Now, rewrite the script

To revive growth, policy and institutional reforms are necessary. Begin with modernising the tax system.

Published: June 19, 2014 11:45:21 pm
A slew of fundamental reforms exploiting the inherent demand within India can sustain GDP growth at over 8 per cent for the next few decades despite a global slowdown. A slew of fundamental reforms exploiting the inherent demand within India can sustain GDP growth at over 8 per cent for the next few decades despite a global slowdown.

By: Arvind Virmani and Charan Singh

The new government has recently assumed office. The country is waiting with hope for new policy direction to revive the economy, especially given the disastrous growth record in the last two years. To revive the sagging growth in the economy, the need is to correct the mistakes of the previous government and re-establish confidence. In addition, it is a good opportunity to undertake fundamental economic policy and institutional reforms, in the immediate future. Therefore, it is a good time to reflect on the vision for the economy and suggest an agenda for reforms that the government can consider. The government needs to sweep away the Fabian Socialist (or Nehru-Indira) model of development that ensured that the licence-permit-quota raj seeped into every nook and corner of the Indian economy. This statist model is unsuited to a young, proud, modern India that wants “equality of opportunity” and “equal treatment” from the government it elects and the bureaucracy of “public servants”, instead of humiliation, harassment and worse from a “mai-baap sarkar”. And this is possible because of the thumping majority that the BJP has won.

There is a lesson to be learnt from the experience of the 1990s. The unshackling of the Indian economy during the mid-1980s and early 1990s raised its real growth rate to 3.6 percentage points above the average growth of the world economy during 1992 to 2010. But since then, the real growth differential has collapsed to 1.2 percentage points. The drop in the growth differential can be attributed to three domestic causes: first, an overemphasis on entitlements vis-a-vis empowerment; second, deteriorating governance (including corruption allegations); and finally, the failure to introduce policy, regulatory and institutional reforms, essential for sustaining growth and employment at its full potential. The fundamental objective of any Indian government must be to close the welfare gap of the Indian people with the rest of the world and provide employment opportunities through faster economic growth.

To take advantage of the demographic dividend, generate employment, and enhance public welfare, the government has to ensure that the economy revives to grow at its long-term growth potential of 8 per cent (or 6.5 per cent per capita) per annum. To help recovery, a reversal of the governance failures and regressive tax changes during 2010-13 could help. A return to the general philosophy of modernising the tax system, by reducing the plethora of state and Central taxes to a few and simplifying these by reducing exemptions/ deductions and reducing marginal rates, is imperative. This also requires the introduction of a GST or national VAT and the approval of a new tax code.

To revive growth, it is necessary that the government is able to establish the credibility of its intentions. Therefore, it would be important to improve governance in terms of the speed of decision-making and ensuring the implementation of those decisions. In view of the widespread allegations, a quick clean-up of the toxic residue left by the alleged scams would also help revive confidence in government. Institutional reforms in political systems, police and judiciary would help to address the issue of pervasive, systemic corruption and restore good governance on a sustainable basis.

A review of, and revisiting, a few controversial legal documents would also address the resentment of the larger public towards government policy-making. Some of these are: one, Right to Education Act — proposed hike in the salary structure of teachers so that thousands of charitable schools (NPO/ NGOs) are not overwhelmed with losses; two, National Food Security Act — the focus should be addressing the needs of the genuinely hungry population and wasted, stunted, malnourished children under five years; three, Land Acquisition, Rehabilitation and Resettlement Act — the laudable objective of fairness in compulsory acquisition of land has been converted into an expansive ecological and social agenda; and four, Environment Protection Act, which has become a bottleneck to investment because of its sweeping authority and expansive mandate. Similarly, the need is to revise the Agricultural Produce Marketing Act and Essential Commodities Act, which now serve to swell middlemen’s profits instead of helping farmers as originally anticipated.

There is an urgent need to rein in deficits, both fiscal and current account, and encourage domestic savings, and review fuel and food subsidies. Fiscal discipline would allow the RBI to ease monetary policy and stimulate investment and consumer durable demand, without fear of increasing non-performing assets or inflation.

As empirical evidence suggests from cross-country experience, to stimulate productivity, there is also a need to introduce competition in public-sector monopolies. The government could examine converting railways, ports and airports into publicly owned and limited companies, and set up professional independent regulatory structures to oversee their performance. Similarly, sale or disinvestment in competitive public-sector units in industry and finance (such as, steel, airlines, hotels, machinery, banks, insurance) could also be considered.

To sustain higher growth, and facilitate trade and commerce, it is important to have good infrastructure in both rural and urban areas. Therefore, a high quality national road network and encouragement to e-commerce would be the most cost effective stimulator of economic development. Finally, to ensure a healthy population, and reduce disease, malnutrition and child mortality, sanitation projects need to be emphasised.

A slew of fundamental reforms exploiting the inherent demand within India, especially rural, can sustain Indian GDP growth at over 8 per cent for the next few decades despite a global slowdown. It is not necessary to accomplish all of the listed reforms, but it would be essential to outline the broad direction of reforms and establish credibility in implementing them.

Virmani is former chief economic advisor, Government of India and executive director, IMF. He now heads Singh is RBI chair professor of economics, IIM Bangalore. Views are personal.

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