An ode to reforms in Modi era

Richa Mishra | Updated on April 12, 2020

Title: India Unlimited: Reclaiming the Lost Glory Author: Arvind Panagariya Publisher: Harper India Price: ₹799

Panagariya hails path-breaking steps such as IBC, and cites labour market rigidity as an area of concern

India Unlimited: Reclaiming the Lost Glory may just be offering the antidote that India’s economy will need in the days to come, provided the eight broad points spelled out by Arvind Panagariya are adopted in totality. These are policy reforms; the importance of growth for tax revenues and, hence, the scale of government expenditures; policy stability; migration of agriculture workforce; importance of medium and large firms; exports as the engine of growth;the opportunity offered by the exit of China from many markets; and, finally, why Indian entrepreneurs need to think about investing in labour-intensive industries.

Those who have interacted with Panagariya would know these points are not new. He used to highlight them during his tenure as the first vice-chairman of the NITI Aayog. But in the book, Panagariya is more vocal about his views.

Focus on reforms

When asked, during a conversation with BusinessLine, where he thinks the gap between the intent and the action exists, he said: “In some of these areas such as policy reform and why growth critical to the size of government expenditures, both intent and action are present; but we could accelerate action. The government has focussed more on projects and programmes and less on policy reforms. We need the balance to shift in favour of reforms. Policy stability requires that we think through policy actions more carefully before announcing them. Reversals often have to be done because insufficient thought went into the initial action.”

In the remaining areas, which are highly interconnected, a fundamental change in thinking and therefore intent, is required. “If policymakers do not focus squarely on labour-intensive sectors, favourable policy environment for the emergence of medium and large enterprises in these sectors, export-friendly policies and facilitation of migration of workforce from agriculture to industry and services, our transition to a modern, industrial and high-income economy will be slow. It will resemble more the transition in Western economies, that took 100-plus years, rather than Asian tigers during 1960-1990 and China more recently,” he added.

When asked if he is still confident about a double-digit growth for India — for which the book provides a roadmap — he said: “If we remain focussed on import substitution, I am afraid the best we will be able to do is 8 per cent. The additional two percentage points necessary to get to a double-digit level would require a clear focus on capturing the export markets, creating a policy environment conducive to the emergence of medium and large firms in labour-intensive sectors, and facilitation of migration of workers out of agriculture into industry and services.”

In the book, he is not kind to bureaucracy. He points at bureaucracy as being a hindrance — when in reality, bureaucracy takes instructions from political masters. “Prior to my stint in the government, I would have probably agreed with you. But, after observing from within how the system functions, I have a more nuanced view. Yes, notionally, bureaucracy takes instructions from its political masters. But it is an independent player in policy-making as well, both at the institutional level and at the level of individual bureaucrats,” said Panagariya.

“At the institutional level, it goes for continuity over change, and therefore slows down the efforts for change, which is what reforms are about. At the individual level, I have seen reform-oriented bureaucrats actually initiate reforms from their ministries and also give them a push at critical points in time. I have also seen other bureaucrats give slow death to reforms desired by their political masters,” he added.

“The bureaucrat never says no to his political master. He simply slows down implementation until either he is moved to another department or the political master gets shifted to another ministry or even loses his mandate,” he added.

Panagariya added: “Most ministers do not draft legislations or rules and regulations that originate from their ministries. Bureaucrats do. How legislation is drafted and how subsequent rules and regulations are written have determining impact on what shape the reform proposed by political leadership takes.”

Modi government

The book also talks about Narendra Modi era. When asked if he thinks somewhere down the line, something went wrong, he said: “The Modi government inherited a fragile economy; some very anti-reform actions such as retrospective taxation and the Land Acquisition Act of 2013; and a paralysed decision-making system from the UPA-2. Growth during the last two years of the latter had plummeted to below 6 per cent per year, and inflation and current account deficit were high.”

“Yet, the average growth during the first five-year term under Modi was 7.4 per cent. Infrastructure in all its aspects has been greatly strengthened, which would yield yet higher returns in the years to come. Major reforms such as the IBC, GST, DBT, cut in the corporate profit tax with exemptions eliminated wholesale reform of regulatory regime in medical education, and an unprecedented assault on corruption were implemented,” he added.

“I am hard-pressed to think of a single comparable reform under UPA-2. The only area in which you can fault Modi government is the clean-up of NPAs. Here the government and the RBI were slow to move. The problem was there for all to see as early as 2013, but real action did not begin till mid-2017, after a new governor took the helm at the RBI. And that delay did prove costly: growth rate in 2018-19 fell to 6.1 per cent and that in 2019-20 to 5 per cent. A careful analysis shows that much of this decline has been due to weaknesses in the financial sector traceable to NPAs and their slow clean-up,” he said.

The book argues about unemployment and the issue of migrant workers in the context of urbanisation. How far have we come in dealing with labour market reforms?“Not much, I am afraid. The unification and streamlining of 40-odd disparate labour legislations into four codes is a step in the right direction. But genuine reform has to go a lot farther, making labour markets more flexible so that enterprises feel comfortable employing workers rather than escape doing so by opting to invest in highly capital-intensive sectors and technologies.”

On banking sector reforms, he said: “Recent consolidation of public sector banks via merger is an important positive step. This being said, we have a long way to go in this sector.”

“In my book, I argue that before the current term of the government expires, we must accomplish privatisation of a few public sector banks,” he said. “Without that, it will be very difficult to avoid recurrent episodes of NPAs and repeated use of valuable taxpayer money to recapitalise them. Privatisation will also help create a uniform regulatory regime, unlike the present system, in which private and public sector banks are subject to very different regulations. We also need to improve RBI surveillance of banks to end repeated large-scale frauds at banks,” he added.

On today’s pandemic situation, Panagariya said:“It has exposed gaping holes in public health systems worldwide. Except for some countries in East Asia — notably, Taiwan, Singapore, South Korea, Hong Kong, China and Vietnam — the world was simply not prepared to deal with a pandemic,” he said.

“I have been very, very pleasantly surprised by the manner in which the Central, State and local administrations in India have responded. Detailed contact tracing and now strict containment that State and local governments are implementing is well beyond my imagination.”

Meet the author

Arvind Panagariya is the Jagdish Bhagwati Professor of Indian Political Economy and Director of the Raj Center on Indian Economic Policies at Columbia University. He served as the first vice-chairman of the NITI Aayog from 2015-2017.

Published on April 13, 2020

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