A bucket list for the new government
-Hindu Business Line 12.05.2014
The new government post-May 16 will face a cocktail of challenges — containing the twin fiscal and CAD deficits, controlling inflation and reviving manufacturing. These pressing domestic problems are aggravated by a yet-to-recover global economy as well as major shifts in energy prices. Yet, this may be the right context to kickstart the growth momentum.
The goal would be to accelerate implementation of policies and shift focus to long-term development. Reinvigorating enterprises should be a priority as this will allow the economy to create the requisite surplus for development initiatives and, most importantly, jobs. The new government will have to bring about ‘structural transformation’ in areas like supply-chain and infrastructure financing. It will have to quickly resolve policy issues where uncertainty is holding back domestic and foreign investors.
There are critical steps that need to be taken. Even during its first month in power, the government should lay out its priorities, draw up the roadmap to implement its agenda and take all the stakeholders into confidence. Central and State Governments must speak with one voice on issues of taxation, labour policy and land-use to make it easier for investors to do their work. This is possible if the new Prime Minister makes it his priority.
The new government must give industry and investors clear signals and, whatever the decisions are, ensure these are administered consistently while simultaneously ruling out retrospective reviews. It would be imperative to focus on bringing the economy back on a robust growth path. Putting into action policies that address macro-economic challenges is the key, be it limiting fiscal deficit, curbing inflation, or maintaining a reasonable current account deficit (CAD). Stability in real effective exchange rate will be crucial, along with maintaining capital inflows.
Some macro-economic indicators are improving. This may provide the much-needed space for bold revival measures. Inflation must be confronted by steps to overcome supply-side bottlenecks.
This brings us to fiscal health, where both expenditure and revenue require balanced management. The immediate target should be a fiscal consolidation plan. The bucket list will also include rationalising subsidies, removing ad-hocs and subsidised consumption. On the revenue side, tax reforms must be implemented with speed.
High interest rates resulting from sticky core inflation have led to tight liquidity conditions which, in turn, have raised the cost of capital for industry. So, while inflation targeting remains critical, the new government will have to focus on reviving industrial and manufacturing growth. Poor productivity is a crucial reason for falling growth, and this turns into a vicious cycle. What is required is a certain acceptable threshold of price stability and a focus on achieving higher productivity, translating into higher output. There are some low-hanging fruit that could be targeted in the short term, particularly expeditious project clearance and completion. Project completion would add nearly 1-1.5 per cent to the GDP growth rate and enhance the growth momentum. Part of the reason for higher savings and investments with an incremental capital output ratio of 4:1 not translating into a higher growth rate of 7-8 per cent is the long gestation periods in projects and, hence, inefficient use of capital as funds remain locked up for years.
For timely completion of projects, the requisite infrastructure needs to be in place along with mechanisms for long-term infrastructure financing.
Environmental clearances and removing hitches in acquiring land would facilitate speedy completion of projects and enhance productivity across sectors. All such issues including land acquisition, coal linkages, mining ban and tax policies need to be addressed on a war-footing to give investments the requisite lift.
Strengthening policies to increase India’s exports and diversifying the export basket are critical. We have the opportunity to increase our share in international markets — whether in traditional sectors such as textiles, engineering goods or emerging sectors of IT and software and other service exports. Industry has the know-how but what is critical is access to quality and competitively priced factors of production — land and labour. A favourable and consistent policy environment that leads to enhanced infrastructure and reduced transaction costs is a necessary and sufficient condition.
This also requires a strong impetus to raise the ‘productivity’ of each factor of production, particularly the workforce. Expenditure on health, skill development and education should be raised so that industry’s demand for a skilled work-force is met. As skills are enhanced, there will have to be appropriate avenues for absorption of surplus labour, especially from the rural sector, in key infrastructure projects including road and rail networks.
To realise growth potential, the new administration will have to make decisive and transparent choices about growth and welfare. This is not an ‘either or’ choice — it would have to be both.
The writer is Secretary-General, Federation of Indian Chambers of Commerce and Industry