Rejuvenating Indian economy

As the heat and dust of the elongated elections settle down, the essential task of governance begins. The promises of the contending parties and the aspirations of the people who voted to realise their dreams must balance. But for now, what should be the main agenda for the new government. Here is a quick look.

The new government must address the problems that had dogged the Indian economy in the last five years. These are: high inflation, twin deficits – fiscal and current account, dwindling manufacturing, low investment and plummeting overall growth rate.

Hence, the action agenda should specifically tackle these issues. As regards inflation, going by recent experience, India’s inflation management is integrally linked with development and management of the farm sector. Since 2006, India has been witnessing high inflation. More particularly, inflation had been triggered and pushed up by sharp price rise in select food articles. In an expanding economy and against the background of rising income levels, demand for food articles can be expected to be strong. Hence, a medium to long term programme need to be formulated and implemented to augment supply of critical food items. These include raise production of vegetables, onions, potato, fruits, milk and protein items which means encouraging dairy, poultry and animal husbandry activities.

The second aspect of inflation is the rigidities in supply chain network. Being a tropical country, the level of wastage of perishable items is high. This underlines the need for actively pursuing policies for building cold chain network for smoother transportation from the fields to the final consumers. Two specific action agendas should be to formulate a national horticultural mission for promotion of production of vegetables and fruits and corporate farming or greater involvement of corporates in forward purchase of produce for farming. Besides, direct involvement of retailers in procurement and distribution of food articles, with the requirement of back-end cold chain infrastructure development, could help bring down wastage as well as improve availability through seamless transportation and distribution. As for manufactured goods inflation, we have witnessed that manufactured goods’ prices have risen at lower than the indicated comfort levels most of the times.

Fiscal deficit cannot be contained without addressing the issue of subsidies. This year budget hides the real size of deficit by pushing many of the outlays out of the budget and onto the next one. Elimination or subsidies is not real politics, targeting is. Hence, all subsidies should be targeted. A general principle for targeting could be to move from price subsidisation to specific subsidies on the basis of income levels of targeted beneficiary groups. Why should even one subsidised LPG gas cylinders be supplied to an affluent household, owning several cars or having large declared annual income?

Food subsidy, which will jump following implementation of food security act, needs to be confined to the weakest income households, instead of covering 70 per cent of population. As for the external imbalance, proper pricing of India’s largest import item, petroleum, should help. Subsidised petrol prices add to fiscal deficit which also spills over into the current account. Additionally, gold import restrictions should continue. Lastly, FTAs should be so structured that they help increase India’s exports not contribute to increase imports. Most FTAs have been seen to have contributed to increase imports. We have noticed over the last two years that the growth of industrial sector had turned flat. Within this, manufacturing growth have been stymied and India’s manufacturing industry is contracting. This needs to be reversed. A major aspect of industrial stagnation has the real time shrinkage of upstream industries. Not only fresh investment in upstream industries had stopped, many of the upstream industries had been closing down. The output levels had dropped. A consequence of this has been increasing imports of raw materials from coal, natural gas to industrial intermediates. This development had been one of the contributors to the rising current account deficit. Revival of manufacturing is linked with two major reforms: first, factor market reforms; secondly, governance reforms.

Factor market reforms have become an imperative. Labour should be transferred to the states. States willing to reforms and liberalise labour laws should not be stalled for want of Central concurrence as has been happening. Labour law reforms of forward looking states could set others to follow. Land should be left at the hands of the private sector industry. State intervention in land acquisition has queered the pitch and resulted in politicisation. Instead, direct negotiations by landowners and industry could help nurturing a market in land which could result in genuine price discovery. Land use pattern changes should be declared well in advance. This influences price of land. 

Capital market should further be strengthened by nurturing a corporate debt market. India’s debt market is narrow and corporate debt is difficult to get ever since the development finance institutions were allowed to convert into commercial banks. It should again be examined if some long term debt institutions could be started. Above all, the ground level clearances and governance has to change. This calls for procedural reforms in the states. It should be easy to do business in India. In this context, environmental clearances should become norms based. The environmental authorities should set norms for compliance by industr4y. Industry should comply with the norms, instead of seeking approvals every time.

All these changes should in their aggregate improve India’s attractiveness for investment. Investment levels have fallen drastically in the recent years. India cannot grow faster without regaining its investment pace as in the years prior to 2007. Once again all these steps in their totality should help regain the pace of growth. 

Growth, in turn, is the surest way for generating employment. We need to create 1 to 1.5 million fresh jobs every year only to absorb the addition to work force. This also is the surest way of achieving poverty eradication in a sustained manner. IPA