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 1/3
rd
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.
[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.
