with Prof Charan Singh, IIMB
Introduction
The
new government has recently assumed office. The country is waiting with hope
for new policy direction to revive the economy, especially given the disastrous
growth record in the last two years (4.6% average). To revive the sagging growth in the economy
the need is to correct the mistakes of the previous government and re-establish
confidence. In addition, it is a good opportunity to undertake fundamental
economic policy and institutional reforms, in the first two years. Therefore,
it is a good time to reflect on the vision for the economy and suggest agenda
for reforms that the next government can consider. The government needs to sweep
out the Fabian Socialist (or Nehru-Indira) Model of development that ensured
that the License-Permit-Quota Raj seeped into every nook and corner of the
Indian economy. This Statist model is unsuited to a young, proud, modern India
that wants “equality of opportunity” and “equal treatment” from the Government
it elects and the bureaucracy of “public servants” instead of humiliation,
harassment and worse from a “Mai-Baap” Sarkar. And this is possible because of
the thumping majority that BJP has received at the elections.
1990s and 2010s
There
is a lesson to be learnt from the experience of the 1990s. The unshackling of
the Indian economy during the mid- 1980s and early 1990s raised its real growth
rate to 3.6 per cent points above the average growth of the world economy
during 1992 to 2010 but since then the real growth differential has collapsed
to less than 1.2 per cent point. The drop in the growth differential can be
attributed to three domestic causes: First, an overemphasis on entitlements
vis-a-vis empowerment; Second, deteriorating governance (including corruption
allegations); and finally, failure to introduce policy, regulatory and
institutional reforms, essential for sustaining growth and employment at its
full potential. The fundamental objective of any Indian government must be to
close the welfare gap of the Indian people with the rest of the World and
provide employment opportunities through faster economic growth.
Employment Opportunities
To take advantage of the demographic
dividend, generate employment, and enhance public welfare, the government has
to ensure that the economy revives to grow at its long term growth potential of
8 percent (or 6.5 percent per capita) per annum. To help recovery, a reversal of the
governance failures and regressive tax changes during 2010-13 could help. A
return to the general philosophy of modernizing the tax system by reducing the
plethora of State and Central taxes to a
few and simplifying these by reducing exemptions/ deductions and reducing
marginal rates, is imperative. This also requires introduction of a GST or
National VAT and approval of a new tax code.
To revive growth, it is necessary that the
government is able to establish credibility of its intentions. Therefore, it
would be important to improve governance in terms of speed of decision making
and ensuring implementation of those decisions. In view of the widespread
allegations, a quick cleanup of the toxic residue left by the alleged scams
would also help revive confidence in the government. Institutional reforms in
political systems, police and judiciary would help to address the issue of
pervasive, systemic corruption and restore good governance on a sustainable
basis.
Laws
A
review and revisit to a few controversial legal documents would also address
the resentment of the larger public towards government’s policy making.
Illustratively, some of these are - (a) Right to Education Act - proposed hike
in salary structure of teachers so that thousands of charitable schools
(NPO/NGOs) are not overwhelmed with losses; (b) Right to Food Act – the focus
should be addressing the needs of genuinely hungry population and wasted/
stunted/malnourished children under 5 years of; (c) Land Acquisition Relief and
Rehabilitation Act - laudable objective of fairness in compulsory acquisition
of land has been converted into an expansive ecological and social agenda; and (d)
Environment Protection Act which has become a bottleneck to investment because
of its sweeping authority and expansive mandate. Similarly, need is to revise
the Agricultural Produce Marketing Act and Essential Commodities Act which now
serve to swell middlemen’s profits instead of helping farmers as originally
anticipated.
Now
that election is over, there is an urgent need is to rein in deficits, both
fiscal and current account, and encourage domestic savings, and review fuel and
food subsidies. Fiscal discipline would allow the RBI to ease monetary policy
and stimulate investment and consumer durable demand without fear of increasing
non-performing assets or inflation.
PSUs and Productivity
As
empirical evidence suggests from cross-country experience, to stimulate
productivity, there is also a need introduce competition in public sector
monopolies. The government could examine
converting railways, ports and airports into publicly owned Ltd companies and
set up professional independent regulatory structure to oversee their
performance. Similarly, sale or disinvestment in competitive public sector
units in industry and finance (e.g. steel, airlines, hotels, machinery; banks,
insurance) could also be considered.
To
sustain higher growth, and facilitate trade and commerce, it is important to
have good infrastructure both in rural and urban areas. Therefore, high quality
national road network and encouragement to e-commerce would be the most cost
effective stimulator of economic development. Finally, to ensure healthy
population, and reduce disease, malnutrition and child mortality, sanitation projects
need to be emphasized.
Conclusion[i]
A
slew of fundamental reforms exploiting the inherent demand within India,
especially rural, can sustain Indian GDP growth at over 8 percent for the next
few decades despite global slowdown. It is not necessary to accomplish all the
listed reforms but it would be essential to outline the broad direction of
reforms and establish credibility in implementing them.
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A version of this article appeared in the Indian Express of Friday June 20, 2014, under the banner, "Now, rewrite the script." http://indianexpress.com/article/opinion/editorials/now-rewrite-the-script/ .
[i]
For further details see, Arvind Virmani, “National Agenda For Growth
and Welfare” Policy Paper No WsPp1/2014, January 2014. https://sites.google.com/site/drarvindvirmani/policy-papers .
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