Exaggerating reforms

In the 1990s, the then finance minister and the commerce minister (now in more august positions) changed India when they cancelled industrial and import licensing, brought down direct and indirect tax rates drastically while simplifying them, gave up government's powers in major sectors to independent regulatory bodies (Sebi, CERC, Trai), opened many sectors to foreign investment, and introduced many other changes. Their actions constituted real reforms and covered almost all sectors of the economy. It speaks for their ennui and age that they tout recent announcements as major reforms that will revive "animal spirits" in the economy.

Diesel and LPG cylinder prices have been raised by significant amounts. The increases meet only a small part of the losses of oil companies on prices of these products. If this government had allowed their prices to fluctuate in relation to input prices, the increases each time would have been modest and not caused such a furore. This could at least be done now so that the large gap between cost and price is narrower. But further increases are inevitable, given the trend in crude prices. A small benefit: these increases will slightly moderate the "below the line" fiscal deficit.

Allowing FDI in civil aviation, broadcasting and multi-brand retail was long overdue. It might enable the resurrection of mismanaged airlines like Kingfisher, and bring in more experience into all. A real reform would be to include Air India in this list for FDI but, given the government's socialist pretensions, it is unlikely.

The commerce minister, in his overselling campaign, has been propagating the myth that FDI in retail will transform agriculture, give the farmer more remunerative prices, a better deal for consumers, and not hurt the small retailers. For a modest inflow of $8 billion over the next seven years, these foreign investors are expected to set up an efficient supply chain for farm products, with cold stores and cold transportation, strategically located warehouses, and better quality. They are expected to do for India what government has not done. In any case, FDI will build up only over time and no immediate effects can occur.

NRE deposits now earn 8.5% interest (repatriable), far more than in the West. The Mauritius route to launder Indian black money, and allow foreign investors to speculate in Indian stock markets, is to remain open, as is the use of 'participatory notes', another enabling instrument for money laundering. This, and NRE deposits, have brought in a deluge of volatile funds. This government should have closed these routes when the economy was in a better position. Now, when exports have collapsed, the rupee is in decline, and a downgrade stares us in the face, it is not the time to take such corrective action, and rightly GAAR has got a quiet burial ('postponement', they call it). Perhaps government never wanted to close these routes because many ministers, bureaucrats and businessmen were beneficiaries.

The finance ministry has let it be known that the deficit and subsidies cannot be reduced much. The hoary chestnut of cash transfers instead of physical transfers under the public distribution system, never implemented, is again trotted out as a solution. The rising deficits, since the start of UPA-2, are due to the implementation of the many social welfare schemes that the NAC (read the Congress president) has pushed for. (She expects an avalanche of rural votes to result.) No social scheme reaches more than half the intended beneficiaries and this one has become another source for illegal incomes for officialdom and politicians. Unless social scheme expenditures are significantly reduced, neither high deficits nor persistent inflationary trends will moderate.

For over two years, the government has tried to press an obdurate RBI to reduce interest rates sharply, as another panacea for resumed growth. Thanks to professionalism in RBI, it has not succumbed to the pressure. Rightly, RBI sees further inflationary pressures in the (correct) decision to raise diesel prices and sees no significant reduction in deficits. Reduced interest rates might slightly stimulate demand and investment. But neither demand nor investment are any more seriously affected as much by interest rates as by administrative and procedural bottlenecks and the fear of losing jobs. With exports in decline, the uncertain economic situation in Europe and the decline of growth in China will further hurt demand, production and investment.

There is a talk of labour law changes. With the Leftish ideological mindset of the Congress leadership, and elections in 2014, what industry wants, will not happen. These are relaxation in minimum wages, in laying off workers when demand is depressed, enforcing discipline, stopping outside union leaderships in factories, etc.

India is desperately trying to avoid a ratings downgrade. The opening of the floodgates to external borrowings (now even by unlisted companies) will only weaken further the perception of the economy as the external debt-to-GDP ratios rise further. The measures taken and proposed are marginal, not major. They will not give a kickstart to much faster growth.

Domestic and foreign media and commentators are right to deplore the large number of approvals required for investments to fructify, due to delays in land acquisition, getting environment clearances, problems in electricity supply, water shortages, the numbers of inspections and permission needed, making India among the most difficult countries to start a new business.

This government has not understood what reforms are needed. There is, for example, no mention of a top to bottom reform in administration, on selection, promotions, accountability at individual levels, penalties for non-performance and for corruption, far less discretionary powers, watertight procedures for offering natural resources, etc.

The reforms do not even do the obvious things; for example, in removing any government role in determining fuel prices, making independent regulators truly independent, preventing the excessive influence of industrialists in getting decisions, etc. The government has shown that it is no longer inhibited by Mamata. It could have done a lot more.