Home / Money / Personal Finance /  Do student protests precede big reforms?

The expectation from Budget 2020 is that it will provide a stimulus to the staggering economy by spending on infrastructure (that leads to job creation and higher wages) and by putting more money in the hands of the people to rekindle consumption by reducing what 35 million Indians pay as income tax. The spending on infra route has a delayed cycle of impact because it takes time for the projects to come up and the ripple effect of jobs and consumption to take place. Putting more money in the hands of the people has a direct impact if people indeed spend the taxes they save. The problem in India is that consumption may have stalled due to the informal economy holding on to their cash and not spending it. While getting the informal part to formalize is a waiting game, it does look as if the government has little option but to let go of the Financial Responsibility and Budget Management (FRBM) target for financial year 2020-21 that restricts the fiscal deficit to 3% of the GDP.

Governments tend to spend more than they gather as revenue resulting in what is called a deficit. To restrain governments, specially those in election mode, from spending their way to an electoral victory (the way UPA-1 did in 2008), the FRBM Act provides limits to the deficit. But there are times when these limits should be breached for various reasons and this year, say economists and experts, looks to be one of those years. But this extra spending will be a short-term solution to a much deeper problem of India trying to level up on an underlying system that is creaking and rotten.

One view of the current unrest in the country is that the protests are actually an expression of the slowing economy and all that accompanies it in the form of a slowdown in jobs and consumption and rising individual indebtedness. Those of us who were students in 1990 would remember the Mandal protests and how violently upset the student community was. Some of us now look back and see that the protests went viral during the time that India’s economic crisis peaked. By December 1990, India had just three weeks of foreign exchange for imports and we were a global junk bond. The crisis triggered the 1991 economic reforms that finally opened the door to lesser government stranglehold over the economy, greater private sector engagement and fewer licences. India went from a $270 billion economy in 1991 to just under $3 trillion in 2019. But the gains of the 1991 reforms have reached their limit and India now needs a new playbook for the next level of growth. The current slowdown and the unrest seem to be symptoms of the need to rethink and re-imagine the rule book one more time.

What must these reforms be? I had an interesting conversation last week with Rishi Agrawal who heads regtech firm Avantis that outsources compliance. Agrawal knows the innards of the various licences, compliances and filings that Indian firms are forced to go through and is of the view that unless there is a rationalization, simplification and digitization of these, Indian enterprise will remain shackled. A report by Teamleasecompliance.com and RuleZBook pegs the number of compliances at a huge 58,726, under 1,074 Acts and with 3,069 annual filings. Worse, this is a moving target with over 2,500 changes in the compliance and filing requirements a year. A regulatory framework is needed for oversight of the behaviour of firms, but if the cost of the regulation and compliance is so high that small and medium enterprises find it easier to bribe rather than comply, then the entire operation loses its meaning.

While technology and digitization can take us some distance, I think that the biggest reform is in the mindset of the rule makers and the bureaucracy who inherited a colonial set of rules and institutions and have largely carried forward their basic DNA. The DNA is one of extraction, distrust, rent seeking and harassment. There is a need to rework the entire structure of the way India thinks about business and those who create businesses. How to get businesses to do the right thing without killing them with compliance and filings is a question that the government needs to think through. It needs a system of effective regulation rather than a process-driven tick-box environment that serves little purpose other than to keep businesses informal.

An important step would be to stop treating wealth creators with distrust, disdain and suspicion. It is still a very ’70s and ’80s thought that you can only get rich by gaming the system. This change in mindset is needed not just in the government machinery but also in our educational institutions. The protesters who want bhook se aazadi (freedom from hunger) want a redistribution of wealth from the rich to the poor, but when we choke the means to wealth creation—private enterprise—there is only a limited state capacity that can give the jobs, handouts and study grants to just a few privileged people.

The current government has four years and some months left. It still has political capital left. It needs to fast-track the reforms that will allow entrepreneurs to flourish and make the next jump in growth possible and sustainable.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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