Alas, the package is a sedative to ease the pain, not a stimulus that will revive a crashing economy. Sedatives have their uses, but must not be mistaken for stimuli, let alone cures. Yet, the package might just go down in history as a turning point in economic reform.
‘Never waste a crisis’ is an old saying, and Modi is not wasting this one. But he and Sitharaman have not spelt out details of many proposed reforms in land, labour and the legal system. But their dramatic embrace of privatisation is unambiguous and stunning.
The Bharatiya Mazdoor Sangh (BMS), BJP’s labour wing, has always opposed privatisation. The Swadeshi Jagran Manch (SJM) has never been enthusiastic either, worrying that public sector undertakings (PSUs) may be acquired by hated foreigners. Last year, these two organisations campaigned against India joining the Regional Comprehensive Economic Partnership (RCEP), a free trade area of 15 nations including China, and Modi surrendered to their viewpoint.
Despite his great victory in the general election, he felt he lacked the political capital to overrule anti-reformers in his party. That seemed to confirm his image as a cautious incrementalist.
But the Covid-19 crisis has ended business-as-usual and created an urgent need for drastic medium-term changes that will accelerate growth once this crisis eases. GoI will notify a list of strategic industries in which a maximum of four PSUs will coexist with private sector competitors. This implies all public sector banks (PSBs) will be consolidated into four mega-banks.
In all non-strategic sectors, all PSUs will be privatised, as may be feasible (some dud PSUs will attract no bidders). This full-blooded liberalisation deserves applause.
Two further measures are required. First, the national security list must be kept short. Second, history shows that every ministry tries to sabotage privatisation of PSUs it controls. Hence, the jurisdiction for privatisation should shift entirely to a new ministry for disinvestment, like the one headed by Arun Shourie in Atal Bihari Vajpayee’s time. The Air India experience shows that bidders for PSUs must be allowed to downsize the workforce.
In dire cases, GoI will have to write off much of a PSU’s debt to make it saleable. Today’s deep global recession is unsuitable for privatisation, but preparations should start for big auctions in the upswing of 2021.
In agriculture, proposed reforms will end the current compulsion of farmers to sell in mandis, making them free to sell anywhere to anybody. Such freedom is badly needed, but cooperation from states is needed too. Abolition of the Essential Commodities Act (ECA) is itself essential, to allow unimpeded stocking and movement of all goods. This will encourage massive investment in warehouses and cold chains by the private sector, investments deterred today by the fear that whenever farm prices rise, state governments will impose stock limits, stop inter-state sales, and arrest traders.
India also needs new agricultural tenancy laws that ensure an owner can get his land back at the end of a lease period. This will incentivise small holders to lease land to large farms with scale economies. Indeed, the time has come to allow corporations to start commercial farming, something still forbidden.
Several BJP-ruled state governments have suspended all but a few labour laws to attract investment, especially from investors exiting China. But a temporary suspension will attract no investor: new laws that look irreversible are needed. These must, while imparting labour flexibility, also provide unemployment insurance and retraining for new jobs.
Gujarat’s special economic zones (SEZs) already give 45 days’ salary for each year of service to laid-off workers, a good model. State governments should learn from Bangladesh, whose labour laws attract giant garment factories with 50,000 workers apiece. The electricity sector is in a mess. State-owned distribution companies have accumulated losses of nearly Rs 1 lakh crore.
Reform must be incentivised by limiting central permission to states to borrow unless they reform this sector; cutting theft and transmission losses (in part by creating one police station in every district dedicated to checking theft); installing smart meters that enable remote payments and disconnection; and privatising distribution companies to improve efficiency. Sitharaman says all distribution companies in Union territories will be privatised.
Why not those in BJP-ruled states too? Atmanirbharta, Modi’s new slogan, can be translated as ‘self-sufficiency’ or ‘self-reliance’. Ambiguity may be politically convenient, but Modi needs to be clear that self-sufficiency — trying to make everything in India — was tried by Jawaharlal Nehru and Indira Gandhi and proved an economic disaster.
A worthwhile interpretation of self-reliance is to create such strong institutions and policies that India can flourish without concessions from others and compete with the best. Constant increases in import duties in recent budgets have been discouraging. Here, too, Covid-19 should become an occasion for liberalised change.