Early shoots of reforms revival

green shoots

Amid the doom and gloom of the world economy, there are encouraging signs that the Indian government is now taking tangible steps to reverse the worst aspects of the slowdown in India.

Ministers take the lead

This is a huge step away from the collective “Nelson’s eye” which was being turned to the crisis earlier. Encouraging individual ministers to become visible while laying out their strategy to deal with the slowdown is in.

R K Singh

Electricity distribution in the spot light

Top bureaucrat-politician R.K. Singh, power and renewable energy minister, is reported to have taken a tough stand and advised state power ministers to restructure their distribution networks, restrict their operations to junk the wholesale supply of power and hand over the job of distributing electricity to private players.

The minister’s advice came on the back of a 2018 report ponderously titled “The Seventh Integrated Rating of State Power Distribution Utilities”, which documents the meagre improvements since 2016. The median coverage ratio (revenues to expenses) is just 0.91, as opposed to 0.88 in 2016. The median level of technical and commercial distribution loss has reduced marginally to 20 per cent from 21.8 per cent in 2016. The target by 2019 was 15 per cent.

More than two decades later distribution reforms lag

Reforming the laggard distribution segment has been a struggle since 1995 when the State of Orissa took the lead and franchised it out to private players. Since then, three separate waves of reforms were rolled out, which focused on “restructuring” or “ever-greening” utility debt from accumulated loss in exchange for achieving milestones for future improvements in operational metrics. None have succeeded.

UDAY left overs

The most recent was under Modi 1.0. The primary outcome of the UDAY scheme has been that Rs 1.68 trillion of utility debt was refinanced as state government bonds, at a lower coupon rate, giving some relief in debt servicing. But it has increased state government debt servicing and worsened their debt to state domestic product ratio.

SERCs a weak bulwark against populism

State-level electricity regulators are unable to withstand populist pressure from state governments. Consider Delhi, where the Arvind Kejriwal government is poised to win the Assembly elections next year, on the back of freebies like limited but free electricity and water. Freebies result in steeply higher prices for better-off consumers, industries and commercial entities. This generates the cross-subsidy which, usually, is less than the cost of freebies. This populist strategy reduces the competitiveness of manufacturing and services in India.

FM setting fiscal strategies right

Union finance minister Nirmala Sitharaman is also settling into her crucial role of getting the Union government finances onto a sustainable path. Policy rollbacks have started reversing inefficient tax overreach measures. More such are expected, leading up to the Budget on February 1 next year for FY 2021.

There has been much argumentation within the commentariat whether the slowdown is cyclical, and hence can be sat out, or structural, thereby needing basic factor market — land, labour and financial — reforms.

While this debate is interesting, it is of limited practical value. It springs from the minimalist mindset that only that which is most critical should be reformed. If Prime Minister Narendra Modi’s target of a $5 trillion economy is to be taken at face value, we need a maximalist mindset which fires on all fronts — private demand, private investment and supply and vastly improved government oversight and regulation.

A slowdown to around five per cent growth through FY 2021 will have negative consequences on (i) our ability to reach a poverty level of nine per cent by 2022 (ii) reverse our growing negative trade balance and (iii) increase jobs.

The elusive productivity enhancements

At the heart of all three objectives is the need to enhance productivity in employment-intensive agriculture and medium and small-scale manufacturing. Increasing productivity, crop diversity and value chain linked earnings can double aggregate farm incomes. Out-migration of one half of the 500 million working age population from dependence on subsistence farming to paid work in manufacturing and services is the other option. SMEs account for 40 per cent of exports. Productivity improvements plus letting the INR depreciate to market levels can make their products and services competitive in external markets.

Our exchange rate policy – works against export but incentivises import

A market-based exchange rate policy has three advantages. It enhances the competitiveness of exports (much needed); protects domestic manufacturing by increasing the cost of imported products; and curbs reckless foreign borrowing and unmitigated capital outflow, both of which are surging today.

Direct tax rationalisation is welcome

Ms Sitharaman has courageously reduced the income-tax rate for new companies to 15 per cent without any exemptions and deductions. In the short term, it will increase profitability, help in de-leveraging and boosting the stock market. Over time it shall induce additional investment if the fine print also reflects the minister’s intentions.

A companion demand side measure is still awaited. Reducing the exorbitant 30 per cent tax rate for incomes between `2 million to `5 million to 20 per cent; reducing the existing tax from 30 per cent to 10 per cent between income of `1 million and `2 million; reducing the tax from 20 per cent to five per cent for income between `0.5 million and `1 million and setting incomes below `0.5 million free of income tax (all without exemptions). The resultant demand surge will boost aggregate tax revenue much beyond the notional non-dynamic income tax loss.

Lower interest and tax rates to incentivise realty investment

The existing artifice of deductions on specified savings or income from specified sources (postal savings) and donations to charity or as lumpsums are regressive. They are a fudge to provide legal cover for effectively evading tax by those who have extra legal sources of income.

Why give a tax break on the EMIs paid for a loan to buy a house? Just compensate public sector banks and NBFCs directly to lower the effective interest rate on such loans, if stoking the employment potential of the realty market is an objective. Alternatively, at least limit the benefit to once in a lifetime for the borrower so that speculative purchase is reduced.

Railway reform: Investment in reconstructing stations; licensing private passenger train and station maintenance services

Finally, the Niti Aayog has constituted an empowered committee to pave the way for bidding out private partnerships to upgrade 50 railway stations to global standards and license 150 private passenger trains, and there is talk of “privatising” BPCL, an oil refiner.

Taken by themselves, none of these initiatives are likely to set the Yamuna on fire. But viewed as a signal of a “Gulliver” government awakening from its self-imposed “reforms” hubris, it could bode well for the recovery of the Indian economy over the next two years.

Adapted from the author’s Opinion Piece in the Asian Age October 15, 2019 https://www.asianage.com/opinion/columnists/151019/are-these-early-shoots-of-a-reforms-revival.html

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