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Business News/ Opinion / Columns/  India has an opportunity to go in for a crisp set of bold reforms
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India has an opportunity to go in for a crisp set of bold reforms

Economic circumstances are converging to create conducive conditions for reforms that could quell the risk of stagflation

There is no magic to a calendar turn of the year, but taken together with the encouraging news that effective vaccines can be administered soon, it is time for the country to begin the task of reconstruction. (Mint)Premium
There is no magic to a calendar turn of the year, but taken together with the encouraging news that effective vaccines can be administered soon, it is time for the country to begin the task of reconstruction. (Mint)

As the page turns on an egregious 2020, a rebuilding opportunity is upon us. Around the world, the pandemic has caused havoc in public health and had an unprecedented impact on economies. For India, the timing was particularly unfortunate, coming as it did after the demonetization of late 2016 and the credit market slowdown of 2019. The Indian economic engine stalled in 2020-21 just as it was beginning to sputter to life.

There is no magic to a calendar turn of the year, but taken together with the encouraging news that effective vaccines can be administered soon, it is time for the country to begin the task of reconstruction. The Indian government may be tempted to continue its current approach of incrementalism. It has been timid in its fiscal response and has not gone far and fast enough to make the conduct of business any easier. Precise, bold strokes are needed. Here is a set of reform measures that should put us back on a growth trajectory.

Fiscal effectiveness: A large Keynesian fiscal package has been widely discussed as an approach to combat India’s demand collapse. Many developed countries have chosen to supplement unemployment insurance, provide ‘gap income’ to households and send ‘cheques in the mail’ to relieve their pain. This consumer stimulus has been supplemented with government investment in infrastructure projects to kick-start employment and demand. In India, since so many are outside the tax network, it is difficult to target households for money distribution. Some targeting can be done through Below the Poverty Line (BPL) household lists maintained by state governments, cross-referenced with federal cooking gas lists. Overall, the infrastructure route is a smarter and more effective approach. While the number of projects and the magnitude of spending does indeed need to increase, the more important thing is to achieve financial closure for existing projects and to implement them at speed. India’s implementation deficit is turning out to be its biggest impediment to growth. Adding dug up roads, incomplete bridges and silted waterways to a raging virus does more to gum up the works than to stimulate the economy. A completed road means new business, fresh demand and an opportunity to employ people in building other things that feed off that road.

Financial closure requires imagination and boldness. If a private business like Reliance Jio can attract major sovereign wealth funds to its capitalization-table on the strength of India’s growth story, there is no reason why the Union government cannot do so. Persuasion combined with innovative structures, which might take the form of guarantees and special provisions for equity investors, may be the need of the hour. For smaller projects, closure can come from domestic investors. For this to take place, the banking sector needs to be recapitalized.

Revitalization of the banking sector: An incremental approach to fixing the balance sheet challenges of public sector banks (PSBs) will result in failure. PSBs need to be recapitalized to the extent of about $100-150 billion. This recapitalization should only be done after separating them into good and bad banks, and by creating a clear and time-bound plan for bad-loan resolution. A ‘good bank’ should bring in new talent, be distanced from government interference, and be set on the path to eventual dilution of the government’s stake in it. A PSB-equity-holding company created by parliamentary legislation and staffed by independent and well-qualified personnel can create the required distance from the government and begin this process of revitalization. Without this, our growth trajectory after this massive pandemic shock will be tepid and uneven. To reach the micro, small and medium enterprises (MSMEs) that are the backbone of our economy, we need the PSB banking system (and in turn the non-banking finance companies that they on-lend to) to kick-start another credit-growth cycle.

The time to act is now: The good news for India is that foreign exchange reserves are at an all-time high of $580 billion, with a strong capital account balance and great stability in remittances. At the beginning of the pandemic, it was uncertain whether inward remittances would be sustained, but around the world and for India, the diaspora-remittance story has been a positive one. This means that foreign direct investors and foreign portfolio investors, along with the diaspora, remain positive on India’s growth prospects.

The extent to which the government shares this confidence, however, is unclear. India will likely have a window of opportunity to act decisively if the Indian currency remains strong, growth rises from its 2020 crater, and the country’s dollar reserves help dampen any external inflationary pressures. If we do not act boldly and quickly in 2021, this opportunity will transform into a “stagflationary quagmire". Because India’s supply chains are weak and not fully established, uneven demand-side stimulus could result in inflation. Therefore, India’s focus needs to be simultaneously on the supply as well as demand side.

India is a young country with at least a few decades of robust growth within our grasp. When it gets rudely interrupted, it is up to us to inoculate ourselves and move forward.

P.S: “Youth means a temperamental predominance of courage over timidity, of the appetite for adventure over the love of ease," said Samuel Ullman.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

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Published: 04 Jan 2021, 10:40 PM IST
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