Embrace reforms

Embrace reforms

This week witnessed a flurry of activity among ministers and bureaucrats as the scale of India's economic crisis has, hopefully, begun to sink in. The slowdown in economic momentum is not just on account of extraordinary disruptions over the last year, including the transition to GST. The fact is the slowdown preceded November's demonetisation announcement.

The emphasis on economic revival through a package of measures is welcome. But Band Aids will not suffice any longer. GDP growth of 5.7% in April-June, the slowest rate of growth in three years, encapsulates the state of the economy. Private investments remain weak, manufacturing and exports have lost steam, companies and banks continue to be weighed down by bad loans. An economic revival package built around a fiscal stimulus is no longer enough to solve India's economic challenges.In fact, there is danger that a stimulus can undo gains in the battle against inflation and fiscal profligacy.

For sure, there should be a package of short-term measures to address specific problems which hamper exporters and other economic actors. But what India really needs is a sustained effort to transform its economic architecture. The 1991 reforms, which can be characterised as measures which unshackled India's product markets, have played their part and their momentum is exhausted. The next stage of reforms must transform India's markets for factors of production such as land, labour and capital. In this context, the Modi government's introduction of a bankruptcy law can serve as a template as it can significantly enhance the efficiency with which capital gets allocated.

An economic transformation to create a `new India' is not going to come about with the prevailing legal framework which governs transactions in land and hiring of industrial labour. As highlighted by Rahul Gandhi, inadequacy of decent jobs continues to remain a problem as it was in UPA's second term; it may, in fact, have gotten worse. Disinvestment hasn't taken off, while areas such as education and agriculture have barely been touched by the 1991reforms. Ease of doing business must improve radically. GST structures are extremely complicated and need to be simplified; diesel and petrol should be brought within GST. Given BJP's political dominance, it is imperative that Prime Minister Narendra Modi uses his considerable political capital to pilot economic transformation. Else `new India' and `acche din' will remain hollow promises.