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.