Does Modi think there is a crisis? If he doesn’t, big reforms are unlikely

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Updated: May 27, 2019 7:09:23 AM

If he doesn’t—as he didn’t in the last five years—the govt is unlikely to undertake the big reforms India so sorely needs.

These sectors are big employers and can make a big difference to the job market.

A heady victory, lots of time to savour it, and no big crisis to tackle. That is the situation the BJP finds itself in today, having won a comfortable, and enviable, majority of 303 seats in Parliament; the tally is 350 seats with the allies. By November next year, it should notch up close to 120 seats in the Upper House. The only key state election on the horizon is Maharashtra, which, going by Parliamentary elections, should be a cakewalk. Indeed, no political party has found itself in such an unassailable position in a long, long time.

The worry then is that the government might not be in a big hurry to roll out big reforms that are unpopular. Serious labour reforms would mean taking on the unions as would initiating more privatisation—not simply offloading equity stakes in the market but selling unprofitable companies like Air India or BSNL. So far, state-owned banks have been restructured through mergers but without any layoffs, which means they don’t really become more efficient. Selling PSU banks might not be possible till they are in better shape. So, at some point, the workforce needs to be more productive. That, of course, goes for all PSUs. There are also agri-reforms that can be pushed through—more mandis, more electronic trading—though that would reduce the clout of the arhatiyas. Multi-brand retail could be thrown open to foreign participation so as to attract capital, but, so far, the government has refrained from doing this—possibly because it fears small grocers would be hit.
At this point, although the economy is slowing and fewer jobs are being created,it isn’t seen as a crisis. The government seemed content to know India was growing more rapidly than other large economies and less worried that the growth wasn’t creating jobs. When the NSSO data leaked, NITI Aayog economists defended unemployment being at a 45-year high saying the data wasn’t comparable. That may have been so, and given the timing—ahead of the elections—the government’s stance was understandable.

But, the reality is that, while e-commerce may be spawning jobs and business opportunities, there is virtually no hiring in banking and financial services—except for very high-skilled jobs, since digital transactions are picking up. Moreover, companies continue to fold up; Jet Airways is a case in point.
It would be worrying if the government is tempted to focus on the many welfare schemes and hold back the big structural reforms for some time. The schemes have won it both goodwill and votes, but the structural reforms must begin now. The spends on building roads and ports will create jobs as will bigger budgets for health and education, which is important and makes for good optics. But, it needs to go way beyond what it did during its first stint, the highlight of which has to be the IBC. The attempts to amend land and labour laws may not have been fruitful, but these need to be taken up again. Moreover, FDI rules must be eased, especially for defence.

While the routine government spending will lift consumption, and schemes such as MGNREGA will benefit the less-affluent sections, it won’t be enough to pull the economy out of the rut, far less take it to a new level. Consumption, in the last few years, was boosted by the hikes that followed the Seventh Pay Commission’s recommendations and the effects of that are evidently wearing off. At an estimated `21.4 lakh crore for FY19, the tax-to-GDP ratio will be flat at 11.2%, not surprising since GDP has been slowing and will clock in just about 6.5% in Q4FY19. The shortfall in direct tax collections in FY19 is of around `50,000 crore.
Typically, tax collections have a buoyancy of one, though, in recent years, this multiple has been higher. An estimated GDP growth of even 12% in FY20 will result in tax collections growing at 13-14% or, at best, 15%. The tax collections for FY20 have been pegged at `25.5 lakh crore, an increase of 19% and suggesting a buoyancy of 1.7, last seen in 2007-08.

This, then, would always pressure the balance sheet and the fisc, and compel the government to cut back on capex since it can never really prune revenue expenditure. In the last couple of years, it has resorted to large extra-budgetary borrowings to meet expenses—not the best way to manage. It is important to start work on labour reforms right away, and try and push them through by end 2020. States such as Andhra Pradesh, Gujarat, Madhya Pradesh and Rajasthan have amended the laws to make them more flexible for companies to hire and retrench employees. Without easier rules, the organised sector will desist from recruiting in big numbers as will mid-sized businesses, especially export-oriented units. And unless businessmen running leather, gems and jewellery and apparel units are able to hire affordable workforces and utilise them flexibly, they simply cannot compete in the global market. These sectors are big employers and can make a big difference to the job market.

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