Economic reforms & challenges 2012
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Analysis of India's Economic liberalization with a focus on Challenges ahead. The harder more politically controversial reforms that are needed to get India on a 10% growth path
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Economic reforms & challenges 2012
- 1. Economic reforms Rahul Reddy
- 4. Pre-Independence 1. Agrarian economy (70% GDP from Agri. in 1947) 2. Food-deficient 3. Colonial exploitation 4. Zamindari system 5. Traditional industries (Cotton Textiles – low value-addition) Triumphant Institute of Management Education Pvt. Ltd.
- 5. Pre-LPG • Resource poor economy • Role of investment for the Govt • Socialistic thinking • Soviet Influence on world economists • Optimally use of resources – Centralized planning • License Raj • Sellers market • No incentive for Quality or innovation • Poor Customer service • Cost plus pricing, no efficiency incentive Triumphant Institute of Management Education Pvt. Ltd.
- 6. Pre-LPG • Shortage and premiums • Licenses cap production quantity • Waiting periods & Premiums • Inward looking economy • High degree of protection • Forex shortages & FERA • Import substitution • Fundamental Distrust of Business • Complex set of rules and regulation • Taxes • High taxes & Low revenues • Tax evasion & Black markets • Distinctive to produce & earn • Huge trade deficits & Foreign Borrowing • Forex Crisis Triumphant Institute of Management Education Pvt. Ltd.
- 7. 1st Generation Reforms • De – Licensing • Import liberalization • Phased reduction of tariffs • Reform Taxation – Direct & Indirect • Reduction in tax rates • Simplified tax regimes • Forex reforms • Allowed FII & FDI • Dividend repatriation • Repeal of FERA Triumphant Institute of Management Education Pvt. Ltd.
- 8. Institution Building • Stock Exchange reforms – SEBI • BOLT & NSE • Demat • Derivatives • Banking sector reforms • Bank Computerization • Private bank licenses • Legal framework reforms • MRTP repeal • Dividend repatriation • Electronic commerce
- 9. 2nd Generation Reforms • Successful • Telecom reforms • Banking Reforms • Insurance – Life & Non Life Work in Progress • Infrastructure • Roads, Power, Ports, Airports • Non Starters • Labor law reforms • Disinvestment • Bureaucracy & Red tape • Company Law reforms • BIFR & Exit Policy Triumphant Institute of Management Education Pvt. Ltd.
- 10. Reform Objectives • Acceptance of private sector as the engine of Economic growth • Using Market forces and Competition to bring about efficiency – not regulation • Bringing the benefits of foreign trade, foreign investment and technology to our economy
- 11. Lessons from Reforms • In a large democracy with many lobby groups, progress would be slow • Process of economic reforms has to be customized for each nation • The sequencing of reforms is critical • In a federal structure, state and local governments need to be involved
- 12. Gradual Approach • Exchange rate reforms • 25% depreciation in two steps • Dual Exchange rate as a transitional measure • Duties and tariffs • Weighted Avg Tariff 80% in 1991 to 30% in 1997 • Lack of Political consensus or Public support • Privatization • Labor law reforms
- 13. Sequencing of reforms • Institution building • SEBI, TRAI, etc • Stock Market & Banking reforms • Enabling legislation • Repeal of MRTP, FERA etc • Caution • Currency convertibility • Financial Integration
- 14. Has it worked? • GDP growth rate • Growth in national Income and Per capita • Poverty alleviation • Significant poverty reduction • Through growth – Job and business creation • Through anti poverty schemes (Funded by Higher Tax Collections) • Creation of World class organizations • Indian MNC’s
- 15. Challenges Ahead • Infrastructure • Public investment Vs Subsidies • Unlocking Manufacturing growth • Agricultural growth & productivity • Tax reforms & National markets • Poverty alleviation or Income Inequality • Governance
- 16. Infrastructure • Key component of Economic growth • Can add 2-3 percentage points to GDP growth • Requires huge resources ($200 Bn – Power alone) • Private sector participation, PPP • Extremely complex structural reforms • Electricity • Ports/Airports (35% higher shipping cost, Much Higher turnaround time) • Roads & Railways • Telecom
- 17. Public investment Vs Subsidies • The Short term Long term balance • Public investment • Infrastructure • Public Health • Primary education • Subsidies • Food & fertilizers • Petro products • Electricity
- 18. Unlocking Manufacturing growth • The 60-20 trap • 60% of Indians are in agriculture and earn about 20% of national income • Will need to shift people from Agri to Industry and then services • Red tape & remnants of License Raj • No of regulations and regulatory bodies • Time delays in permits and permissions • Rigid Labor Laws • Applicable only to 6% of pop (organized sector) • Encourages Capital intensive production • Encourages outsourcing of production • Land acquisition issues • Flow of Talent to Services sector • Lack of skilled, Trained manpower
- 19. Legal Reforms • The Legal system has huge impact on the economy • Laws and rules • Regulators and Inspectors • Enforcers (Police and Judiciary) • Laws and Rules • 1000s of Laws and Sub laws • Outdated, Ambiguous, Complex and often Contradictory • Regulatory system • Large number of regulatory bodies with sweeping powers • Inspector Raj leads to Delays, harassment and corruption
- 20. Legal Reforms • Police and Judicial system • Understaffed and ill trained police force • Overloaded judicial system • Delayed justice • No enforcement of contracts • Inadequate protection of property rights • Solutions • Repeal, Rationalize and simplify rules and regulations • Dismantle inspector Raj, Change mindset • Increase courts and judges, reform procedures and use technology
- 21. Agricultural growth & productivity • Fragmented landholdings • Under employment and Disguised unemployment • Highly regulated markets • Mandi – Broker nexus • Storage and transport • Market distortions • Urea Vs Phosphate • Price Signals & Crop Choices
- 22. Agriculture reforms • Free markets in agriculture • Contract farming, Corporate – Farmer partnership • Better supply chain, Cold storages, Food processing and exports • Agri-Productivity • Seeds, Technology and practices • Long term goal • Shift of employment from Agriculture to Industry and Services • Consolidation of land holdings, better investments and management • Public Investment – Irrigation and infrastructure
- 23. Tax reforms & National markets • Low Tax to GDP ratio • Black money – Parallel economy • Indirect tax reform • Goods and Service Tax • One national market • Direct tax reform • Lower taxes • Elimination of Exemptions
- 24. Poverty alleviation or Income Inequality • Job creation • Private sector, Manufacturing and Services • Education and skill development • Entrepreneurship • Awareness, Information of opportunities • Availability of credit • Red tape and regulations ‘Inspector Raj’ • Social Security • Subsidies • NREGA • Public health • Direct Cash Transfer – Conditional cash transfer
- 25. Fiscal Consolidation • Can we get Fiscal Deficit back under control? • FD expected to hit 5.5% against Budget target of 4.6% • Tax Buoyancy slows down due to Falling GDP growth • Ever expanding Subsidy Bill • Petroleum, Fertilizer, Electricity, Food Security Bill • Expenditure control • Huge increase in social sector outlay • Need to Focus on better efficiency in delivery systems
- 26. Subsidy Vs Direct Cash Transfer • Direct Cash Transfer • In place of Fertilizer, Kerosene Subsidies • Using the UID (Aadhar) In a phased manner • Advantages of DCT • Cuts leakages • Reduces administrative costs • Gives the poor a choice • Disadvantages • Prone to misuse (Alcohol and Gambling)
Editor's Notes
- Explain rationale behind License Raj. Fear of Foreign countries, Socialism in fashion across the world, Capital limitations etc
- Premiums of Bajaj Chetak. Why we should thank the DuabaiMallu’s
- Resistance to Foreign investment was high. People predicted the death of Indian industry. Explain Tax complexity with the Bicycle example
- It is critical for a market economy to have institutions that enable free markets to perform optimally.
- The objective of reforms were to use competition to drive efficiency and deliver better value at lower price for the customer. Briefly the Telecom story.
- While corruption is a different topic, it is important to note that the freer the market, the lower the corruption and the better the deal for the customer
- I am not disappointed that there is opposition to reforms. Given that it threatens vested Interests, you expect that. What is disappointing is that no one, not even the so called Reformer in chief MMS has tried to explain or sell reforms to the Indian public, not even to the middle class.
- Institutions like efficient Banking system, Stock markets including regulators are critical for further reforms.Given size of global fund flows it can be dangerous for any economy especially a developing economy to opt for full currency convertibility. Any crisis can lead to capital outflow which causes rapid currency depreciation, destabilizing the economy. Full financial integration can also be dangerous as we found out in 2009, with Banks and FI’s collapsing like dominoes or bicycles in a cycle stands (Sidhuism)
- Electricity – Shortfall of Electricity, Inconsistent Availability, Unsustainable subsidies, High T & D LossesPorts – Hi cost, Slow turnaround time, etcRailways – Low passenger fares, High frieght costs, poor quality of frieght trade, low investments in infrastructure and safetyRoads – Poor quality of roads
- Why do we need Industry? Developed nations have between 10-15% of population working on Agriculture. The only agri nation to try and develop its economy sans industry is Argentina, a country that bankrupted itself many times over. No of permissions required to start a business. Employmentgrowth in India has been concentrated in sectors not under rigid labor laws – Services, IT etc or unorganized sector. Explain how a law designed to protect labor works against them.
- There are 55 Central and over 100 state laws covering only labor related issues. Any company employing more than 100 employees requires government permission to fire workers or shut down. Prohibitions on hiring contract workers, Permission for women to work night shifts (Haryana govt invoked section 30 of Punjab shops and establishment act to threaten Gurgoan’s ITES industry.
- The Farmer to retail mark up is about 2-3x. Loss during transport and storage is about 15-40%. Access to credit and crop insurance. Why Loan waiver is a bad policy decision.
- FD Excludes State deficits and part of the Fuel and Fertilizer subsidies – shown as off balance sheet items. As we shall see tomorrow, high Fiscal deficit is like Cholesterol - A warning signal. Take corrective action or one day your heart shall stop pumping blood. From Individuals to countries, from Kingfisher to the US sub prime crisis to the Eurozone crisis, there is a simple lesson, one that your Grandfather would have told you. Live within your means. Or as my friend puts it – If your Outflow exceeds your Income, then your upkeep will be your downfall.