One of the key takeaways from Reserve Bank of India (RBI) governor Urjit Patel’s interview to CNBC-TV18-Moneycontrol is his not-so-subtle message to the Narendra Modi government on where it needs to act at this stage to continue with the reform agenda, so that the India growth story remains intact. The message pertains to areas -- land and labour reforms, which are highly politically sensitive and hence long pending.
Responding to a question by Rahul Joshi, editor-in-chief, Network 18 on whether India will be able to achieve nine percent plus growth rate any time soon, Patel said, “If very fundamental reforms take place, especially when it comes to factors of production like land, labour, then a higher growth rate is possible.”
In other words, this is a message to the government that beyond indirect tax reforms and subsidy rationalisation, it should look at other key areas urgently where the industry is suffering such as land and labour. The progress made on the Goods and Services Tax (GST) consensus is, no doubt, a major success in the reform programme of the Narendra Modi-government, but most economists have cautioned that unless the government follows it up with other reforms in the abovementioned two areas, the much-hyped big leap to the higher growth orbit won’t be a reality anytime soon. GST is only one side of the story.
True, there has been progress on multiple incremental reforms after Modi took charge in 2014. The PM has carried on with the subsidy reforms baton from his predecessors such as the UPA government’s Aadhaar-based Direct Benefit Transfer programme. Ever since the government initiated subsidy reforms, linking Aadhaar numbers of individuals and their bank accounts, it has saved Rs 26,408 crore in the past two and half years up to December 2016 by directly transferring subsidy to user bank accounts in LPG.
So far the government has linked 39 crore Aadhaar numbers to bank accounts and has issued 111 crore Aadhaar cards to a population of 128 crore. The government has also linked over 18.73 crore LPG connections, over 16.62 crore ration cards and over 8.61 crore MGNREGA cards with Aadhaar. Continuing this exercise in food and fertiliser subsidies is crucial to cut down the government’s overall subsidy burden and, here too, the process has begun. Total subsidy burden constituted 15 percent of government’s revenue expenditure in 2016-17.
Similarly, the passage of the bankruptcy code is seen as a major step to resolve the pain banks face in the recovery of corporate loans. For a banking system that is neck-deep in bad loans (about 12-13 percent loans in the stressed category), the absence of a strong bankruptcy code has been a major issue. But the government is still tasked with preparing the infrastructure ready in the banking system.
According to Nomura, India currently ranks 136 in the World Bank's resolving insolvency ranking and it takes 4.3 years to resolve insolvency and the recovery rate (at 25.7 cents to a dollar) is very low. Therefore, a consolidated legal framework for resolving bankruptcy will play a key role in improving the ease of doing business in India. But, NPA resolution remains a major challenge with the pace of NPAs in some state-run banks remaining high.
After GST, the big task for Modi government is land and labour reforms. Making land available to industries, especially foreigners who want to set up factories in India, is key to Modi’s Make in India program. In the last budget, finance minister Arun Jaitley had said that the government will allow private companies to manage, operate airports in smaller towns and cities under public-private partnerships; but this alone won’t help unless there is a comprehensive land policy for industries.
On labour reforms too, the NDA government hasn’t made much progress. Modi, who endorsed labour reforms in his earlier avatar as Gujarat chief minister, hasn’t managed to overhaul the complex labour laws in the country. Almost two-third of Indian workers are not protected by any laws and are outside the organized structure. The Modi government has to address the issue to deal with the emerging workforce and improve ease of doing business negotiating with the country’s powerful trade unions, including the right wing unions.
During the CNBC-TV18-Moneycontrol interview, Patel also hinted that a very high growth without the necessary infrastructure, something we have seen in the past, may not have been sustainable. “…the fact is we did grow at some point, faster than where we are now, but it could very well be that that was unsustainable and this is sustainable. So, 7.5 percent growth rate is not something to be disappointed,” Patel said. The central bank governor's argument of high-yet-unsustainable-growth is something that his predecessors such as Y V Reddy too have talked about in the past.
In the last policy announcement, the monetary policy committee had expressed optimism of a growth rebound in the next year when the demonetisation impact fades away and spending picks up. Patel repeated that in the interview.
“There are some good reasons behind that recovery. One is that international trade, especially exports after a long time are now showing some life. We have had 5 months of positive export growth. I think the Budget has provided impetus to key sectors which has multiplier effects - realty, housing, the rural segment. Over time we will see that some of the capacities that had been installed in the past will come up for expansion,” Patel said.
Further, the governor expects a pick up in private spending in the second half. “Private investment demand is something that maybe in the second half of this year will give a fillip coming from that source also. So, our central estimate for next year is 7.4 percent which I think is a highly respectable growth rate under the circumstances.”
Throughout the interview, Patel sounded a big optimist on both the demonetisation outcome and economic growth scenario. One needs to wait and watch if Patel’s optimism indeed translates into reality. The pain inflicted by demonetisation on the economy is hard to repair and is, certainly, time-consuming. But, Patel has surely passed a message to the Modi-government on certain critical reform issues.