Economic reforms are best done brick by boring brick4 min read . Updated: 13 Jan 2020, 10:58 PM IST
Rather than big bang measures or a stealthy agenda, we can count on small but significant improvements
The accepted conventional wisdom is that economic reforms in India happen only in a crisis or by stealth. The big example of the former are the 1991 reforms, when the country faced a huge foreign exchange crisis, resulting partly from the fiscal profligacy of the previous decade. Another example is from 1999, when the telecom sector was in near bankruptcy, and that crisis led to the shift away from fixed fee for spectrum to revenue sharing. In both cases, there was considerable opposition to those reforms, but they were pushed through because the crisis left no other choice. Otherwise, more often than not, it has been economic reform by stealth. These are introduced without fanfare, often in the form of an executive decision rather than legislation. For instance, the expansion of the list of items under the Open General Licence for imports, which is a reform of protectionism, or the reduction in the set of industries reserved for small-scale businesses. A more recent example of a contentious reform was the insertion of an electoral bond scheme in the Finance Bill of 2018. There was hardly any debate. Reform by stealth offers the advantage of going in either direction. In 2013, faced with a potential currency crisis, the Reserve Bank of India (RBI) quietly retracted the limits on the liberalized remittance scheme (LRS), a reversal of an earlier step towards capital account convertibility, the journey towards which was also characterized by stealth. We might as well accept that India will never have reforms backed by conviction or ideology. Mostly, the moves are reluctantly made and the resistance is from industry or trade unions, not politicians. The Economic Survey of 2015 pretty much ruled out Big Bang reforms in India, calling instead for “persistent, encompassing, creative incrementalism" on them. This is the right mantra, and needs to be supplemented by the term “boring". It does not have to be by stealth, which could make them unpredictably reversible. Incrementalism implies continuity, not slowness, a sustainable speed that gives reforms predictability and stability. Here are a few examples to illustrate this approach of “chipping away at constraints". A big part of India’s food subsidy is the difference between the minimum support price paid to farmers and the (lower) price at which it is sold to consumers at ration shops. The amount spent annually can be higher than 1% of gross domestic product (GDP). How to reform it? The incremental approach is first to reduce leakages of the subsidy to non-farmers. So, an online registration system has been implemented, started first by Odisha but now extended to other states. Then biometric Aadhaar linkage has been made mandatory, to register farmers. Thus, when procurement is done, payments go directly to their Aadhaar-linked accounts. In Punjab, most procurement is done through middlemen, who receive a commission from the government. Now the government is insisting on proof that payments have been deposited into beneficiary farmers’ Aadhaar-linked accounts, before commissions are released. By spring, Punjab and Haryana expect most farmers to have switched to the e-procurement system. As non-farmers get eliminated, it will lead to subsidy savings, allowing us to limit the subsidy only to poor farmers. E-procurement also helps create a detailed database of potential beneficiaries. Even this “brick by brick" reform has faced stiff resistance from middlemen, who are fighting a losing battle. Another example is the fertilizer subsidy reduction. This column had argued that direct cash transfers to farmers won’t work, since half of them don’t own the land that they cultivate. Hence using land records for subsidy payments does not make sense. Also, poor cultivators cannot afford to pay upfront the full price of fertilizers and wait for subsidies to reach their bank accounts. And yet, there is incremental progress. Fertilizer firms are now being paid only after point-of-sale data is captured. Soon enough, a rich database of beneficiaries will get built and artificial intelligence tools will help target poor farmers better.
Sovereign gold bonds are another example. The use of paper gold greatly reduces imports of the physical metal and outgoes of foreign exchange. The sale of these bonds is being expanded, and they would eventually be everywhere, even at post offices.
A fourth example is of income tax notices. An under-appreciated reform, it requires that every notice has a computer generated document identification number. Without this, you can simply ignore the notice. This lowers harassment-related corruption.
A fifth example is the gradual increase in the threshold number of employees, below which no permission is needed from the government for shedding staff.
A sixth example is from a new category called account aggregators licensed by RBI. It allows users control over the digital data trail that their transactions generate, and they can monetize it or use it to enhance their creditworthiness. This is an incremental reform with huge ramifications.
These are just few of thousands of examples of reforms that are underway and have transformative power. They are incremental, not big bang, persistent but not slow, open and not by stealth, and finally, imaginative too, since they respond to real needs. Effective reforms are those that are done brick by brick, the boring measures that chip away at everything that constrains high, inclusive and sustainable growth.
Ajit Ranade is an economist and a senior fellow at The Takshashila Institution