Home / Opinion / Online-views /  Opinion | A pause in the reform agenda

Caught between the compulsions of a win-at-all-costs political strategy and an ostrich-like approach to new ideas, the government has put structural reforms on pause.

The early years of this administration saw an attempt at reforms that spanned the full spectrum—from bold and significant (bankruptcy law) to pretty good (goods and services tax, though implementation was below par) to ludicrous (demonetization). Unless you count the deeply under-thought and under-funded national health insurance scheme called Ayushman Bharat as reform, nothing much at all has happened in 2018.

The reform cushion that the Bharatiya Janata Party-led government enjoyed from 2014 to 2018 came from two sources: a legislative majority and an oil price that remained significantly below $60 a barrel for much of that time. In 2018, oil prices have risen and reached an average of over $75 a barrel. At the same time, buoyed by tax cuts, the US economy has been on a tear. Consequently, US dollar short rates have been rising and Indian interest rates have increased in response to temper the threat of imported inflation from a weak rupee and a wobbly current account. Each extra rupee on the exchange rate means an increase in the import burden of 12,000 crore, and each extra dollar per barrel of oil implies about 8,000 crore on the current account.

Legislative productivity in terms of new bills has been extremely light as well. Only one new bill (all others are amendments) has been passed in 2018. The Fugitive Economic Offenders Bill 2018 that replaces an ordinance of the same name can be argued to be as much a political bill as an economic one. To be fair, others like the Muslim Women Protection of Rights on Marriage Bill 2017 (also a social/political bill) have been passed by the Lok Sabha and are presently stuck in the Rajya Sabha. However, no significant new bills related to agriculture or labour have been passed during the entire term of Prime Minister Narendra Modi.

What remains to be done and will the reform pause break with the completion of the general elections in 2019? With oil prices remaining stubbornly high and a significant legislative majority appearing difficult on both sides of the political aisle, the prospect for reforms appears dim.

Significant structural reforms are still required. Here are some major areas.

Agricultural reforms: The gap between agriculture’s share of gross domestic product (15%) and the percentage of population dependent on rural income (57%) is unsustainably large. No country has been able to develop without a farm to industry/service labour transition. It is time for a comprehensive set of reforms in agriculture that results in a competitive, sustainable and diversified agricultural base. This will require imagination and persuasion. Land ownership (fragmented) and use, sustainable use of technology and fertilizers, diversified cropping methods, drip irrigation, information asymmetries in the route to market and many other vexing issues will need to be tackled.

Job creation: A cross disciplinary cabinet task force needs to be established for job creation. Obvious focus areas such as tourism and infrastructure are not being worked upon. Longer term drivers such as an upgrade in human capital specialization will have to be carefully thought through.

Labour market: Incumbent governments have shied away from labour market reform believing it to be political dynamite. However, India’s labour laws are a quagmire and have not been simplified and modernized for a 21st century economy. In addition to simplification, a key requirement will be to make employee benefits such as health services and disability payments convenient, accessible and better quality. While the apprentice law has been changed, it has lacked momentum in implementation.

Public sector bank (PSB) reform: The government’s approach to PSB reform has been timid. While non-performing loans are the current problem, governance is the core issue. Government ownership should be consolidated in a holding company that permits independent boards and managements at each of the underlying banks. Over time, this ownership should be reduced in such a manner that the government’s ownership becomes a minority. In today’s economy, there is no logical reason for it to own such a large portion of the banking sector.

Female empowerment: Gender equality is not merely a desirable social objective, it has great economic implications for India. If female workforce participation in India matches China’s, India’s rise to prosperity will be greatly enhanced. Women need to be encouraged and incentivized for education and jobs.

Other reforms: There are a whole host of other required reforms, including judicial capacity and speed, police reforms, genuine improvement in ease of business (rather than gaming the World Bank system), reservations reform, and the reform of electricity distribution companies.

India has great potential to lift its trend growth rate from about 6.5% to 8%, but this will not happen with mere sloganeering. It will require reforms of the type mentioned above to lift total factor productivity.

Every 1% increase in trend growth rate will lift 25 million households out of poverty a full generation earlier than otherwise. The current pause in reforms comes at great cost to the poorest Indians.

P.S: “You may delay, but time will not", said Benjamin Franklin.

Narayan Ramachandran is chairman, InKlude Labs. Read his earlier columns at www.livemint.com/avisiblehand.

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