1. Narendra Modi government must speed up land, labour reforms, make Indian manufacturing nirmukta

Narendra Modi government must speed up land, labour reforms, make Indian manufacturing nirmukta

The economy faces the spectre of slowing global growth, combined with muted private investment. During the last fiscal, private investment saw a measly increase of 5.8%. Focusing on underlying symptoms, diagnosis and treatment can lead to lasting improvements.

Published: October 16, 2017 4:19 AM
There is a welcome focus on discussions about reigniting growth. But most of these discussions have been reduced to the level of inter- and intra-party wrangling, with positions being taken to score political goals. (Reuters)

There is a welcome focus on discussions about reigniting growth. But most of these discussions have been reduced to the level of inter- and intra-party wrangling, with positions being taken to score political goals. Suggestions for improving growth are seen as being against the ruling coalition, while appreciating the economic reforms under way is accused of sycophancy. The economy faces the spectre of slowing global growth, combined with muted private investment. During the last fiscal, private investment saw a measly increase of 5.8%. Focusing on underlying symptoms, diagnosis and treatment can lead to lasting improvements. GST provides the platform for next generation of reforms. The malaise impacting growth in the private sector is the deadly concoction of high interest rates and reluctance of banks to lend for capacity creation. Indian SMEs have been the creator of jobs. The problems of banking sector are well known. Unmitigated past disasters in lending to the few and favoured have shut the tap of credit for a vast majority of SMEs. Most of these enterprises, which are run efficiently, are unable to expand due to high interest costs and onerous bank stipulations. Most business cases for investment cannot be justified at the 14-18% interest rates prevalent for such loans. The top elemental costs for any manufacturing entity are raw material, wages, interest, logistics and depreciation. In India, any entity is at a disadvantage due to high interest, logistics and compliance costs. These can pose up to a double-digit penalty, which more than offsets the relatively lower labour cost.

The solution is a radical surgery of the banking system. Inflation declined by 700bps in the last five years, but RBI reduced policy rates by only 200bps. A minimum 200bps reduction is needed to align real interest rates with global levels. This must be combined with a clear separation of existing bad loans, and calls for far-reaching reforms in banking. The government has shown its ability to take difficult economic decisions. Partial to complete privatisation of PSU banks with recapitalisation and operational autonomy is imperative. The banking system needs to be enabled to restart risk-based lending to manufacturing. In a successful capitalistic system, measured risk is encouraged and compensated over a pool of assets. Unless entrepreneurs and bankers are allowed to take informed risks and make honest mistakes, without fear or favour, growth cannot happen. It’s ironic we are celebrating e-commerce entrepreneurs who are selling goods below cost and losing millions in a rush for market share. PE firms invested $17.6 billion in Indian companies in the nine months of 2017. Most investments came from private venture funds that have limited tools to evaluate risks and no physical assets to fall back upon. Factories that provide employment and reduce imports are shackled with high interest rates. If we have to compete with growing imports, we need to encourage new private manufacturing enterprises. These will also be the companies that will contribute taxes and grow jobs.

South Korea, China and Japan supported private manufacturing to create enormous capacities for both domestic consumption and export competitiveness. India should identify priority industries where imports dominate, but which can be produced in India for local consumption and exports. Indian imports surged by 34% since 2009 to reach $357 billion in 2016, and 58.2% of these are from Asia and the top ten categories constitute 74.3% of all imports. Import of plastics and plastic articles that can be produced in India are up by 121% over the last seven years. Other examples are soft luggage and furniture—mostly imported from China but can be produced in India with the right interest rate regime and encouragement for entrepreneurs. India has $136 billion of foreign exchange invested in low-yielding US treasury bills. These can be used to encourage manufacturing investments by providing low interest rate loans to such entities. A thumb rule is: every new dollar of private manufacturing investment can generate between 1 (textiles) to 3 (furniture) dollars in annual sales every year when capacities can be utilised. An annual increase in loans by banks equivalent to the incoming PE value of investments in India can generate at least $20 billion in annual output increase with a lag factor. Think of the impact this will have on job creation!

The Modi government was elected on the basis of less governance. It’s time to accelerate labour and land reforms and allow businesses to focus on running their business rather than increased policing and compliance. It’s time we focus on the basics. The Sanskrit word ‘nirmukta’ means freed and liberated. It’s time to make Indian manufacturing nirmukta.

Sudhir Mehta
Chairman, Pinnacle Industries, Pune; Past Chairman, CII Western Region.
Views are personal

  1. S
    Shashikant
    Oct 16, 2017 at 10:20 am
    The article is well written, suggestions are very good but our government has some difficulty in: Labour reforms in India always hints at more job loss and exploitation. Imagine the Apex Court has to pass judgments in 2014 and 2017 on payment of wages for educated journalists. The labour authorities favour employer and not the employees. Our labour laws need to renamed as employers law. Labour reforms only possible if industry willingly decides in the interest of the workers. 2. Bankers cannot lower rates as we have comparatively less earning of dollars from exports than arbitrage. 3. GST has come under criticism and negative zone since government did not consider the C-efficiency of the country before brining it into effect. So tax-base and manufacturing activities are widened but collection is stagnant even lower.
    Reply
    1. I
      Indra
      Oct 16, 2017 at 8:34 am
      How can there be any drastic reform in labour policy with a big distruption such as demonetisation till the just few persons in the management take away all the profits through remuneration and dividends and other perks, leaving the minimal for those who don’t have any voice, and still they become target every time for cost reduction. Let the new management be more pragmatic and not work only for money by all fair and fowl means such as not paying the taxes, going to court for any little problem, not returning the loans. Why can’ t the business community help government in removing corruption by not paying any one anything in cash or kind to get their favour. Every one must appreciate one day some one is to do that. Let Modi be successful in GST and other reform related tax non-compliance and removing the corruption and inefficiency, reform of labour and land will certainly follow. Let the business men and traders not make the nation miss this get opportunity to be global players.
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