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Raipur: Road construction enroute to Sukhma. (Mint)
Raipur: Road construction enroute to Sukhma. (Mint)

India should use this economic crisis to implement Reforms 3.0

We must be bold about our aspirations and use this chance to push ahead with tough reforms that could revive our economy

The covid-19 pandemic has, by default, left India with a “good crisis". India’s economic goose was being cooked on “slow boil" from late 2016 onwards, with demonetization, shoddy implementation of the goods and services tax, the Infrastructure Leasing and Financial Services crisis, and anaemic investment spending against a backdrop of a dysfunctional public banking system. The government correctly imposed a strict lockdown in late March that was well complied with, but appears to have lost both the public-health and economic plots since then. Today, India finds itself with the worst large-country economic performance of all.

Now is the time to both accelerate reforms and be bolder in the aspiration for change. Here is what the government should do:

Monitor the economy: The pandemic has fully demonstrated the need for transparent, fast, accurate and non-politicized data as the basis on which to make decisions. The country must initiate steps towards a non-partisan data gathering and dissemination body that could dramatically lift the quality and type of data gathered on the economy. We should begin with an independent fiscal council tasked with putting out objective data on budget revenue, expenditure and taxes. We must gather high-frequency indicators for the economy, not only for economic activity, but also for labour markets. Our labour-market data is particularly poor and contributed at least in part to the shameful reverse migration of labour during the lockdown. The currently disempowered National Statistical Office (NSO) should become an independent authority reporting to Parliament. An apolitical, high-quality NSO with an independent fiscal council will serve as a strong foundation to go about necessary structural reforms.

Reform labour and education: This third generation of reforms would admittedly be more difficult to do than the first two because it must deal with factor reforms and “wicked" problems. The two major foundational pillars for job growth over the medium- and long-term are: 1) an industrial-strength apprentice and vocational training system in India; and 2) a quantum jump in the quality of our education. The government has made impressive strides on both counts with recent efforts to streamline legislation through four labour codes and with its National Education Policy 2020 (NEP). The consolidation of 29 labour legislations into four codes reduces both the time and cost of compliance for employers, and also aids the formalization of job contracts with employees. The code on wages modernizes provisions and rationalizes civil and criminal penalties, thereby making the system less susceptible to corruption. Building on this momentum, we must institute reforms that allow straight-through compliance processing for all labour codes, rationalize penalties to make them more effective, and fully decentralize minimum wage setting to states. While the NEP is not fully binding on states, its thrust for foundational learning and regional language education until Class 5, its modular building of college credits, its multidisciplinary emphasis in higher education, and its vocational streaming from high-school onwards deserve to be developed fully.

Turn over agricultural practices: The government has taken a step in the right direction by deregulating farm-to-market supply chains, reducing the number of commodities under the Essential Commodities Act, and letting farmers de-fragment their biggest asset, which is land. These reforms, if fully implemented, will dismantle the elaborate middle-man patronage structure that has evolved in various states. Much more action needs to be taken on improving the fundamental returns in farming through a new green revolution that emphasizes appropriate water-use based rotational cropping, the use of higher quality seeds, the sustainable and frugal use of fertilizers and the deployment of farm technology to improve yields and efficiency. We will need greater focus on production and the indirect implications of rural displacement of labour.

Fix the dysfunctional public banking system: Public sector banks are in desperate need of governance reform and equity capital. The government has been timid and unimaginative with solutions, and seems not to have understood that balance-sheet crises cannot be fixed incrementally. A weak banking system has gummed up a re-start on the economy. Unless we equitize, change governance and place bad assets in a “bad bank", India is likely to see a very patchy economic recovery.

Multiply infrastructure: While there has been a lot of discussion about fiscal stimulus packages, a debate on their multiplier impact on spending has been muted. The “fiscal multiplier" estimates the ratio of economic output to input. The effect of a direct-to-citizen fiscal stimulus can be estimated using the marginal propensity to consume, which will be greater for households whose livelihoods have been severely impacted by the crisis. The most effective method in the long-term for both employment and output generation is to use fiscal spending for capital infrastructure. It has knock-on multiplier effects on an entire supply chain. Also, properly-conceived capital projects, once completed, inherently improve economic output.

P.S. “We cannot solve problems with the same kind of thinking we used when we created them," said Albert Einstein.

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