An Economic Manifesto For The New Government, Whoever Comes To Power

A country with a hoary, glorious past and a proud civilisation and with a big population will, more often than not, be at the crossroads, having to make big choices. On the 70th Republic Day and on the 69th anniversary of having become a Republic, India faced such a moment yet again. Nearly five years have gone by quickly since Narendra Modi won for the Bharatiya Janata Party (BJP) a decisive mandate in the 2014 national elections.

Now, it is almost time for India to choose its leader again, for the next five years. Therefore, it is also time to tell our leaders what they should be doing once elected. Getting elected to office is only a means to an end. Or, at least, it should be that way. The end-goal is national interest, national priorities and a better and sustainable standard of living for the vast majority of the population.

India is a country with millions impatient to reach the top of the prosperity ladder. India is a country with many more millions impatient to get on to the ladder first, for a shot at the top of the heap some time later. India’s governments have to let the aspirational class decide their own future and guide the lives of the less well-off to a better future. The government has a role and the government has to abdicate as well. Therefore, its policy challenges are doubly complex and difficult.

For about 33 years since Independence, India experienced the Congress rate of growth in real gross domestic product (GDP) of around 3 per cent per annum. From the eighties, Indira Gandhi and later Rajiv Gandhi began gradual and hesitant liberalisation of the economy, which got some momentum under Narasimha Rao, in the nineties, thanks to the balance of payment crisis.

Like in the United States, where the Republican Party talks the language of maximum freedom, minimum government and frugal budgets but ends up overseeing an expansion of the government and the fiscal deficit, the Congress party in India has repeatedly presided over expanding fiscal deficits, rampant and persistently high inflation, external deficits and banking crises.

It has been left to the relatively short-lived non-Congress governments to come in, stem the rot and repair the economy. The National Democratic Alliance (NDA) government under Atal Bihari Vajpayee did that from 1998 to 2004 and the history repeated itself under the BJP-led government from 2014 to 2019.

Therefore, it is important that, whichever party or alliance that comes to office in May 2019, the hard-won macroeconomic stability is not squandered away as the United Progressive Alliance (UPA) government did rather spectacularly from 2004 until 2014. India needs a sound macroeconomic strategy not just for the next five years but for the next two decades. Homilies and platitudes do not make for macroeconomic strategy. What needs to be done is understood but how it can be done is less clear.

Reforming Factor Markets — Capital — Banking Reforms

Since 1991, in fits and starts, India has liberalised its product markets, financial markets and the external sector. But, Indian governments have faced greater political economy challenges in reforming its factor markets. Of the three factor markets — land, labour and capital — the last one was substantially better reformed than the first two. In fact, reform of the market for capital, the factor, got a major boost with the enactment of the Insolvency and Bankruptcy Code (IBC).

As Arvind Subramanian, the former chief economic adviser to the government of India put it, India had capitalism without exit and, in particular, the BJP government faced the challenge of dealing with “stigmatised capitalism” in the wake of the crisis of bad and non-performing assets in the banking system. IBC has dealt with both these challenges — capitalism without exit and stigmatised capitalism. But, there is still the unfinished task of reforming the banking system, which is an important cog in the wheel of provision of capital for the economy.

Admittedly, the dilemma of solving the problem of bad assets in the banking system might, without appearing to bail out the wilful and not-so-wilful corporate defaulters, be one of the reasons for the present government’s delayed recognition of the problem and its scale.

It is also possible to argue that it simply did not do the homework early enough to anticipate how the problem would develop nor did it understand the deflationary consequences of some of the reforms it undertook and the consequent adverse impact on the already-fragile balance sheets of Indian banks, majority of whom are under majority-owned by the government. But, it is never too late. The stress in bank assets is still real and big and is festering and the crisis still presents an opportunity for the government to reform the banking system.

In 1969, privately-owned commercial banks came under government ownership for reasons of economic development and financial inclusion. In the first two decades, these two objectives were met mostly rather than unmet. Post-1991, as the opportunities for rent-extortion shrunk in a liberalised economic environment and as government finances came under increased scrutiny, the banking sector became a proxy financier of government’s budget priorities and, in the process, it facilitated both rent-seeking and patronage.

That is why since 1991, nationalised banks have had a far more mixed record of contributing to economic development. In fact, they have been more of a burden on the economy than a boon.

Long-term infrastructure financing by commercial banks who did not raise money for the long-term have resulted in asset-liability and cash-flow mismatch. In the liberalised financial and banking environment, India had shuttered its development of finance institutions. It was a case of misapplication or thoughtless application of Western model of financial and banking sector, ill-suited to India’s development context.

Ownership need not be a hurdle for efficiency and profitability but it ends up being one. The government needs to be a far-sighted owner. In other words, the priorities of politicians elected to govern should be distinguished from the priorities of governance. It is easier said than done.

The only way to ensure that is to deliberately empower the regulator in such a way that the regulatory playing field between privately-owned and government-owned banks is levelled. That is, India’s banking regulator, the Reserve Bank of India (RBI), must have full regulatory authority over all banks, regardless of ownership.

The government, as an owner, can be in banks’ boards of directors but the regulator need not be. Further, the regulator should have the right to approve and to direct removal of key personnel of government-owned banks as it has over majority non-government owned banks.

There may be a case for reviving development finance institutions with long-term financing options backed, perhaps, by government guarantees such that they could fund infrastructure projects with long gestation periods and uncertain cashflows.

Such government guarantees must be explicitly recognised in the budget calculations such that the fiscal obligations of the government are fairly and accurately represented while, at the same time, it imparts a higher degree of accountability both on such long-term lenders and borrowers.

Further, as mentioned earlier, India has failed more often than succeeded in distinguishing between political and governance priorities. A case in point is the waiver of agricultural loans, which has become an accepted political promise, notwithstanding its disastrous consequences for the lenders coupled with dubious or even non-existent benefits for the borrowers.

The frequency with which agricultural loan waivers are deemed necessary is an indication that the problems run deeper. Fragmented land holdings render farming unviable to begin with. Irrigation does not extend to all farm land and, as the chief of NABARD argued recently in an op-ed, the extension of agricultural credit is skewed and unbalanced. More importantly, the government of India itself has conceded that farms less than 4 hectares are very unlikely to be viable. The solutions to the perennial problems of the farm sector are not easy to find. However, three things come to mind.

Priorities For The Farm Sector

Farmers need to be freed to sell their produce wherever, to whomsoever and at whatever price the market is willing to pay. Frequent imports to clamp down prices of farm produce (think onions and tomatoes) is anti-farmer. Urban consumers should be allowed to rein in consumption of products that are dearer or switch to other vegetables. Indeed, concerns over inflation in urban consumption goods and inflation targeting in a developing country smack of urban bias in policymaking.

Empowering farmers means alienating powerful middlemen. The new government needs to be prepared to expend political capital on that. Therefore, the earlier in the term it is pursued, the better are the chances of success.

Farmers need a working, effective and timely crop insurance. The BJP-led government had initiated a sensible crop insurance policy. But, the implementation has been in the hands of state governments, some of whom had not paid the premiums on time rendering the initiative futile.

The third intervention will allow for easier and even automatic land-use conversion. Digitisation of farm ownership and easier land-use conversion policies are substantial deterrent to corruption and bribes at lower levels of bureaucracy. This initiative too rests with state governments and the next Union government must encourage friendly and like-minded states to pursue this initiative and consider rewarding states that do so.

Access To Working Capital For Small Businesses

More important, perhaps, than addressing regional imbalances in the extension of agricultural credit is the issue of access to working capital by micro, small and medium enterprises (MSMEs). The BJP-led government has pursued this unheralded but important reform by giving teeth to the recently formed Receivables Exchange of India.

In 2017, the government mandated all central public sector enterprises to participate in the Receivables Exchange of India, which enables MSMEs to factor their claims on big buyers of their goods in the exchange and receive payment from banks. Banks, in turn, will collect the monies due from big companies on the due date.

For the claims presented by MSMEs to be accepted and paid by banks, they have to be authenticated by their customers. That is why it is noteworthy that the government, in the package it announced for micro and small businesses, mandated all companies with a turnover of more than Rs 500 crore to join Trade Receivables e-Discounting System so that MSME did not face cash crunch that they do face when they are at the mercy of big companies to pay their bills on due date. Corporate boards of directors (or the audit committees of boards) should be made responsible to monitor companies’ compliance with this.

Scrap Inflation Targeting

India’s inflation targeting regime needs revisiting. It might even have to be scrapped and the country might be better off going back to the old ‘multiple indicators approach’. In 2014-15, I had supported the adoption of ‘inflation targeting’ because the experience of the previous five years wherein the country suffered a cumulative inflation of more than 60 per cent thanks to gross macroeconomic mismanagement of the previous government, meant that macroeconomic stability and macroeconomic policy credibility had to be restored urgently. The BJP-led government has largely achieved that.

Just as inflation targeting in developed countries favours the rich and results in asset price inflation (central banks act as though they prefer this rather than target this!), inflation targeting in developing economies favours the urban consumer. It is anti-farmer. Further, evidence has accumulated even internationally that inflation targeting central banks have little influence, if at all, over inflation expectations of households. However, if scrapping it is too much of a policy climbdown, there is a case for raising the target to 6 per cent with the range around it constructed asymmetrically.

The lower-bound should be 5 per cent and the upper-bound should be 8 per cent signalling a higher tolerance for overshoot than undershooting. Empirical evidence is that single-digit inflation — at mid-to-high levels — are hardly a deterrent for economic activity.

Reinvent The Income Tax Regime

If the inflation targeting regime deserved to be scrapped, India’s income tax regime needs a drastic reorientation. Unfortunately, it cannot be scrapped. The most urgent policy decision that awaits the next government is the reorientation of the philosophy of the Income Tax Department. They need to target evaders, using data and technology. But, interpreting law always in favour of ‘revenue’ has to be diluted.

Recent examples:

• Proposal to treat banks’ free services as taxable service income by imputing a value to them and to levy tax on them.
• A ruling by ‘Authority for Advance Ruling’ that back-office operations of IT companies will be deemed domestic service and not exports and subject to goods and services tax (GST) of 18 per cent. This boggles the mind. Some of the proposals are so stunning that one wonders if they are aimed at neutralising the government’s economic agenda.

The finance minister and the prime minister of the day must make sure that the tax department is in alignment with overall policy goals. This is the overriding priority of any government now or six months later.

Let A Thousand Models Emerge In Education

Education sector itself is in dire need of not just a breath but a gust of fresh air. It is in the concurrent list. The Union government can set the direction. The BJP-led government has begun work on abolishing the Medical Council of India. That is a move in the right direction. But, the new government should not stop there. It must chip away at the intrusive, meaningless regulations into the nook and cranny of management of educational institutions.

These regulations contribute precious little to educational outcomes. The ‘Right to Education’ legislation is a classic example of a policy that focuses far too much on inputs and far too little outcomes without even bothering to establish a correlation between the two. The new government should bury it post-haste. As Devesh Kapur of Harvard University pointed out in a recent lecture in Chennai, India needs to allow multiple experiments and modes of delivery in education in order to figure out the best outcomes.

Indeed, this is consistent with what Gulzar Natarajan and I wrote in ‘Can India grow?’ published in November 2016. We wrote that policymakers must allow a thousand policy experiments to bloom given India’s complexity and diversity. ‘One size fits all’ policies administered from the national capital or from state capitals are unlikely to work. Put differently, empowering of local administration with fiscal and decision-making authority on delivery of services like education, health, water and sanitation that directly touch the lives of the local population is an urgent policy priority for the new government.

Prioritise Public Transport

As important as education is, energy is vital to secure India’s economic growth and to sustain it. Neelkanth Mishra of Credit Suisse has given a comprehensive list of options in his paper on energy reforms for the ‘Economic Strategy for India’ compiled by Raghuram Rajan and Abhijit Banerjee.

Broadly, he wrote, “the solutions can only lie in a rapid increase in domestic energy production, improving energy efficiency and encouraging substitution to locally produced energy sources.” In other words, he is hinting at greater recourse to coal which is locally produced in plenty. He had also mentioned the need to use locally available thermal coal to produce steel. Here, we focus on the biggest user of fuel in India — the transport sector.

According to a press release by the Ministry of Petroleum and Natural Gas of the government of India in January 2014, 70 per cent of diesel and 99.6 per cent of petrol is used as transport fuel in the country. Therefore, it follows that the transportation sector is the largest user of hydrocarbon fuels and hence it is reasonable to wager that it is the largest polluter in the country. Thus, the next government must prioritise the following policy measures, in my view:

• Electronic road pricing during peak hours (morning and evening) in top 10 metros
• Staggering of hours between educational institutions and offices
• Rethinking the architecture of public transportation — integrating road, rail and water (where relevant)
• Introducing ‘park and ride’ options in metros in all stations. Reduce road congestion and dependence on private transportation

The benefits are multiple: especially with respect to pollution, easing road congestion, improved productivity and less stress.

Investing In Reliable Data And Statistics

It is possible to implement some of these measures above only if the government has the right data with acceptable quality and reliability and the right personnel. Therefore, it is imperative that the government invests in improving India’s official statistics collection and their reliability.

For example, concerns over the reliability of industrial production (boosted by the production of antacids!) have not been resolved while new concerns have emerged over the abruptly big jump in inflation in the prices of services like healthcare and education in rural India. It is impossible to make sound policies with inferior or no data.

Making Bureaucracy Purposeful

Armed with good and timely data and information, competent bureaucrats can offer sound advice to politicians. The current government made a good beginning by advertising for lateral entry into senior levels of bureaucracy from the private sector in 2018. The process is not over yet but it was a good beginning. It needs to be pursued with vigour to its logical conclusion, and expanded under the new government.

More than relying on the private sector, the new government should focus on merit-based appointment of key personnel in key departments and ministries, institutions, in regulatory bodies through evolution of appropriate, transparent and objective criteria with consideration for non-partisan talent and experience.

Resources can be drawn from the private sector too where necessary. It is noteworthy that two (one serving and one retired) senior and prominent civil servants had taken to the media expressing their preference for lateral entry and calling for better work ethics and morality from the civil servants.

In the two op-eds that they wrote, the authors had not touched upon the need for revisiting the curriculum that selected candidates for Indian Administrative Service go through. But, it is possible that a thorough re-examination of it is needed.

Furthermore, it needs to equip them for mid-career change as many civil servants transition from small towns and districts to policymaking roles in state capitals and in Delhi which require them to deal with global issues, personalities and international economics, trade and politics.

Just to mention a few, India’s geopolitical and geo-economic priorities in matters of global interest (climate change and international trade come to mind), statecraft, negotiation strategies, interpersonal and behavioural dimensions must become a part of the mid-career curriculum, if not in the initial orientation.

Labour Market And Employment

I am aware that this note has a conspicuous omission: it is about labour market and employment. It is easy to make superficial suggestion on both but a lot harder to make specific policy proposals. The BJP-led government had relaxed rules on apprenticeship training, on fixed-term labour contracts and it had offered to bear a portion of payroll deductions in order to incentivise hiring. Its attempt to have a simpler and simplified labour code has run up against the political calendar.

That is unfortunate. India needs to invest in ease of hiring. Simplifying labour laws is not about ease of firing workers. Perhaps, one of the most important ministries in a Union cabinet is the Labour Ministry. It cannot be a parking place for non-performers. The ministry needs someone who is competent and passionate about workers and employment generation. It needs a purposeful champion. My hope is that the policy proposals presented earlier would revive the Indian economy resulting in greater employment generation.

Finally, Aim For A Place In History

Finally, for all these initiatives to be credible and have a higher probability of success, the top political leadership has to set an example of communication and accountability. Both, in fact, start with an efficient organisation of the Cabinet, including appropriate personnel selection.

The BJP-led government made the right noises at the beginning about super-ministries that would subsume many individual ministries such that efficient and coordinated decision-making were possible. But, the intent was not fully translated into action. The new government should do that. Then, at least, once in six months, the prime minister must present a performance scorecard. It needs to be honest, to be credible. Both failures and successes must be highlighted and shared.

Finally, I realise that some of the ideas may be politically costly, at least in the short-term. Constant, credible and sincere communication with the public might mitigate some of it but there is no guarantee as the funding of political parties is still done by specific and moneyed interest groups.

Therefore, for these policy proposals to be considered, implemented and to succeed, one needs a political leadership that is interested in cementing its place in history rather than focused on cementing a victory in the next election in 2024.