Seven steps to an economic rebalancing

The analogy of what might happen to an aircraft when it suddenly drops from 40,000 feet to 20,000 feet in a matter of seconds is one that lends itself to describing the state of the Indian economy. After smooth sailing at close to nine per cent growth rate it suddenly dropped to less than five per cent in a very short time, leaving behind unemployment, social unrest, banking woes and stuck projects in its wake.

The huge task before the Narendra Modi government now will be to quickly > revive the economy. In doing so, a huge array of issues need to be addressed.

In its current stage of evolution, the Indian economy requires a fundamental rebalancing across multiple macroeconomic parameters. To begin with, it needs to rebalance savings and investments which have deflated over the recent past and are inadequate to sustain a high rate of growth. Second, the share of manufacturing in GDP must be stepped up in accordance with the employment imperative and the need to build an advanced knowledge-intensive, >technology-based product profile. Third, the economic mindset has to incorporate a much faster pace of planned urbanisation, along with a humane approach, which would foster higher economic productivity given all factors of production.

Four, India’s financial sector requires modernisation and integration with the larger global system, a task which was interrupted by the global financial crisis. Five, India’s major resource — its people — must be critically upgraded in order to effectively participate in a knowledge-driven global economy. Six, our global integration in terms of the flow of goods, services, technology and funds must be greatly expanded. Finally, we must strategise to redress the massive infrastructure gap that we currently face.

The new government is keen to address these multiple dimensions to the Indian economy in order to revive growth and boost employment. I believe it would need to focus on immediate measures that would moderate inflation and bring in new growth drivers as a first step. Equally, it would need to lay strong foundations in all these rebalancing imperatives in order to ensure sustained high growth over the next two to three decades, remove poverty and improve the quality of life by improving human development indices. The central idea would be for the government to create the right conditions of governance, macroeconomic stability, and policy framework for private sector entrepreneurship to flourish.

Focussing on agriculture

The challenge of inflation requires huge efforts in the farm sector for productivity increase. The immediate action would be better food-grain management. In the longer term, water management can play a critical role in unleashing a new era of agriculture growth, including new irrigation facilities, water user charges, mapping of micro-districts for best usage, and interlinking of rivers. The Supreme Court has mandated the river-linking project, and the administration now has to plan to execute the detailed strategies that would help share water resources across the country.

We need to plan water resource management for every village using geospatial technologies.

The Prime Minister-designate, Narendra Modi, has already announced his intention to institute a Pradhan Mantri Krishi Seechayee Yojana. This would need to be accompanied by strengthening of supply chains, both for agri inputs such as fertilizers, farm mechanisation and seeds as also for upstream investments in storage and cold chains. Corporate sector participation through novel ideas like land leasing, and farmer-producer cooperatives can play a big role in building agricultural productivity.

Taxation and savings

Once inflation is on the downtrend, there would be an incentive to lower interest rates that could kick-start new household consumption and corporate investments. Apart from interest rates, steps need to be taken on the taxation front to revive savings and investments. The Goods and Services Tax is one overarching reform measure that can immediately meet many economic targets such as lowering inflation, raising economic efficiency and productivity, and incentivising investments. The government must act quickly to resolve last mile issues to forge an agreement with States and introduce GST without delay. Stability on tax policies is essential to revive investor sentiment and bring in more capital, particularly from overseas. >Foreign investors are key participants in the Indian economy and their role can be enlarged by reassuring them about India’s policy attractiveness as an investment destination.

Investments need to be greatly escalated in all infrastructure sectors, including power, transport and urban development, among others, as the country can absorb $10 trillion worth of new infrastructure over the next three decades. Both public and private investments would be critical to the task.

The government would need to look into restarting the infrastructure and manufacturing projects already on the ground by creating a strong institutional mechanism for project oversight. Such an organisation would likely include Central and State governments along with industry. Two, unlocking stranded projects would be the fastest way to create demand for upstream and downstream sectors. Public-private partnership contracts can be renegotiated, rebid or restructured, while fresh norms and models should be worked out for future projects. Three, there is need to identify top projects with multiplier impact and roll them out on the fast track.

Further, current financial conditions in terms of credit cost, tenor, and financial instruments mitigate against long-term project viability. Strengthening the >corporate bond market to make it more efficient and vibrant through new financial instruments, calibrated tax measures, rationalisation of stamp duties and so on are essential for infrastructure build-up.

Energy management

One of the key constraints for sectors such as >manufacturing and infrastructure is the lack of adequate power capacity. India is highly import-dependent in terms of fuel supplies (crude oil, gas, and coal) and we should be able to convert our own natural resources to bolster our energy security. A holistic energy policy to bring together thermal, hydro and renewable sources as also to resolve challenges in electricity pricing, transmission and regulation may be speedily instituted. The Electricity Act, 2003 sets a sound foundation and can be updated to encourage minimisation of transmission and distribution (T&D) losses and strengthen the finances of distribution companies, including by reducing subsidies. The mining sector is a key corollary to the energy effort as a lack of fuel supply linkages has stymied large power capacities from going on-stream. All angles including exploration, bidding and mining practices have to be explored. The private sector should be incentivised to play a stronger role in these areas.

Administrative reforms and creating a new structure of governance are the key to success in any sectoral reforms.

Administrative procedures and “ease of doing business” parameters must be high on the agenda of the incoming government. Business has highlighted the role of lengthy and complicated procedures in environment clearances, land acquisition and other processes in delaying projects and raising transaction costs. These would have to be streamlined and fast-tracked, with as much as possible passing through transparent and time-bound technology platforms to slot into the credo of “minimum government, maximum governance.”

Employment generation

The critical issue of employment generation can only be tackled through committed efforts towards education and skill development on the one hand, and employment regulatory architecture on the other. Leveraging Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) funds for skill development, deploying private sector expertise under the Apprenticeship Act, expansion of the number of Industrial Training Institutes (ITI) and more vocational trades are some of the areas to be addressed for building capacity of our human talent resources.

Employment is governed by as many as 44 Central laws and over 150 State laws, and retrenchment and exit are greatly discouraged. By re-examining the labour law framework, we can easily consolidate laws as well as shift some social security obligations from the government to the private sector. For example, mass manufacturing enterprises may enjoy a more flexible labour-force size depending on market conditions, but may also be tasked with ensuring better worker conditions and higher wages. Fixed term employment can be reintroduced.

Building export competitiveness would enable India to have a larger presence in global value chains. A comprehensive suite of steps to identify the right products and strategies in conjunction with India’s product profile and comparative advantages are central to this endeavour. Effective marketing in key global destinations and making India a favoured investment destination can be conducted in tandem.

India’s economy is at the core of its global profile. The incoming government can transform global equations by rebalancing the Indian economy, making it a platform for a foreign policy outreach.

(Suresh Prabhu is a former cabinet minister and now active in several global and multilateral organisations.)

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Printable version | Nov 30, 2021 4:51:09 AM | https://www.thehindu.com/opinion/lead/seven-steps-to-an-economic-rebalancing/article6037673.ece

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