A balance between efficiency, productivity and equity will be critical for sustaining economic growth.
Significant reforms, ongoing and achieved over the past few years, have set the stage for India to sustain growth at 7-7.5 percent levels. However, a move up to a further higher growth trajectory would be crucial for meeting people’s aspirations. The concomitant expansion in productive job opportunities in one of the youngest countries will need more aggressive reforms.
The next phase of reforms would have at least two defining aspects. First, the large areas of policy reforms, such as land, labour and mobility, are almost entirely within the domain of state governments where the Centre plays an enabling and facilitating role. Second, focus now has to shift to microstructure and microeconomic reforms with a view to enhance process efficiency, reduction of investment uncertainty, and improved delivery of state services.
As a corollary, the focus on micro-structure reforms will entail balancing the often contradictory, sometimes conflicting tradeoffs, between efficiency and social equity. Social safety nets are being put in place with wider coverage of income transfer and support schemes with various life, accident, health and crop insurance projects in place or underway. The current debate on the benefits of a targeted “universal” basic income will point the way to the most effective method of delivering state services to lower income households and should be seen as an opportunity to have a relook at the entire system of subsidies.
In the near term, the role of the government in sustaining investment and ensuring equitable growth will only increase. The government will need more resources. Plugging tax evasion is an ongoing exercise, which will be facilitated by data, but innovative ways to monetize existing under-productive assets should be aggressively explored.
Execution, as always, will be key. One of the transformational changes arising out of both technology advancements and government policies over the past few years has been the deluge of data generated by businesses and households. Advances in data analytics are now enabling regulators and policymakers to understand individual and corporate behaviour and monitor transactions in almost real time. This will open up space for more effective policy formulation and improvements in process and system efficiency. Managing legal caseloads, inventory management for the massive government supply chains, early warning systems for crop failure are just the tip of the iceberg for improved service delivery.
Stable policy frameworks, avoiding retrospective changes, in particular, are critical to attracting larger investments. Rather than having to enact broad brush retrospective changes to legacy policy, the use of sophisticated data analytics will permit detection of specific cases of financial wrongdoing, tax evasion and non-compliance with policies and laws, thereby enabling targeting of enforcement actions.
In the drive for financial inclusion, the financial sector is likely to be one of the largest job creators with a unique mix of brick and mortar branch network and the use of cutting edge digital technologies. The relative under-penetration of financial services in India provides significant growth opportunities. Availability of credit is one of the key requirements for sustained high growth. Multiple initiatives for “funding the unfunded” over the past few years has accelerated last mile credit delivery to MSMEs. This has to be taken forward.
Fintech startups offer great promise. Partnerships of banks and fintechs should be prudently facilitated by innovative regulatory initiatives. The approach outlined by the Reserve Bank of India (RBI) is the exact right path to move ahead, but specific facilitations will accelerate the process.
Phasing reforms are very important. While the operating environment for attracting domestic and foreign private sector investment is being progressively put in place, arresting a seeming deceleration of economic momentum, particularly a deepening negative sentiment, must be a priority. Interest rates, in inflation-adjusted terms, remain high. RBI, unquestionably, has worked with banks with outstanding ingenuity to facilitate transmission (the Fx swap, for example), yet structural constraints on savings behaviour have impeded this process.
In summary, India’s aspirations for growth now require ever deepening structural reforms. A balance between efficiency, productivity and equity will be critical for sustaining growth.(The author is MD & CEO, Axis Bank. Views are personal)