Structural Reforms for Better Governance
By Ajay S Singh, ICAS[1]
There is no second opinion about growth in India and
its further prospects. Reforms took place in 90s and then somehow could not
continue the momentum. There have been sporadic reform attempts in the past.
During last few years, economy started improving due to global and domestic
factors. The macroeconomic outcome in India is currently in consolidation mode with
higher growth, lower inflation, stable exchange rate and stronger fiscal and
current account position. Despite global headwinds, India now grows at over 7.5
per cent and has potential to do much better. However, due to the slow growth
in last many decades, country has huge appetite of growth. India needs higher
growth which is sustainable, inclusive and job-oriented in order to fulfill the
requirements of Aspirational India. While pushing for higher growth, India also
needs to be conscious of her environmental and ecological carrying capacity. There
are green activists and people from civil society actively watching government
and reminding it of any effort causing distress to environment. It is in this
context that correction of structural bottlenecks gains added significance.
What are the major structural bottlenecks that hold
India back from achieving its growth potential? First and foremost are infrastructure
bottlenecks. One
important result of infrastructure hurdles is India’s relative low
manufacturing base, especially of capital goods, and low value addition in
manufacturing. Manufacturing sector needs to be nurtured with simplified
procedures, easy credit, and reduced transaction cost. The
presence of a
large informal sector and inadequate labour absorption in the formal sector has
compromised the optimal utilization of human potential. Apart from the limited
manufacturing capacity, low productivity and the absence of required skills are
the major constraints.
It is very difficult to realize the intrinsic
growth potential, without robust agricultural growth, which is still the
lifeline of India’s substantial rural populace. Low productivity and inadequate
labour mobility, as mentioned above, have hampered an agricultural
transformation. Side by side, the structural factors engendering food inflation
would need to be tackled too. It is important in this context to address issues
related to the imperfections in agricultural marketing, shortage of storage and
processing infrastructure and restrictions in inter-regional movement of
agricultural produce. Apart from all the above, there
is a historical legacy of ill-targeted
subsidies that has cramped the fiscal space for public
investment and distorted allocation of resources.
India
has a good reservoir of globally-acclaimed scientists, IT experts, academicians
and entrepreneurs. For tapping this potential, there is a need to achieve a
supply-side transformation entailing increased competitiveness, improved labour
mobility and high-quality, export-oriented manufacturing. Promotion of research
and development, technology and innovations would be the prime mover of this
change.
Being
completely conversant with this background and with concrete solutions in mind,
it shall undertake well-thought out structural corrections that have elicited
favourable response from investors, rating agencies and lenders including
multi-lateral institutions. At present, Government’s approach to reforms is
calibrated to the requirements of the complex political-economy considerations
of our diverse, pluralistic and democratic set-up.
India
has identified and agreed to the framework of nine priority areas for
structural reforms within the G20[2].
These include: promoting trade and investment openness; advancing labour market
reform; educational attainment and skills; encouraging innovation; improving infrastructure;
promoting fiscal reform; promoting inclusive growth; etc. The three planks of
India’s infrastructure strategy are; prioritization, innovativeness and
debottlenecking. In order to give fillip to the infrastructure investments at
sub-national level, greater share of central taxes are now transferred to the
States, replacing the transfers through Plan schemes. With a steep jump in
States’ share of taxes from 32 per cent to 42 per cent[3]
of the gross tax revenue, divisible pool, in nominal terms this has amounted to
increase in states’ share by more than Rs.1.75 lac crores.
The
last two budgets[4] of
the Central Government have clearly brought out its infrastructure priorities
in terms of irrigation, housing, transport infrastructure including dedicated
freight corridors, railway as well as rural connectivity and rural
electrification. For infrastructure projects and industrial development, land
acquisition is a major challenge. Land acquisition, being a state subject in
the federal structure of India, is handled by the states. Initially, it caused
delay in many projects but with time, states are now able to acquire land for
the infrastructural projects through elaborate consultative process.
In
the realm of innovative solutions, the National Investment and Infrastructure
Fund[5]
has been created to extend equity support to infrastructure. Real Estate
Investment Trust and innovative Infrastructure Investment Trusts are being
created to reduce the pressure on the banking system. Once these funds and
trusts come into effect, infrastructure sector is likely to get a good boost.
During to downturn in the steel and some infra sector projects, many banks
under sever distress. These moves of the government are essential to give them
some respite and also provide some oxygen to the ailing sectors.
Banks
need to be encouraged to extend long term loans to infrastructure sector with
flexible structuring to absorb potential adverse contingencies. Government has
offered some relaxation in External Commercial Borrowing and Foreign Direct
Investment norms which would also boost infrastructure investment. The
debottlenecking efforts relate to the rejuvenation of the stock of projects on
the public private partnership mode and initiatives on strengthening the
dispute resolution mechanism, as well as, focus on according speedy clearances
to projects. The transparent allocation of key public resources like coal and
spectrum, apart from calibrated fiscal incentives, has also given a lot of
confidence to the infra sector and it would also catalyze infrastructure
investment.
In
order to cater to the requirement of skilling and creating employment, an
ambitious program called “Skill India”[6]
has been launched by Government of India to offer skill-based training to
youth. The newly constituted Skill Development and Entrepreneurship Ministry
consolidates skill initiatives spread across several organs of government and is
standardizing procedures and outcomes across 31 Sector Skill Councils. State
governments are on board in these initiatives and it is expected to give good
results in coming 2-3 years.
The
complementarities built around the flagship Make-in-India program, including;
comprehensive measures for improving the ease of doing business, encouragement
to budding entrepreneurial talent under the Start-up India and Stand-up India
Initiatives and advertisement and global campaign, have evidently improved
India’s global ranking as a business destination. India has launched eBiz
platform for creating a business and investor friendly ecosystem by making all
business and investment related clearances and compliances available on a 24x7
single portal, with an integrated payment gateway. An entrepreneur-friendly,
legal-bankruptcy framework-- the Insolvency and Bankruptcy Code-- has been adopted
by India.
The
Budget 2016-17 has provided for promoting favourable ecosystem for startups,
including entrepreneurial hubs. Norms for foreign direct investment have been
progressively liberalized in various sectors including defence, insurance,
railway infrastructure, construction etc; with most of the FDI sectors having been
put on automatic approval route. The first hand
reflection of the improved confidence on India is the robust growth in foreign
direct investment in the last year. The
Government has also launched a nation-wide ‘Digital India’ program with the
vision to transform India into a digitally empowered, knowledge society.
For
a country like India, industrial development must promote employment. Maximum
employment is generated by micro, small and medium industries. These industries
look forward to government for support and hand holding in the form of easy
access to fund, market and conducive eco-system. Government has established a corpus
of Rs.1000 crores fund to create a supportive eco-system for venture capital in
these sectors; and, a credit delivery program for micro and small businesses
through a specially-created vehicle called MUDRA bank[7].
A scheme for Promoting Innovation and Rural Entrepreneurs, called ASPIRE, was
launched for setting up a network of technology centres and incubation centres.
Combining
India’s deep mobile phone penetration with unique identification numbers for
citizens and a greatly successful financial program, the Government has laid
the groundwork for a profound structural transformation in the country. Though a nation-wide, time-bound program of
Financial Inclusion, more than 216 million bank accounts have been opened for
unbanked persons since August 2014. Together with Unique Identification
framework and mobile telephones, this Financial Inclusion Program, called
Pradhan Mantri Jan Dhan Yojana[8],
has helped in improving the delivery of services and benefits to eligible
persons through direct benefit transfer. Now, India has an astonishingly successful
program of direct benefit transfers in cooking gas called the PAHAL scheme
apart from other transfer of scholarships to under privileged and minority
students, transfer of cash under Rural Employment Scheme etc through
web-enabled Public Financial Management System[9].
Success of this system has mad ethe government realize the power of IT enabled
financial and accounting management systems. Hence, DBT will now see phenomenal
expansion in areas like pension payments, disbursement of relief and subsidies
etc. The comprehensive coverage under financial inclusion has also helped the
Government in transferring benefits under social security schemes. Since the statutory
backing for delivery of services and benefits based on unique identification
numbers, called Aadhaar numbers, has been established, this mechanism has now
come out of its initial phase of uncertainty. The entire successful initiative
has become popular as the “Jandhan-Aadhar-Mobile” Trinity or the JAM Trinity. Now
with the financial inclusion growing day by day, there will be demand for more
financial institutions. New licenses for banks would give a fillip to the
inclusion process.
Tax
reforms and trade policy measures reinforce structural reforms in other sectors.
India reduced the burden of corporate taxation for smaller companies and
simplified compliance procedures in direct and indirect taxes in a significant
way. For faster clearance of import and export cargo, measures are being
initiated to extend the existing 24x7 customs clearance facility to 13 more
airports in respect of all export goods and to 14 more sea ports in respect of
specified import and export goods. For regional cooperation and trade, trade
facilitation strategic framework is being developed among some SAARC members,
including Bangladesh, Bhutan and Nepal. Further, bringing in an Indian Customs
Single Window Project to facilitate trade all across is also envisaged.
Reforms
are difficult to be carried out in a vibrant democratic set-up like India with
more than 1 billion aspirations. It is hoped that Government’s focus on
co-operative and competitive federalism would speed up the required consensus
on reforms and eventually lead to policy convergence across our vast polity. There
are many important reforms in the pipeline; some at advance stage of approvals.
One keenly awaited change is the advent of the Goods and Services Tax[10],
which is being discussed widely in the public domain[11]
for very long but once implemented, will be a significant structural change
that can integrate indirect tax framework nationwide, improve transparency in
tax administration, reduce transaction costs and unify scattered markets, finally
leading to a significant impetus to growth. We are confident that the systematic
focus on the “Reform-to-Transform” motto of the Government will metamorphose
the Indian economy, polity, bureaucracy and society as a whole.
[1] Mr.Ajay S Singh is an
officer in Govt of India and view expressed are personal. Article was written in 2015 and published in CSMS Journal, Delhi, India
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