| Improved governance. We have observed popular discontent about corruption and inefficiency in recent years, calling for more transparency and effectiveness in decision making processes in all walks of life. Institutional (an empowered office of ombudsperson) and technological (database for subsidy disbursal, universal identification, e-governance) reforms would help in this area, both in terms of enhancing faith and efficiency in day-to-day transactions of individuals and businesses.
Power supply. We have highlighted the criticality of power sector reforms. There is no choice but to move toward market-based pricing of inputs and outputs in this sector. We are heartened by recent developments that suggest that the authorities are taking tough decisions in the desired direction.
Fuel price liberalization. India cannot afford to incur 1% of GDP in fuel subsidies year after year. It distorts demand, burdens the fiscal position, adds volatility to price expectations (when the inevitable, ad hoc, fuel price adjustment is made to reduce the gap between world and local prices), and undermines the financial performance of the energy sector. A movement toward market-based pricing therefore would be a positive in a variety of ways.
Labor market measures. Wage pressure has picked up in recent years due to high inflation and the government’s income support policies. Another reason for tightness in the labor market is rising skills mismatch. There are many jobs for which only a few are qualified (such as skilled manufacturing) whereas the reverse is true in other areas. Progress in skills building is absolutely essential to maintain competitiveness and support job creation. Education reform is key, as flagged in the previous chapter.
Agriculture subsidy reform. There is considerable scope for improving the way the agriculture sector is being managed. The government seems to be pursuing a model of income tested, cash-based direct transfers to farmers as opposed to providing untargeted and subsidized supply of electricity, seeds, and fertilizer. This would be best practice, when implemented, but in the meantime even partial progress toward rationalizing farm subsidies (as has been the case with fertilizer recently) would be helpful. Improvement in land title registration would not only help the agriculture industry by facilitating consolidation of farms, it would help other parts of the economy as well (such as the setting up of industrial plants that need large tracts of land).
Tax reform. India has two landmark tax reforms in the making; the Direct Tax Code (DTC) that aims to streamline and reform the collection of income tax, and the Goods and Services Tax (GST) that is geared toward subsuming various sales taxes (that exist across states) and replacing them with a uniform and transparent rate. The DTC is expected to be implemented from 2012 onward, although having gone through numerous revisions, the impact of the measure is open to question. Perhaps substantially more influential is the likely implementation of the GST, although that measure has been delayed repeatedly due to a lack of agreement among states, as well as other execution related hurdles (such as human resource and IT problems). The authorities have to find a way to facilitate a consensus among states to bring this measure to fruition, which could lead to considerable improvement in tax administration and the movement of goods in the country.
Retail reform. India’s retail sector is beset with distributional inefficiencies. Allowing foreign retailers in the market would allow for greater competition and technology transfer. Large players in the retail space would be able to use economies of scale to push down inflation, as well as offer consumers more choice and better quality.
RBI’s policy framework. The Reserve Bank of India, given its constraints of dealing with inflation without support from fiscal policy, has generally done the right thing in recent years. It has, sometimes belatedly, raised rates to stem rising inflationary expectations. Beyond that, it has overseen financial sector stability during recent bouts of global financial crises, and taken a largely laissez faire approach to exchange rate management. Still, the RBI needs to communicate more clearly to the market with respect to its inflation objectives and policy instruments. Using multiple instruments (CRR, SLR, repo rate, and so on) and non-explicit inflation objectives do not ensure, in our view, a stable monetary policy regime. We look forward to RBI’s move toward a single objective (say inflation targeting) and instrument.
Deepening of the financial sector. India’s financial sector remains tightly controlled; a characteristic that has enabled it to withstand several global financial shocks in recent years. While the authorities can rightly take credit for preventing global spillovers of stress from gravely impacting India’s financial system, it is high time to add more competition and activities to the system. Between the statutory liquidity ratio and the cash reserve ratio, Indian banks have to put aside 30% of their deposits in cash and government bonds, and on top of that they also have priority sector lending requirements. Easing these constraints would help intermediation and ease liquidity. Opening up the sector to more competition and products would also be a positive signal for the economy.
Regulatory stability. India’s regulatory regime with respect to investment needs greater uniformity, transparency, and stability. Investors should be able procure land with certainty, abide by existing regulation in good faith, be assured of consistent treatment under the law, and not be subject to sudden changes in regulations. By coming across as investor friendly, the authorities would signal that the country is open for business, where capital and labor is mobile, competition is open, and laws are transparent and uniformly applied, and breaches of governance are not tolerated. We await that juncture. |
