INTERVIEW | India needs bold reforms, reliable power supply to benefit from US-China trade war, says expert

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Updated: Oct 27, 2019 4:37 PM

Modi government lost some reformist zeal by the end of its first term. The slowdown may be a cyclical thing tied to global trade matters: Richard Rossow

investment according to your age, investment strategy, investment tips, mutual fund, bank FD, RD, PPF, liquid fund, bond, cash, savings, capital market, investment instrumentsRichard M Rossow is hopeful that the US will offer trade concessions to India, but feels the latter also needs to open up a little more.

Richard M Rossow is one of the foremost India experts in the US. He holds the Wadhwani Chair in US-India Policy Studies at the Center for Strategic and International Studies, a think-tank based in Washington DC. Prior to CSIS, he has worked at McLarty Associates and New York Life Insurance company. Mr. Rossow had a very important stint as the deputy director of US-India Business Council (USIBC), where he managed the Council’s policy groups in the energy, information technology, insurance, media and entertainment, and telecommunications sectors. He is hopeful that the US will offer trade concessions to India, but feels the latter also needs to open up a little more. Edited excerpts of an exclusive Interview with Financial Express Online.

How do you see the economic crisis playing out? What are the reasons for this slowdown?

I haven’t seen the government take many steps that I think would sink the economy. when you have a big move like the Goods and Services Tax, you are going to see a depression for some time. Demonetisation, as most external experts would suggest, also caused a short-term depression, but things would bounce back. By and large, it may be a cyclical thing, tied to global trade matters. You see less reformist zeal at the end of the Modi government’s first term. Of course, there are a few bright spots — the tax cuts that just happened and allowing private firms to get into petroleum retailing. But reforms take many years to gestate, companies have to get licences, they have to hire people, pay taxes. So for about 4 years, there was very little reform going on. This is one of the reasons for this slowdown along with global issues – they come together in a pretty powerful package.

Should the Modi govt be worried? Is there any way other than high govt spending to beat slowdown?

Whenever you have a crisis, it gives an opportunity to do big things. There still are some major significant reforms that would really help the economy to get into a different trajectory. There are some big reforms that the government should consider. Number one, of course, is labour reforms. In fact, there is a nice section in the Economic Survey this year talking about one of the reasons why Indian companies remain small — The Industrial Disputes Act. Rajasthan govt amended the law and there was an increase in average firm size.

Second one is land acquisition. it still remains one of the most difficult parts of doing business in India. How do you acquire land, how do you clear that land? How do you do it without offering bribes? Extremely difficult to do. Third is power sector reforms. It is one of the biggest failings of the Modi government. State governments are trying to fix the broken utilities. How do you go about that? I think the central government has to be more active in helping the states.

And finally, foreign investment. Despite the Modi government claiming that India has one of the most open foreign investment regimes in the world,  it is not there yet. You have foreign investment restrictions in insurance, in pensions, retail, defence, e-commerce. Lifting all of this is an easy way to attract investment, boost growth and generate jobs. Among these, the tough ones are land acquisition and labour reforms. The easier ones are investment caps.

What do you think of stimulus measures? Can India spend its way out of trouble?

In the short term, it can. There is no problem with stimulus measures as long as they are in the right direction. Some of the ways in which the Modi government has decided to spend money – expanding the distribution of cooking gas cylinders. These are stimulus measures that are giveaways, but they provide a better quality of life. You have seen state governments across India that have chosen to spend money in unproductive ways – bicycles, television sets, and gold jewellery. The government must stay away from such unproductive spending.

Farm loan waivers are politically attractive, but there is also this trap that you fall into. Farmers expect elections in a couple of years so they make bad decisions. So if you are doing stimulus, do it well, do it targeted, in ways that will improve lives. Do it in ways that are easy to withdraw when things get better.

What is the unfinished reform agenda?

Modi government started its first term well. He began by ranking the states’ business environment, got rid of the Planning Commission and constituted the NITI Aayog. Anybody that tells me that the NITI Aayog is roughly the same as the Planning Commission does not know how it works.

They gave tax revenues to the states to do better. But halfway through the first term, Modi government lost momentum. For instance, they did three versions of the ranking of states. By the third version, most states were at 90% or higher. What kind of threshold do they set if every state is at 90%? They haven’t ranked states in the last two years. States control the economy and if Modi wants to fix the economy, he needs to get states to do better.

Another thing that needs to be done is to get a cost-benefit analysis before implementing new regulations. We do it in the US, but in India, you don’t see it often.

Despite its close ties with the US, India is getting hardly anything from the Trump administration in terms of trade concessions?

There are some misconceptions in Delhi about the real roots of the trade dispute. Right now there is a US administration that is a bit irrational on trade. The US administration has been a bit unpredictable. But, most of the current problems predate Trump. When Modi first came to power in 2014, one of the first files that came to his table was the implementation of the WTO Trade Facilitation Agreement (TFA). This was something that had been agreed to by the Manmohan Singh government. India single-handedly blocked the implementation of the agreement.

There have been steady increases in customs duty, import-substitution and price controls. The price controls make it impossible to sell in India. It is another way of trade control. Then suddenly the election of an American president who looks at trade as a zero-sum game. He sees that India has been imposing trade barriers and targets the country. The US has lashed out strongly and we can argue whether or not it went overboard on revoking GSP benefits and so on.

A lot has happened in Delhi since then and hopefully, there will be concessions. India will not come to the negotiating table with a set of unilateral concessions.

India was supposed to benefit from US-China trade tension. But countries like Vietnam, Malaysia, Argentina, and Chile are the ones that are getting benefited. What is a winning strategy for India?

As we discussed earlier there is an unfinished agenda on reforms. We need a functioning power grid that gives you reliable power supply 24X7. You see this without fail in all countries you mentioned. India is improving on this. It’s getting investments, but not half of what China used to get during its peak.

A lot of investment coming into India is round-tripping by Indian firms through tax havens like Mauritius and Singapore…

It’s true, but you can’t term all investment round-tripping. Go to cities like Bangalore, you see all global companies have set up offices. India has made a huge leap in the ease of doing business ranking. The country could be the next big investment destination if it continues on reforms path.

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