Headline : India needs to be geared to a single-minded pursuit of growth Editorial 5th Aug’19 IndianExpress
Path to $5 trillion economy:
- India needs to transition towards a $5 trillion economy, taking it from lower-middle income status to upper-middle income.
- The path of this transition can only be paved with reforms.
Some of the measures undertaken in the past five years:
- The introduction of goods and services tax (GST)
- Insolvency and Bankruptcy Code (IBC)
- Real Estate (Regulation and Development) Act (RERA)
- Monetary Policy Framework
- A focus on ease of doing business
- Formalisation of the economy
- Enhanced foreign direct investment (FDI) limits
- Recognition of the scale of the nonperforming asset (NPA) problem
- Recapitalisation of public sector banks (PSBs)
Major measures often have short time negative impact:
- Structural reforms of this magnitude always bring with them consequent headwinds.
- Demand, both internal and external, is subdued and private investments are yet to take off.
- Expansionary monetary and fiscal policies are needed to bring aggregate demand out of its slump.
- However, with both fiscal deficit and inflation targets, the extent of monetary and fiscal expansion to stimulate aggregate demand is limited.
Reforms should be focused on growth:
- The focus of second-generation reforms should be a single-minded pursuit of growth that is investment- and exported.
- In 1965, South Korea’s income level was around $700. By 1996, it had risen to $16,230 thanks to the annual average growth of 10.7% over 31 years.
- China’s per-capita income in 1993 was $530. In 2008, it had reached around $2,720 with average annual growth at 11.5%.
Steps India must take to drive a $5 trillion economy:
Improved credit flow:
- A slew of recent events have triggered a liquidity crunch.
- Banks and mutual funds are reluctant to lend to nonbanking financial companies (NBFCs), and bank lending growth is meagre.
- Given the undercapitalised nature of PSBs, the liquidity crunch is further compounded.
- Ensuring sufficient credit flows is the need of the hour.
- The Indian financial sector is overly reliant on banks as source of funding.
- Deep Bond market necessary for this:
- In India, the bond market represents only 20% of total corporate debt as compared to 80% in the US.
- India needs to deepen the corporate bond markets to lessen the load on banks as drivers of credit in the financial system.
Asset monetisation and recycling:
- Innovative ideas such as asset monetisation and recycling need to be vigorously pursued to fund government capital expenditure.
- Reverse BOT (build-operate-transfer) and TOT (tolloperate-transfer) for airports, roads, infrastructure investment trusts (InvITs) of power transmission grids and gas pipelines, along with monetising land lying idle with public sector enterprises, can raise significant funds.
- Strategic disinvestment can raise further non-tax revenues for GoI. NITI Aayog has recommended strategic disinvestment of 46 central public sector enterprises (CPSEs). These need to be expeditiously taken forward.
- Government must get out of business enterprises and become a facilitator and catalyst.
Lower Interest Rates:
- Reserve Bank of India (RBI) must also recognise that the real cost of borrowing in India is inordinately high when compared to peer nations.
- The imperfect monetary transmission mechanism implies that successive and large rate cuts from RBI are needed to bring down the cost of capital.
- Liquidity needs to be infused into the system, increasing the pool of loanable funds available in the market.
- Several sectors remain unreformed, agriculture being the biggest example.
- We need to unleash the productive spirit of our farmers by eliminating outdated laws such as the Essential Commodities Act, the APMC Act, and replace them with modern regulations such as the Agricultural Produce and Livestock Marketing (APLM) Act, the Contract Farming Act, and the Land Leasing Act.
- Along with marketing reforms, investments in the value chain are needed. This will boost both exports and the domestic food processing industry.
- Dependence on agriculture as a source of livelihood also needs to be reduced.
- 80% of global economic production happens in cities, lifting vast segments above poverty lines.
- They are centres of growth, innovation and creativity.
- We must focus on making Indian cities smart, sustainable and innovative.
- They hold the key to growth and job creation.
- Manufacturing will play an important role in growth and job creation.
- Export-led growth needs to be targeted, particularly in labour-intensive sectors.
- To capture larger shares of export markets, our firms must be globally competitive.
- Rationalising electricity tariffs, labour and land laws are critical enablers of firm competitiveness.
Textile sector reform:
- The textiles and apparel sector presents significant employment opportunities, especially to the labour force exiting agriculture.
- A focus on man-made fibres, through removal of the inverted duty structure, is a first step.
- India also needs to focus on scale. Nearly 95% of our fabric is produced in small-scale industries, leading to a loss in competitiveness in destination markets.
- Largescale textile parks, providing common infrastructure and plug-and-play facilities to entrepreneurs, would make this sector competitive.
Power and railway sector reforms:
- We need vibrant and dynamic power and railway sectors.
- In power sector, we need to bring in franchise and public-private partnership (PPP) modes in distribution, permit open access and free renewable from licensing requirement for generation and supply.
- In railways, we need to rationalise passenger fares, and projects like dedicated freight corridors to be completed. Private sector play in train operations and station redevelopment will fast-track infrastructure to global standards and bring efficiency.
Mining sector reforms:
- Opening up the coal sector for commercial mining, along with enhancing domestic oil and gas production and exploration, will reduce India’s dependence on imports of fossil fuels.
- In allocating these blocks, the focus should be on production, rather than revenue maximisation.
- Tourism is an area where significant growth and employment opportunities emerge.
- While India has many destinations, we do not have many circuits.
- Developing the ‘Buddhist Circuit’, by providing air connectivity through UDAN (Ude Desh ka Aam Naagrik) to destinations such as Kushinagar and Bodh Gaya, will help us capture the burgeoning East Asian tourist market.
- India needs to bring down GST on hotel rooms from 28% to 18%, and reduce visa fees to $25, so that we can offer attractive and competitive packages.
Improving saving and investment levels:
- For India to grow at 8-9% over the coming years, the structural reforms need to aim at boosting domestic investment and savings levels, especially from the private and household sectors.
- Domestic infrastructure creation, funded through non-tax revenues, can ‘crowd-in’ private investment.
Ease of business:
- Similarly, stability, predictability and consistency in policies can boost and maintain investor confidence.
- Reforms in ease of doing business must continue with the aim of making India one of the easiest places in the world to do business.
- Tax laws need to be simplified, the processes fully digitised, and the tax research unit needs to be manned by professional tax experts.
Enabling private sector:
- Finally, we need to do everything possible to unleash the animal spirits of the private sector.
- Wealth creation on a sustained basis requires the private sector to play a key and significant role.
GS Paper III: Economy