How to use the mandate (Indian Express)

Mains Paper 2 : Governance
Prelims level : Economic reforms
Mains level : Highlights the economic reforms by the new government.

Context

• In India, there has rarely been a dearth of options on what needs to be done, and there is a long list of reforms that often appear on wish-lists, each discussed for decades.
• For example, the problems of the railways have been repeatedly documented, their criticality for the economy highlighted, and suggestions for ending the government’s monopoly, splitting it, corporatising it, listing it or privatising it have been made.
• Administrative reforms were first discussed more than five decades ago.
• India’s laggard manufacturing has similarly dominated economic literature and the voices of commentators for a long time.
• Much has been written on the challenges of power distribution: Notoriously inefficient state-government monopolies; or on agriculture, where India’s workforce remains disproportionately large.

Background

• There are a few areas where significant background work has been done, and the process needs to move towards conclusion, such as in labour reforms.
• More than 40 laws with often contradictory clauses are to be replaced by four new laws (or codes);
• The first of these (the code on wages) now needs to be legislated. The code on labour could be next.
• There are some long-standing issues like urban infrastructure and affordable housing where intent has been shown and efforts made, but with limited success so far: Continued focus would be of the essence.
• The realisation in the past few years that there is scope for significant improvement in the abysmally low direct tax to GDP ratio also needs to see some follow-through.
• To these must be added some new challenges that have a more recent provenance, that is, those that have only become critical in the past few years.
• In these, the problem itself has to be first defined properly, and the government’s approach made clearer.

Growing dependence on imported energy

• The foremost here must be India’s frighteningly growing dependence on imported energy.
• One cannot grow economically without consuming more dense forms of energy, and India either does not have domestic sources of dense energy, or does a poor job in extracting and using them.
• As a result, import dependency is rising, creating growth risks: These days even a $10 rise in crude oil prices begins to threaten growth.

Dominance by PSUs

• The second has to be the financial system where government owned (PSU) banks still dominate.
• When 90 per cent of the bad loans in the past few years turned out to be in PSU banks, the government made a tacit assumption to privatise the financial system by stealth.
• It assumed that as PSU banks lost market share to private banks and non-banking financial firms (NBFCs), the system would become privatised.
• This had worked (even if unintentionally) in airlines and telecom, but once the NBFCs growth slowed due to a funding crunch, the problems in this approach have become obvious.
• The recent economic slowdown is perhaps worsened by a lack of financial capacity in the system: A decisive approach on the financial architecture in India is necessary.

Maintain foreign capital inflows

• The third has to be a rethink on foreign capital inflows. Total capital inflows as a share of GDP last year fell back to 2002 levels, and can become a cap on economic growth, particularly given rising energy imports.
• The last time the rupee’s convertibility on the capital account was discussed in-depth and a consensus built on the framework, India’s economy was the 15th largest in the world, struggling with chronic high inflation and no demonstrated commitment to fiscal responsibility.
• The world has also changed, in its geopolitics as well as growth assumptions and capital flows.
• The objective should not just be to attract more foreign capital, as it can cause undesirable volatility, but to prudently assess which risks are worth taking, given the changed domestic and global environments.

Improve better measurement and transparency

• The fourth would be better measurement and transparency.
• Everyone being on the same page on where our fiscal deficits are, where our growth is, and if we are creating enough jobs, is important.
• Even if some of the distrust on growth metrics is politically generated, there is no doubt that the Indian economy is very hard to measure, and that the time spent debating whether the economy is growing or not is a waste.
• This uncertainty has real costs too: The lack of a clear time series and the policy on off-balance-sheet borrowings by the government is one of the factors often quoted to justify high interest rates in the economy.

Three challenges in economic reforms

• That change has been slow on all of the known fronts is a reflection of the challenges in economic reforms.
• First, even steps that improve the “collective good” have interest groups that would lose economic power: Think, for example, about corporates that lose control of their companies if the firms go bankrupt, or tax evaders who are forced to pay up.
• Second, reforms are disruptive, and the more radical ones almost by definition involve uncertainty, like a surgery: Slip-ups in execution can imperil even the best intended changes.
• Third, given that reforms for the above reasons use up political capital, or goodwill of the masses, it is tempting to target incremental improvement. This requires sustained effort and is less risky.

Conclusion

• At the same time, political capital, earned through hard work in elections, also fades fast.
• Spending some of it to push through some long pending decisions could be the stimulus a three trillion dollar economy needs to keep growing rapidly.

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Prelims Questions:

Q.1) Which of the following privileges is/are enjoyed by the members of Parliament individually?
1. They cannot be arrested during the session of Parliament in both civil and criminal cases.
2. No member is liable to any proceedings in any court for anything said in Parliament.
3. They can refuse to give evidence and appear as a witness in a case pending in a court during the session of Parliament.

Select the correct answer using the code given below.
(a) 1 and 2 only
(b) 2 and 3 only
(c) 3 only
(d) 1, 2 and 3

Answer: B
Mains Questions:
Q.1) New government should utilise its enormous political capital to introduce economic reforms. Explain.