Reforms in a Covid era: World trade will rise again. Here’s how India can ready itself to take advantage

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Finance minister Nirmala Sitharaman has taken most observers by surprise by including wide ranging reforms in her stimulus package. Alongside, some states have announced some equally bold reforms. Most notable among the latter are those relating to labour laws by Uttar Pradesh and Gujarat and to land laws by Karnataka.

Proposals relating to the Essential Commodities Act; agricultural marketing; and legal framework for farmers to engage with processors, aggregators, large retailers and exporters represent the deepest reforms in agriculture to date. Yet, it is difficult to overlook the fact that even these reforms cannot make India’s poorest farmers prosperous. 70 million or 48% of all land holdings in India are smaller than half hectare, with an average size of just 0.23 hectare.

The average value added on these holdings is small and the income accruing to the owner smaller still once marketing costs are taken into account. Even tripling this income would fall short of making the owner prosperous. These farmers need an exit to gainful employment in industry and services.

Ideally, the starting point for exit is a liberal land leasing law that allows the farmer to lease out her holding for any use and for any length of time thereby yielding the maximum possible rent. Absent such a land leasing law, the proposed Karnataka land law reform could offer a workable alternative. That reform allows farmers to convert land from agricultural to non-agricultural use and sell it at market price.

The conversion would get the farmer fair market value for her. Other states must consider similar reform or a liberal land leasing law.

The possibility of exit offered by these land law reforms need not translate into actual exit, however. The latter requires the availability of well-paid jobs in industry and services. The only way India can create these jobs in large numbers is by replacing China as the world’s factory of light manufactures.

Pessimists would no doubt argue that the vast volume of exports necessary to become the world factory are infeasible in the wake of Covid-19. But they forget that no shock ranging from the black death pandemic of the 14th century to Spanish Flu and Great Depression of the 20th to 9/11 terrorist attacks and the global financial crisis of the 21st, has been able to bottle up trade for long. World trade will rise up again sooner than most pessimists think.

In fact, Covid-19 lull offers India an excellent window of opportunity to implement reforms that would help it maximise the benefit of reopening of export markets post-Covid-19. India’s factor markets – capital, labour and land – still remain major constraints on economic activity, especially as they apply to medium and large enterprises whose emergence on a substantial scale is essential to the capture of world markets in light manufactures.

Financial markets in India remain weak. Unfortunately, banks are likely to weaken yet further because of a large volume of defaults on loans expected in the post-Covid-19 era. Keeping this in view, the government has been wise not to fire all its fiscal bullets when announcing the stimulus package despite the pounding it has had to take from many commentators. Once Covid-19 recedes, it will need to infuse large sums of resources into banks to recapitalise them.

On labour law reforms, UP and Gujarat have announced reforms bolder than anyone including this author could have predicted. Each has suspended all but three central labour legislations for limited periods, UP for three years and Gujarat for 1,200 days. But these reforms go too far in one dimension and not far enough in another.

Suspension of some key provisions in labour laws relating to health and safety of workers, resolution of industrial disputes and right to form unions and strike for even a short period violate the spirit of a modern-day democratic state. At the same time, a well-functioning market economy must also give employers rights to reassign workers to different tasks and terminate them (with fair compensation) when their services cannot be profitably deployed. The central government will need to balance the legitimate rights of the two sides as it considers the proposals by UP and Gujarat for approval.

The dimension in which the proposed reforms fall short is time. What India needs most are many more medium and large enterprises in light manufactures that are globally competitive. But no entrepreneur worth her salt will invest in such enterprises if she faces the prospect of the current labour law regime returning once the suspension period is over. This is especially true of the current laws relating to reassignment of tasks and termination of workers in enterprises with 100 or more workers. In its present form, the reform would fail to turn UP and Gujarat into manufacturing hubs.

Finally, land market rigidities too need to be addressed. High land prices have made even infrastructure projects excessively costly in India. More land needs to be brought on the market through conversion of agricultural land for non-agricultural use, release of excess land held by sick as well as healthy PSUs, auctioning unused land owned by various public sector entities, and raising the floor space index in the cities.

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