Reforms: From Now Till 2019

Maximizing employment generation should be the exclusive focus of this government’s reform measures. This must be the singlemost important policy priority today.

At the end of the Narendra Modi government’s first year, the economy is slowly but surely emerging out of the morass it had descended into in the last two years of the UPA regime. A substantial part of the messy legacy has been cleared. A new start has been made with Finance Minister Arun Jaitley allocating an additional Rs 1.4 lakh crore for public capital expenditure in the previous Budget and with Railway Minister Suresh Prabhu coming up with the Kayakalp programme designed to modernize the Railways with sharply higher investment and technology upgradation. Shipping, Road Transport and Highways Minister Nitin Gadkari is likely to follow suit by announcing the initiation of 70 new road projects for which regulatory and procedural impediments have been cleared along with those affecting 520 of the 600-odd public-private partnership (PPP) projects. All this will hopefully result in the much-needed upturn in the investment cycle in the coming months.

The Jan Dhan Yojana, under which 160 million new accounts have been opened until 10 June, and more than Rs 18,000 crore mobilized as fresh deposits, will surely improve the access of poor households to the formal banking sector. A 100 million new policies have been issued under the three insurance schemes that were launched in May. Both these financial inclusion measures will significantly reduce the dualism between the formal and informal sector that has characterised the Indian economy so far. These financial inclusion measures and the initiative to directly transfer subsidy payments will improve the flow of benefits of more rapid growth to the bottom of the pyramid.

This is the best bet for Modi to be returned to office in 2019, unlike other prime ministers who undertook reforms like Atal Behari Vajpayee and P.V. Narasimha Rao who lasted only for a single term. Having taken care of his political future, Modi can now be more aggressive and out of the box in pushing a set of critically needed reforms.

India must break out of its self-imposed glass ceiling of 6-7 per cent GDP growth and raise its potential rate of growth on a sustained basis. Double-digit growth is both achievable and in fact essential for generating 12 million jobs each year for the next two decades.

The first precondition for this is to usher in governance reforms that will not only break down walls between various ministries and the central and state governments but also those that divide the government from other key stakeholders like the business sector and academics. India cannot hope to successfully compete in global markets without all stakeholders pulling together in the same direction.

The second precondition is to spell out a set of targets for the next 10 years (up to 2025 when our Republic will be 75 years old) for focusing the efforts of the government, and indeed also the party, on some key variables. A 10-year vision would also help reinforce the coalition of key stakeholders by bringing them on the same page. This would generate much-needed synergies across sectors and, for once, ensure that national interest takes precedence over petty, parochial, partisan and provincial interests.

The third precondition is Modi improving his bench strength by bringing in a much larger number of domain experts and managers from the private sector into the government. His current working assumption, based no doubt on his experience as Gujarat chief minister, is that he can achieve his ambitious goals by relying exclusively on the permanent civil servants. This, I am afraid, is hugely misplaced.

Modi’s leverage on officers working on deputation in Delhi is far less than it was in Gandhinagar. Moreover, policy formulation and design of nationwide programmes is qualitatively different from managing specific state-level projects. Let us hope this correction is made before it is too late.

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It is surprising to see that four sectors—education, health, public housing and agriculture—where reforms can further improve Modi’s credentials on inclusive growth have so far not received adequate attention. It can be argued that these sectors are principally the responsibility of state governments. Even if true, it will be a big mistake for the Centre to ignore them. Modi must be seen by the common man to be taking care of his basic necessities, which are largely dependent on these sectors. Two of these four—agriculture and low-cost housing, also have strong multiplier effects that will further boost investment and growth. Hence, it is time that these four sectors received priority policy attention and are headed by the best talent available from within or outside the political class.

In education, a four-pronged approach can be adopted. First, permitting private accreditation agencies to evaluate and certify higher education institutes. Second, formulating attractive schemes to convince talented Indians teaching in foreign universities to return to India and help alleviate the crippling shortage of good quality faculty. Three, permitting joint ventures between foreign and Indian universities by pushing through the Foreign Universities Bill with this provision. Fourth, tripling the budget allocation for vocational training and skills formation and for merit-cum-means scholarships in higher education.

In health, the fundamental reform will have to be to significantly improve governance and delivery of public health services prior to sharply raising budgetary allocations. An innovative approach would be to hand over the management of primary health centres and even district hospitals to private providers on the basis of a carefully drawn contract that is strictly monitored and enforced. The central government could design such a model contract for adoption by the states. Policy should emphasize preventive health as much as curative treatments and also encourage the adoption of traditional and Ayush medicinal practices. Medical tourism, already on the increase, could be actively promoted through a PPP mode.

The government would do well to give a boost to tourism in general as it is a huge employment generator. India receives a mere seven million foreign tourists as compared to more than 50 million in China and New York. The potential is evident.

No country in the world has succeeded in expanding its manufacturing sector without adequate provision for low-cost worker housing. The success of Modi’s flagship Make In India programme could be dependent on this in more ways than one. Therefore, the Cabinet approval on 17 June for fiscal and other measures to build 20 million low-cost dwellings over the next five years is most welcome. A more ambitious target of completing 100 million low-cost houses by 2025 should be adopted and implemented. These housing colonies can be the vibrant nucleus of the proposed smart cities. The government should follow the Gujarat example of roping in the private sector, perhaps organized as cooperatives, to execute this ambitious and critical programme.

Gujarat’s economic success can be directly linked to breakthroughs achieved in agricultural growth and productivity. India cannot achieve double-digit growth until its agriculture sector grows at 5-6 per cent annually for the next 10 years. Some major reforms are needed to achieve this. But the precondition is to win the farmers’ trust so that they become partners in modernizing Indian agriculture. This can be done, for example, by drawing up a list of all land already in government ownership in each district and assuring the farmers that additional land will be acquired only after land presently held has been utilized for infrastructure and industrial projects.

Other measures include, first, shifting the urea subsidy immediately to the direct payment transfer system by using the JAM trinity (Jan Dhan, Aadhar and mobile telephony) that is already in place. The cooking gas subsidy has been replaced with direct payment of equivalent amounts to beneficiaries’ bank accounts. The kerosene subsidy is tipped to go the same way. This, now needs to be extended to the disbursement of the fertilizer subsidy, of which the small and marginal farmer hardly receives a very small share at present. This will transform and rationalize the production and consumption pattern of fertilizers in the country.

Second, the process of establishing Farmers Producers Organizations, that currently number a thousand, must be accelerated to act as aggregators and bring the benefits of economies of scale to small and marginal farmers. Third, a large number of skill training and technology transfer centres should be opened across the entire rural sector to meet growing farmers’ needs. Fourth, minimum support prices (MSPs) must be reviewed and revised to remove the bias against crops other than superior cereals and sugarcane.

These measures along with steps to facilitate the emergence of an agriculture land market will help modernize Indian agriculture. Other than reforms in the four sectors hitherto relatively neglected, manufacturing needs a major push for it generates jobs on the large scale that is required. Make In India is a laudable programme and fortunately one which has had a headstart because it was initiated by the UPA government with its announcement of the New Manufacturing Policy in 2011. Some key measures have already been implemented for improving the business environment.

We now need to tackle the labour market issue, without which Make In India will fail. This does not in any way imply instituting a system of hire and fire.

At present, India has about 50 laws related to labour. These laws need to be reviewed and rationalized to focus on the most important aspects of safeguarding workers’ rights and ensuring modern and safe working conditions for them in all sectors including agriculture. The five sets of labour laws could be:

• Laws governing terms and conditions of employment, which consolidate the Industrial Employment (Standing Orders) Act, 1946; Industrial Disputes Act, 1947; and Trade Unions Act, 1926.

• Laws governing wages, which consolidate the Minimum Wages Act; Payment of Wages Act; and the Bonus Act.

• Laws governing welfare, which consolidate the Factories Act, 1948; Maternity Benefits Act, 1961; Employee’s Compensation Act, 1952; and Contract Labour (Regulation & Abolition) Act, 1970.

• Laws governing social security, which consolidate the Employees Provident Funds Act; Employees State Insurance Act; and Payment of Gratuity Act.

• Child Labour Abolition Act, which should be expanded so as to be enforced for domestic household employment.

This minimal, but comprehensive, set of labour laws must be strictly enforced across the economy including in the informal sector. Violators should expect to be treated harshly and slapped with deterrent penalties. This will effectively eliminate the distinction between formal and informal labour markets and remove the blemish of inhuman working conditions operating in the informal sector. These labour market reforms are critical for achieving the objective of generating 12 million jobs each year. Lack of success on this issue could have severe consequences for not only the economy but for also the social and political fabric of our nation state.

The government has to decisively reverse India’s perennial export pessimism. This is reflected in net exports contributing (-) 5 per cent to India’s growth in contrast to (+) 6 per cent for China. Consequently, India’s exports remain one-fifth of China’s and, even at this low level, have been on the decline for the last six months. India has to get integrated into global production networks and take advantage of burgeoning intra-industry trade flows. This requires significant improvement in export-oriented infrastructure and more a hospitable and welcoming climate for FDI.

The government must reverse its decision to not permit FDI in multi-brand retail and also allow FDI in the sunrise sector of e-commerce. It should raise the FDI cap in defence production to 75 per cent, thereby strongly signaling its intent to firmly integrate India into global economic, financial and technology flows. This will be in keeping with the centuries-old trading traditions of this country. It will also demonstrate to the world that India has finally exorcised the ghost of the East India Company from its public policy discussions.

Finally, macro-economic stability has to be ensured. The target must be to eliminate revenue deficit and reduce overall fiscal deficit to no more than 1 per cent of GDP. This should not be achieved, under any circumstances, by cutting public capital expenditure, which crowds in private investment and promotes growth. Instead, the revenue deficit should be eliminated by reducing wasteful expenditure including curbing misdirected subsidies; raising direct tax revenues; monetizing the government’s vast land bank; and privatizing loss-making public sector units. In this context, it is imperative to undertake a thorough review of the direct tax administration and revamp it to make it taxpayer-friendly and geared to expanding the tax base rather than be perceived as a measure for meting out punishment to political opponents and truant businessmen and officials.

It should be evident that maximizing employment generation is the exclusive focus of reform measures suggested here. This must be the singlemost important policy priority today. Quite inexplicably and to my utter dismay, employment generation still does not figure in any public policy pronouncements or discussions. This must change and the sooner the better. The futile policy debate on “microchips and not potato chips” must be consigned to the trash can. Paraphrasing Deng Xiao Ping in the current Indian context, the colour of investment does not matter as long as it generates employment.

The author is Senior Fellow, Centre for Policy Research and Founder Director of Pahle India Foundation