Good news seems to distance itself from the Indian economy. The index of industrial production (IIP) at 4.3% in September 2019 is at its lowest in seven years; business confidence index of National Council of Applied Economic Research (NCAER) is also down by 22.5% from last year’s second quarter; Moody’s sovereign rating also looked southwards to 5.6% this fiscal. Trade cycles, ups and downs and market uncertainties are natural phenomena. These should be no reason for the economy at the cusp of change and set to touch $5 trillion by 2022, to dwarf its long-term vision. This challenge is an opportunity to clean up its policies.
During the past five years, remarkable changes took place in the Indian economy: GST was introduced; the insolvency and bankruptcy code has come into being; Real Estate Regulatory Authority (RERA) has been set up in most States; corporate laws also underwent changes to plug many loopholes; the way the country should look at priorities is being driven by the National Institution for Transforming India (NITI) Aayog. Yet, somewhere down the line, political stability, cooperative federalism and the economy’s resilience seem to be having a serious disconnect that demands correction on the policy front.
Environmental issues that took the front seat through Swachh Bharat during the first five years would appear to cause greater concerns through mountains of plastic waste, smog caused by burning stubble, irreverence for regulations and disrespect to authority. The national education policy, after all the opinions are drawn in on the draft, is still in hibernation. Water policy totters between the rising demand from industrial users, irrigation for the farm sector, and universal safe drinking water amid acute scarcity.
Contrary to expectations, demonetisation exacerbated the concerns on corruption and money leakages. The financial sector continues to be in doldrums with frauds, acts of maleficence, regulatory sluggishness, capital erosion and adverse global impacts.
The interface between government and industry is drifting to high expectations from the private sector participation at a time when its credibility is at its lowest, with corporate frauds and an ever-shrinking morale.
Even against the declining growth rate of the population, we notice from the www.tradingeconomics.com (MoPSPI), an alarming status in the unemployment rate at 6%, 49.80% in labour force participation rate and a decline in real wages among the wage-earning population. Average wage of the manufacturing work force is around Rs347 per day compared to Rs330 per day in the services sector.
High unemployment rates call for correction sooner than later as they are likely to increase the risk of youth migrating to hazardous terrorist outfits.
The focus and forms of state intervention are undergoing a change with technology overdrive. Intense global competition has been pushing several nations to look at their nations’ interests more than balancing the headwinds in trade. WTO is fast yielding its space to regional trade agreements. The current economic scene in the context of global uncertainties tells us that there exists no room for complacence.
This backdrop provides us least comfort over the improvement in World Bank’s ease of doing business (EODB) ranking in 2019. In fact, the current scenario uncompromisingly calls for serious introspection into the policies and the implementation framework. Corruption at different levels has been seriously hurting our growth prospects.
Legal reforms that were taken up in 2017 suddenly retracted. Land disputes occupy a large space in courts at all levels. It is the government that is either a plaintiff or defendant in most cases and all the adjournments and delays in courts are because of the delays, incorrect information or wrong affidavits on the part of governments, more than any lapse on the part of the individuals. This also calls for cleaning up the databases of all the departments of both the Union and state governments.
State governments and Union government are swearing by digital frameworks as solutions for several projects plaguing the information lags, even though much depends on the type of data we feed into the digital platforms.
1. Hence, reforms should commence at the highest policy level first, with a resolve that we need them most.
2. Since the foundations for a strong economy lie in good education right from childhood to the highest technical and managerial levels, the education policy with a clear roadmap should make the best beginning.
3. While there has been considerable work in agriculture, there is no clear policy yet on an integrated approach to the sector where the issues relating to tenant farmers, agricultural insurance, agricultural marketing (e-Nam is just the beginning and lot of traction is yet to take place), value addition at the doorstep of the farmer, a firm resolve to disband the loan write-off, which alone will ensure flow of institutional credit, cleaning up of the rural cooperative credit structure etc., should find a resolution sooner than later.
4. Health, environment and water policies not as watertight compartments but as inclusive policies, need to be people-centric and people-participated, with concurrent evaluation of projects in these sectors over the promised deliverables.
5. Since good economy and bad banking can never go together, cleaning up the entire governance system in the financial sector brooks no delay. This depends on setting up the right checks & balances at each stage of the ‘new normal’ in the financial sector to emerge.
6. Industrial policy should lay more emphasis on inclusivity and comprehensiveness so that employment orientation and competitiveness get due focus. There must be a separate policy for micro, small & medium enterprises (MSMEs) with a focus on manufacturing that is defying expansion.
7. There should be a focus on reduction of regulatory costs in all areas where the cost of regulation should be far less than the cost of its avoidance or evasion. Minimum government and maximum governance should get more attention than now.
8. Institutions that lost their relevance should be wound up as a part of reforms. There will always be a tendency to defend them in the guise of employment protection while they have been hindering employment growth in the real sectors they are supposed to promote, like the Small industries Development Bank of India (SIDBI) and the National Bank for Agriculture and Rural Development (NABARD). SIDBI is trusted with a host of funds that did not reach the MSMEs and there has been also neither monitoring nor evaluation of these funds that flowed from the Union budget while the needy are suffering. Similarly, in the name of the rural infrastructure development fund (RIDF) activity, NABARD is serving the State governments and large projects more while the farmers per se, the subjects of the NABARD Act, have no reprieve. Rural cooperatives in its fold diminished in reach and regional rural banks (RRBs) have branches in urban and metro cities!
9. The RBI governor in his latest address agreed that corporate governance failures in banks is responsible for their current status and needs urgent changes.
Obviously, this requires intervention from the Union ministry of finance. It is sad indeed that the issues identified in the year 2000 in my co-authored book Corporate Governance in Banking and Finance (Tata-McGraw Hill) remain unresolved till now.
(The author is an economist and Risk Management specialist. The views are personal.)