Sixteen is a difficult age in anyone?s life. As the country?s economic reforms enter their sixteenth year, signs of trouble are everywhere. The momentum has slowed on several fronts and the troubled teen, like any other problematic teen of its age, is besotted with corrupting influences. In this instance, the Left and the debilitating roadblocks from bureaucracy and the political process are leading the teenaged reform process astray.
What is more, to take the analogy further, this particular teen seems uninterested in its parent?s advice. The team that fathered the reforms is still in charge, but Manmohan Singh and his reformers are finding it increasingly hard to steer the agenda in the right?and logical?direction. The problem areas are many. Because the teen has got good grades so far, there is evidence of complacency on the part of the parents. Such complacency is misplaced, and if stock is not taken now, the future of the reform process looks gloomy.
The need is to follow the example of another parent, China, which decided to discipline and direct its own reforms way back in the year 2000 with renewed vigour. The Chinese teen had no time to smell the flowers, it had to shape up and deliver. The Indian parents, alas, appear far more indulgent.
Take labour reforms, for one. Nothing has moved at all on this front. The same old archaic and frustrating laws are in place. Instead of reforms, we have evidence that the opposite is happening. There are moves afoot to extend the labour regulation in fields as apart as special economic zones, software and hospitality. Now is the time to proceed with a new hire and fire legislation if India has to sustain economic benefits and especially enjoy success in the manufacturing sphere. However, with an election year upon us, it is unlikely to happen.
India sits on $270 billion of foreign exchange reserves, and this is likely to balloon to over $300 billion by this time next year. Yet, the nerve to go in for capital account convertibility is nowhere in evidence. If there is one single agenda of reform that needs action, it is capital account convertibility. Here again, the Left is unlikely to approve, and the ruling party even less likely to act.
On the tax front, collections are at a record level. This is the ideal time to cut taxes and introduce measures that do away with unnecessary and complicated state level taxation policies that often increase the tax burden. However, the approach is the all too familiar ?if it isn?t broke, don?t fix it?. The truth is that in several areas, including personal income tax, there is scope for lowering taxes. The Union Budget is unlikely to take the tax bill by the horns and come up with a more radical tax cutting approach. The cushion of robust collections is not likely to comfort policymakers who are fixated on elections rather than economics.
The real laggard has been infrastructure growth. Project backlogs cost the economy a staggering Rs 105,000 crore in overruns. Some infrastructure sectors like electricity generation are in total disarray. The supply-demand gap has no bridge in sight. The result is a laggard effect, which, by some estimates, shaves a percentage point off India?s growth rate. A renewed focus and emergency attention is needed on power generation. With either gas or coal as the chosen feedstock for a national level energy generation mission. It is the same story in roads, ports and airports. The will to get governance going in core sectors is scandalously absent.
As for selling off cash-guzzling public sector undertakings, with the grip of the Left on the government tightening by the day, this item on the reform agenda is dead on arrival. Even as Indian corporates turn in record profits, our laggards in the nationalised sector keep bleeding. It appears that PSU selloffs are not on anyone?s agenda at all.
Finally, there is the issue of oil prices. India has no option on this one with oil again on the boil. The unending delay in rationalising oil prices is creating deficits of billions, yet the government has not had the nerve to take this crucial policy decision for six months now.
The troubled teen would do well to listen to some sane advice, but its attitude is coming in the way. If India?s economic reforms push ahead with a renewed focus, 10% growth is a possibility. If it turns out, however, to be a case of more of the same, then sustaining current growth levels will become a challenge in itself.
Happy New Year!