Stalled economy awaits new govt for effective turnaround

There is a sense of optimism among investors and market players that a change of guard, about five months from now, will turn around India’s fortunes by re-igniting the dormant economic reforms.

There is also a hope among the vast swathe of rural and urban wage earners that a regime change may pave way for better management of the economy and controlling of prices. Both these assumptions may be borne out of tall claims made by political parties or a sense of fatigue from the current regime. But before giving rise to such expectations, one needs to look at the ground realities and why it may not be possible to unleash reforms anytime soon or have an immediate check on prices, no matter who wields the power after elections.

Most urgent reforms which have been pending for years are the Goods and Services Tax, Direct Taxes Code and raising the FDI cap in insurance sector, which together have the potential to change the face of economy. Also, important are infrastructure and power sector reforms delayed due to various clearances. Then there is pricing reform, at least, in essential commodities. Skyrocketing prices have eroded people’s ability to save and invest in future.

Essentially for both these reforms to kick-start, any future government needs to inherit sound finances and a clean balance sheet. But, contrary to this, the government which takes charge in May, is going to take over an economy with slowing growth, high inflation, rising subsidies, and most notably, a whopping sum of pending bills on account of fuel, food and fertiliser purchases. To rub salt on the wound is the burden of maturity of government debt and their redemption which is going to rise from fiscal 2014-15, virtually leaving it with much less money to carry on its business as a large part of government’s borrowing will go into debt servicing. While debt redemptions in 2013-14 is below Rs 50,000 crore, from 2014-15 onwards the redemption rates will go up from Rs 1,50,000 crore to Rs 2,50,000 crore annually over the coming five years, according to a recently released report by the Reserve Bank of India.

Constraints coming in the way of reforms are many. Why the GST and DTC cannot be passed by the next government immediately even if it takes these up as priority? And what may come in the way of Insurance law becoming an Act anytime soon?

The GST needs forging of consensus across states and then cobbling up a two-thirds majority for a Constitutional amendment. Before it gets implemented, each of the states will have to change regulations and many may choose to do so at their own pace like in the case of VAT. The changes in VAT were made in 2002, but took three to four years to be implemented. Besides, the contentious issues in GST have remained where they were years ago. According to estimates, the GST is expected to add an extra two per cent to India’s gross domestic product.

Minimising exemption

The DTC, although easier to get implemented, has been languishing for want of will by the government. The bill after being vetted by the Parliamentary standing committee on finance is being re-drafted after a change of guard in the finance ministry in mid-2012. Now, it will need to pass the standing committee test once again, if the same government takes over after elections. The problem may become more complicated if the government changes as the new dispensation may like to make changes in the direct tax laws once again. The DTC aims at reducing tax rates and expanding the tax base by minimising exemption.

Insurance bill, which has still not been passed by Parliament because the main opposition BJP has not agreed to raise the bar for foreign investment to 49 per cent in the sector, may be dumped altogether if the BJP-led coalition forms the government at the Centre. This reform is needed to ensure that insurance penetration in India increases.

The FDI in multi-brand retail sector, which received all-clear signal in September last year for the second time after change in rules, has not been able to attract any player except UK-based Tesco. But, this too faces a roadblock in the two erstwhile Congress-ruled states which have now gone to the BJP (Rajasthan) and the Aam Aadmi Party (Delhi). The two parties have made it amply clear that they do not want FDI to come in the retail sector. Retail reform is seen as a game changer in the country of a billion plus population by increasing the market size several times and creating more job opportunities.

Now, to reforms waiting for environment clearances. According to official information, of the 72 coal mining projects awaiting environmental clearance, only nine got it in 2013. With 91 mining projects awaiting environment clearance, only 25 got approvals last year. With as many as 118 industrial projects awaiting environmental nod, only 13 got cleared. Roughly, 83 per cent of the projects have waited well over one year.

About controlling prices, the high and persistent inflation especially in food commodities is partly because India does not have proper infrastructure facilities, roads or rail to ship these from the place of production to distribution. It is also partly because of the faulty Agriculture Produce Marketing Committee regulation, which comes in the way of removing intermediaries and cutting cost to consumers. Reforms in infrastructure sector have begun, albeit a little late, but to have a meaningful impact, these will take some years, irrespective of which government comes to power. As for the APMC Act is concerned, the government woke up only after the poll reverses in four of five state Assembly elections last month. The UPA then prescribed delisting of vegetables and fruits from the APMC Act in 12 Congress-ruled states by January 15.