But the strain is beginning to tell. Two points stand out. The first one, probably better understood and more articulated, is the problem of infrastructure. Even as the middle class devours the cars that multinationals produce, roads are choking. Even as the housewife fills her house with gadgets, power cuts increase. So this problem of infrastructure bottlenecks is visible, stark and dimensionable. The second point which also affects the growth of the economy in equal measure is the regulatory system, and this is where one can draw satisfaction from the record number of economic bills passed in Parliament last session. A closer examination, however, reveals that while much has been achieved, we need to do a lot more to modernise economic laws.
The Securitisation Law is a landmark legislation which has taken the entire industrial and financial sector by storm. In fact, its a three-in-one law. It includes a Securitisation Law, a portion to create and regulate asset reconstruction companies, and finally, a structure for securitisation of seized assets. Admittedly, the architecture of this legislation is as vast as the bad loan problem of the Indian financial system, which on last count stood at around Rs 1,10,000 crore. The Securitisation Law has given the lenders a powerful some would argue draconian weapon to get back their loans. They have the option of walking in and seizing assets or changing management. The borrower has no option and cannot get an injunction from the courts. The first notices under this have already gone and some irate borrowers have moved courts to stop this.
While lenders argue that but for something like this, they would also go down the tube with the borrowers, the borrowers say that it is the environment and the foot-dragging of lenders that has led to the present mess. It is necessary that all involved should sit together and make whatever amendments that may be required to ensure that while willful defaulters get no mercy, those who are victims of the system are not destroyed either. The coming days will see how the system is able to handle this situation before it turns into a crisis.
Another highly modern legislation which has been passed by both Houses of Parliament and awaits notification is the Competition Law. The law would provide a framework for preventing dominance in the marketplace. Cartelisation and predatory pricing would now be brought under the lens through a separate Competition Commission. In my view, while there could be two opinions on the ferocity of the Security Law, there can be no dissension on its merit. When we open up the economy and make the market rather than the government the arbiter of the destinies of business, it is absolutely necessary to have in place a proper law to ensure that might is not always right. In advanced market economies like the US, anti-trust legislation has become the focal point of protecting the consumer. The government should speedily set up this Commission and implement this law.
The introduction of a modern Value Added Taxation (VAT) system from 1st April has all the signs of being a landmark legislation. Different types of sales tax and octroi have ruined our economy by placing impossible obstacles in the free flow of merchandise. Thankfully, after much stone-walling by the states, the Centre will be introducing VAT all over the country.
We have achieved much but a lot remains to be done. There is another area of economic laws that we need to address urgently. This relates to reforming labour laws, and it is good to see that based on the recommendations of the Second Labour Commission, a Bill is on the anvil. Almost every investor domestic or foreign has gone on record to say that archaic labour legislation is one of the main bottlenecks in making investments in India. As economies get market-driven, chances of failure are high, and so investors are always looking for a way out. If we give them a red carpet to come in and then close the door behind them, they feel threatened and strangled. A proper labour policy, which allows managements to retrench workers with adequate compensation, has to be a basic ingredient of our economic laws.
It is not just the US or UK that have this, even China, Singapore and South Africa have it. If we did this, the size of the cake would be bigger, and the labour market more vibrant. It is a pity that employment in organised industry has actually come down in the last few years in spite of impressive rates of growth. More investment leads to more production, which creates more jobs. This is the basic cycle which no one can stop or change.
The time is ripe for making a serious dent in economic legislation. We need to remove many laws that hamper agriculture and prevent it from becoming a profitable business. We need to open up our foreign exchange regulations even more, and this could be the opportune time to do it. Experience over the last few years has taught us that there would be opposition to any change but once we show the necessary determination to do it, the opposition suddenly withers away. Year 2003 may go down in history as the year where we installed the software in the reform computer.
The author is a Delhi-based investment banker and Convenor of the BJP Central Economic Cell. The views expressed herein are personal. He can be contacted at firstname.lastname@example.org