Structural woes call for policy action

Structural woes call for policy action

Slowdown demands politically tough reform.

We ran 12 articles on this page over the last two weeks, dissecting the economic slowdown. The overwhelming conclusion is that it is both structural and cyclical, with the structural element dominating. Cutting policy rates will help, but monetary measures are not sufficient. Decisive policy action is required to make the economy competitive in the global market, to boost investment and allow savings to be mediated to investment.

To make Indian producers more competitive in the export market — India’s share of global exports is just 1.7% — wage must become more competitive and labour, more productive, land prices must come down, capital must be cheaper, and tax rates come down and become stable while exemptions are extirpated, and policy must become predictable. The structural reform as has taken place — GST, the Insolvency and Bankruptcy Code, Real Estate (Regulation and Development) Act, putting an end to camouflaging bad loans, bringing down the level of inflation via fiscal restraint and monetary policy, improving the ease of doing business — is welcome, but much more remains to be accomplished. People must be asked to pay for the power they consume — financial engineering can postpone the day of reckoning of unpaid power dues, not mitigate it. Subsidies that distort incentives cause misalignment of crops and agroclimatic zones, hurting the farm sector. Water-guzzling crops are grown in arid regions and excess rice and wheat produced, only to rot in government godowns, while degrading the soil on which these are grown. Excessive protection from import competition keeps Indian industry uncompetitive. Paucity of urban land increases overhead costs for everything, from schools and hospitals to factories and offices.

The towns planned under the Delhi-Mumbai Industrial Corridor must be completed soon, both to generate demand and create urban infrastructure. A vibrant bond market must be built, as the most viable source of longterm funds for infrastructure. Most of these call for policy, rather than fiscal, action.