OCTOBER 14, 2015

By TIOL Edit Team

THE Finance Ministry should blend the gradual improvement in economic conditions under benign global commodity prices with determined pursuit of reforms.

It should draw inspiration from appreciation of upturn in Indian economy by International Monetary Fund (IMF) and the World Bank to clear huge backlog of reform. The pending and delayed improvements in the arena of products and services markets are humungous.

Consider first the positive developments that create conducive situation for roll out difficult to purse reforms including neglected expenditure reforms. These should seized by Modi Government as opportunity to catalyze economic growth.

IMF's latest World Economic Outlook (WEO) notes domestic demand in the country is projected to remain strong. Many analysts would state this statement can't be applied universally across all sectors.

WEO also believes that inflation is expected to decline further in 2015, reflecting the fall in global oil and agricultural commodity prices. The country's near-term growth prospects thus remain favorable.

The Global Monitoring Report (GMR) 2015, jointly prepared by IMF and the World Bank, has aptly put: "Growth in India will benefit from policy reforms, a pick-up in investment, and lower commodity prices."

Turn now to the reforms agenda. WEO, sub-titled ‘Adjusting to Lower Commodity Prices', suggests: "Continued fiscal consolidation is also essential, but it should be more growth friendly (tax reform, reduction in subsidies)."

It adds: "With balance sheet strains in the corporate and banking sectors, financial sector regulation should be enhanced, provisioning increased, and debt recovery strengthened. Structural reforms should focus on relaxing long-standing supply constraints in the energy, mining, and power sectors. Priorities include market-based pricing of natural resources to boost investment, addressing delays in the implementation of infrastructure projects, and improving policy frameworks in the power and mining sectors."

Similarly, IMF Managing Director's Global Policy Agenda (GPA) has pertinently suggested that India should undertake education, labour and product market reforms to "lift productivity and pave the way to higher income levels."GPA has also pitched for removal of energy market bottlenecks.

Both the pace of reforms and direction of reforms in product and services markets have been varied. There is a complete lack of prioritization and focus.

As put by Organisation for Economic Cooperation and Development (OECD), "a competitive product market environment that allows new firms to challenge incumbents, efficient firms to grow, and inefficient ones to exit, can help boost economic growth and living standards. Two main policy ingredients are necessary for a growth-enhancing competition environment. First, product market regulation should be set in a way that does not hamper competition and, second, an effective antitrust framework needs to be in place that safeguards a level playing field among firms."

Modi Government should rely on product markets reforms indicators developed by OECD and apply to them to each sector. Such a systematic exercise would help the Government identify steps to be taken to improve competition, policy and regulatory environment and cost competitiveness in each sector. This is vital for making ‘Make in India' Initiative a success.

The policy and regulatory framework has so far largely been driven by compartmentalization/ silo approach and crony capitalism. This anachronism has lost relevance in the era of convergence among different sectors and disruptive innovations. Time has come for an end-to-end value chain reforms in each segment. This would create scope for improvement in value-additions and productivity enhancements.

Take the case of civil aviation sector. It has policies for different segments but is bereft of an integrated, comprehensive national civil aviation policy, which has gone several drafts over the last 20 years. Aviation sector has thus always been in turbulence mode.

Another similar case is that of textiles sector, which has been waiting for fibres-neutral, integrated textiles policy for many years. The case of chemicals sector is similar. BJP-led NDA Government, which ridiculed UPA's legendary, has smartly imbibed this malaise without any qualms. A few sectors or their segments remain unopened to competition. There are also a few sectors that have been opened only on the paper.

On the expenditure side, the Government is claiming credit for subsidy savings and decline in inflation resulting from benign global commodities price markets. It must unveil an expenditure reforms road-map as well as make public reports of Expenditure Management Commission.