In his August 12 interview to ET (bit.do/e4AcL), Prime Minister Narendra Modi reiterated his pro-growth, pro-investor intent. But despite some important reforms like goods and services tax (GST), Insolvency and Bankruptcy Code (IBC), foreign direct investment (FDI) liberalisation, and better ease of doing business and infrastructure, the overall impression of his first term hasn’t been investor friendly.
The economy is in a downward spiral. The stock market has taken a huge beating after the Budget was announced, as foreign portfolio investments (FPIs) have fled. Major sectors are drastically down and layoffs increasing.
The economy is, perhaps, in a worse shape than when Modi came to power. Turning all this into a virtuous cycle, and to revive ‘animal spirits’ to reach the goal of a $5 trillion economy, will require some of the harmful measures in the Budget to be retracted, and get growth, exports and investment — not handouts — to become the focus of economic policy.
Getting Exports on Track
RBI governor Shaktikanta Das must be congratulated for doing his bit by reducing the repo rate by 110 basis points.
He could cut further, as the real repo rate is still over 200 basis points and core inflation has dropped to 300 basis points. But by keeping an accommodative stance, he is clearly headed in the right direction. This will also help weaken the rupee and encourage exports. Only a third of these cuts have been passed on, and State banks must cut further.
But monetary policy will only do so much. Fiscal and real-side measures are needed. The ball is now in GoI’s court. Modi’s call to look beyond the Budget will not work. Some immediate short-term measures should be introduced:
* Revoke the recent increase in taxes for high-income. This may also repair confidence among FPIs in Indian markets.
* Reduce corporate taxes for all firms to 25% and remove exemptions as announced in the first year of the Modi administration.
* Take back the idea that all listed companies must have 35% public shareholding.
* Reduce statutory liquidity ratio (SLR) and direct State banks to lend, instead of buying more government security (G-Sec) debt. Set lending targets for public sector banks.
* Do a quick quality review of nonbanking financial companies (NBFCs) and help those that are well managed and vital to recovery.
* Provide incentives for housing and automobile sectors to revive demand. Even temporary time-bound relief will help.
* Remove all ecommerce restrictions. Target 10-12 key exportoriented labour-intensive sectors for special credit, duty-free access to imports and tax incentives.
* Aggressively sell 50-60 public sector undertakings (PSUs) and direct funds towards the National Investment and Infrastructure Fund (NIIF). Ensure that the Air India sale doesn’t get stalled again.
*Remove all labour laws and employees’ provident fund (EPF) requirements for micro, small and medium enterprises (MSMEs).
* Monetise existing infrastructure assets to accelerate funding for new projects.
* Reduce freight rates for railways and reduce cross-subsidisation of fares.
* Abolish the Corporate Social Responsibility (CSR) Act, and not just remove the jail punishment clause for violations, as was reportedly decided by GoI earlier this week. No other country has such a law. It simply reduces India’s competitiveness, with no clarity on its impact. But over the medium term, more structural measures will also be needed to improve India’s competitiveness.
* Agriculture: Revise the Essential Commodities Act and Agricultural Produce Market Committees (APMC) to liberalise the farm sector. Reduce subsidies on fertilisers, pesticides and electricity, and shift funds to the Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) and Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme.
Reform the Food Corporation of India (FCI) and allow more private trade in cereals, encourage trade in lentils and vegetables, and horticulture and animal husbandry. Incentivise refrigerated storage and marketing chain infrastructure through dedicated transport corridors and special credit and incentives.
In a Mood to Grow
* Trade and industry: Announce a new strategic industrial and trade policy, with incentives for attracting industries leaving China, and includes special efforts, including a more realistic exchange rate to export to under-represented markets. Liberalise the mining sector and allow more private entry into restricted sectors.
* Announce a new tourism policy to target 20 million tourists by 2025 with aggressive global publicity, and ensure follow-up in infrastructure and public safety.
* Announce a five-year plan to reduce government stake in PSUs, with the idea of keeping the ‘Maharatnas’ and a few key ‘Navratnas’ and selling the rest.
* Establish ‘bad bank’ with RBI excess reserves and reform PSBs aggressively, while reducing GoI’s stake in the banking sector. IBC is a good reform, but it’s too slow to resolve the non-performing assets (NPA) mess.
* Work with state governments to reach No. 50 in the World Bank’s ‘Ease of Doing Business’ index. But also reduce cost of doing business, especially energy, logistics and labour, by establishing 20 special economic zones (SEZs).
* Also work with states to increase education public spend from 4.3% to 6% of GDP and increase public spend in health from 1.4% to 3%, with more funds for basic health and sanitation. Execute public-private partnerships (PPPs) for skilling, working closely with major national and state chambers of commerce and industry.
* Rationalise and simplify GST further to three rates, and introduce direct income-tax (I-T) reforms to widen the base instead of raising the rates. The current I-T exemption of Rs 5 lakh is the highest in the world. But, above all, stop the ‘Fiddler on the Roof ’ approach — instead of constantly fiddling with taxes, import tariffs, cesses and regulations, bring some predictability so that investments can be made. Setting a pro-growth mood with these shortand mid-term measures will hopefully change outlook.
GoI needs to walk the talk — with actions — to revive animal spirits in investors.
The writer is former director-general, Independent Evaluation Office, GoI