INDIAN ECONOMY FROM 2014 AND REFORM AGENDA FOR 2019 – MY THOUGHTS

Thiru Gunasagaran 

Disclaimer: This is based on the media reports, business news and thoughts of economists and politicians expressed over the years with a few of my personal opinions. 

With the general elections in India due to finish soon it is a good time to look ahead and plan the economic and reform agenda for the next 5 years. Before we look ahead it is important we review the reforms done in the last 5 years. 

The current government has improved the macroeconomic parameters and made India a bright spot in the world.The government has made significant reform by introducing GST and the Bankruptcy law. It has also introduced significant welfare reforms mainly by  converting the benefit of several schemes into electronic cash transfers direct to recipients bank account account. This is based on the JAM trinity(Jan Dhan bank account-Aadhaar ID-Mobile number).

The Past 5 years

After the new government took over the reins it went about improving the ease of doing business and has over the years made significant progress. India’s stated goal is to be within the top 50 ranks. I understand most permissions are now online without unnecessary interference from the bureaucracy. The FDI norms were further liberalised and many sectors were brought under automatic approval. There was also a huge push to improve infrastructure by unclogging the many highway projects and adding more. A new National Waterway Bill was passed and the government has also made investments in rail infrastructure. 

A policy less talked about but in my view very significant is the policy of e visa for visiting India. It not only enables movement of business executives but increases tourism arrivals with domino effect on several other sectors like travel and hospitality.

Following this the economy was on the mend and growth was picking up but this was when high denomination current notes were Demonetised by the government. A decision  that evoked shock, dismay, anger and even derision. A risk averse prime minister would never have taken this decision as the economy at this stage was recovering well.

My understanding was that Demonetisation was an attempt to kill ‘Black Money’. The government believed the black money would not be deposited in banks. The ruling party spokespersons were optimistic that 1.5 lakhs crore to 2 lakh crore or more would not return to the system giving the government and RBI a huge boost. The added benefits were thought to be controlling counterfeit notes and improving tax compliance and increase in use of digital money. At the end of the 6 week window to deposit invalid notes after demonetisation almost 100% of the notes returned to the system. The initial optimistic assessment of notes not returning to the system was wrong. The main benefit of extinguishing 1.5-2 lakh crores of black money did not happen. On this one single point I would deem DeMo a failure. 

Is this a failure of the government policy or was it the ability of the black money hoarders to beat the system and get the cash back into banks ? The government thought it was clever to demonetise notes overnight and catch everyone by surprise. In the 6 week window to deposit money, the Indian society showed that they were more ‘clever’ in getting the cash into the system denying the government the satisfaction of achieving its goal. 

Does that mean there was no benefit from DeMo at all ? It is important to appreciate that money returning to the bank does not automatically make it clean money. On the contrary it created a money trail forcing more people to file taxes or pay penalties- which is what made it ‘white’ money. It also uncovered lakhs of shell companies used for tax evasion and money laundering. The increased tax compliance and closing down shell companies has definitely created a cleaner financial sector which is a positive.

The shock DeMo did have a temporary negative effect. The economy ground to a halt and took a while before the growth recovered. There was undoubtedly significant hardship for millions of people. This hardship combined with the poor optics of almost 100% money returning to the system should have affected the ruling party’s political fortunes but instead the people voted for them handsomely in subsequent regional elections. How did this happen ? It is possible, the not so well off were willing to endure short term hardship because they felt the rich were forced to bin their black money and suffer losses. This probably made the government and the prime minster a darling of the masses.  Although it seems plausible, was the support for demonetisation really that simple? There was what I’d like to describe as the ‘Robin Hood effect’. An eminent economist in an interview mentioned that most of the very rich employed agents to get their money deposited in banks who in turn went to villagers and got them to deposit the cash in their accounts for a juicy commission. Also some of the poor acted as ‘money mules’ for a fee, helping the rich exchange notes running from bank to bank. Thus in an unexpected way the money from the rich made its way to the poor ! This is also what made demonetisation ‘popular’. 

The other talked about reform is the GST. This has been on the agenda for almost two decades and credit should be given to the government for implementing it. The central government assuaged the concerns of all states especially the industrialised states with many manufacturing units. They committed to matching revenues initially and also fixed percentage increase for the next few years till the GST is well established. This is what made all the states come on board making the GST a reality. 

The other reason why the GST wasn’t pursued with zeal by previous governments  was that it was felt it will contribute to inflation in the short term and inflation is a potent factor in electoral politics. In the last 5 years inflation has been low. How did the government prevent GST from stoking inflation ? When GST was envisaged it was meant to be a single tax rate. I was disappointed when the government introduced multiple tax slabs, picking and choosing items to be taxed at different rates.This made the process complicated. In hindsight the different rates ensured that food and daily use were taxed low while others higher and sin goods even more. This ensured that inflation especially food inflation didn’t shoot up. The tax slabs are already being rationalised and higher tax rates are planned to be phased out. 

The GST  was meant to be simple by eliminating multiple taxes and multiple tax authorities and reducing corruption but it also needed a complicated electronic filing and uploading. The large companies adapted to the change but smaller MSME probably struggled with this and couldn’t comply. I feel, those companies that couldn’t comply shut down and are contributing to the unemployment that the opposition is talking about. In time this will reverse. As an aside, in a country with such a high population it will be impossible to provide formal jobs for everyone and self employment will continue to be relevant. Jobs and employment may not be the same but this however is a different debate. In the long run the GST is a good idea and there is never a wrong time do implement a good idea. All criticism that it wasn’t implemented properly is likely exaggerated as such a radically new concept cannot be perfect from the start. The GST Council has proved to be responsive to the challenges of ironing out imperfections and will hopefully simplify the electronic filing process.

The bankruptcy bill (IBC) is much needed reform. This is having  some teething troubles including one company challenging it in court, but a start has been made. I hope with time it will deliver and improve the NPA’s in banks. Also from the point of ease of doing business we always talk about the ease of starting a business. It is equally important that there is also ease of exiting a business and that’s what this law enables.

The GST and IBC are the two biggest reforms of this government and will have an impact for decades.

The Next 5 years.

As we look ahead of what can be done to improve the economy it is equally important we do not take our eye off the reforms initiated by the previous government as they need continued attention to ensure their success. This includes –

1. GST and IBC – will need further refining.
2. Ease of Doing Business – to break into the top 50
3. Electronic cash benefits for welfare schemes can be expanded. 
4. Infrastructure – maintain the push for creating highways, waterways, railways and fibre optic and broadband 
5. Fiscal deficit – Maintain the glide path to reduce the deficit.

A cliched question that is often asked is what are the top three suggestions for reform. It is silly to believe just three suggestions can transform an economy the size of India. I will however make a top 3 suggestion that I think are a priority in addition to few more especially in Agriculture. These aren’t necessarily new, pathbreaking or revolutionary ideas.

1.Privatisation and FDI in Public Sector Banks

2.Privatisation of Public Sector Enterprises – like Air India

3.Electricity distribution and retail reform.

1.Privatisation of Public Sector Banks – If only one thing had to be done it is this. In in my view this is the reform that will have maximum impact. It is well know that most public sector banks need capital infusion as they are struggling  with huge NPA’s. The government announced a huge capital infusion plan of about 2 lakh crore over a period of time. This is a significant amount but may not be adequate. Also a new board was setup to improve governance of banks and reduce government interference. Both these have had only minimal impact. Not only is more capital required but also banks need to be governed professionally without government interference to give loans to crony capitalists. Privatisation will bring in new capital from outside the government and also reduce the influence of the government in bank decision making. Allowing foreign direct investment in banks increases the pool of capital allowing quicker recapitalisation of banks. I also feel with the fintech revolution in India its cheaper to acquire, maintain and lend to banking customers and this will attract more investors in the retail banking sector.

The quicker we have healthier banks the better for the economy. The growth of an economy is dependant on the credit availability. Banks with stressed assets and lending restriction are unable to provide new loans. This restricts private investment (and employment) which is essential for robust growth. It’s also true several large corporates with huge debts are unable to borrow which was referred to as the twin balance sheet problem( financial stress in both borrower and lender). Once credit starts to flow the issues of growth and employment will be automatically addressed. 

2. Privatisation of Public Sector Enterprises – A well known saying is the government has no business being in business. Yet India has bloated public sector enterprises which are managed by bureaucrats along with the whims and fancies of the political boss. Many of these are making huge losses which are paid for by peoples tax money. It’s time the government stems the annual money loss. There is already a proposal to close down unviable units and sell others but this is not being implemented. The biggest loss maker is Air India and this needs to be a priority. There was a failed  attempt to sell Air India and the government needs to review why no one was interested. I hope the government persists with its attempt to sell Air India after making appropriate changes to ensure a successful sale. The government currently relies on divesting shares to reduce fiscal deficit which helps in the short term. It should instead look at sale and privatisation of PSE.

Like Air India there are many non strategic companies that should be sold. Not only will these stop the waste of tax money it will divert the resources for better use like infrastructure or welfare or reduce the fiscal deficit.That more infrastructure or better fiscal deficit is good for the economy is a no brainer. I’d call this a low hanging fruit that needs to plucked at the earliest.

3. Electricity Reforms – There are two reasons why I have included this as one of the top three. The state electricity boards are inefficient and have racked up huge debts which cannot be good for the country in the long run and also poor retail service with load shedding is unacceptable for industry and to those wiling to pay for uninterrupted power.

Many past governments have attempted to reduce this debt and failed. The current government introduced the UDAY scheme to improve the debt and this has fared better than the previous attempts. These schemes are unlikely to solve the problem as long as the state enjoys a monopoly in transmission and distribution of power. The state electricity boards are not good at preventing electricity theft nor are they managing the finances efficiently nor are they providing acceptable customer service. There is no reason not to introduce competition to shake these boards out of their sloth. A Private company for power transmission will likely reduce power theft as there will be incentive to reduce theft and make a profit. Like wise a private player in retail distribution will provide good customer service and ensure continuous power to paying customers and not supply power at a loss to win elections. I hope ‘load shedding’ will be a thing of the past. A reliable power supply is important for a growing economy and also having many retail providers will ensure quick access to a new power connection which will also improve the ease of doing business rankings.

I was recently interested in roof top solar power generation and and I realised for an ‘on grid’ solar power system would involve having the electricity board install a new bidirectional meter. I gave up the idea of roof top solar as I didn’t want the hassle of dealing with an unresponsive office of the electricity board. A private player with responsive customer service might encourage customers to install roof top solar. This will also aid the target of 100GW of solar power generation that country aims to achieve.

In addition to these top 3 reforms the government should pursue other reforms like labour, land acquisition and in Agriculture.

Labour and Land – The previous government had a plan to reduce 44 labour laws to 4 codes but didn’t proceed as they probably anticipated resistance from labour unions. The recent bankruptcy of jet airways and its unpaid employees is good evidence that current labour laws are not protecting the work force but only being an impediment to growth. This should be pursued along with land acquisition reform which was blocked due to lack of political consensus. Both these will give a fillip to Make in India and creating physical infrastructure.

Agriculture – The regularity of feigning interest for the farmer during budgets and election made me interested in the farm and agriculture sector. That this is a problem area 70 years after independence suggest that the problems run deep. In spite of fertiliser subsidy, crop insurance and other support like MSP there is recurrent agrarian distress and farmer suicides. More of the same will not solve the problem.I have a few suggestions.

1. Irrigation – With all the improvement in science and engineering and after 70 years of being independent I think its embarrassing to get excited when there is a good monsoon or vice versa ! It’s ok for stone age men to be completely at the mercy of the monsoon but not in this day and age. There have been irrigation schemes in the past but these have not solved the problem nationally and some have been blighted by corruption. A comprehensive look at interlinking of rivers and ensuring nationwide irrigation along with drip irrigation technologies should be explored.
2. Market Restriction – Each state has its APMC(Agricultural Produce Market Committee) which controls sale of agricultural produce but is also a barrier to interstate trade and inter regional trade. The APMC in each state should be reformed to remove such restrictions. Maharashtra recently passed an ordinance to over come the limitations of the APMC. There should be an attempt to create a national market and also extend the reach of eNAM (electronic National Agricultural Market). A senior minister made  suggestion of creating a national body like the GST Council for agriculture and this is an idea that should be pursued.
3. Cooperative – Farmers should form cooperatives/company to insulate themselves from going into personal debt. This could be between contiguous land owners to share cost of farming and borrowing money as a farming company and not as individuals. They can share profits as per land holding. This will ensure no individual farmer is in debt much like corporates who are secure even when their companies are bankrupt. This requires a mindset change to work as team rather than ‘plough a lonely furrow’.  Also an author and economist suggested a cooperative like Amul but for agricultural produce. Amul made a huge contribution to milk collection and sales. There is no reason why such companies cannot be created for Agriculture. These Amul like companies can also invest in Cold storage in their region or this can be done by independent business’.
4. Procurement – The government is one of the biggest buyers of crops and they fix the MSP. This artificially creates surplus production of specific crops at the cost of some others while it can stoke inflation if the MSP is too high. A comprehensive review of government procurement, storage and the public distribution system should be done. If food subsidy is converted to an electronic cash incentive – the entire process can be avoided.
5. Encouraging investment in cold storage and Food processing – I believe the government has made some efforts including allowing foreign investment in food processing. In my view encouraging FDI in multi brand retail/food retail will give a fillip for cold storage chains and create a lobby against market restriction laws and procurement monopolies.

I hope the new government in 2019 is able to take the economy to greater heights.