The reforms that India needs now to restore and accelerate growth

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Published: November 7, 2019 1:16:07 AM

Political control will be worthless if it is not used for decisive actions, with respect to the economy, which will both restore and accelerate growth

Indian economy, economic reforms, economic reforms of 1991, tax rates, NBFC, financial sector, bankruptcy code, GST,  trillion economyIndia’s new bankruptcy code represented a significant step forward, but it has not yet been operationalised in the best way possible.

The current state of the Indian economy is bad enough to merit the description of being in a crisis. This is not the kind of crisis that triggered the economic reforms of 1991. At that time, India was facing the prospect of being unable to pay its bills to other countries whereas now, its problems are much more domestic, and, superficially, not as severe, with growth still at around 5%. The remedies now are also going to need to be very different. Removing controls, and cutting punitive import duties and tax rates is not where major reforms have to come, although trimming some tariff rates could help Indian firms that need to import equipment, or intermediate goods for efficient manufacturing.

The biggest problem, as has been said in this column multiple times, is in the financial sector. First banks, and then non-bank financial companies (NBFCs), have run into trouble, and credit has dried up in many key areas of the economy, with domino effects on real economic activity in those sectors. Cleaning up this mess will require major, concerted efforts if it is to be accomplished in a way that minimises the depth and length of the crisis. Bankruptcy and default situations involve renegotiating complex sets of claims by multiple creditors, and a poor resolution process can lead to an ongoing destruction of value as uncertainties are prolonged, and forward looking actions, such as new investments, are put on hold.

India’s new bankruptcy code represented a significant step forward, but it has not yet been operationalised in the best way possible. Some of the problem lies with a judicial branch that is relatively inexperienced in such matters, perhaps to the point of lacking sufficient competence and expertise. Another large problem may be continued political interference. Political corruption and cronyism have been the bane of India’s financial sector. Government bureaucrats and financial regulators also lack sufficient expertise and experience, along with a problem of bandwidth. This is one area where bringing in foreign know-how could be very valuable. It would be expensive, but with many billions of rupees of lost economic activity at stake, it would be an appropriate crisis response.

Unfortunately, the government has not seemed open to ideas and expertise from outside. A welcome trend of involving academics of Indian origin with stellar reputations has been reversed over the past few years. Even the warm glow of Abhijit Banerjee’s Nobel prize only lasted a few days, as he became subject to ugly personal attacks by prominent ruling party members, annoyed by his gloomy, if realistic, assessment of the Indian economy. Right now, India needs more experts like him, who will speak their minds and provide unbiased analysis, as well as specialists who can manage, and accelerate, the process of financial restructuring.

Another opportunity for “crisis driven” reform is in privatisation. In the long run, the GST will help India’s government raise more revenue; and, as growth recovers, personal and corporate income taxes will also become more buoyant. But, for now, a series of well-structured, transparent privatisations, in areas such as the financial sector, telecom, and air transport, has the potential to raise revenue that the government needs to avoid a different (more traditional) kind of economic crisis. Privatisation will also have large long-run benefits as money-losing public sector enterprises are removed from the government’s broader fiscal responsibility basket, and are forced to become more efficient and competitive. This kind of privatisation has to be whole-hearted, not just the sale of minority stakes that do nothing to force greater efficiency of operations. Again, experts who can design the mechanisms for structuring these privatisations, are needed, and the biggest challenge is whether the government is willing to recruit them from a global pool.

A complementary reform to privatisation is opening up entry in some areas of finance, in particular, but also, possibly, in telecom and other sectors where there is a shortage of supply, dominant players behaving as monopolists, possibilities for growth, or all of the above. Just repeating slogans about a $5 trillion economy will not bring it about, and not having a broad vision of where the growth will come, and how it can come about, will ensure that the goal remains unattainable. Having a concrete vision of what a robust economy, driven by competition and innovation, might look like in the next decade will also require expertise from around the world, including from people who do not necessarily agree with the government on everything—or indeed, on anything.

The ruling party has a solid national political mandate for the next five years. It will soon complete its project of extending that mandate to enough states so that political control of the Upper House of Parliament is also ensured. But, political control will be worthless if it is not used for decisive actions, with respect to the economy, which will restore growth, and even accelerate it to the East Asian-miracle levels that have remained a mirage for almost three decades. Making the right decisions will need openness to ideas, and drawing on global expertise in ways that have, so far, escaped the thinking of the current government.

The author is Professor of Economics, UC Santa Cruz. Views are personal

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