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Realizing India’s Potential

Kalpana Kochhar's picture

Yesterday, I discussed India’s incredible economic transformation over the last two decades and some of the challenges that the country is currently facing. So, what can India do to reduce the impact of global uncertainty and improve growth performance and boost investor confidence?

India’s firepower to respond to a crisis with traditional monetary and fiscal stimulus is much weaker now than prior to the 2008 crisis. Fiscal space for additional spending is severely constrained in light of continued high deficits. Room for monetary policy easing is modest in light of continued high inflation, and still low real interest rates. Moreover, when investor confidence is at a low ebb as it is in India, easing monetary policy would be tantamount to “pushing on a string.”

We believe that the best means of providing near term stimulus to the economy is to implement the much needed and long planned structural reforms. Indian policy makers are well aware that what is needed in India is a concerted and sustained effort to implement the next generation of structural reforms. And as India’s own history from the 1990s shows, such structural reforms—whose full impact on growth and poverty reduction will be felt in medium term—will have an immediate positive economic impact by turning sentiment around and inducing investors to translate the perception of positive changes in the future economic climate to investment today.

So what are some things that India can do—without breaking the proverbial bank—both to cope with the extremely uncertain and shaky global outlook and put the economy back on a robust growth and poverty reduction trajectory?

• Further reducing the subsidies on diesel and LPG and immediately announcing a time-bound plan for their phased elimination. Eliminating them in one shot is not likely to be feasible, but announcement of a firm timetable to do so would provide a powerful message on fiscal sustainability.

• Significantly reduce fertilizers subsidies and announce a moratorium on raising minimum support prices. The savings from the subsidy reduction can be set aside to further accelerate the roll out of the unique identification program (Aadhar) and link direct cash transfers to this program.

• Combine the opening up of FDI in multi-brand retail together with a package of reforms in agricultural marketing (removing movement restrictions on commodities and lifting stock limits for private traders) so that the desired backward linkages and efficiency gains can be realized. This will increase investment and build needed supply-chain linkages to bring agricultural products to market and for producers to respond more swiftly to consumer demand.

• Announce that the proposal for retroactive taxation on foreign investors has been dropped.

• End Coal India’s quasi monopoly status by liberalizing the coal market and allowing private investors to whom coal blocks have already been allocated to produce for the domestic market. Speed up coal production by expediting environmental and land clearances.

• Announce a plan to deal with the losses of the electricity distribution companies—through a combination of bonds and tariff increases, thereby going back to the spirit of the electricity sector reforms that were introduced in the early 2000s.

• Accelerate investment projects that are currently under implementation and/or are ready for implementation. As a means to facilitate project implementation in the near-term, the Government could consider introducing an infrastructure "one stop shop," headed by an individual of unimpeachable reputation who would facilitate project implementation by centralizing information on needed clearances and project requirements and managing bottlenecks, as they arise.

While this is a only a subset of the many areas that would provide a boost to the medium term growth prospects, movement on these critical areas would boost investor confidence, reinvigorate investment, and act as a needed stimulus in these volatile global economic times. It would also resume the process of growth and poverty reduction efforts that are so critically important to keep India’s promise alive.

Comments

Submitted by amit srivastava on
Dear Ma'am It is nice to interact on your blog. The views expressed by are very pertinent and relevant in the current economic scenario of the country, however it is mainly repetition with little focus on new ideas. The biggest problem with INDIA is non utilizing the abundant human power across various sectors with the help of effective policies to engage them in meaningful activities. As world bank is driving the reform strategy for the country, some action on the suggested line may provide lot of help in the empowerment of the people and make them self reliance. I request for your focus and kind attention on this aspect. with regards amit

Submitted by Nachiket Mor on
Dear Kalpana, This is a very insightful set of blog posts. My limited understanding of policy making and its implementation in India is that very little happens quickly and most efforts take an enormous amount of time. My own interest therefore has been to look ahead and only explore ideas that have a longer term impact. I wonder if you have a list of broader ideas around which gradually domestic consensus can be built. Some such ideas that occur to me include: 1. Universal essential healthcare with a strong emphasis on broad-based formal primary care. Move away from the exclusive focus on reproductive and child health and the model of informal community health-workers essentially performing a referral function to one in which broad-based formal care is made available deep within the community. Explore multiple ideas in this regard including public-private-partnerships, managed care, and new ways to improve public sector performance. 2. Universal elementary education with independent standardised testing of children on a regular basis using modern tests such as ASSET so that teacher performance can be tracked and made visible. 3. Universal access to finance (multiple products, wealth management, SME & local infrastructure finance, local availability). Even here there is a need to explore many more ideas and partnerships and not make cooperatives and public sector banks, the only instruments. 4. Move towards unconditional and perhaps even universal automatic cash transfers and away from myriad schemes such as mid-day meals, public distribution systems, fertilizer subsidies, priority sector banking subsidies, minimum support price, and fuel subsidies. 5. Significantly improve urban and rural tax levying and collection capability (and willingness) of local bodies. 6. Move away from a focus on owned urban housing for low-income households to rental housing and ensure that the enabling regulations on issues such as repossession, rent control, and REITs are in place. I am not a development expert and would eager to hear from you and other experts on what they think of these ideas as well as read about other ideas that they think are more or equally important. Sincerely, Nachiket Mor

Nachiket, I could not agree more with the need to focus on longer-term impact from Day 1. As my colleague Tara Beteille points out, the problem is that India’s fiscal space is very constrained currently, and unless the government takes some urgent measures—such as those I have listed—there will not be enough money to initiate/undertake the longer-term reforms you write about. For instance, a unique identification number for every Indian is a prerequisite for many of the reforms you propose. But where will the money for this come from? If India’s fiscal situation continues to deteriorate, it is much more likely to undertake short-term, cosmetic reforms in the social sector than long-term reform. These will undermine the ability of people to participate effectively in the economy, and will worsen the economic situation—a vicious cycle. In short, to think long-term, the government need to think near-term simultaneously and quite urgently.

Submitted by Mahabaleshwar Hegde on
While the overall theme looks good. some of the ideas are half baked. One of particular interest is "Significantly reduce fertilizers subsidies and announce a moratorium on raising minimum support prices. The savings from the subsidy reduction can be set aside to further accelerate the roll out of the unique identification program (Aadhar) and link direct cash transfers to this program" While nobody would like to deny utility of an Aadhar, the projection that it is the answer to all the subsidy problem is highly over rated. The point of particular interest here is on Fertilizer subsidy and minimum support price. My detailed assessment of the issues relating to Fertilizer subsidy in its current form while indicating that it has increasingly become counter productive, shows that it requires urgently mechanisms to introduce competition driven productivity improvements and investments in both brownfield & greenfield capacities, by liberalizing the pricing of fertilizers. While that looks as an attractive proposition and the right direction to take, The need for protecting the interest of the farmers in the short term brings out the idea of direct transfer of cash. However the lack of digital infrastructure (land records, tittle of ownership, leasing information etc) to identify the beneficiaries and the infrastructure required to disburse cash only after buying the fertilizer, makes the proposition an unfeasible idea. Similarly, the history of fertilizer subsidy clearly shows how short term ideas become long term political tools and become socio political structures, impossible of dismantling. That lesson should be in the back of mind while embarking on a direct transfer regime - since it has all the potentials to become another monster of a socio political structure of benefits. If the real point is about policies which have long term impact and have the potential to break the monsters of subsidy based socio political structures, the thrust should be on liberalizing the farm sector - if farming is an enterprise it should be treated so. The first point of liberalizing for the farm sector is dismantling the mandis and the related structures which restrict the farmers. The second point will e liberalizing the farm input regime. My guess is that with such long term measures, the need for subsidy will disappear by itself.

Mr Hegde, thank you for pointing out that many of the reforms we seek are complex, and can be jeopardized by vested interest groups. I appreciate your point about mandis and the need to liberalize the farm sector. However, let us not underestimate the political challenge in doing so. There are definitely fewer mandi owners relative to fertilizer subsidiary beneficiaries, but they are a powerful lobby group too. At the end of the day, we will have to find creative ways to address these political-economy type problems. My sense is they permeate most areas in need of reform, not just subsidies and mandis.

Submitted by Anonymous on
Hello Madam, On NPR regarding the power grid failure, you mentioned that India's population is 3 times of USA. I just want to let you know that it is 4 times (1.25 billion approx) compared to 312 million or so. That is all. Regards PR

Submitted by Sumedha on

brilliant piece of Information, thanks man. It's something that gets underestimated an awful lot on most sites...

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