Seven steps to an economic rebalancing - The Hindu

23rd May 2014 - Link

Indian economy. After smooth sailing at close to nine per cent growth rate it suddenly dropped to less than five per cent in a very short time, leaving behind unemployment, social unrest, banking woes and stuck projects in its wake.

Seven Steps for Economic Rebalancing

1.Needs to rebalance savings and investments which have deflated over the recent past and are inadequate to sustain a high rate of growth.

2.The share of manufacturing in GDP must be stepped up in accordance with the employment imperative and the need to build an advanced knowledge-intensive, technology-based product profile.

3.The economic mindset has to incorporate a much faster pace of planned urbanisation, along with a humane approach, which would foster higher economic productivity given all factors of production.

4.India’s financial sector requires modernisation and integration with the larger global system, a task which was interrupted by the global financial crisis.

5.India’s major resource — its people — must be critically upgraded in order to effectively participate in a knowledge-driven global economy.

6.Our global integration in terms of the flow of goods, services, technology and funds must be greatly expanded.

7.We must strategise to redress the massive infrastructure gap that we currently face.

WHAT the new government has to do?

1.It needs to focus on immediate measures that would moderate inflation and bring in new growth drivers.

2.It would need to lay strong foundations in all these rebalancing imperatives in order to ensure sustained high growth over the next two to three decades. 

3.Remove poverty and improve the quality of life by improving human development indices. 

4.Create the right conditions of governance, macroeconomic stability, and policy framework for private sector entrepreneurship to flourish.

HOW can the new government do it?

The new government could achieve the required stability and rebalance the economy by focussing on the following sectors:

Agriculture:

Immediate action: Better food-grain management. 

In the long run: 

1.Water management:

It can play a critical role in unleashing a new era of agriculture growth, including new irrigation facilities, water user charges, mapping of micro-districts for best usage, and interlinking of rivers.(Narendra Modi has already announced - Pradhan Mantri Krishi Seechayee Yojana.) 

2.Strengthening of supply chains, both for agri inputs such as fertilizers, farm mechanisation and seeds as also for upstream investments in storage and cold chains. 

3.Corporate sector participation through novel ideas like land leasing, and farmer-producer cooperatives.

Taxation and Savings:

Immediate action: Lower interest rates that could kick-start new household consumption and corporate investments.

In the long run:

1.The Goods and Services Tax is one overarching reform measure that can immediately meet many economic targets such as lowering inflation, raising economic efficiency and productivity, and incentivising investments. 

Steps:

• The government must act quickly to resolve last mile issues to forge an agreement with States and introduce GST without delay
• Stability on tax policies is essential to revive investor sentiment and bring in more capital, particularly from overseas. 

2.Investments need to be greatly escalated in all infrastructure sectors, including power, transport and urban development, among others, as the country can absorb $10 trillion worth of new infrastructure over the next three decades.

Steps:

• Look into restarting the infrastructure and manufacturing projects already on the ground by creating a strong institutional mechanism for project oversight.
• Unlocking stranded projects would be the fastest way to create demand for upstream and downstream sectors.
• Need to identify top projects with multiplier impact and roll them out on the fast track.

3.Strengthening the corporate bond market to make it more efficient and vibrant.

Steps:

• New financial instruments.
• Calibrated tax measures.
• Rationalisation of stamp duties.

Energy Management:

Key constraints for sectors such as manufacturing and infrastructure is the lack of adequate power capacity.

Immediate action: Holistic energy policy to bring together thermal, hydro and renewable sources.

In the long run:  

1.Resolve challenges in electricity pricing, transmission and regulation

Steps:

The Electricity Act, 2003 sets a sound foundation and can be updated to encourage minimisation of transmission and distribution (T&D) losses and strengthen the finances of distribution companies, including by reducing subsidies. 

2.The mining sector is a key corollary to the energy effort as a lack of fuel supply linkages has stymied large power capacities from going on-stream. 

Steps:

• All angles including exploration, bidding and mining practices have to be explored.
• The private sector should be incentivised to play a stronger role in these areas.
• Complicated procedures in environment clearances, land acquisition and other processes in delaying projects and raising transaction costs would have to be streamlined and fast-tracked.

Employment Generation:

1.Leveraging Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) funds for skill development.

2.Deploying private sector expertise under the Apprenticeship Act. 

3.Expansion of the number of Industrial Training Institutes (ITI) and more vocational trades.

4.Consolidate laws as well as shift some social security obligations from the government to the private sector.

Global Trade:

Building export competitiveness would enable India to have a larger presence in global value chains. 

Steps:

• A comprehensive suite of steps to identify the right products and strategies in conjunction with India’s product profile and comparative advantages are central to this endeavour.
• Effective marketing in key global destinations and making India a favoured investment destination can be conducted in tandem.