View: India needs structural reforms for growth to make a strong comeback

By Devashish Mitra
In response to a crisis such as the current pandemic, which has thrown an estimated 122 mn Indians out of work, one expects GoI to come up with an effective rescue plan.

However, the current crisis is different from anything seen before because Covid-19 prevents people from producing output — either directly by making them sick or indirectly through the lockdown in response to the pandemic.

As reviving the economy is not possible without restarting production, there needs to be a phased exit from the lockdown through extensive testing that identifies people who can go back to work with the confidence that they won’t contract the disease from others.

For these reasons, people like Amartya Lahiri and Urjit Patel have argued in favour of ‘ubiquitous testing’ in India, attaching an estimated non-trivial price tag of 2.5% of GDP, but, at the same time, expecting huge positive growth effects relative to the alternative of very little testing.

While GoI so far hasn’t allocated any money to such testing, it may ultimately have to be done as we ease the lockdown.

Loosen the Belt
GoI’s total additional fiscal expansion to address the Covid-19 situation is Rs 2.1 trillion, or 1.1% of GDP, as opposed to the 10% figure touted.

Of this 1.1%, cash transfers to women and pensioners and additional allocations to Public Distribution System (PDS) and MGNREGA, according to London School of Economics economist Maitreesh Ghatak, amount to a total of Rs 1.3 trillion, or 0.67% of GDP. The support per family of four from these allocations is then Rs 4,000.

GoI could target this support of Rs 1.3 trillion to below-poverty line citizens. Then, a poor family of four, despite some inclusion and exclusion errors, may even get, say, Rs 16,000.

There is some scope here to raise the expenditure on these three items from Rs 1.3 trillion to about Rs 2 trillion (GDP share from 0.67% to 1%) without breaking the bank, but not much more.

With GDP falling significantly this year and growth taking time to recover, there isn’t fiscal space for a much bigger rescue package, especially given the current debt-to-GDP ratio at 70%.

Also, the necessary testing, probably costing around 2% of GDP, raises further the opportunity cost of such a package. A big fiscal expansion could, thus, result in a macroeconomic crisis with extremely high inflation and serious debt problems.

This is made worse by India’s serious supply bottlenecks and supply-chain problems. To control debt build-up and inflation stemming from even a modest fiscal stimulus, growth will have to make a strong comeback, for which structural reforms are needed.

While the announced liquidity injections into MSMEs will help with post-pandemic job creation, the real reform here is the raising of the maximum turnover threshold for medium enterprises in the MSME definition to Rs 2 billion (from Rs 50 million). Thus, somewhat large firms also can now avail of current and future benefits in this category.

Hence, firms are no longer being discouraged from expanding, something really needed to successfully compete in the world market for labour-intensive goods, such as textiles, apparel, footwear and some electronics. To counter India’s handicap of small firm size in labour-intensive industries, also needed are labour reforms in the form of amendments to the Industrial Disputes Act and the Industrial Employment (Standing Orders) Act to allow firing of workers and changing job descriptions even in firms employing over 100 workers, alongside paying a decent living wage.

Such reforms will allow firms flexible employment adjustment in response to demand and technological changes.

Refrain From Non-Reform
Temporary suspension for three years of almost all labour laws, including those protecting worker rights and ensuring safe working conditions, in some states serves no purpose, and cannot, by any means, be called reforms.

Their temporary nature creates unnecessary economic uncertainty that firms, domestic or foreign, will not want to deal with. An important reform recently announced is privatisation in various sectors, such as coal, minerals, civil aviation, power distribution, space and nuclear energy.

Most importantly, the new public enterprise policy announced allows private firms to operate in all sectors and a few public enterprises only in strategic sectors. While privatisation will provide GoI with much-needed revenues, it is also expected to boost efficiency and quality.

There are, of course, other reforms that have been announced, such as freeing agricultural markets and strengthening cold chains. FDI participation has been raised from 49% to 74% in defence production. But, despite the strong desire expressed by Prime Minister Narendra Modi for India to be a major player in global supply chains, there should be concern about India’s recent protectionism, which needs a serious course correction.

A few rounds of hikes in tariffs on components and labour-intensive final products over the last few years have now been followed by the recent announcement to keep away foreign bidders from government procurement up to a pretty high threshold. Such a policy could adversely affect GoI’s operating costs and budgets.

Also, indigenisation of spares in defence production makes very little sense from the efficiency and comparative advantage point of view. In light of this, GoI needs to explicitly clarify whether ‘self-reliance’ now has a new meaning, given that, for decades in India’s post-Independence history, it meant virtual autarky and isolationism.

The writer is professor of economics, Syracuse University, New York, US