For actions to be proactive,not post-crisis,political discourse must involve more economics
With stalled growth,a precipitously dropping currency and the governments and the central banks hands tied,pundits talk of economic reforms as Indias only way out. The government claims to have kick-started reforms last year,having convinced the ruling party of their merits,but India observers continue with their hand-wringing.
Given the air-time and newsprint spent debating them,few seem to have much clarity on what economic reforms stand for,and what exactly is needed. Some have called the hike in diesel prices an economic reform,or even the restructuring of the debt of state electricity boards. These are,in reality,administrative decisions taken after much procrastination,and they wont,in any way,obviate a repeat of the problems. Then there is the naïve belief that the pension and insurance bills will somehow drive investment,or that approving FDI in multibrand retail should have galvanised the economy. Even the most cursory analysis can easily show that each of these undoubtedly positive potential steps has a rather insignificant impact on the broader economy. So what are the needed reforms?
To put things in perspective,let us look back and marvel at the magnitude of the changes we saw in the first wave of reforms,which lasted till 2003. Until the early 1990s,the private sector was not allowed to be in industries like telecom,civil aviation,power generation and metal production (look at where we are now); average import duties were 78 per cent in 1992 versus 7 per cent now; there was a dual exchange rate and currency controls. There are too many changes to enumerate,yet they are so dramatic that it is now hard to imagine the country without them.
Looking forward,to catalyse growth again,policymakers could target several inefficiencies. These include sharply increasing the number of taxpayers,creation of a truly national economic zone instead of state-level supply chains (both goals of the proposed and long-delayed goods and services tax),introducing time-bound clearances of projects (something the proposed National Infrastructure Board intended to do,but which got scuttled),breaking the cosy relationship between banks (especially public sector banks) and large corporate groups und so weiter.
These are non-trivial changes,and for well-justified reasons,require consensus building. That means astute politicking: how else do you get individuals to bargain away their rent-seeking powers in order to build a process that is more efficient and benefits the group? This has proven to be a difficult task so far,and it seems to be too late for the current government,in any case. With elections now approaching,the top of the mind concern for everyone is: which political party/coalition in government will drive these changes and which ones will not? What if we get a fragmented verdict?
History suggests one neednt worry about election outcomes: economic policy in India seems to have tremendous continuity,not least because political positioning is less economic,more social. Economic issues are debated,but the final arithmetic for each seat will still mostly involve caste and religion. In all but one of 23 budget speeches since 1991,if one hid the name of the finance minister and the customary quote at the end of the speech,where each FM puts in a personal flourish,it would be impossible to figure out which political party he belonged to. The pace of reforms remained surprisingly consistent till 2003,through governments that span the complete political spectrum: the Congress,BJP and Third Front. Ironically,the Left supported two of these governments. All governments extolled the virtues of low fiscal deficits,and then missed their targets: not unlike the weight reduction targets we set ourselves. We only act when the doctor (in this case the ratings agencies) gives an ultimatum,or we suffer a serious ailment (the rupees fall).
The one speech which read a bit differently was in 2004 (the first by UPA 1): among other things,the phrase no room for complacency had disappeared. It had appeared in every budget speech till then: the scars of the currency crisis of 1991 were still fresh. So in 2004,the government became complacent and stayed that way till 2011: you will recall how frustrating it was to see the government viewing an 8 per cent GDP growth rate almost as an entitlement. But as economic stresses became obvious,the complacency disappeared. The phrase made a comeback in the 2012 speech and reappeared in 2013.
But if the government was shaken out of its stupor a year and a half back,why havent we seen any recovery yet? A study of the first wave of reforms suggests it takes six to eight years for government intent to translate into meaningful job creation or growth. This shouldnt be surprising: India is a large and diverse country,and change is slow anywhere,especially when it is meaningful. Take a large global investment bank,for example,which announced restructuring plans last year: it took the new CEO two years to devise the plan,which would take another three years to execute. If an efficient bank with a few tens of thousands of employees takes five years to restructure,it is impractical for the Indian Central government,with 3.2 million employees and enormous inefficiency,to effect change in less than five years.
The complete lull in reform momentum seen in the last eight years,therefore,means that the investment cycle and therefore the economy is unlikely to recover meaningfully for the next two to three years,at least. Even the oft-discussed fiscal consolidation is unlikely to come about until the economy re-accelerates.
But some remarkable changes are already afoot,and one should take heart. With the government having lost numbers in the Lok Sabha,meaningful legislative changes are unlikely. But there is administrative action aplenty. Take,for example,the introduction of the base rate for banks. It widens and deepens Indias bond markets,and as corporates borrow from individuals through bond mutual funds,it dis-intermediates banks and thus also works towards breaking unhealthy bank-corporate relationships. The issue of new bank licences should further reduce the share of government-owned banks in a few years. Thus,without much political noise,the regulators are making the banking system incrementally more efficient. This is not very different from the way the airline,metals and telecom industries were privatised. Similarly,while the timing of opening up the capital account for debt investors was ill-advised (and we are already paying for it),its longer-term rationale cannot be questioned. Other steps to relax capital flows,as well as the series of free trade agreements,are also likely to make the economy more competitive going forward.
Much more needs to be,and will likely be,done in the coming years. But for actions to be proactive,and not post-crisis,political discourse will have to involve more economics. Right now,that seems several elections away. But,as always,one hopes the Indian electorate surprises those that write it off.
The writer is the India Equity Strategist for Credit Suisse