The Hindu Business Line : Big bang reforms are the key to India’s recovery

With the Indian economy slowing down sharply from the second half of the last financial year, speculation is on as to when India will recover from the impact of the global crisis.

One view is that recovery is imminent irrespective of the international situation. The other outlook is that the recovery is inextricably linked with the recovery of the global economy.

Despite the sighting of some “green sprouts” in the last few months, economic analysts are of the view that global economic recovery will be a prolonged “U-shaped” one rather than a sharp “V-shaped” one.

This is mainly because the basic ‘macroeconomic imbalances at the root of the crisis have so far shown no signs of stabilising.

Besides, the developed world’s banking system, which has turned largely dysfunctional, will take some time to regain its health.

Therefore, India cannot count on a benign external environment being in place soon to pull up its economy. India’s recovery, if it is to take place early, will have to be domestically driven. And here comes the need for a reinvigorating burst of reforms.

The return of a stable government with a decisive pro-reform and inclusive growth mandate has kindled hopes of an early and sharp economic recovery. The forthcoming Budget is the right occasion for the Government to indicate its determination to push through the reform agenda.

The first item on this agenda is to organise massive investments in social and physical infrastructure.

It is well-known that infrastructure is a key constraint to India’s growth and the Government should press hard to change policies and procedures to incentivise the private sector to build world-class infrastructure in the power, roads, ports, airports, urban infrastructure, water and sanitation sectors.

Public-private partnerships have been rightly identified as the way forward but the speed and efficiency of project formulation, approval and implementation have to stepped up considerably.

Education and farm sector

Next is the reform of the education system at both school and university levels aimed at improving both access and quality.

This sector requires radical reforms to eliminate barriers to entry and to create autonomy for curriculum modernisation, it should be given flexibility in fixing salaries and fee structures and enabled to establish multiple and independent accreditation agencies, as well as creation of conducive conditions for foreign and domestic investment, etc.

The third is to carry out reforms in the long-neglected agriculture sector. This has to be through a “root and branch” method at all stages, from input to output to marketing.

A sensible approach would be to end the open-ended farm subsidy system and to confine fertiliser, water and power subsidies to only marginal and small farmers owning up to 1-2 acres of land.

Regulatory reform

Fourth is further regulatory reform. While the licence-control raj has been significantly eroded as a result of reforms in the 1990s, there still remain significant obstacles to doing business in India.

As shown by World Bank surveys on ‘doing business’, India ranks very low among countries on regulatory environment with regard to enforcement of contracts, payment of taxes, business closure, licensing, property registration and setting up a business.

The government should substantially relax its “permit and approval” system by carrying out procedural reforms. The removal of regulatory constraints will substantially improve the investment climate.

Fifth is reform in the quality of delivery of public services such as education, health, poverty alleviation and employment generation.

The Government should empower the actual beneficiaries with direct transfer of money through cash vouchers and smart cards which could, on the one hand, plug leakages and, on the other, improve service delivery by not hindering the competitive, market-based production system.

Finally, the fiscal deficit. While it is inevitable that the deficit will remain high in the context of extraordinary circumstances, it is imperative that the Budget should set a definite path of return to fiscal balance within the next two to three years.

(The author is Senior Consultant, ICRIER, New Delhi. The views are personal.)