(This was written for some competition last year, whose name I don't remember. Didn't get published there, but thought might post it here.)
“With great power, comes great responsibility”. Unfortunately, this isn’t the case with the government of India. The UPA – II has been marred by gross underdevelopment over the past four years. The economy, which was quite stable during the global meltdown of 2008 has not only deteriorated, but shows very little inclination towards an early upheaval. The nation’s credit rating has been downgraded; the fiscal deficit and current account deficit have become bigger. Not to mention the blackout in July, the constantly increasing prices- diesel, food and whatnot. Much could be attributed to the policy paralysis that the government is facing and the countless acts of corruption by officials. Key policy issues and executive decisions pertaining to industries have been pending for long and some that are being taken are not working as planned. One could blame the obduracy and ego of the various political parties in the coalition as a reason for not taking decisions. But local interests of the parties and any conflicts arising due to them must be met with a firm hand by the policy makers, which sadly isn’t true in the current Indian perspective. The monetary policy of the Government is in shambles. In order to tame the rising price index, the RBI is trying to control money supply in the economy by raising repo rates and reverse repo rates. Already the RBI has hiked the repo rate by 3.25 percentage points in 12 installments since March 2010. This has increased the interest rate in commercial banks. High bank rate discourages investment, thereby reducing aggregate demand. Moreover a shortage in fuel supply and low quality electricity- one which doesn’t come at the correct frequency- are also playing havoc with the manufacturing industry. Many units are forced to close down on certain days of week, thereby reducing production. Naturally, the GDP growth has declined drastically from 8.4% in the years 2009- 10 and 2010-11 to 5.3% in Q4 of 2011-2012 and 5.5% in Q1 of 2012-2013. Private investment in infrastructure and industry has remained subdued. From 14.3% of GDP in years preceding global recession it has gone down to 10% of GDP.
The entire Indian situation has become so dire that it is in urgent need of reforms, reforms that should have been brought about a long while back. But amidst all the tension, corruption and allegations of indecision and weakness, Prime Minister Dr. Manmohan Singh seems to have seized the initiative- “I am in charge”, as Shashi Tharoor calls it- and come up with policy decisions that are of utmost importance given the current state of events. Allowing FDI in multi brand retail (subject to state approval) so that giants like Wal-Mart start their operations in India, increasing the share of foreign investors in airlines (up to 49%) and media (74%), increasing diesel prices and decreasing subsidies on LPG to counter fiscal deficit have been introduced much to the benefit of investors. The power sector, facing high aggregate technical and commercial losses mostly due to under recovery of costs through tariffs and high arrears, has been given a relief in terms of grants and loans. There are also many reforms waiting to happen like the nationwide introduction of cash transfer scheme and Goods and Services Tax (GST).
But the question that spawns out of all this is: Is it good enough? It is not that FDI (in retail or aviation) didn’t exist earlier; investment was always open for domestic companies and for foreign companies with some conditions. Wal-Mart was in a 50:50 partnership with Bharti Enterprises LTD since 2006 and was handling the back- end of the Bharti Groups’ retail chain. The only thing FDI reform achieved was in allowing Wal-Mart to open its own outlets. Even in aviation, companies were allowed to invest; the only thing that these reforms changed is that now foreign airlines can invest in aviation which was not the case earlier. Rescuing power companies by grant and loans and increasing price of diesel to counter fiscal deficit begets the question that is it really reform, or a forced change that had to be implemented in order to survive? Are all these reforms, for reforms’ sake or the Government actually has a plan? One of the most memorable reforms in recent history that comes to mind is the Saemaul Movement in South Korea in 1970. It helped decrease poverty to 10% from the existing 30% and skyrocket the per capita income in the country. We need something of the proportion of the Saemaul Movement to get us out of the rut we are in. The government has schemes like NREGA, which although good intentioned, have not delivered in terms of increased productivity or the general uplifting of the rural society and hence, the nation. The government has waited so long to introduce these reforms that it forces one to speculate: “Is it too late?” Pratap Bhanu Mehta in his article ("not-reform-vs-populism") in The Indian Express, writes, “The fact that these reforms are coming after four years of colossal mismanagement is making the reform narrative problematic. Admittedly, there was a global financial crisis that required a different policy response. But politically it is not easy for the government, after running all fiscal responsibility into the ground for four years, and after stoking structural inflation, to turn back and accuse opponents of being populist. The crisis narrative is a double-edged sword: it makes the case for reform compelling. But it also exposes the complicity and opportunism of government.”
The Government needs to bring substance into the reforms it doles out. Back in 1991 when India was in a severe BOP crisis, the Government of PV Narasimha Rao and his Finance Minister, Dr. Manmohan Singh came out with plenty of reforms. The new policies included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. The effect it had on the foreign investment was huge. It rose from a paltry 132 million USD in 91- 92 to a staggering 5.3 billion USD in 95- 96. It took India from state of almost bankruptcy to an emerging new market where business could be done. It is in lieu of what happened in 1991 that these current reforms don’t appear to be substantial. True, we are not as badly placed as we were back then. But it is very much possible that we go down that road again if we are not careful. The License Raj that was abolished in 1991 led to a rise in domestic entrepreneurship- existing firms scaled up and many new enterprises were started. India needs a further modification on this account. Starting or even running a business is still tough in the country. There are far too many clearances required, far too many corrupt officials to feed. The Government needs to relax the stringent regulations and implement them carefully as these medium and small businesses generate employment and keeps capital flowing. Back then Dr. Singh reduced subsidies on fertilizers and food to counter fiscal deficit, much the same that is being done today by increasing diesel prices and reducing subsidies on LPG. In 1991 it helped reduce the deficit to 4.8% of GDP. If it helps out in 2013 it could be good move, but as of now nothing seems sure as the deficit is predicted to be near 5.3% of GDP at the end of this Financial Year.
What India requires today is a series of ‘Big Bang’ reforms and not incremental ones as are being implemented by the Government. It happened in 1991. The face of the country was changed. Investors were attracted; businesses flourished, public sector came alive, the entire nation was rejuvenated. Although those reforms were a necessary part of the IMF program, many of them were ‘Big Bang’. India thankfully does not need an IMF program this time around but for it to keep this fact this way, bigger and better reforms need to be implemented. GST, cash transfer, Right to Education Act are some game changing reforms waiting in the flanks (RTE already being passed). They have the potential to be the next ‘Big’ reform the country needs. The Government only has to keep its will about it. “Where there is a will, there is a way.”
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