Don’t Let Policy Stasis Set In
Subhash Chandra Garg*
Budget 2022 conspicuously quite on economic and financial reforms
Budget 2022 did not propose any significant economic, financial and taxation reforms measure. This was quite telling, especially against the backdrop of NDA government’s budgets of last few years, which were full of policy initiatives.
The Budget 2022 did not talk about real progress and issues in implementing any of the major policy initiatives announced in Budget 2021- privatisation of banks and insurance companies, monetisation of assets, reforms of agriculture and food economy, labour reforms, opening up foreign investment and so on.
My fears expressed in an earlier piece https://www.thequint.com/voices/opinion/budget-2022-is-the-bjp-govts-economic-reforms-momentum-dying about reforms petering out unfortunately seem to be coming true.
Policy reforms too critical for India’s future
The policy reforms are too critical for generating high growth of the economy, eliminating multi-dimensional poverty and assuring good standard of life for people by improving state of environment.
The pragmatic realisation of $5 trillion economy by 2026-27 and $10 trillion economy by 2035 critically hinges on the set of policy reforms which we choose carefully and then implement faithfully.
If a policy reforms stasis sets in, we are in for a big trouble. We cannot allow that. It is too costly for the future of 135 crore Indians.
Let me assess the state of policy reforms to check where are we.
Agriculture reforms
The Government had announced policy goal of doubling the farmers income by 2022 in 2014-14. This goal actually required fundamental reforms in agriculture policies for its achievement.
Gross value added (GVA) in agriculture, forestry and fisheries in constant 2011-12 prices was placed at Rs. 16.09 lakh crore in 2013-14, the year before the NDA Government took over in May 2014. GVA of this segment was placed at Rs. 21.19 lakh crore for the year 2021-22 in the first advance estimates released on 7th January 2022. Farmers income, assuming all the gross value added went into increasing farmers’ incomes only, grew by only Rs. 5.1 lakh crore, which is only 30% more than in 2013-14.
The goal of doubling farmers income has been missed by as much 70%.
Agriculture sector has been in dire need of serious policy reforms.
It required reform of agriculture procurement system, especially the food procurement system. The policy of minimum support prices (MSP) essentially is intended to ensure that farmers get a decent profit margin/ value embedded in the MSP.
The best way to provide the embedded profit margin is to give it as direct cash transfer to the farmers and leave him free to raise whatever crop he gets best returns from the market. Instead, we have built a gargantuan, largely dysfunctional, MSP based procurement system, which results in annual wastage of Rs. 2 lakh crore, equal to 1/3rdof the output market value of wheat and rice.
Government tried to assure marketing freedom legally and institutionally to farmers by bringing the three farm laws. While the design of the marketing reforms was flawed, the government was got cornered and had to repeal these farm laws.
After this setback, agriculture reforms seems to have become a completely touch-me-not subject.
Other much needed agriculture reforms- replacing subsidies in numerous inputs- water, electricity, seeds, fertilisers etc.-, which don’t actually benefit farmers in the form of income, by direct cash support to the farmers have seen only marginal action and presently seems to be placed on back burner.
Finally, encouraging and facilitating migration of a majority of more than 20 crore labour, trapped in agriculture as farmers and agriculture labour, out of agriculture to industry and services would have helped in doubling income of the farmers remaining in agriculture. Not much has been done on this score.
While agriculture policy reforms- of mostly flawed type- occupied pride of place in all previous budget speeches, agriculture sector received a big short shrift in the Budget 2022. The Government did not mention either the status of doubling farmers income or express any intent to undertake any agriculture reforms in future.
Agriculture reforms seem to have got into the state of policy stasis.
Industry and labour reforms
Privatisation of public sector undertakings, opening up Indian industry to foreign and domestic competition, undertaking reforms to eliminating extra cost of doing business in India and modernising labour laws for the 21st century economy are the principal reforms which India needs to undertake to awaken the ‘animal spirits’ of Indian industry and labour for accelerating investments and generating industrial growth.
Privatisation agenda had received a major boost in 2021 budget with Government firmly deciding to sell two public sector banks, one insurance company and complete privatisation of eight major transaction, including that of Air India, BPCL, CONCOR and IDBI Bank.
Air India privatisation has been successfully done though it has come at a heavy cost with Government writing off equity of about Rs. 50,000 crore and taking over Rs. 85,000 crore of debt.
But, privatisation of no other transaction has moved.
Major requisite policy actions like amending the bank nationalisation act for privatisation of public sector banks, or institutionalising a truly free petroleum product pricing regime for privatisation of BPCL have been initiated.
While Government representatives are making formal noises about continuing with privatisation programme, lack of real progress in undertaking requisite policy actions, indicate that Government is unlikely to proceed with any serious privatisation in its remaining two years in office.
Frequent upward adjustment in customs tariff, several non-tariff actions under the rubric of Aatmnirbhar Bharat narrative and exclusion of foreign participation in many Government procurement have been cited frequently as building a non-competitive industry instead of a competitive industry.
India is getting decent foreign direct investment (FDI), mostly in start-ups and services sectors. Still, the investment in manufacturing has been very low making the share of manufacturing in GDP stagnate.
India is nowhere close to its manufacturing attaining 25% share in India’s GDP.
Reforms in reducing cost of doing businesses have not moved much on account of lack of progress in power sector reforms, lack of progress in land and building reforms and in banking and financial sector reforms.
Numerous labour laws were consolidated in four labour codes. Though consolidation was no real reform, still, there has been no progress in implementing these laws despite the laws having been passed more than two years ago.
Production Linked Incentive (PLI) scheme has sought to cover-up for extra cost of doing business in India in 14 specific sector. There has been good progress in some sectors. However, PLI schemes are not reforms. These are incentives driven investments, which will have only limited impact.
Not policy stasis, but a lot of stagnancy has got permeated in the arena of industrial and labour sector policy reforms.
Financial sector reforms
Government amended the RBI Act equating to be introduced digital rupee with the bank-notes which RBI is authorised to issue. There are numerous design, use-case, targeted users, technology choice, model, medium of using digital currency etc. which would need to be thought through, experimented and worked out. This will take years.
Government continued with the Emergency Credit Line Guarantee Scheme (ECLGS), as its’ policy choice, for credit expansion. The amount covered by the government guarantee was enhanced by Rs. 50,000 to Rs. 5 lakh crore though limiting the enhanced amount to only the highly stressed contact intensive hospitality and related sectors.
ECLGS use has tapered off in 2021-22 with the disbursements amounting to less than Rs. 3 lakh crore despite being in operation for more than 20 months.
ECLGS in fact has substituted bankers’ credit judgement and risk assessment with a government guarantee. This is not a reform of credit system but quite reverse of it.
Government made a provision of Rs. 15,000 crore in 2022-23 budget to cover credit guarantee losses. The ECLGS is likely to leave the banking sector quite bruised as non-performing loans in this portfolio starts piling up.
Two major initiatives taken last year- establishing a bad bank as an asset reconstruction company (ARC) and a national bank for financing infrastructure development (NaBFID)- have moved slowly.
Government has continued with full provision of Rs. 25,000 crore for NaBFID in the revised budget, though it is unlikely to be disbursed even to the half during the year.
Loans the bad bank would take over from PSBs are guaranteed to the extent of over Rs. 30,000 crore signifying another government interference in the financial sector.
Monetisation of infrastructure assets, to be undertaken as part of Rs. 6 lakh crore National Monetisation Pipeline (NMP), is moving painfully slowly with only two transactions of total asset value of about Rs. 12,500 crore taking place against the target of Rs. 80,000 crore for the year 2021-22.
Don’t let policy stasis set-in
BJP Government, in both terms, has been a single party majority government. Prime Minister Narendra Modi is extremely popular, capable of taking bold decisions and exudes enormous confidence. In this respect, he rivals Jawahar Lal Nehru and Indira Gandhi, quite admirably.
As I present in my book- The Ten Trillion Dollar Dream: State of Indian Economy and Policy Reform Agenda- https://www.amazon.in/Ten-Trillion-Dream-Economy-Reforms/dp/0670095710 - the most popular leaders have not necessarily been great for Indian economy.
Nehru’s policy choice of a socialist pattern of society, exclusion of private sector in most of basic industry and concentration of production function in the public sector led to India to get trapped in a very low growth cycle.
Indira Gandhi’s maniacal nationalisation of private sector and extreme practicing of licence control raj made India miss the growth bus in sixties and seventies.
Now, if the Government, led by Mr. Modi, takes the eye off the economic policy reforms and allows the economy to dither, India may perhaps witness the decade of 2020s become a low performing decade.
Don’t allow the economic policy stasis to set in.
*Author, Economic Policy Strategist and Ex-IAS. Also, served as Economic Affairs and Finance Secretary of Government of India
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