India badly needed these second-generation reforms as a reboot to the 1991 reforms that have run their course.
India’s goal of becoming a $5 trillion economy has been set back by at least five, if not 10 years. With its GDP stagnating at $2.8 trillion this year, reaching $4 trillion by 2030 will now be a struggle if India grows at 4% per annum, the old ‘Hindu growth rate’.
If it does not turn inwards, and focuses on making India globally competitive, it may reach $5 trillion by 2030. That must be India’s new goal. Both Prime Minister Narendra Modi and finance minister Nirmal Sitharaman have reiterated that ‘Atmanirbhar Bharat Abhiyan’ is not about India turning inward.
Buying more defence equipment, built around a proper plan with private sector participation, is a move in the right direction. As India also strives to attract more FDI — especially firms leaving China — and make local brands global, it requires a very big focus on global competitiveness.
But beware, as import substitution-driven ‘Make in India’ could make local firms content to sell shoddy products at inflated prices to captive consumers. Globalisation is in retreat and may fracture further. Global trade as a share of GDP had already peaked at around 60% before the Covid-19 crisis.
An aggressive export-led strategy may not be an easy option as it was earlier for East Asia. But an inward turn by India, already evident before the crisis, will surely ensure low growth. India’s share in global markets remains low and there will be many export opportunities, especially as countries diversify away from China.
In shock-and-awe style, media headlines have been on the size of India’s latest package — at Rs 20 trillion (9.6% of GDP) being the ‘fifth largest in the world’. But India’s number includes large liquidity easing measures and partial guarantees (contingent liabilities).
The direct fiscal package without these — about 1-1.5% of GDP — is about a quarter of the fiscal stimulus India used to come out of the 2008 Great Recession. In comparison, the sizes of fiscal package in Japan (21%), the US (13%), Sweden (12%), Germany (10.7%), Britain (5%), China (3.8%) and South Korea (2.2%) are much larger.
India started with a huge deficit — 4.5% of GDP — and is unwilling to risk downgrades by printing money. But with a heavy focus on liquidity (supply side), the fiscal demand booster may be too small for recovery. If immediate recovery is muted because of low demand, the debt dynamics turn adverse and the downgrade comes anyway.
A supplemental fiscal boost will be needed if recovery is tepid.
All on Board
The package touches almost all aspects of lives and livelihoods. A big focus is on the MSME sector. Collateral-free loans of Rs 3 trillion for MSMEs will benefit 45 lakh units.
For stressed MSMEs, subordinate debt provision has been announced, and the definition of MSMEs has been widened — investment up to Rs 1 crore and sales Rs 5 crore. How quickly funds get to the firms facing insolvency will matter hugely. Partial credit guarantees (20%) for NBFCs and mutual funds, and a one time emergency liquidity injection to discoms have been given, but without assurance that they will use it to pay providers of energy.
MGNREGA allocations have been increased by Rs 40,000 crore (0.2% of GDP), state borrowing limits raised from 3% to 5% of gross state domestic product (GSDP), and funds amounting to 1% of GDP devolved to them with performance conditions. But GST shortfalls remain huge. India needs to increase public health spend from 1.3% to at least 3% of GDP.
The sudden and severe lockdowns have hurt migrants the most. Free rations for 80 million for two months and a one nation-one ration card, and subsidised housing, have been announced. That this whole migrant mess could have been avoided altogether with better planning must weigh on the government. Why not turn to direct cash transfers — like the rest of the world — instead of cumbersome ration cards, with their huge implementation leakages and corruption?
The crisis has focused attention to reforms in factor markets — land, labour, liquidity (finance) and laws (regulations). India has badly needed these second-generation reforms as a reboot to the 1991 reforms that have run their course. But how will these be done will matter. Labour market flexibility is badly needed. But just giving employers the right to hire and fire is not by itself enough a reform. Employee rights to safe working conditions, adequate compensation and unemployment benefits must go with it.
Amendment to the Essential Commodities Act (ECA) and Agricultural Produce Marketing Committee (APMC) are also welcome, along with supply chain infrastructure, as long as it’s done boldly, not just tinkering at the edges.
The decision to privatise many non-essential PSUs is also welcome, as is the need to fix land titling and acquisition. Restructuring India’s public finances to spend more on health, education and infrastructure, and less on wasteful subsidies, will also be needed.
And finding ways to reduce the ever-present virus of corruption and over-regulation must get top priority. India has been forced a reset by Covid-19. While it has set us back by at least five years, it gives India an opportunity to revitalise and structure our economic system for the future. The political economy of reform has changed. Aristotle said it best: there is an opportunity in every crisis. One hopes India takes it.
The writer is distinguished visiting scholar, Institute of International Economic Policy, George Washington University, Washington DC, US