The government has announced a number of major post-Budget initiatives to kick-start the economy and to accelerate growth. In the last month or so, there have been announced a number of tax reliefs and concessions, followed by liberalisation of Foreign Direct Investment (FDI) policy in key sectors, merger of public sector banks, and the big one—sweeping and unprecedented corporate tax rate cuts.
These will all have an impact. Will they be enough? Can and should more be done? To rebuild growth, the reforms momentum must keep going. There are at least five big reforms that need doing, can quickly get-off the ground, and which will have lasting positive effects on growth.
The first is divestment of public enterprises. This is indeed a logical follow up of the corporate tax reforms, and can have a similar impact on sentiment. Disinvestment, sell-offs, asset monetisation and closure of public sector enterprises are all actions crying to be done. Despite being talked about a lot, these haven’t yet got going.
The beauty is that the preparatory work is mostly done. The blueprints are ready. Even for something like outright closure, which governments usually shy away from, a successful model was developed in the last term of this government. I have written about this model in these columns. Action on these fronts is eminently possible. Just the decision to get going is needed.
The second, and arguably even more important reform needed is the liberalization of agricultural markets. Agriculture has escaped reform all these years, and is stuck in a low-growth equilibrium. This needs change, and reform needs to be broad-based. With liberalization, farm efficiencies would go up. Farmers with marketable surplus will get better prices for their produce. The benefits would go deep.
Again, a lot of groundwork has been done. In its last term, the government had finalised and circulated two model Acts—the Agriculture Produce and Livestock marketing Act, 2017 and the Agriculture Produce and Livestock Contract Farming and Services Act, 2018. A committee of chief ministers has been set up to examine these further. There is also a Model Land Lease Act, 2016 under consideration. These legislations have enough firepower to kick-start the agricultural economy, and their implementation must be pushed.
Such reforms should be a no-brainer. But the potential losers from reform are the lobbies, often backed by political parties, who currently control agricultural markets. These have to be overcome.
The third big one is labour reforms. Here too, all the homework has been done in the last two years with four new labour codes being proposed to replace 44 labour laws. These new codes are expected to facilitate the ease of doing business. More significantly, the new laws will benefit the large unorganized sector, which as per the latest Economic Survey, consists of about 93% of workers. Opposition comes from powerful organized sector labour unions, both from the left and the right. Their turf, we must remember, consists of the more privileged 7% of the workforce! Government has to throw its weight behind its own reform agenda, for the larger good.
Fourth is direct tax reform. There is a case for drastic simplification of provisions and reduction in direct tax rates. Experience indicates that such reductions can be revenue neutral. A lot of work has been done. A draft Direct Tax Code is ready, and reports suggest that the proposals are in the right direction. Signals are that such reforms may be a part of the next Budget. Ideally, the reforms should be announced with a commitment to keep the rates unchanged for a defined period, say three or five years. This would bring the element of predictability that is needed to really encourage investment.
The fifth big reform is needed in the external sector, particularly to encourage exports. Many factors go into improving export performance. Subsidies and tax incentives have been the preferred policy so far. But exports have virtually stagnated in the last five years. We need to do something different, to dramatically prioritize exports, beyond the usual incentives given to different sectors. The right signals need to be sent.
One direct signal that hasn’t really been tried is exchange rates. The real effective exchange rate (REER) has been well over 100 over the last five years. Economists say that a REER over 100 broadly indicates that the currency is overvalued, putting Indian exporters at a comparative disadvantage. Why should this be so?
The rupee should be allowed to gradually find a level that makes our exports more competitive and gives our exporters a fair chance in overseas markets. This is not difficult. The simple reform needed here is only in the mindset……
This is not on the agenda of the government, unlike the other big reforms mentioned. But it is easily doable. Maybe the time has come to relook our exchange rate policy.
Worldwide experience on the political economy of successful structural reform has shown that a big bang approach, with speed of implementation, clarity and consistency in policy, and lucid communication of the rationale gives the best chance of success. The mere announcement of these initiatives and reforms will generate activity and infuse hope into the economy. When things start rolling on the ground, we can expect broad based growth to pick up.
What is to be done is known. As set out above, most of the things to be done are already part of the Modi government’s declared priorities.
How it is to be done is also known. Official-level homework has been done. Notably, the highest level of commitment and enthusiasm by the implementing machinery for any new policy is usually evident at the beginning of a five-year term of a government.
Five big reforms. Feasible. Will rebuild growth. No better time to get them going than now!
(The writer is former secretary in the Department of Heavy Industry (DHI))
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Updated Date: Oct 05, 2019 11:03:16 IST