What does 2010 hold for the Indian economy? The finance minister recently tabled the mid-year fiscal review in Parliament, with a growth forecast for 2009-10 leaning towards 7.75% This looks like a good bet, despite concerns about the fiscal deficit and food price inflation. The best defence against these challenges is to keep reforming the economy in ways that relax constraints on growth, or provide positive contributions to the growth process. What is on the reform agenda?
Financial sector: Financial sector reform is high on the list of priorities, and several recent committee reports are in hand. The Prime Minister publicly stated in November that India needs to develop long-term debt markets, deepen corporate bond markets, strengthen the insurance and pension sectors, and improve futures markets for better price discovery and operation. One key issue is the development of appropriate regulatory frameworks. Another is that of drafting and passing appropriate legislation where needed. Some boldness on the microeconomic front is called for, since domestic financial development can lubricate growth.
Industry: There is an effort to restructure existing public sector firms in heavy industries such as steel, and to attract significant new investments from large foreign firms. This involves tackling problems in the land acquisition process, as well as reforming mining laws to provide access to raw materials. Textiles, important for employment, are slated for modernization to reach new markets and segments, but tax and labour laws provide disincentives to expand. Food processing is a natural industry for India’s level of development. The main challenge is creation of an adequate supply chain infrastructure. Foreign direct investment (FDI) is permitted, but has not materialized at any significant scale. The large number of very small farmers makes it difficult to coordinate changes. A new Companies Bill aims to strengthen institutions of corporate governance, and improve disclosure and transparency, but also would streamline bankruptcy procedures. That would improve the investment environment, and is part of needed reforms to make it easier to do business. The government has also announced that it plans to divest shares in unspecified public sector enterprises: Even if it retains control, this can enhance efficiency by bringing in new stakeholders.
Infrastructure: The electric power sector has been a continued drag on economic growth and past reforms have not accelerated capacity increases. The cabinet has approved streamlined procedures for setting up large new power plants. Nuclear and renewables are also being pushed, but progress is slow. Road building, another critical infrastructure component, encountered implementation problems under the last government, but now is back on track. Private participation in these and other infrastructure projects is gaining traction, with improved capacity for structuring financing. Here, too, the process of land acquisition is a challenge, and new legislation may face an uphill battle. Railways and urban infrastructure are two other areas with plans for significant investment.
Taxes: The new direct taxes code provides consolidation of procedures and regulations, streamlining and greater clarity. A Bill has already been introduced in Parliament. For indirect taxes, the goods and services tax (GST) is a high priority. It consolidates earlier reforms that introduced value-added tax (VAT) systems in the states as well as the Centre. The goals of GST are to harmonize tax rates, coordinate the Central and state tax systems and broaden the tax base to include services in a unified manner, rather than the previous piecemeal approach. Tax reform has been an unsung hero of economic reform, and has done much to support higher rates of growth and increased government expenditure on the poor.
Education: There is now a clear recognition that the domestic supply of higher education in India is unduly constrained. A key issue has been the question of entry of foreign educational institutions into higher education in India. There is continued suspicion of private for-profit educational providers, but proposed legislation at least provides a framework, otherwise lacking, for new entry. This will remain a political battleground, but at least the battle has been joined.
Agriculture: Reforms in this sector are tied to the development of food processing, and the provision of rural infrastructure. Access to credit, rural employment and crop insurance are all important policy concerns, and have been receiving national policy attention, including in the context of financial sector reform. Since agriculture is a state subject, tackling inefficient subsidies, procurement and restrictions on interstate trade is difficult.
Law and governance: Legislative actions are already being initiated on increasing judicial accountability, particularly with respect to control of corruption. The old issue of reducing judicial delay has been raised, but there are no concrete proposals yet. An administrative reforms commission has submitted a dozen reports on a wide range of issues: the 10th outlines reforms for personnel policies, including a proposal to allow greater entry at senior levels of the civil service.
This is a rich agenda for achieving sustained inclusive growth, and a happy 2010.
Nirvikar Singh is a professor of economics at the University of California, Santa Cruz. Your comments are welcome at email@example.com