Inspire confidence, revamp social sector schemes, rein in bank NPAs

Written by Arup Roychoudhury | Updated: Mar 25 2014, 14:40pm hrs
India SchmesWe asked leading economists to mention 5 issues that must feature on the agenda of the next government.
What are the five most important things that need to be on the economic agenda of the next government FE posed this question to some leading economists and policy experts within and outside the government. The answer was unambiguous: Inspiring confidence among investors by ending policy dithering and implementing projects with gusto; boosting manufacturing by way of better policy coherence and labour reforms; rationalising subsidies and revamping social sector schemes to plug leakages while not deviating from the path of fiscal consolidation; and avoiding a banking crisis by taking steps to stem mounting NPAs.

With GDP growth plunging to under 5% and the investment scenario remaining dismal, the new government cannot postpone Track II reforms any longer, said Planning Commission member Arun Maira. Crisil chief economist DK Joshi stressed the need to continue with tough decisions on reducing non-merit subsidies such as those on petroleum products. CARE ratings chief economist Madan Sabnavis advocated a one-year programme to revive the power sector. Financial sector reforms (bolstering the corporate bond market), rise in farm productivity and policies to support SMEs also featured among the suggestions.

Arun Maira member, Planning Commission

India cannot postpone Track II reforms any more. Track I reforms are economic reforms opening up to FDI, financial sector reforms, etc. Track II means reforming institutions and streamlining processes for effective outcomes. Track I reforms may be the accelerator, but stepping on the accelerator without releasing the brakes on Track 2 can stall progress and slow growth, which is what has happened in India in the past few years. The five reforms that must be given priority by the next government are:

Improve regulatory environment for small enterprises. We need regulations no doubt, but the administration of regulations must be streamlined. Fewer forms, less corruption and speedier clearances must be the motto.

Implement infrastructure projects faster. Stuck projects are making investors wary of putting money into infrastructure. The banking sector is also under strain with past investments in projects not yielding expected returns.

Focus on how to implement big changes, rather than merely demand big-ticket reforms. For example, both trade unions and employers have been demanding labour reforms for over twenty years. We will not be able to make reforms until we get the stakeholders to work out what the reforms must be. Similarly, several big policy announcements, such as FDI in retail, have been stuck because all stakeholders are not on board.

Coherence for central government policies. Defence production and growth of manufacturing enterprises is stymied by policy contradictions among different ministries. For example, our trade policies facilitate imports while the industrial policy seeks to increase domestic production, which is essential to increasing employment.

Reform institutions, weed out corruption. The mistrust in institutions is resulting in protests. Leaders of political parties and government and business institutions must concentrate on reforming the institutions they sit atop.

DK Joshi Chief economist, Crisil

Improve business climate. Bringing in clarity on land acquisition, and fast-tracking project clearances is critical to improving the business climate, building a strong project pipeline and boosting manufacturing.

Rein in inflation. Work out a mechanism for coordination between the government and the RBI for a smooth transition to a low- inflation regime. For this, the government will have to ensure low food inflation and fiscal restraint.

Detoxify bank balance sheets. Bank NPAs are expected to rise to 4.4% of advances by end March 2014, and the number of assets that need restructuring has also grown swiftly. This needs to be corrected to allow the financial sector to facilitate growth.

Implement GST. This will be the most fundamental reform in the sphere of indirect taxation, and it will improve the efficiency of the economy and boost growth.

Fiscal consolidation. Continue with hard decisions on reducing non-merit subsidies such as those on petroleum products.

Madan Sabnavis Chief economist, CARE Ratings

Target 1% of GDP as part of the fiscal deficit that will be spent on pre-decided infra projects. This should be implemented with immediate effect, irrespective of how other expenditures or revenue shape up during the year. This will ensure a Keynesian thrust, which is irrevocable. Last year, the government compromised on development expenditure to balance the budget, and such situations should be eschewed.

revisit subsidy targeting. In the long run, we need to identify the beneficiaries for all schemes. In the short run, we should freeze these amounts and work on the principle that if the cost goes up, it has to be shared between the government and the recipients. Therefore, we must confine fuel subsidy to 1/12 of the amount for each month and, if it is breached, the cost should be passed on to the consumer.

Revamp social sector schemes to make them effective. The NREGA has done a good job of creating purchasing power, notwithstanding the leakages. But the scheme should be taken to the next level where we can create assets. Using such labour to support building of infrastructure with provisions for rudimentary training will help the cause.

Create a roadmap to revive the power sector. This would mean taking the states along, to ensure that the sector remains viable. The map should outline cost-sharing across the value chain to ensure that the sector is revived.

Have a clear policy for foreign investment. We need transparency while dealing with foreign investors as we need them more than they need us. We need to reassure them that no retrospective steps will be taken in terms of policy changes. Policies with respect to FDI in retail or insurance or pensions should be clearly marked with necessary safeguards so as to leave little room for ambiguity.

Anis Chakravarty Senior director, Deloitte

Revive manufacturing by sorting out supply chain issues and facilitating investment. Focus on de-centralised manufacturing-sector spread across rural areas (across industrial corridors). Generate employable human capital based on industrial skill sets.

Resolve fiscal issues. Ensure a viable divestment plan, in line with realistic targets. Meet expenditure leakages by controlling subsidies. Provide confidence on international taxation matters with well laid-out policies.

Have a viable trade policy in place to boost manufacturing competitiveness. A big fear is that if gold import restrictions are lifted, the CAD will widen. The new government should consider coming out with a viable trade policy focused on improving manufacturing competitiveness by going up the value chain, entering new markets for capital goods and maintaining quality.

Attract FDI/FIIs. This can be done by demonstrating India as a viable, long-term, investment-friendly destination. Policy certainty is essential in this respect.

Control inflation with supply-side measures. Having a base-level agricultural supply chain that is efficient will lead to a better farm-to-market flow. It will ensure that prices are kept in check and multiple middle layers are eliminated.

NR Bhanumurthy Professor, National Institute of Public Finance and Policy Continue with Aadhaar. This would help in better transmission of government policies that are counter-cyclical.

Chart out policies for growth of MSME sector. We need policies that lead to better financial access for productive sectors, particularly the unorganised segment.

Avoid policy reversals. The need of the hour is well-informed policy decisions even if the implementation gets delayed. Policy reversals are worse than policy paralysis.

Coal and power sector reforms. These are required for better allocation and better pricing regulation.

Gradual elimination of oil and fertiliser subsidies. Food subsidy has to be channeled through Aadhaar. More focus should be on meeting the revenue deficit target rather than fiscal deficit target.

Sumant Sinha Chairman & CEO, ReNew Power

Fix the macro. There is a great need to revive growth by fixing the supply side and ensuring that investments pick up. I expect the new government to continue fiscal reforms.

Need for new and improved infrastructure. The incoming government should take action to make sure that projects of national importance go ahead, and mitigate the risk of delays or cancellations. The country needs uninterrupted, 24x7 power supply with greater emphasis on renewables as a sustainable solution in the future.

* Revive stalled projects, revive economy. This will go a long way in reducing the banking systems non-performing assets and kickstart the credit cycle. The government should ease the regulatory burden and simplify procedures, which, in turn, will make people less averse to risk-taking.

Conceive, drive and execute large projects. Kickstart projects of large magnitude, such as building 100 new cities, industrial corridors, big solar parks, growth in offshore wind projects, interlinking of rivers, high-speed trains, etc. All these projects will go a long way in reviving the economy.

Eliminate policy paralysis. There is a need to reduce friction in the Indian economy by making land acquisition time-bound, introducing tax reforms and administrative reforms for faster project clearances, and moving towards decisive policy-making.