Opinion | Policymaking needs an urgent reboot in India

On 14 September, the government of India announced a few measures to reassure the financial markets that there was no benign neglect of the fate of the Indian rupee. Most of the measures were meant to encourage short-term capital inflows from abroad. It was easy to fault those measures as either inadequate or symbolic, or as the wrong answer to the problem. To the extent that the government refrained from doing anything drastic, it was actually a good thing.

There are problems having easy solutions and then there are difficult problems. The exchange rate value falls in the latter category. The government’s focus on short-term capital inflows stemmed from two considerations. One is the concern that the governor of Reserve Bank of India (RBI) had flagged a few months ago in an article he wrote for the Financial Times. He feared that the supply of US dollar, globally, would dry up as the Federal Reserve shrank its balance sheet and as the US government issued more bonds to finance its budget deficit. The second consideration is that India’s short-term external debt (residual maturity of less than one year) amounted to $222.2 billion in the financial year ending March 2019. Funding a current account deficit of around $50-70 billion on top of this repayment demand for dollars, therefore, became both urgent and important. That is what the government is focused on.

Some felt that it was not enough for the government to curb imports, but that it should encourage exports. Precisely what is it that the government can do to encourage exports? Obviously, it cannot buy export goods and services instead of foreigners. It cannot offer export subsidies without running afoul of international trade agreements or Donald Trump’s tweets. It cannot stimulate foreign demand. Any government can weaken its currency more easily than it can strengthen it. Printing money without limit is possible and it will ensure that the external value of the currency weakens. But, making a currency stronger is a lot harder. India is doing the former—not necessarily willingly. It has no choice in the matter. Its domestic fundamentals ensure that. I had written about it in August (‘What the rupee weakness says about fundamentals?’, 20 August, 2018). Beyond that, fixing India’s export uncompetitiveness requires a fundamental reboot, not of the economy, but of policymaking in India.

Recently, A.K. Bhattacharya of Business Standard had written (‘Factor market reforms: States ahead of Centre in changing land, labour laws’, 17 September 2018) about the factor market reforms by states. States have responded to the onerous conditions of the Land Acquisition Act of 2013 by diluting the requirement of social impact assessments (SIA) that the Act mandated. More than the compensation, it was the comprehensive prescription for SIA in land acquisition that appeared to be the potential cause for delays.

The article provoked some thoughts in me. One, big ticket reforms make headlines. However, they can be diluted. There is both good and bad in that. The Land Acquisition Act, 2013, could have been a game-changer for the worse. In reality, it might not be because states have diluted it. This is a positive. In contrast, the electricity tariff reforms of 2003 could have been a big reform. Suresh Prabhu toiled hard for it. But states considerably nullified it as they were loath to allow tariff revision regularly. This is a negative.

So, headline-grabbing reforms may not mean much for the economy. If they do, that is a bonus. The policy reforms now needed are trickier because they are matters of detail—goods and services tax refunds, tax rules (retrospective claims), Securities and Exchange Board of India beneficial ownership rules, valuation premium paid to start-ups deemed to be income, sale of Indian assets between two overseas holders, price controls, minimum export prices on farm produce, invoking essential commodities Act, making e-mandis and real mandis work for farmers, reducing and streamlining the number of inspections, etc. Most low-hanging fruits of big-ticket reforms have been plucked. Getting these things right matter, because their damage-potential is rather high.

Most of the time, experts’ or economists’ diagnosis of the issues are sharp, but solutions underwhelm. That is because answers require “feet on the ground” awareness and not “high altitude” knowledge. That means casting the net wider for advisors who generate big ideas, know the implementation pitfalls, know the behavioural dynamics of the bureaucracy and the government system’s quirks, etc. But advisors need vision and guidance, and that is the task for the political leadership.

Hubris and complacency, pre-2008, was not the sole preserve of the West. India suffered from those maladies. Post-2008, the malady persisted. In fact, the crisis of 2008 has not left America, but India (and China) structurally weaker. As things stand, India is incapable of sustaining high growth over long periods. Political leaders have to grasp this reality. Their mission is more difficult than before. They have to roll up their sleeves and ensure that implementation is loyal to the spirit and vision of the policies. For example, it is one thing to announce measures to attract dollars to India, but another to impose restrictions on Indian-origin folks for managing funds investing in India. So leaders should be clear about the big picture they want to paint and be masters of the minutiae, too. It all begins with listening more and listening to more.

V. Anantha Nageswaran is an independent consultant based in Singapore. He blogs regularly at Thegoldstandardsite.wordpress.com. Read Anantha’s Mint columns at www.livemint.com/baretalk.

Comments are welcome at baretalk@livemint.com.