Eightfold path to revive the economy – Virendra Parekh

Indian Economy

Virendra Parekh“We set out below the broad philosophy that should guide and inform the policies of the new government, followed by ten sets of measures it should take up on a war footing to breathe some fresh air of hope, confidence and enthusiasm in an atmosphere vitiated by cynicism, diffidence and pessimism. The focus here is exclusively on the economy, for economic revival holds key to national resurgence in other fields.” – Virendra Parekh

Indian General Election 2014The outcome of the forthcoming Lok Sabha elections will determine the pace and direction of the economy and the nation for the next decade. The great churning is expected by most observers to throw up a different set of rulers. Replacing the current lot with a new one, however, will not make much of a difference by itself. The country will benefit from the fiercely contested elections, involving expenditure of billions of rupees and time and efforts of lakhs of mandays, only if right kind of ideas triumph over the wrong ones which have led the country to the brink of a precipice.

There is a proverb in Guajrati: Baltu ghar krishnarpan karvu (Dedicating a house on fire to Lord Krishna as homage). Come May, and the UPA will be handing over to its successor virtually a house on fire—a stagnant economy, a weak fisc ridden with maliciously planted mines in the form of deferred expenses and a country which is regarded as fair game by enemies on both the sides of the borders. The new government will be expected to hit the ground running.

We set out below the broad philosophy that should guide and inform the policies of the new government, followed by ten sets of measures it should take up on a war footing to breathe some fresh air of hope, confidence and enthusiasm in an atmosphere vitiated by cynicism, diffidence and pessimism. The focus here is exclusively on the economy, for economic revival holds key to national resurgence in other fields.

There is no dearth of suggestions, agendas, action plans blue prints etc. for ‘guidance’ of the new government. Our object here is to distil a few measures which are absolutely essential to revive the economy, rather than present a comprehensive roadmap.

In nutshell, the country needs a government that is clean and caring, efficient and enlightened. It would be a government that serves the people, not harasses them; which arouses hope rather than fear and disdain; which is fair and consistent, not vengeful and whimsical; which facilitates and not obstructs progress; which creates opportunities for the many rather than favouring the select few and which encourages initiative and entrepreneurship instead of killing it.

Its focus will be on governance rather than control and regulation. The government will consciously shed what it need not do. It will delegate to the private sector with appropriate supervision what it cannot execute efficiently on its own. Its own resources will be conserved for things which government alone can do or do best—security internal and external, political stability, rule of law, speedy and affordable justice, sound money, basic infrastructure, primary health and basic education, among others. This will mean shrinking of government in some areas, and its expansion in some others. The government will foster a culture of honesty, hard work, innovation and cooperation rather than patronage and entitlements.

The government’s role in the economy will be to provide public goods and essential infrastructure, and set rules for private players. It will ensure economic stability by following well-recognised fiscal and monetary policies that facilitate this. Taxation will aim at minimum distortions in incentive structures, moderate rates and broad coverage.

The government will facilitate the creation rather than the capturing of wealth. Its decision-making will be open and transparent. Discretionary powers of ministers and officials will be sharply curtailed. The government will run a more open economy on both trade and investment, strengthen competition and prevent emergence of oligarchies and crony capitalism. There will be a level playing field, and little incentive or scope for lobbying, rent seeking or playing favourites. All of this will minimize the need and scope for corruption of government and its processes by business.

The Road AheadThings to do

First, a few measures to clear the ground and set the stage for positive action.

A few announcements such as ‘there will be no changes in law with retrospective effect, especially in tax laws’, ‘clearance once given will not be revoked unless fraud or mala fide intentions are prima facie involved’ will go a long way in clearing the atmosphere and restoring investor confidence.

Abolish the Planning Commission forthwith. It has no role to play in a liberalized economy where bulk of the investment comes from the private sector and follows risk-reward ratio rather than ‘national priorities’. There is a council of economic advisers to the prime minister. Almost every ministry has an economic advisor. The finance ministry as well as the Reserve Bank constantly keeps a watch on the economy. That should be enough for long term planning and coordination.

Reduce the number of ministries at the centre to 12, if not 10. Most of the economic ministries—steel, coal, textiles, food processing—are a legacy of the licence raj and have no role in a liberalized economy. Some social ministries deal with subjects which are better handled by the state governments. Create a cell to deal with WTO in the foreign ministry and abolish the ministry of commerce. Privatise Air India, empower DGCA and abolish the ministry of civil aviation.

Ensure that the laws on food security, MNREGS and land acquisition remain largely on paper. Enacted in the name of poor, they have the capability of derailing India’s growth for ever. Block foreign retailers and GM foods, in spite of the heavy duty lobbying in favour of both.

Second, kick start economic growth on war footing. Give priority to investment in power, roads, and irrigation. The false trade-off between growth and equity is a pernicious legacy of the Left parties during UPA I and the jollawallah brigade dominating the Sonia Gandhi’s National Advisory Council during UPA II.

Merely clearing the projects will not do. Most of the projects are stalled for want of environmental clearances, issues related to land acquisition and uncertainties of returns and financial viability. Every country protects its environment but none stops hundreds of projects in the process. Frame a clear, consistent and comprehensive policy for environment that will facilitate clearance or rejection of a proposal in a time-bound manner. Address land acquisition issues in a manner that is just and fair to the farmers and tribals but is also conducive to development and growth.

Renewable energy, especially solar power, deserves far more encouragement than it receives now. Research on making solar power cheaper and competitive with thermal power should be funded generously and pursued vigorously. Nuclear power should be sought only after a fresh and thorough cost-benefit analysis, including long term environmental costs. The whole strategy on nuclear power should be structured around thorium instead of uranium.

Third, eliminate the nearly 70 clearances—yes 70, according to planning commission’s new manufacturing policy!—for starting a business, and fuse them into a ‘single window clearance’ achieved by our competitor nations. India’s notorious red tape is mainly responsible for putting off foreign entrepreneurs and hindering indigenous initiatives.

Labour laws need to be reformed to promote job creation in the organized sector. India’s labour laws insist on lifetime jobs. Hence, Indian companies avoid hiring permanent staff and 90 per cent of workers have ended up as casual or informal workers. Employers should be allowed to lay off surplus staff but with a safety net to be funded by the employers and the government.

Businesses which are no longer viable should be allowed to be wound up in a just and humane manner. This will free up resources like land and capital for new businesses leading to growth, jobs and incomes.

Fourth, complete the good work already done to make the Goods and Services Tax (GST) a reality and India a national market. GST will replace the present nightmare of indirect taxes—state sales taxes, central sales tax, excise duty, service tax, entry tax, etc. Since it will tax only the added value at each stage, it will discourage cash transactions as no one wants to lose credit for taxes already paid. Compliance will rise, tax revenues will swell, black market will diminish, and peoples’ morals will improve.

Draw up a list of items whose import or export is expressly prohibited. Allow free trade in the rest. Have a low, uniform rate of customs duty for all goods for precious metals/stones and demerit goods (liquor, cigarettes, etc.) There should be no exceptions. Have a predictable export-import regime for farm products. Stop the present ‘switch on, switch off’ policy which harms the farmer and brings disrepute to India.

Direct taxation also needs a similar overhaul. The emphasis should be on simplicity and clarity, low rates, reasonably high threshold and fewest exemptions.

Fifth, Government intervention in agriculture has proved disastrous for farmers, consumers and traders. The agricultural policy should aim at reducing the cost of production, freeing and unifying the market and preventing financialisation of agricultural markets, especially in edible goods.

The prime task is to restore viability of agriculture as a commercial enterprise, otherwise farmers will keep deserting it in millions. Increase investment in agriculture, both public and private, to realize untapped irrigation potential, catalyse scientific research and link producers with consumers. Policy must prioritize enhancement of productivity of food grains as well as vegetables and other cash crops.

Futures trading in food grains, pulses, vegetables, edible oils and sugar should be banned with immediate effect and replaced with delivery-based forward trading. This will prevent speculative capital and idle cash—mostly black—from driving up prices of essential commodities, while allowing genuine producers, suppliers, processors and exporters to hedge their risk.

All the restrictions on storage, movement, prices and trading of agricultural commodities throughout the country should be abolished forthwith. Let anyone buy from and sell to anyone else. Scrap agricultural produce marketing committees (APMCs) which function as wholesaler cartels in mandis. Opening markets will allow traders, consumers and farmers to buy and sell freely, making India into a national market. When consumers can buy directly from farmers, it will curb profiteering by traders. When large retailers buy from farmers, they will save food from rotting through cold chains, raising returns to farmers and lowering prices to consumers.

Stop the practice of announcing minimum support prices with guaranteed unlimited procurement. Instead, the government should buy from the open market at the beginning of the season whatever grains it needs for PDS. This single measure can cure several distortions afflicting Indian agriculture.

Organic farming should be encouraged as a superior way of cultivation and supported with a ban on slaughter of milk cattle. At the same time, GM crops through which foreign multinationals want to destroy our genetic wealth and acquire a vice like grip on agriculture should be banned formally.

Sixth, like a household the government must learn to live within its means. The best way to achieve fiscal consolidation is to reduce consumption expenditure by the government, including subsidies. Cutting down the number of ministries and reducing the role of government will help cut expenditure. Bring petroleum products under Cenvat at the Centre and VAT in states until GST replaces both. This will help eliminate fuel subsidy while making fuel cheaper.

Disinvestment should not be looked upon as a means to bridge fiscal deficit, but as an exercise in vacating areas where the government has no to reason to be. Sell off hotels, airlines, and all uncompetitive public sector enterprises, which have been bleeding the country for generations. Reduce government stake in public sector banks to 33 per cent. It will address the problems of NPAs and undercapitalization at the same time. Break the monopoly of Coal India, which has made India—sitting on the world’s third largest reserves—the largest coal importer in the world.

Seventh, ensure closure of litigation, civil as well as criminal, within reasonable time and affordable cost. There are myriad suggestions for speeding up justice ranging from appointment of more judges to running courts in three shifts and curtailing oral arguments and number of appeals. What is lacking is drive and initiative to implement them. Swift justice by itself can vastly contribute to greater compliance.

Eighth, education holds key to future of the nation as much as of the individual. Increase the spending on education but also ensure quality. Emphasize comprehension and application rather than learning by rote. Vocational training and skill development deserves heavy investment. End the licence raj in education so that the shortage of good quality educational institutions could be addressed properly.

As mentioned above, this is only an outline of some essential measures. Details need to be worked out by experts, policy makers and administrators. – Vijavaani, 24 March 2014

»  Virendra Parekh is the executive editor of Corporate India magazine and lives in Mumbai.