Opinion | The unfinished agenda for the next government

Sachchidanand Shukla

Whichever government takes charge after the elections will have its task cut out for it. It will need to push the accelerator harder on reforms. The reason: slowing growth.

Global growth predictions for 2019 and 2020 have already been revised downward by most forecasters to factor in the negative effects of tariff increases enacted in the United States and China. The commodity price backdrop has been quite volatile too.  Crude oil prices have yo-yoed, reflecting supply issues as well as a global demand scare. Crude oil prices are up 25 percent this calendar year. Note that the India story can look vastly different when oil prices move up $10-15/ bbl in a short span. The recent change of heart at the US Federal Reserve and its dovish language as well as any breakthrough in the US-China trade deal can give a fresh leg up to commodity prices.

Back home, India’s GDP growth was down to 6.6 percent in the third quarter of FY19, the lowest in the last five quarters, with a drag from consumption. Q4 growth is also estimated to be in the slow lane with growth forecasts being pared across the board.

Thus there remains much to be done on the reforms side before the growth engine cranks up sustainably. Comprehensive reforms will be needed to raise productivity and set the stage for higher sustainable growth with employment generation.

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Sachchidanand Shukla

Chief Economist|M&M Group

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Trade policy reform

At a time when countries have an increased propensity to close or restrict business with the rest of the world, exports are an obvious casualty. However, there is further trouble lurking around for India. Recently, US President Trump announced his decision to withdraw the preferential trade status granted to India and Turkey. India has now crossed the income threshold, above which a country becomes subject to the prohibition on export subsidies. Unless India comprehensively reforms its subsidy regime in entirety, countries such as the United States will continue to challenge India’s export subsidy schemes at the WTO.

Agriculture and the rural economy

The fact remains that agriculture is still in the clutches of hugely restrictive laws which have inhibited it from developing into an efficient market place for agricultural produce. This is an area where the central government can continue to play the lead role. There exists a maze of laws especially the Essential Commodities Act, the Land Ceiling Act, the APMC Act and the Foreign Trade Act, 1995, which enables arbitrary slapping of export restrictions, minimum export prices, and unfair imports. Unless there is an effort to rid the agriculture sector of this maze, farm distress will not be cured with sporadic measures to spur prices or announcement of loan waivers.

Reinvigorating the investment cycle

Gross fixed capital formation has moved up for five quarters in a row. However, given excess capacities and the focus on correcting the balance sheet stress, the private sector has remained a laggard in investing. If a company makes money incrementally in this scenario, it will try to repay existing loans or address operational issues first rather than think of putting up new capacities.  Thus, a continued public investment push to create and enhance infrastructure, both soft (education, skilling, health) and hard (roads, railways) remains a must.

Giving a boost to manufacturing

 Manufacturing has remained a weak spot despite the Make in India push. A huge supply-side effort is needed especially on the land and labour reforms which have been the Achilles Heel for India. Thus, going forward, acting on some of the factor reforms such as land and labour will be critical as they remain on top of the unfinished business heap.

• Labour: Fast-tracking of labour reforms, including simplification and ease of compliance of the four labour codes reforms could spur the formalisation of the economy and create fiscal space for higher social and infrastructure spending.
• Land: Land acquisition remains a challenge and it will be interesting to see how this issue is dealt with especially when the Rajya Sabha numbers remain tricky for both the NDA and UPA.
• Ease of Doing Business: There is also an urgent need to continue to improve quantitatively as well as qualitatively on the Ease of Doing Business. Improving the business climate would help with a more integrated, domestic market. This should now be pursued with vigour in partnership with state governments.

A hectic reform agenda has been pursued of late. However, there is a need to work these reforms to their logical conclusion despite some short-term pain.

• Goods & Services Tax (GST): The immediate focus should be on simplification and ensuring enhanced coverage by lowering the number of rates and then gradually focus on the exclusions–electricity, fuel, and alcohol etc-and try to get these within the ambit of GST to make the standard rate lower. GST, once fully actioned and implemented in its ideal/ desirable state, will be a big multi-year driver for growth.
• Direct tax laws also need an overhaul and the government should endeavor to expand the tax net without sacrificing revenues.
• Insolvency and Bankruptcy Code (IBC): Must be fast-tracked and issues ironed out on the go without diluting the desired objective. This will free up locked capital and sapped entrepreneurial energy and provide much needed "Exit" to businesses.
• A stable and predictable tax regime along with the improved mechanism for resolution of tax disputes will also be needed to push corporate sector growth.

It is about time the much delayed administrative reforms are initiated to improve the performance, accountability and governance structure of the administrative machinery. Simultaneously, The Judicial Standards and Accountability Bill should be passed and implemented to augment delivery of justice. There should be an endeavour to continue to simplify laws and weed out outdated laws accompanied by police reforms.

Simply put, if we are to increase India’s potential growth rate and provide decent jobs to the millions joining the workforce every year, we can no longer put off the next generation of reforms.

(Sachchidanand Shukla is chief economist, M&M Group. Views are personal.)