Reforms 2.0: 9 Things Arun Jaitley Can Do To Unleash The Economy

The government is moving in the right direction, but rather slowly. It needs to go beyond procedural changes and strike at some very basic wrong premises that hold back India’s growth. Here are 9 major reform areas that come to our mind.

Yesterday, Finance Minister Arun Jaitley promised “a whole set of second generation reforms” in the Budget proposals that he is going to present before Parliament in February 2015. He said the reforms called for some “undoing”: Allocation of resources without the executive exercising discretion, a rational and reasonable tax regime and some procedural changes in land laws, among other things.

1. Beyond Incrementalism

It is in the language of the third that status quoism that the minister has been accused of, manifests. Procedural changes as well as freeing business from legal hassles had marked his first Budget announcements, but that clearly did not satisfy the liberal intellectuals who campaigned for a BJP government or the people who shunned their old favourites to vote for a Narendra Modi-led dispensation during the Lok Sabha elections to see an employment-generating, paralysis-free policy in place.

2. Land Acquisitions

It is wrong premises—more than lengthy procedures—that stunt India’s growth. In the case of land, for example, government must cease to be a broker. A hands-off regime will not only set the ruling party free from the accusation of being guided by cronies, but will also send personal property prices hurtling down while helping stop generation of black money needed to book a piece of earth in this country.

In case of acquisition, let it be a direct deal between the industry and the land owner; in case of housing, let there be no registration hassles. Government’s job should be restricted to oversight of compliance with regulations. Once land is acquired, an increase in its value will not lead to agitation by farmers who would regret having charged less for the land that is no longer theirs. For, only the State can be subjected to activism; private parties can’t.

As the Lok Satta Party had put it last year in reaction to the UPA government-made law, “in the guise of helping the farmer, the Bill creates all sorts of bureaucratic hurdles in the shape of committees at the district, state and central levels for clearing land acquisition”.

The party’s then president Dr Jayaprakash Narayan had said that the children of farmers who parted with land should be equipped with skills and provided jobs in activities that follow land acquisition. He recalled that he had the privilege of training 8,000 children of farmers who parted with their land for the Visakhapatnam Steel Plant and providing permanent jobs to all of them. The Land Acquisition, Rehabilitation and Resettlement Act is silent on this aspect.

The people get a raw deal, too. More than 50% of land allotted to special economic zones (SEZs) across the country remains idle. The SEZs’ very purpose was defeated with no significant increase in employment even as the government’s revenue foregone was to the tune of Rs 83,000 crore between 2007 and 2013, according to the Comptroller and Auditor General (CAG).

Will the NDA Government change the scenario? On 12 November, The Indian Express reported:

“Worried about the adverse political fallout of watering down provisions of the Right to Fair Compensation and Transparency in the Land Acquisition, Rehabilitation and Resettlement Act, 2013, the NDA government is unable to decide whether to go ahead with its plan to amend the Act in the forthcoming winter session of Parliament or try and build a larger consensus on the issue.  Sources said the government is even toying with the idea of taking the ordinance route after the winter session of Parliament to effect key but politically sensitive changes to the Act. In fact, the government had earlier also mulled issuing an ordinance to give effect to the changes but the move did not fructify.”

True, this columnist had explained to Swarajya’s readers in his 23 October article that the new government was committed to reforms, but it would usher in changes keeping their political implications in mind. However, that cannot perpetually stay as the government’s excuse, especially after the BJP’s remarkable victories in Maharashtra and Haryana assembly elections. If 288 seats in Parliament were not enough to instil confidence in Team Modi, the BJP will be in a better position to send its representatives to the Rajya Sabha with more states in its kitty, which its Upper House MPs can represent by the time February 2015 arrives. Still, will “procedural changes” be all that the people will get from Jaitley’s next Budget?

3. How about disinvestment?

The government is indeed moving in the right direction, but rather slowly. The disinvestment programme for 2014-15 seems to have kicked off in right earnest with the Cabinet clearing the sale of government stake in three major public sector companies—Oil and Natural Gas Corporation (ONGC), Coal India (CIL) and National Hydroelectric Power Corporation (NHPC). The sale of 5 per cent stake in ONGC, 10 per cent in CIL and 11.36 per cent in NHPC will generate over Rs.45,000 crore at current market prices. But what about several other businesses that, according to Modi’s pre- as well as post-election speeches, government had no business to be in?

The Indian State is a strange authority that once nationalised domains where competition was possible and privatised those where it wasn’t. Tata Airlines, Oriental Life Insurance Company and other insurance companies, 20 privately owned banks, etc were once forced to sell their stakes to Indira Gandhi’s government. Air India, Life Insurance Corporation, etc sprung up in their place and banks were now State-owned while retaining with their old names in most cases. On the other hand, State electric and water supply contracts are being gifted on a platter to private industries, even though if the customer is not satisfied with the services, he can in no way switch from one supplier to another.

Shouldn’t government stop running hotels and airlines and being the country’s chief moneylender forthwith?

4. Smart Welfare

When it comes to replacing subsidies by direct benefits transfer (DBT) via Aadhaar, bank accounts, Su-Pay, debit cards, and mobile payments, for instance, the subsidies on cooking gas and kerosene will soon be transferred to bank accounts of beneficiaries. The UPA government was handicapped by the Supreme Court judgement that said Aadhaar could not be forced down people’s throats for DBT. But Jan Dhan Yojana coupled with Aadhaar reaching Uttar Pradesh, Bihar, Chhattisgarh and Uttarakhand means an increase in the number of people with unique identification numbers to 1 billion by the end of 2015.

Government must now rely on an anticipated human reaction; when some people get the benefits and others don’t, there will be a rush among those left out to secure their Aadhaar cards. DBT must, therefore, not be delayed any further.

5. Coal Mining

The NDA Government moved on 20 October to open up the coal industry to commercial mining, signalling the most serious shift in 42 years toward allowing private players full participation in the sector. But procrastination is writ large on its announcements. While the industry will be opened as and when required, no timeline has been set. Further, no foreign company will be allowed to do commercial mining.

This isn’t totally liberal, but acceptable nationalism. Once coal-bearing land is taken back from private companies whose mining licences were cancelled by the apex court in September, the government will hold an electronic auction of the mines for steel, power and other companies for their own consumption in three to four months; this transparency is welcome. Now the status quo: No changes are being made to the structure of Coal India.

6. Fixing the Railways

Liberals were quite happy with the first Railway Budget of this government, but then came the rude shock of removal of D.V. Sadananda Gowda from the ministry. News of the Cabinet reshuffle was immediately followed by a report that the former Railway Minister was not able to get his job done. Why was he then put in the Law Ministry that is crying for judicial reforms?

But this article is about economic reforms. Mercifully, a go-getter Suresh Prabhu has been put at the helm. The new committee on rail restructuring will come out with multiple reports on different themes. Before the next Railway Budget, the committee’s first interim report should be submitted. If the government desires, these recommendations can be implemented in a phase-wise manner.

7. Labour Law Reforms

India’s labour laws are archaic, suffering from a 19th century impression about capitalists, thereby making capital investments virtually impossible. Rigid laws discourage firms to introduce new technology, as that sometimes entails retrenchment. This deters FDI because of the fear that it would not be possible to dismiss unproductive workers or to downsize during a slowdown. Hence, getting FDI into export-oriented, labour-intensive sectors in India has not been fully achieved.

The Industrial Disputes Act (1947) has rigid provisions such as compulsory and prior government approval in the case of layoffs, retrenchment and closure of industrial establishments employing more than 100 workers. A 21 days’ notice and employees’ consent are required if the job content or nature of work of employees needs to be changed, as per the Contract Labour (Regulation and Abolition) Act (1970). The Trade Union Act (1926) provides for the creation of trade unions where even outsiders can be office-bearers. This hurts investor faith and restricts economic growth.

Amendments to some restrictive provisions of the Factories Act (1948), the Labour Laws Act (1988) and the Apprenticeship Act (1961) have been cleared by the Cabinet and are set to be tabled in Parliament. The punitive clause that calls for the imprisonment of company directors who fail to implement the Apprenticeship Act of 1961 is sought to be dropped. Employers will no longer be required to absorb at least half of the apprentices in regular jobs if the amendments pass parliamentary muster.

Doubling the provision of overtime from 50 hours a quarter to 100 hours in some cases and from 75 hours to 125 hours in others involving work of public interest is on the cards. Companies with 10-40 employees will be exempt from having to furnish and file returns on various aspects, helping avoid procedural delays. But there is no proposal to increase low worker productivity in the country.

8.  The Insurance Sector Needs Reforms Too

In the insurance sector, thankfully, the BJP, as the then main Opposition party, had not made as much of a noise of protest as it had made against FDI in retail. Observers will, therefore, be less stuck with the irony that it is pushing for more or less the same Insurance Laws (Amendment) Bill it had opposed when the UPA had proposed it. That does not make the going easy in Parliament, though.

The Trinamool Congress, JD(U) and CPI(M) have decided to oppose it, while the Congress and BSP have held their cards close to the chest on the first day of the winter session. It’s not just about increasing FDI in the sector from 26 per cent to 49 per cent. The proposed law gives more power to the Insurance Regulatory and Development Authority (IRDA) to decide on expenses of the insurers. This, among other things, allows the regulator to stitch a new commission structure for distributors.

The industry has seen blatant and unabated accounts of wrong sales, but punitive damages on the erring party have been few and far between. Accountability is needed to bring fair market practices to the industry. The Bill also puts the onus on the insurer to tighten its underwriting norms. Currently, an insurer has a window of two years after a policy is bought to reject a claim on grounds of any mis-statement or fraud. After two years, the insurer can still reject a claim on grounds of fraud such as intentional suppression of material information.

The Bill, however, gives insurers three years to establish this, after which the insurer will not be able to reject a claim on any grounds. This will curb the practice of underwriting a customer at the time of claim instead of at the time of buying the policy. The Bill and the proposed amendments gives more power to the regulator and brings in several customer-friendly reforms. It defines quantum of penalty on specific violations such as insurance sale through unlicensed entities and clearly prohibits damaging sales practices such as multi-level marketing.

9. Let’s go easy on Taxes

Finally, taxes have been the biggest disappointment. While the Finance Minister said before his last Budget—and has maintained so thereafter—that he is personally for a wider tax net but lower tax rates, the exemption was upped in his Budget by a measly Rs 50,000 per annum.

Elsewhere, how much RBI Governor Raghuram Rajan’s reluctance to reduce lending rates has curbed inflation is unknown, but the middle class, whose lives run on how efficiently they manage the monthly liability of instalments, has certainly got no relief. Goods and Services Tax is now the buzzword; hopefully, the states, which have been offered a good share from the consolidated tax, will not object. But what happens to competitiveness of indigenous products with imported ones in the scenario to follow is not clear.

Further, with a tough fiscal deficit target of 4.1 per cent of GDP, slack tax revenues and the challenge of raising a record $9.5 billion target from asset sales could force Jaitley to cut spending, risking a fragile economic recovery.