected in two policy initiatives: The “Swach Bharat” campaign which doesn’t involve “high technology” but does reflect a huge gap in sanitation systems and practices between India and the developed countries and will require innovative technological, managerial, social and public solutions. The second is the “Digital India” campaign, which recognizes the gap between India and digitization frontier, but treats it as an opportunity to solve problems of governance and corruption as well as its innovative use for health education & training needs of a population four times the size of the largest developed country (leap frogging). It is probably the first time that an Indian PM elucidated India’s economic & technological objective abroad(“India First”),  identified  the specific role that each country could play in achieving these objective and made that the center piece of the discussion with that country!

Foreign-Domestic Policy Integration

    The second change is a much greater alignment of foreign policy with domestic objectives.  Though the talk about integrating national economic policies and foreign policies started in the 1990s, this has only been episodically reflected in domestic or foreign policy.  The Indian Prime Minister mentioned both the programs (“Swach Bharat”, Digital India/smart cities) in his public statements in the USA & Japan. In his meetings with leaders of advanced countries, he has been very explicit about Indian objectives with respect to economic development and technological catch up and in exploring how these countries can help India close these gaps. The message to all inside and outside the government is quite clear: Both domestic and international policy can/must/will be used to close the economic and technological gap with more advanced countries across the entire spectrum from basic sanitation to defense vehicles, aircraft & ships to the frontiers of cyber space & outer space.
  “India First” means that what India needs/wants from each economic & technology power will be expressed with greater clarity & specificity and these counties have to respond in the way think appropriate. India’s decisions will then be based on comparative benefit-cost ratio of dealing with different countries on a defined set of issues, not on philosophical and/or ideological consideration of (non-) alignment.

National Power

      The third change is a greater emphasis on overall national power, with a more realistic assessment of the appropriate role of military power. Economic power is the foundation of national power, but above it must be a solid block of military-strategic power, topped by a smaller cone of “soft power”.[i]  The Modi govt. has a clearer appreciation that economic power/economic relations cannot be a substitute for military power/international security relationships, in deterring the aggressive designs of ideologically driven foes. On the contrary economic concessions may be viewed by militaristic ideologues as a sign of weakness to be exploited and economic assistance as an expression of superiority to be resented. Economic relations can complement international security relationships by influencing the behavior of non-ideological, economically rational players in the global system,[ii] but only military strength can deter militaristic ideologues and ensure peace.

Unconventional Threats

      Operationally this has several implications. One is the increased focus on unconventional threats (cross-border terrorism, use of non-state actors, foreign ideologues-mercenaries). This requires a buildup of World class equipment and skills over a much wider spectrum of warfare & covert capabilities  and a willingness to boldly attack the aggressor in his safe havens. This is (in my judgment) already in the process of change, both in terms of capabilities in counter-terrorism and defense against non-state actors, but even more importantly in doctrines incorporating a willingness to take calculated risks in using asymmetric capabilities.  
     Deterrence is however only effective, if the adversary using these tactics is convinced that the new government will respond to asymmetric warfare with appropriate actions across a much broader menu of conventional & unconventional options.  As the diplomatic signals sent to our Western neighbor (e.g. through track 2 dialogues and cancellation of Secretary level talks) did not seem to be heard & understood by its “deep state”, it became necessary to signal the seriousness of the change in overall strategy, through a heightened (conventional) response to border firing/cease fire violations.[iii] Similarly unconventional psychological warfare & “creeping annexation” tactics on the northern border are being countered by bold new plans (e.g. the ‘McMohan highway’ along the LAC in Arunachal) that have both a conventional defensive and a signaling component.

Defense Production Capability

The second implication is a much greater focus on national capability to produce a broad range of defense equipment in India (though actual production of any specific item will be influenced by financial benefit-cost). “Self-sufficiency” has been a slogan from the days of “Nehruvian Socialism,” as it played second fiddle to the ideological goal of preserving a Public sector monopoly over the means of (defense) production and discouraging foreign participation in Indian JVs.  This defense public sector veto over use of private domestic & foreign capabilities for defense production within India is being decisively broken by the new government, to give primacy to defense self-sufficiency. The ability and willingness to transfer technology and help build skills & research capabilities at lower cost, will consequently play a much more important role in relations with Japan, Russia, USA and EU countries.  The reinvigorated approach to national security is likely to manifest itself in a reversal (over the next five years) of the trend decline in ratio of defense expenditures to GDP (since the BOP crises of 1991).

Soft Power

   The fourth change is a greater emphasis on global socio-politics and “soft power”, the third dimension of national power.  This includes the expansion of common ground based on religious and cultural heritage & history of India (e.g. Hinduism viz. Nepal, Buddhism viz. E & SE Asia, Yoga viz. West, modern Islam viz Indonesia, democracy viz Australia, Canada), as well as the Indian diaspora across the World. PM Modi’s speech to the Indian diaspora in New York, USA, was a very successful attempt to inspire the diaspora to contribute to the economic & technological development of India, either directly or indirectly through political participation in their country of citizenship.

Confident Pragmatism

   The fifth change is a freeing up of self-imposed, historical and mental, constraints on developing the full potential of economic or security relations with any country.  Thus India’s economic relationships with potential adversaries can be pursued relatively independently from the security relationship, without one constraining the other or being completely parallel.  This is most clearly apparent from the meetings PM Modi held with President Xi Jinping of China, the economic agreements reached and the formation of the BRICs Bank and AIB (Asian Infrastructure Bank). Further neither the economic nor the security relationship with one country (friend or foe) will constrain the economic or security relationship with any other country (e.g. economic & security co-operation with Japan).  Both will be evaluated in terms of India’s primary objectives of closing the economic and technological gap and building national power, in a pragmatic forward looking manner jettisoning ideological blinkers and minimizing historical baggage.

India Back On World Stage

     Short Term/Immediate goals of PM Modi’s foreign policy initiatives from the day he took the oath of office seemed to be three (partly) overlapping ones:  One goal was to establish Mr Modi’s credentials as a National and International leader.  During the general election campaign most political analysts had predicted that Shri Modi, a State leader with no Central govt experience, wouldn’t be able to rise above his regional origins and limitations.  Mr. Modi wanted to lay this specter to rest quickly & decisively so he could focus on achieving his development objectives.  The second goal was to put India back on the global stage, from which it had fallen off during the last 3-4 years, according to all objective analysts and observers. In this he was backed/supported by advise from virtually all international relations experts inside & outside the government.  In this process he also wanted to convey to the World, the change in foreign-domestic policy emphasis of his government along the lines elucidated above.  The dramatic outreach to SAARC countries, the meetings with leaders of Japan, China and USA, and a flurry of meetings with other countries (eg Australia, UK, France), complemented by a number of foreign trips by the President and the EAM, have achieved both these goals.

Confidence and Trust (B2G)

    The third goal was to re-establish international investor confidence in Indian economy and polity.  The results of the general election, in which the BJP and its allies won a decisive majority in the Lok Sabha, had already opened the flood gates of capital inflows into India, before Shri Modi was sworn in as Prime Minister.  However, this expression of confidence by foreign finance capital, had not been reflected in a similar increase in gross fixed capital formation (GFCF).  It was therefore felt necessary to communicate directly with the largest foreign direct investors (FDI). The PMs goal was to gain their trust & understanding of his seriousness in reversing the effects of obstructive policies & procedures that resulted in the collapse in growth of GFCF and removing bottlenecks in investment in infrastructure, manufacturing etc.  The US private sector is the most important source of technology and foreign investment across a broad spectrum of industries. The PM was largely successful in establishing trust. However, given that foreign direct investment usually follows domestic investment and both were waiting to see action on certain known policy & regulatory problems, full restoration awaits action on the domestic policy & regulatory front. Now that two important State elections are over and the government has re-started the reform process, we will soon be able to judge whether enough has been done to revive GFCF from the second half of 2014-15. I expect the legacy problems for foreign private sector operations (B2G) and general bottlenecks facing all direct investment (domestic & foreign) in India to be sorted out within a year, restoring a flourishing Business to Business (B2B) relationship.

Strategic Partnership

     The US is still the sole super power and likely to remain so for at least a decade and stands head and shoulders above others in the depth and breadth of strategic and defense technology.  Thus Indo-US relations have a special salience and it was particularly important to restore them to the level before the global financial crisis and the series of policy missteps since then. It was therefore important for PM Modi to convey the changes in the new Govt.’s approach to foreign policy and for US President to understand these at first hand. 

Geo-economic Constraints

        Despite the considerable overlap in the long term strategic interests of US and India in Asia, it is unclear how quickly a genuine strategic partnership will develop given the inherent differences in economic perspective between a rich global power and a poor regional one.  The USA, like many rich countries is a net exporter of technology with high per capita but low incremental pollution while India is a net technology importer with low per capita but high incremental pollution.  These differences need to be recognized and dealt with objectively & fairly.[iv] There is also a conflict of interest between the profitable capital-intensive, export competitive US agriculture sector and India’s labor-intensive, low productivity, subsistence agriculture with 66% of population dependent on it. These gaps will narrow over the next decade or so, along with the gap in per capita income.  In the meanwhile, a pragmatic approach is needed to resolve these differences and/or minimize the negative fallout of unresolved differences. There are indications in the joint statement, of the beginning of such an approach. 

Strategic Opportunities

     There are also some differences arising from the historical interests, commitments and actions of a long term “Super Power,” and an India two decades from becoming a “Great Power,” whose regional security suffers collateral damage from Super powered actions.[v]  However, the reasonably high convergence of interests on Terrorism and on maritime security in the Indian Ocean and Indo-Pacific, can form the core of a strategic understanding, while pragmatically allowing for greater differentiation in the respective approaches to individual countries in West Asia.[vi]  The outcome of PM Modi’s discussions with President Obama appears to be a deeper understanding on and heightened co-operation in, counter-terrorism (safe havens, “financial and tactical support for networks such as Al Qaeda, Lashkar-e Taiba, Jaish-e-Mohammad, the D-Company, and  Haqqanis”).  There are also hints of enhanced cooperation in Defense procurement, production and technology development and on Maritime Security in the Indian Ocean and Indo-Pacific Region. The former includes (a) An extension of the Framework for US-India Defense Relationship(2005) and a Reinvigoration & expansion of Political-Military Dialogue. (b)The setting up of Task Force under Defense Trade & Technology Initiative, whose first meeting was in Sept 2014, to decide on specific projects & technologies. Maritime security is to be enhanced through likely technology transfers to the Indian Navy (e.g. the magnetic catapult for Indian aircraft carrier) and an expansion of Malabar exercises. Thus the outlook for further development of Indo-US strategic partnership is cautiously optimistic at this point.

Conclusion

    The PM Modi led Indian government is changing the emphasis of India’s Foreign and National security policies. Elements of this change in approach are already visible. These involve a clearer definition of Indian interests (“India First”) in terms of economic and technological development, a greater focus on these goals in foreign policy and a consequent integration of domestic and foreign policies. Other changes involve a greater focus on development of national power, in particular an enhancement of the somewhat neglected element of military power, its broader definition to include asymmetric warfare of which State financed-directed non-state actors are a dangerous part, and a jettisoning of self-imposed constraints of ideology and misplaced fear of offending other countries who display no such squeamishness in their behavior.[vii]   Overall a much more confident, credible and effective national security-foreign policy is predicted to emerge over the next five years.
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A shorter version of this article appeared  on the Op Ed page of The Hindu, on 1st November, 2014 under the banner, “Recalibrating India’s Foreign Policy “, http://www.thehindu.com/opinion/op-ed/comment-recalibrating-indias-foreign-policy/article6553306.ece .


[ii] The economic collapse of the USSR and changes in China’s behavior after the global financial crisis, are instructive in this regard. China shifted from export-investment led growth to aggressive geo-economic (IPR, espionage) & geopolitical behavior (Arunachal. E & S China Seas).
[iii] Cross-border terrorism in J&K (as measured by no of deaths) increased from 1993 to 2001 and declined after 9/11 because of the deal reached between US-Pakistan. In response Pakistan changed its Jehadi tactics by using Nepal as a conduit and Bangladesh as a base for terrorism. It also gradually started recruiting and training Indian Muslims as terrorists(IM).
[iv] A (national) patent is a monopoly right conferred on the inventor in the interests of the nation as a whole. Thus, for instance, the optimal length of the patent is likely to be shorter in a poor country than in a rich country. A bilateral/multilateral agreement has to be a compromise between the rich country/countries and the poor country/countries. There is no inherently right length!
[vi] US analysts should remember that in the US scheme of geographical divisions, India is included in the “Pacific command(USPACOM)” and not in the “Central Command (USCENTCOM)” covering West and Central Asia.
[vii]  One must, however warn against the unfortunate tendency of some prominent Indians toward bombast & hyperbole. Those who accuse PM Nehru of publicly making tall claims and assertive statements viz China, after denuding & hollowing out the armed forces through neglect & resource starvation, should be very careful about chest thumping based on hypothetical (future) capabilities that will take decades to build.

Friday, September 26, 2014

PM Modi’s Development Objectives & Reform Possibilities: Big Bang or Incremental?




Introduction

     One year ago (13/9/2013), I wrote that, “India needs an alternative narrative of economic growth and welfare, that politically challenges the monopoly of the left intellectuals.[i]  I also indicated that BJP leader Modi may be the ‘non-intellectual leader who overthrows this monopoly and creates a new "governance and growth," "right of center" national narrative to compete with the "socialist ideology"? I went on to conclude that, “Shri Modi has a better than even chance of becoming the next Prime Minister of India and of changing the political narrative of National welfare, governance and growth.” Prime Minister Modi’s actions and his government’s performance to date strengthens my belief that he is indeed that leader.
      Several eminent economists and analysts have expressed their disappointment that Prime Minister Modi has not used his election mandate and his majority in the Lok Sabha to introduce “major” reform. I am not one of them because it has been clear to me for more than a year that, it is not his style. He is laser focused on the objectives and goals he has outlined, first in the BJP manifesto, then in the President’s address to the first session of the new Parliament and in subsequent speeches.  And he will make whatever policy & institutional changes that he is convinced are necessary to achieve them, no more and no less.

Likely Approach to Reforms

Given PM Modi’s personal experience and achievement in Gujrat, his first inclination is to improve governance, speed up decision making, make administration more effective, improve the functioning of Departmental Public Enterprises, Public sector Banks and Public sector units and he has started doing all this. But a second, perhaps equally important element of PM Modi’s approach is the understanding that  it is business that will create productive, self-sustaining jobs across the entire spectrum of skills( from unskilled to semi-skilled to highly skilled). Hence to be “pro-poor” is to be “pro-growth” (of economy and employment) and to be “pro-business” is consistent with being “pro-poor.”  Thus it is essential to cut through the jungle of laws, rules, regulations, procedures and controls, to make it easy to set up and run new (job creating) businesses. All business is welcome, domestic or foreign, if it “First Develops India(FDI)” and helps us to close the large economic and technological gap with China and the rest of the World.
  Are “big bang” reforms of the kind whose lack has been bemoaned even by political opponents, needed to achieve PM Modi’s objective of providing job opportunities for every youngster, making India a manufacturing hub and closing the economic & technological gap with the World?  That is the question that I believe the PM will seek an answer to over the next six months.  In my judgment, PM Modi will undertake those reforms that are essential for achieving these results, no more and no less. Thus the initial focus is likely to remain on governance and other incremental reforms that have been outlined in the PMs speeches. If and when the limitations of these improvements is apparent and the PM is convinced that major policy reforms are needed to achieve the objectives he has outlined, only then is he likely to undertake such policy reforms.  The opposite of the same coin is that he is unlikely to undertake (in his first term) any policy or institutional reforms that are either peripheral to his task or whose likely contribution to these objectives is uncertain.

Phasing and Timing

  What are these reforms and how should they be introduced?  My experience of Indian economic reforms from 1987 to 2009, shows that the cost-benefit calculus for any reform must account for the risk of a substantive political counter-reaction as part of the cost of reform. Operationally this means that reform objectives must be kept clearly in mind at all times, but the timing and phasing of their introduction must depend on this modified benefit-cost calculus. The pace of introduction must therefore be “with all deliberate speed” without either being politically foolhardy or being overwhelmed by so called “political compulsions”. Fortunately, PM Modi has demonstrated that he can communicate directly with the public to reduce the political risk and thus increase the benefit-cost ratio from reforms.

Policy Reform Menu

 In my view the following reforms, can restore and sustain growth at 8% for several decades:[ii]
  1)      Macro Pivot:[iii] Scale back government consumption expenditures including subsidies and transfers, to bring Revenue deficit to zero in three years and Fiscal deficits to zero in five years. This will reduce government debt, the Current account deficit and foreign indebtedness and raise the national saving rate, allowing RBI to ease monetary policy and stimulate investment and consumer durable demand without fear of increasing Non Performing Assets or inflation. A UID linked mobile payment system provides the most effective means for delivering cash to all those who need & deserve public welfare support. Competitive auction of all natural resources will reduce corruption and raise more revenues. It is hoped that the Expenditure Reforms Commission will spell out a road map for improving the revenue & fiscal deficits.
  2)      Public sector: Close loss making units and reduce shareholding in profit making ones. Sell those units in industries that are inherently competitive (e.g. steel, airlines, power/ railway equipment, hotels, machinery; banks, insurance).[iv] This will stimulate a surge in manufacturing productivity (as in 1990s).  Use the proceeds of Public sector bank (PSB) share sale to recapitalize them and thus lift constraint on bank lending.[v]  Use PSU share sales to expand the fund for Govt. investment in Public goods infrastructure like highways, seaways, higher speed rail lines, MRTS & sewage collection & disposal networks.
  3)      Environment Protection has become a big bottleneck to investment because of its sweeping authority and expansive mandate.  A professional, technocratic, ‘environment protection agency (EPA)’ should be set up to deal with all types of environmental pollution (water, air, land; chemical, nuclear). The EPA should set standards for different forms of pollution and have the authority to impose penalties for violation of norms.  The environment ministry should have no discretion on application of these norms and standards.  The Supreme Court’s Green Bench, the only court of appeal, must be strengthened to ensure expeditious disposal.  An organization similar to the EPA, should be considered for dealing with ecological issues (forest, wetlands, coast, river basins, mountains).  Ecological issues must be defined and circumscribed much more carefully to eliminate endless governmental reviews and scope for corruption.
  4)       Land Acquisition Relief and Rehabilitation Act. The extremely laudable objective of fairness in compulsory acquisition of land has been converted into an expansive ecological and social agenda. Purely private voluntary land transactions must be removed completely from the ambit of this law and the enormous bureaucratization of rules and procedures rolled back. In addition the process & procedures for changing land use must be made transparent. The concerned minister has already initiated discussion with States, who are now becoming aware of the threats to growth that the law poses. This discussion needs to be carried through to changes in the Act.
5)      Institutional Reform: Fundamental political/electoral, police, judicial, legal and bureaucratic reform to address the issue of pervasive, systemic corruption and restore good governance on a sustainable basis.[vi]  Public safety & security is the right of all citizens as is “equality before law.” In the long term, the “rule of law” is critical to sustaining growth in a democratic open society. With good governance, we can even dream of welfare catch up with China! The e-governance and digital India initiatives can help in reducing corruption as will competitive auction of all natural resources. The law minister has already announced that many outdated laws will be repealed and more will be considered from repeal, amalgamation & simplification. The PM has also announced his support for measures to reduce the presence of criminals in legislatures. Tentative announcements on judicial and police reform need to be pursued more vigorously.
  6)      Infrastructure:  Break up government monopoly in coal and infrastructure sectors and introduce competition.  Convert the Indian Railways, Ports and Airports into publicly owned Ltd companies and set up professional independent regulatory structure to oversee free entry & benchmark competition in these sectors.  Enforce open access in electricity distribution & transmission & separate farm feeders for irrigation. The Digital India mission will be facilitated, particularly in rural areas, by “open access” to telecom land lines and electricity wires. This will set of a cycle of self-sustaining infrastructure growth and productivity improvement. The Coal nationalization act must be amended to allow private entry into coal mining. Coal India should be re-divided into 4-5 companies that compete with each other & shareholding reduced to 49%(to start with).
  7)      Labor Laws, rules & procedures: A reform of labor laws can play an important role in the success of “Make in India” campaign and is critical for generation of better quality jobs for unskilled & semi-skilled youth.  Exit clauses (5-6) in labor law can be repealed, with existing employees in organized sector grand fathered. Allow private competition in Employee State insurance (ESI), Employee Provident Fund (EPF) and other monopoly social welfare schemes for employees.[vii] Reform “Contract labor Act” to make it easier for labor contracting firms to comply with labor laws and increase provision of contract labor to industry. The already initiated reform Apprenticeship Act, to encourage training, instead of hindering it, is a good step.
  8)      Agricultural Policy: [viii]  Halt procurement price led inflation and massive overstocking of wheat and rice, repeal Agricultural Produce Marketing Act and Essential Commodities Act. Remove all policy restrictions on FDI in food retail.  Replace the policy of Ad hoc agricultural import-export bans by import-export tariff bands that offer transparent protection within limits. Re-establish scientific approach to GM crop trials and introduction of GM crops. These & related reforms will reduce Indian food inflation to the much lower levels prevailing globally, and thus help control overall inflation. They will also incentivize farmers to raise productivity and farm profitability.
  9)      Education:[ix] Research has shown that the private non-profit (NPO) sector provides education of quality equal on average to that of the public sector, but at 1/3rd the cost. By requiring the NPOs to double or triple the salaries of teachers, RTE Act will drive them out & do incalculable damage to the cause of education. These clauses need to be dropped. The “license-permit raj” control system in education, needs to be replaced by a modern system of performance/quality rating and transparent accounting/financial disclosure, that allows students-parents to judge for themselves the quality & cost of education in different schools & colleges.

Conclusion

 The above menu of policy reforms is not cast in stone. As the economy recovers, other policy changes may need to be added to the list and perhaps some removed. The history of economic growth shows, that sustaining fast growth is much more difficult than raising it from a slower level.[x] Many countries have raised growth to higher levels for short periods, few have sustained it for long enough period to move from Low income levels to high income (or even upper-middle income) levels. Success has usually come to those who have a non-ideological, pragmatic approach to economic development, growth and welfare, and have pursued these objectives with determination.[xi]  Successful countries are those who respond to shocks and challenges as they arise instead of ignoring them or allowing them to fester.


[ii] First presented in http://dravirmani.blogspot.in/2013/12/reforms-2014-19-for-employment-and.html  and Arvind Virmani, “National Reform Agenda For Growth and Welfare,: Policy Paper No WsPp1/2014, January 2014. https://sites.google.com/site/drarvindvirmani/policy-papers .
[v] A recent  calculation shows that the market value of the 23 largest PSBs (excluding SBI) is less than the market value of one private bank. Thus a large portion of the national debt could be eliminated by selling these 23 PSBs. All those who are declared eligible for bank licenses by the RBI could be authorized to bid for controlling shares in a competitive auction of the smaller, less profitable PSBs (with 51% minimum govt. holding deleted). Govt. would also sell 25% of its shares in the other 23 PSBs (reducing it from 51% to 26%) so as to capitalize them.
[vii] The New Pension Scheme (NPS) for government employees already allows private management of these funds.
[ix]  “Sustaining Employment and Equitable Growth:  Policies For Structural Transformation Of The Indian Economy,” Working Paper No. 3/2006-PC, Planning Commission, March 2006. http://planningcommission.nic.in/reports/wrkpapers/rpwpf.htm.
[x] “Accelerating And Sustaining Growth:  Economic and Political Lessons,”  IMF Working Paper No. WP/12/185, July 2012. [ http://www.imf.org/external/pubs/cat/wp1_sp.aspx?s_year=2012&e_year=2012&brtype=default ].
[xi] https://sites.google.com/site/chintan1997reg/economic-policy-and-regulation/skills-education or Arvind Virmani, “Sustaining Fast Growth In India: Economic and Political Economy Lessons,” Working Paper No. WsWp 3/2012, June 2012 [ https://sites.google.com/site/drarvindvirmani/ ].