Is India trapped in Lilliput state? – IV

The reforms of 1991-93 were based on three fundamental principles that were not explicated:

* Partial withdrawal of the state from suffocating interference in the economy.

* Introduction of market principles and competition into the Indian economic model by delicensing and partially freeing trade and prices.

* Gradual reversion to financial probity in the handling of public and corporate finances and the management of internal and external accounts.

For India to realise its destiny in becoming a developed nation and a global power, these principles should continue to guide the next phase of reforms to retain/achieve global competitiveness in services and manufacturing, but with some essential additions such as:

1. A commitment to progressive but time-bound withdrawal of the state from direct engagement in economic or financial-services activity through ownership of industrial, trading or financial enterprises of any sort (except perhaps in times of acute crisis when temporary intervention may become necessary to prevent implosion and restore stability and confidence).

2. A commitment to ensuring and enforcing better standards of public and private (corporate) governance to reach world standards within a decade by:

* Confining the role of the state to being an enabler in normal circumstances (intervening temporarily only in the event of crises) and to that of a playing-field leveller, enabler of genuine, fair competition.

* Focusing on improving arms-length, impartial regulation and regulatory capacity by applying world standards of regulation in every area of economic activity to ensure sound corporate governance for producers, as well as consumer and investor protection, along with the application of world class quality, health, safety and behavioural norms in regulating activity.

3. Integrating the Indian economy and financial system seamlessly into the global economy and financial system in a phased, properly sequenced manner over the next decade, which means:

* Improving the efficiency and cost-effectiveness of India?s financial system (that supports economic activity) by revamping the role, functions and independence of the RBI to convert it into a monetary authority, and overhauling the financial regulatory/supervisory system by moving towards having a single financial services regulator that is separate from the monetary authority.

* Levelling the playing field for all players in banking, securities, derivatives, insurance and asset management segments of the financial services market with no preferences being shown in the treatment (in terms of market access and market share) of public or private, domestic or foreign players in any of these segments. All players should be treated equally and regulated equally in keeping with domestic and international home/host country rules and regulations. There should be no artificial suppression of the activities of any player.

* Opening up the capital account fully and removing petty, counterproductive restrictions on inward FDI and FPI flows that impede rather than accelerate India?s development through a faster rate of aggregate private investment in infrastructure and the productive economy.

* Pursuing an aggressive time bound programme of financial system reform that enables India to enter the global market for financial services and increase its share of exports in that global market.

4. Restoring the integrity of public finances that have gone astray by applying time-bound measures to reduce the fiscal deficit to zero by the end of the decade.

* Fiscal policy should be aimed at running a balanced budget or a surplus in boom times leaving room to incur counter-cyclical deficits during economic cycle downturns.

* Limiting public borrowing to finance only genuine investment in public infrastructure and not to finance recurrent budget deficits in perpetuity.

* Abandoning all producer price subsidies at all levels of government for energy, fuel, fertiliser and food and switching to income subsidies for the poorest families instead, through the expansion and refinement of schemes such as the NREGS.

* Reducing the proportion of aggregate public debt from 85% of GDP to 40% of GDP by 2025 thus reducing the crowding out of the private sector from access to sufficient credit in India?s debt and capital markets, and permitting the debt market to develop rather than having it stifled by government monopoly over access.

* Progressive, irreversible privatisation (not just partial and creeping divestment) of public industrial, telecommunications and oil/energy/power corporations, banks and trading companies, openly and on a substantially accelerated scale to reduce the stock of public debt as rapidly as possible. That would create fiscal headroom for providing targeted interventions aimed at poverty-reduction in rural and urban areas. By 2020 government at central, state and local levels should have no ownership interests in any commercial or

financial enterprises.

* Using the proceeds of privatisation (i.e. asset sales) to reduce public debt stocks (i.e. liabilities which financed those assets).

Receipts from divestment and privatisation should never be passed through the recurrent account as extraordinary revenue to reduce the fiscal deficit in the year that such proceeds materialise. A distinction must always be maintained between capital asset/debt stocks and recurrent income/expenditure flows. Asset sales should go toward reducing debt stocks not toward reducing fiscal deficits. Indirectly they would reduce deficits over time by reducing the annual public interest burden.

5. Accelerating infrastructure provision by:

* Focusing public infrastructure investment on rural areas unlikely to be served commercially.

* Leaving infrastructure in urban areas (primary, secondary and tertiary cities and towns) largely if not entirely to the private sector to invest in, finance, own and operate.

* Privatising all public infrastructure providers (for power, water, telecommunications, transport, sewerage and sanitation) that presently provide services in such urban areas.

* Subsidising public-service provision conditions on private operators of infrastructure services in all urban areas.

* Permitting direct foreign entry into infrastructure investment, operation and service provision without constraints unless a key and obvious issue of national security is involved but not permitting the national security bugbear to impede or restrict foreign or private investment in any area (e.g. telecommunications or nuclear energy).

This would facilitate and accelerate infrastructure development to meet burgeoning demands for such services in urban areas without being constrained by the limitations on public finance.

6. Emphasising food security and rapidly increased agricultural production through the encouragement of corporate farming and farm-to-fork supply chains, while dismantling public food storage and distribution networks that are wasteful, inefficient and corrupt. India should permit the entry of global grain producers/traders and encourage Indian firms to compete with these global giants.

7. Realising that the most efficient and durable path to inclusive development is through expanding genuine employment in the economy rather than focusing on the creation of temporary, artificial employment measures as a welfare substitute. To achieve that India needs to revise and modernise its labour laws to permit global competitiveness to be achieved while encouraging labour rather than capital intensive investment in production.

At present India?s labour laws achieve the opposite by discouraging employment creation while protecting the rights of a labour elite at the expense of disenfranchising workers in the informal sector.

8. Recognising that no society can progress without improving standards of law & order and judicial functioning that are as dysfunctional and sub-optimal as India?s are at present. Reform cannot be supported or sustained, nor can India be globally competitive across the board, unless India?s judicial and legal systems are upgraded swiftly to operate with world standards of efficiency and probity in resolving conflicts and delivering justice in real time.

9. Emphasising targeted and rapid human capital development by opening up space for private institutions to operate freely but on a properly regulated basis in the tertiary and vocational education sectors as well as opening space for private profit-making as well as non-profit organisations in the primary and secondary schools sector. The goal should be for the public sector to finance demand for education services but withdraw from providing their supply.

Absent these actions India will run quickly out of a sufficiently well educated and trained labour force in key industries (especially IT-based and financial services as well as manufacturing).

10. Finally, next generation reforms need to be structured so as to disincentivise and root out the cancer of corruption that pervades Indian society, judiciary, administration and state-owned enterprise sector, from top to bottom?from the police, to high court judges, ministers at every level of central, local and state government, as well as managers of PSU enterprises and SOBs. Corruption is so deeply ingrained now (especially at sub-sovereign levels) that we all accept it as impossible to root out. But it has extremely high costs in terms of transaction costs, frictional losses, and acute uncertainty of processes and outcomes.

(To be concluded)

The author is an economics and corporate finance expert