By Hemant Manuj
The current slowdown has rattled all sections of the nation. There have been loads of prescriptions and suggestions on what the government should do. There have been meaningful suggestions on the fiscal and monetary measures, including a reduction in tax rates, cut in interest rates, extension of sector specific sops, etc. Of course, there are also disagreements amongst the commentators on the efficacy or desirability of each of these measures. But a healthy debate is useful in the choice of measures.
The belief that the slowdown is, at least partially, for structural reasons, rather than just cyclical reasons has gotten stronger. For example, reform of the factor markets is an often cited suggestion. The solutions to structural issues have to go deep enough to address these. The execution of structural reforms is also more time consuming, often politically difficult, and slow to show real results. As a result, most governments are not too keen on structural reforms.
The problems due to continuing hesitation, or inability, to bring about the structural reforms keeps adding up over time and reduces the efficacy of the ad-hoc factors as well. An example of this is the lack of transmission of policy rate- cuts through the banking system. The absence of proper lending benchmarks, developed bond markets, and efficient contract enforcement systems are some of the structural factors that make rate transmission difficult. Unless these are addressed, we will keep getting disappointed.
While the desired economic reform measures are being well articulated in the public domain, there is another dimension that needs more attention of the government and policy makers. This relates to the dharma of governance and administration. Without a strong base of sound governance, economic measures are likely to have limited benefits.
A few specific measures that the government could consider are:
Reduce policy uncertainty: Investors are willing, and conditioned, to deal with volatile demand and supply in the markets. But they find it most frustrating to deal with uncertainty in policies and regulations. The fiscal, monetary, regulatory, and other policies need to have a fundamental part that is stable and, fundamentally unalterable in the long term. It should be akin to the long lasting stability of the core principles of our Constitution. The government needs to publicly define and adhere to the core set of such policies. If required, a task force can be set up to accomplish this task.
Pro-active consultation: The government must adopt, and follow, a methodical way of consulting with the relevant stakeholders before announcing changes in major policies. This would not only produce superior policy decisions, but also save precious time and efforts.
Performance measurement: There is currently very little performance based differentiation in the compensation and rewards of the public servants. Since a large part of the planning as well as execution of the government policies is carried out by the public servants, it is logical to incentivise accountability and good performance.
One example, that can be cited, relates to the series of recapitalisation of public sector entities. These have not only miserably failed in outcomes but also strained the public exchequer. There needs to be accountability and performance measurement at all levels. The above measures are imperative. There are certainly more, and better, ideas for bringing about sustainable benefits in the politico-economy of the country. We need to begin working on these.
These measures may be difficult, not glamorous enough, and slow in showing results. But, a strong and credible beginning on these initiatives will definitely bring back some confidence in the investors.
The current Modi government enjoys a strong political support, and therefore, has a definite edge in implementing structural reforms. If it begins the process to implement these now, there is a good chance that it would be able to reap the benefits of at least a part of them before 2024. Political will can transform into an economic as well as political win.
Associate Professor, SPJIMR