Charting recovery: Next on the reforms agenda

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October 06, 2020 7:01 AM

Govt did well on Farm, medical education, etc, reforms. Now, it must work on bank reforms, judicial & police reforms and shunning protectionism

Hopefully, the government will reverse the trend quickly and make the economy export-oriented.

At last, there is some welcome news on the economic recovery. After six months of severe stress, some important high-frequency indicators show that the economy is on the mend. Of course, the recovery is staggered and patchy. Yet, the performance of these indicators in September brings some optimism. The Purchasing Managers’ Index (PMI)—an indicator of manufacturing activity—has shown a sharp increase from 52 in August to 56.8 in September, the highest in eight years!

The Goods and Services Tax collections, at `95,480 crore, have entered a positive growth zone in September, increasing 3.8% from the level a year ago, and were 10% higher than the August collections. The sale of passenger vehicles has increased 31%, led by Maruti rising by 34% and domestic sales of Hyundai rising 23.6% in the month. The Railways’ freight traffic has shown an increase of 15%. After a gap of six months, merchandise exports have registered a growth of 5.3%, driven by outbound shipments of engineering goods, petroleum products, pharmaceuticals, and readymade garments. There has been an increase in power demand and generation.

Despite the indicators showing revival, substantial contraction in the economy is likely to continue in the second quarter as well. In the first quarter, the GDP contracted by 23.9%; except agriculture and allied activities, all other sectors suffered negative growth rates. The sharpest contraction was in the construction sector (-50.3%), followed by trade, hotels, transport, storage and communication (-47%) and manufacturing (-39.3%). Even as the economy is seen to be on the mend in September, contractions will continue, albeit a slower pace.

With most urban agglomerations continuing as Covid-19 hotspots, partial lockdowns in areas and sectors have continued, and non-availability of labour and supply chain disruptions continue to pose additional constraints.

In keeping with the dictum “crisis is the mother of reforms”, the government has initiated essential reforms in several areas. These should help improve the environment in the medium- and long-term. The merger of 24 central labour laws into four Codes is a significant reform that imparts greater flexibility to the labour market and ends the inspector raj.

This has been discussed for long, sans much progress. The Industrial Relations Code allows units with up to 300 workers to hire and fire without needing government approval. Firing in organisations with more than 300 workers would still require prior permission. However, if the labour department does not respond within the given time frame, consent will be deemed to have been received.

The three new legislations enacted in the farm sector provide flexibility to the farmers to sell their products anywhere. The amended Essential Commodities Act deregulates production, storage, supply and distribution of cereals, pulses, potato, onion and oilseeds, and enables the private sector to play an important role in these activities. The Farmers’ (Empowerment and Protection) Agreement of Price Assurance and Farm Services Act, allows small farmers to ink agreements with corporates for contract farming.

In the social sector, the National Medical Commission Act, 2020, abolishes the tainted 64-year-old Medical Commission of India, and ends its inspector raj while enabling the appointment of mid-level community health providers to address the shortage of medical professionals in rural areas.

By liberalising private medical education, with 50% seats earmarked in private medical colleges and deemed universities, it augments the number of seats. Similarly, the New Education Policy gets rid of multiple regulators like UGC and AICTE and replaces it with a single regulator—Higher Education Council of India. UGC was both a regulator and a funding institution.

These structural reforms are critical to improve the economic environment, ease of doing business and ending the inspector raj. And, they are necessary to reverse the declining investment climate in the country and secure better mechanisms for price discovery for the farmers in the medium- and long-term. However, the immediate task the government has to address is the removal of supply and demand constraints to lift the economy out of the morass.

This requires the government to initiate measures to (i) increase public consumption and investment, (ii) undertake banking reforms to accelerate lending, (iii) police and judicial reforms to protect life and property and enforce contracts, and (iii) reverse the protectionist trend in the last three years in the interest of making the domestic production sector competitive and export-oriented.

The stimulus package announced so far has been mainly to improve liquidity, provide moratorium and restructure loan repayments. The government did not have the luxury of providing a large fiscal stimulus with little fiscal space aggravated by a sharp contraction in revenues. Nevertheless, in these exceptional times, the government will have to loosen the purse and should not be fixated on fiscal targets for this and the next year.

More importantly, it should frontload disinvestment and monetise assets to increase public investment spending. In the given geopolitical situation, defence expenditures will have to be increased, and the pandemic demands higher allocation to the health sector. The states have embarked on a number of measures to raise revenues, including monetising land. The Union government should fast-track disinvestment as well as monetise its assets like land to augment spending. The ministries like defence and Railways have large tracts of land which can be monetised.

Hopefully, PSUs like Air India will be privatised soon. The most important agenda is the reform of the banking sector. This is the time to dilute the government’s stake in PSBs and empower the boards to improve governance. The government can use the proceeds from bank disinvestment for the banks’ recapitalisation.

Simultaneously, the government should distance itself from the management by abolishing the department of financial services and creating a separate holding company to oversee the functioning of these banks. There are other reforms needed to make land available for entrepreneurs wanting to relocate from China.

Judicial reform, is the need of the hour, to ensure that the basic duty of the State, of ensuring property rights and enforcing contracts in a timely manner, is accomplished. This is also the most important factor in the ease of doing business.

The last three years have seen a steady creeping of protectionist stance in the government, and the pandemic and the stand-off with China have fuelled the protectionist zeal. History shows such stances to be self-defeating. Denying the benefit of goods at international prices to consumers to protect domestic producers has only helped the latter to be less competitive and eventually ask for more protection. Hopefully, the government will reverse the trend quickly and make the economy export-oriented.


Former director, NIPFP and member, 14th Finance Commission. Views are personal

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