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Thursday, December 2, 2021

Five Steps To Resurrect The Indian Economy


• Reduce Interest Rates • Property Rights for the poor • Launch Green Revolution Part Three • Change Labour Laws • Re-Abolish License Permit Raj
SUTANU GURU WITH KS NARAYANAN & PARIMAL PEEYUSH | Issue Dated: November 30, -0001, New Delhi
Tags : Raghuram G. Rajan | RBI | 2014 Lok Sabha polls | UPA-II | Atal Bihari Vajpayee | Food Security Bill | Indian economy | Green Revolution | Permit Raj | Mafias | Iron -ore mining | Sand mining | Labour reforms |

"Far too many of India's youth do not have access to adequate nutrition, healthcare, education or governance to lead productive lives. As I argued earlier in the case of the United States, the creation of an underclass that does not see opportunity in society is a recipe for political and social conflict, as well as ineffective but costly populist policies".
-Raghuram G. Rajan in the 2010 book Fault Lines.

One thing is for sure. The globally well known economist knows quite well that his upcoming tenure as the Governor of the Reserve Bank of India is going to be incredibly challenging. The other thing we know for sure is: no matter which party or coalition comes to power after the 2014 elections, the Finance Minister of that regime and Rajan will face a situation similar to 1991 when India was staring at economic humiliation and disaster. The third thing we know for sure is that the Indian economy is almost in a state of voluntary coma, with stakeholders waiting for the electoral verdict of 2014. Almost everybody is postponing decisions. As economist and former advisor to Prime Minister Atal Bihari Vajpayee, Jagdish Shettigar says (see attached interview): The UPA-2 is managing to drag on but they are in a minority. Bureaucrats will never allow the government to take measures now. Tomorrow when the new government comes they may be required to answer questions.

For the moment, the Indian economy will remain a helpless bystander as the Congress and the UPA try to plunder a virtually bankrupt treasury to fashion a UPA-3 in 2014. The Food Security Bill, of course, is the big daddy of them all. Inevitably, we are looking at a situation where the Indian economy will be facing a crisis similar to, if not worse than the 1991 one. Inevitably, drastic measures will need to be taken by a new Finance Minister in tandem with Raghuram Rajan who, as RBI governor, will not be facing an electorate. So instead of crying hoarse over the pathetic state of the Indian economy-it is indeed in a pathetic state- it might be more useful to look at the "drastic" steps that will need to be taken in 2014 to resurrect the Indian economy. This prompted The Sunday Indian to speak to a number of economists on the nature of these "drastic" steps. The unanimous response that emerged was: first, the Indian economy is tanking so badly that public discourse would be overwhelmingly tilted towards bread and butter emergency measures needed when the new regime takes over. Second, like in 1991, a smart regime would use the crisis to implement reform measures that would transform India just as the emergency and drastic measures of 1991 did. So what are these measure? If you talk to two economists, you are liable to get three opinions. No wonder, there were a bewildering array of opinions proffered by economists. But we have narrowed down the list to five key measures of reform.

Launch green revolution-3: Says Rajeshwari UR of Christ University, Bangalore, "Infrastructure development has to be u dee taken in rural areas and government should encourage industrial development in rural areas. More importantly, the agriculture sector should be considered an economic priority". Submerged in the often acrimonious debate over poverty levels and welfare measures is one unmistakable fact: no matter what parameters you consider, hundreds of millions of Indians have emerged from desperate poverty since 1991.

Tens of millions more will emerge even if the economy grows at a 'slower' rate of 6% a year. This is already resulting in a huge increase in demand for non cereal food items like fruits, vegetables, eggs, milk and meat. One key reason for the stubbornly high rate of food inflation is this. What even economists sometimes fail to understand is that no amount of monetary policy intervention by the Reserve Bank of India will persuade a poor family to stop desiring vegetables, milk and eggs, apart from more cereals. India badly needs a third generation of green revolution. The first generation led to adequate production of basic food grains. The second generation led to adequate production of other food items. The third green revolution will need to connect the Indian farmer with global markets so that both the Indian farmer and the consumer benefit. To enable this, the new regime in 2014 must utilize the "crisis" to lift the stifling controls and restrictions that have been imposed on Indian agriculture. Just one example: it is illegal for a farmer from one state to directly sell his food grain in any other state. Just as the abolition of the license permit raj unleashed the  entrepreneurial energies of India Inc, a lifting of stifling controls will unleash a revolution in Indian agriculture. This win be a huge victory in the fight against poverty and will also enable the government to focus its energies and resources more effectively on the truly poor.

Re-abolish the license permit raj: Everyone in India is now familiar with the controversy generated by the suspension of the UP based IAS officer Durga Shakti Nagpal by the Akhilesh Yadav government. It has been alleged that she was 'punished' for taking on the 'sand mafia' that operates with impunity in Noida, the suburb adjoining Delhi and the Yamuna river. One fallout of the controversy generated by this was that the National Green Tribunal banning all mining of sand near river beds without prior approval. But as Swaminathan A Aiyer writes in his column: "This is well-intentioned , but has immediately worsened the sand scarcity and made illegal mining more profitable. The stock market price of all cement companies has slumped, since a shortage of sand means less matching demand for cement. Our slowing economy will be further slowed by the tribunal’s orders — unless illegal mining comes to the rescue. What a mess! "

Justice Santosh Hegde earned a sterling reputation as the Lokayukta of Karnataka when he courageously exposed the series of iron ore mining scams that were going on. His exposure played a significant role in the allegedly corrupt BJP government of Karnataka losing badly in the recent assembly Elections. But one fallout of this was that upon ore mining in states like Karnataka, Goa and Odisha came to a virtual halt. The case of coal is even more shocking. In 2012-13, India, which boasts of the third largest coal reserves in the world, actually had to import more than 110 million tons of coal. This is criminal at a time when India is already looking at huge trade and current account deficits. Look at another gem from a totally unrelated field: the government is now insisting that no TV channel can air more than 12 minutes of advertising in one hour. Quite strangely, often quietly but at a huge cost, the UPA regime has taken India back to the pre 1991 days of the license permit raj. This reverting back to the bad old days of "discretionary" powers has encouraged the worst kind of crony capitalism and corruption, as evidenced by the series of scams. The new regime must make an honest attempt to sweep away as many discretionary powers as possible. In fact, the license permit raj is the biggest enemy of poor Indians.

Implement Labour Reforms: A recent event in Maharashtra has made eight wing economists happy while left wing economists are mourning. After a prolonged standoff with the management, the trade union at the Bajaj Auto factory near Pune decided to unconditionally withdraw its strike and resume work. Right wing economists were happy for obvious reasons while left wing economists lamented that the declining power of trade unions is another reflection of growing inequality in the country. Both are wrong. In an ideal world, workers would get the best salaries, medical facilities and even stock options. But we do not love in an ideal world. For an unemployed worker whose family is facing starvation, work of any kind is better than a hungry stomach. Policy makers in East Asian countries have realized this since long and have thus been hugely successful in creating a thriving and globally competitive manufacturing sector. Over time, not only have these economies emerged as manufacturing powerhouses, but they have also succeeded in improving the quality of life of workers. All this has been achieved mainly because of flexible labour policies that have encouraged domestic as well as global investors to set up factories. India has been inexplicably stubborn in this regard by persisting with outdated labour policies. The rigid labour policies of India have discouraged investors from setting up manufacturing units across the board. The irony is: these labor laws are applicable to just about 5% of the total labor force in the country which work in the organized sector. For the rest, the labour laws have no meaning. And there can simply be no doubt that the time has come to adopt flexible labour laws. Just one example will indicate why.

After the quota system was abolished in the global textiles market, textile exports from Bangladesh at about $25 billion a year are now poised to overtake exports from India. A decade ago, textile exports from Bangladesh were one fourth of India's. The message is loud and stark.

Reduce Interest Rates: Way back in February, 2010, economist Surjit Bhalla had written in a column: "Our copycat analysts want an interest rate hike just because there is talk of this in the West - never mind that Indian rates are higher than enough and all inflation is food-related...while food inflation hurts the poor more, it should not be an excuse to hurt the poor even more by raising interest rates". Unfortunately, policy makers in India, including the predecessor of Raghuram G. Rajan at the RBI refused to accept this logic and the worst expectations of crashing growth with high food inflation have come true. Unlike China, growth in India has been consumption driven and the persistently high interest rates in India have simply destroyed consumer confidence. For nine consecutive months, the auto industry reported a decline in sales in July. And the auto industry is a barometer of consumer sentiments as well as the health of the economy. There is an even more compelling reason for lower interest rates. Almost all the successful companies to have emerged from Japan, South Korea and China have been beneficiaries of access to cheap capital. The new regime in 2014 must embrace this lesson with all alacrity.

Property Rights for the Poor: Noted activist waged a long battle with the powers that be during the tenure of the Atal Bihari Vajpayee government to secure livelihood rights for push cart vendors in Delhi who are mercilessly exploited by corrupt officials. She partially succeeded. Despite her efforts and despite orders from the Supreme Court, the millions of small entrepreneurs of India simply do not enjoy any property rights. A tea stall or a push cart vendor can be thrown out of the street in which she is operating at the whim of an official who hasn't been bribed adequately. This absence of property rights for poor and small business enterprises of the country is a big curse. As globally renowned economist Hernando De Soto has shown often through Latin American examples, property rights can work miracles for the poor as well for the economies. If the Finance Minister of the new 2014 regime can ensure this and if Raghuram Rajan as RBI governor can kick start a workable credit scheme for these small businesses, there is little doubt that their place in history would be assured.

On the face of it, all the five steps highlighted above look very difficult to implement because of vested interests. But then, even the 1991 reform measures were thought impossible to launch and implement till they happened. Who knows, the great economic crisis of 2014 might result in yet another reform revolution.   

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Issue Dated: Feb 5, 2017