Reforms Must Perform

Narendra Modi’s first six months have not yielded any significant improvement in economic growth but reforms are underway for ensuring the country climb back to the 8 per cent growth orbit. Some of the policy initiatives that seem to be lacking include a policy for rejuvenating the services sector, a holistic poverty alleviation plan and economic empowerment of women, points out Raj Kumar Ray

01 January, 2015 Opinion, Governance
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While six months is too short a period to judge the performance of a new government, Narendra Modi has rolled up his sleeves for a slew of reforms—some have been announced and implemented, some are getting framed and some caught up in administrative, political and legislative tangles. The initiatives on Jan Dhan, Make in India, Smart Cities, Digital India, Skill India, Clean India, Shramev Jayate and diesel price decontrol are no mean achievements considering the policy inertia in the past few years. The launch of MyGov portal that aims to engage the masses with the reform process, and streamlining various procedures by making them online—be it environment clearance or labour law compliance, has indeed improved the level of governance. Still, a lot more needs to be done to ensure a sustainable development.

Although the policy focus is now on rejuvenating manufacturing to create 100 million jobs but what is equally needed is a thrust on accelerating the growth of services sector that contributes close to 60 per cent of GDP and almost half of it coming from small firms. While Skill India is a much-awaited initiative, it has to ensure durable employment opportunities and not a short-term contractual job for the restless youth. Financial inclusion will be of little use unless it leads to poverty alleviation. What is vitally missing is a thrust on empowering women, who comprise almost half the population but its share in the country’s labour force is only 29 per cent. Can poor families come out of poverty if the female members stay unemployed or confined to inferior jobs? So far, the government is yet to delve deep into these difficult but vital questions.

It’s been a good start by Team Modi in raising the confidence over India’s growth story. One of the gauges for measuring Modi’s success in instilling confidence among investors is the 30-share benchmark Sensex that has scaled new peaks. From a shade lower than 24,000 just a day before Modi’s party emerged winners in the Lok Sabha election to near 29,000 in early December, Sensex has risen by 20 per cent in a matter of six months making India one of the best performing markets across the world. With his charming foreign policy, Modi has been able to get commitment for large doses of foreign direct investment (FDI)—United States-based businessmen have lined up $41 billion for India in next three years as per reports, Japan has pledged $35 billion in five years and China will bring in another $20 billion. Unfortunately, this $100 billion of commitment from major economic powers is not exhaustive for India as the demand is much more—Smart Cities and urban renewal alone will require ₹45 trillion ($750 billion) of investment and much of it has to come from abroad as neither the government nor domestic companies will be in a position to invest so much. Are regulations and policy environment congenial for investors as yet? Has India’s ranking in ease of doing business improved significantly? Has the investment cycle revived? The answer is no.

Even otherwise, Sensex or FDI commitments should not be the lone matrix for measuring the well-being of the 1.2 billion people—retail investors, most of which are urban rich, hold less than a fifth of equity in Indian firms and hence a majority of Indians don’t quite benefit from a rise in share prices. As expectations and aspirations are soaring, the country is eagerly and restlessly waiting to see the results of these reforms in terms of higher growth, more jobs and entitlements. Which is why, expectations are high that reforms must show visible results and start transforming the lives of Indians.

State of the Economy

The Modi Government has completed two quarters and the economic condition is not so pleasing as yet. The GDP growth during the second quarter (July-September) printed at 5.3 per cent, slower than 5.7 per cent of first quarter April-June. While it is some improvement over last fiscal’s 4.7 per cent, the GDP growth is way below 9 per cent plus of UPA’s heyday years just before Lehman crisis. The present government cannot be entirely blamed for this.

Economic revival will depend on a host of factors. Economists will point to three main factors—consumption, investment and government spending. While consumption demand is still holding at 57.8 per cent of GDP during second quarter of 2014-15, slightly higher than 57.4 per cent during the same period last year and government consumption expenditure also tad higher at 11.7 per cent of GDP, what has fallen is the gross fixed capital formation from almost 30 per cent to 28.3 per cent.

After Lehman crisis of 2008, the then government pump-primed the economy with massive stimulus spending and tax cuts that amounted to 2 per cent of GDP as reflected in the bloating of the Centre’s fiscal deficit. This is not an option that the present government is looking at. The only other option left is to revive private investment.

However, domestic companies including PSUs are reluctant to carry out rapid expansion until they see some concrete reforms, aggressive rate cuts and revival in demand. RBI has decided to wait till February 2015 for cutting rates. Demand cannot be lifted unless there is an improvement in job situation and rise in income. This leaves us to the only option of faster reforms to accelerate growth.

Reforms Redux

Faster growth and percolation of its benefits will require some big-bang reforms. What has been pending for almost a decade, the NDA government must take up the reforms aggressively. The immediate focus has been to repackage and modify some of the UPA’s pending reforms and launch them with greater vigour. Swabhimaan has been modified into Jan Dhan and launched on a mission mode, National Manufacturing Policy has been remoulded as Make in India, Nirmal Bharat has been renamed Swachh Bharat, National e-Governance Programme has been relabelled Digital India. The list goes on.

Unfortunately, many of the reforms that need legislative changes such as implementation of a Goods and Services Tax (GST), raising the foreign investment limit in insurance, labour reforms, changes in land acquisition and mining laws, cannot happen overnight as it will take its own course in the Parliament. The present government has an absolute majority in Lok Sabha but lacks the number in Rajya Sabha. If the government is determined to go ahead with the reforms, it should not hesitate to call a joint sitting of the Parliament to ensure passage of important Bills.

In case of GST, for instance, the passage of Constitutional Amendment Bill has to be followed by similar legislations in the state assemblies. Not all states are eager or in a hurry to take GST forward unless they are assured of a positive sum game, as it has been the case for Value Added Tax during 2004. While Finance Minister Arun Jaitley has claimed to clinch a deal with states on GST, it needs to be seen how fast the legislative business is carried out.

In case of the Insurance Bill, opposition parties are wrangling over the definition of foreign investor—whether it should be purely foreign direct investment or a mix of FDI, FII, NRI and others. While it is a matter of debate on why lawmakers should argue over the nature of investors in private insurance companies, the passage of the Bill hinges on a small issue. It is also doubtful whether it will pass the test in Rajya Sabha.

Much of the speed of reforms will depend on the political management of Parliament by Modi and his team. It may not be a surprise if joint sitting is called for to pass key Bills. Whichever way we look at it, legislative reforms will take their own time.

Why it’s Difficult to Make in India

Not all the reform pronouncements of Modi may sail through easily as there are headwinds ahead. For instance, the Make in India initiative is unlikely to take off unless companies are assured of land, capital, inputs and labour in favourable terms. Land acquisition under the new Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (earlier Land Acquisition Rehabilitation and Resettlement Bill) has become extremely difficult for large industries. Unless it is amended, the entire exercise of infrastructure development and Make in India will be rendered a futile exercise.

Unless the Reserve Bank of India and banks lower lending rates aggressively, very few industrialists would like to venture out in a green-field project. Infrastructure developers are already reeling in high debt and to expect them to take up new projects at a high interest rate is akin to asking for the moon. Shortages in coal and hence power will pose a big hurdle for many industries. While an Ordinance has been issued to auction the cancelled coal blocks, there is no level-playing field for private players as public sector gets the priority. While some states such as Rajasthan, Madhya Pradesh and Maharashtra have shown inclination to change labour laws to accommodate the industry’s demand, labour laws remain a grey area for the central government as well as a majority of states.

Unfortunately, this $100 billion of commitment from major economic powers is not exhaustive for India as the demand is much more—Smart Cities and urban renewal alone will require $750 billion of investment and much of it has to come from abroad as neither the government nor domestic companies will be in a position to invest so much.

Much of the interest in Make in India has come from the defence offset industry, which is a good sign considering the inflated import bill that India has to foot for upgrading its defence force. These are, however, capital intensive industries and may not be major employment generator. For large scale jobs, what is urgently needed is a comprehensive policy for micro, small and medium enterprises (MSMEs) that enables small businesses to ramp up operations.

Smart Cities Need Smarter Planning

While the announcement of 100 smart cities excites all of us, the problems are aplenty in implementing them. The main problem is how do we involve the private sector including foreign investors in building those smart cities? The present laws, both at the federal and at local levels, do not allow many municipalities to act as a corporate entity which can attract big doses of investment. One way that is being explored is forming special purpose vehicles for various projects as it has been the case for Metro Rail, where the local body or state or the central government will have a stake and the majority to be offered to private investors.

Another question that comes to mind is—will those cities just become showcases of technology or will they pay some attention to the social needs of the citizens? Security issues are coming to the limelight more too often in some of the existing new satellite cities. Smart cities should not only be about smart electricity grids or computerised traffic systems but should also look at how to make the cities safe for citizens.

Wanted: Service in India

Make in India should have been accompanied by a “Service in India” policy that could leverage the intellectual and technological prowess of India to enhance its global share in global knowledge process outsourcing (KPO), business process outsourcing (BPO), legal process outsourcing (LPO) and other activities.

India’s services exports (net of imports) have grown from less than $10 billion in 2000-01 to $115 billion in 2013-14, and most of it has come from software exports. Had not the services exports grown phenomenally, India’s current account deficit would have shot over the roof as the merchandise trade deficit has also inflated from $12.5 billion to $148 billion during the same period.

At present, a small services company has to go through 40 government offices to start a business. The company hits other regulatory hurdles including restrictive labour laws the moment it wants to expand its labour force. The company comes under RBI’s lenses the moment it wants to service clients abroad. Not to forget the glare of local law enforcement authorities.

Skills Sans Jobs Kills Labour

Similarly, Skill India will remain just a short-term relief to the unemployed youth unless durable employment opportunities are created. While the Shramev Jayate and the Labour Ministry’s new initiative on vocational training are laudable, the ultimate aim of generating gainful employment in good numbers depends on what opportunities industry can offer.

The Ministry of Labour has made a positive start through a flexible MoUs for running industry-driven courses in it and customised industry-led courses with high employment potential where a minimum 80 per cent of the trained youth are provided at least 6 months of job. It made a good start with MoUs signed with Tata Sons, Flipkart, Cadila Pharmaceuticals, Gujarat Industries Power Company Limited, LabourNet and Raymond in August 2014 and with Maruti Suzuki in October 2014. This momentum has to gain steam across India Inc.

Unfortunately, unless companies start expanding, the job market will remain bleak. During April-September, the manufacturing growth has stayed a measly 2 per cent. A quick revival in the factory output is necessary for absorbing the trainees as permanent staff. Otherwise, the skilled workers would be rendered useless.

Skill development efforts have to be woven into the broader poverty alleviation scheme. Just as the Financial Literacy and Credit Counselling Centres (FLCCs) and Rural Development & Self-Employment Training Institutes (RUDSETIs) have been combined, there is a need for FLCC linkage with other programmes run by Ministries for Micro, Small and Medium Enterprises, and Labour. The performance of the banks should not be linked with how many people from FLCC went through the training but how many people got either credit-linked or employed after training at RUDSETIs. So the evaluation should be on outcome and not on input. During UPA regime, there have been instances that the skill development programme yielded fuzzy outcome. If you train all the youth on tailoring, it is bind to create a pool of redundant skilled workforce in various pockets.

Jan Dhan Must Aim at Poverty Alleviation

Not all the policies can be tagged as fool-proof and hence some may need more refining. Take the case of the flagship financial inclusion programme Jan Dhan. Being implemented in a mission mode, Jan Dhan has been able to bring more than 100 million people within a short span of four months, one month ahead of the targeted the deadline of 26th January 2015.

However, almost three-fourth of the 74 million Jan Dhan accounts is devoid of any funds. The poor cannot be blamed for this. Also, the pace at which Jan Dhan accounts are opened far outpaces the issuance of RuPay cards. This further hinders transactions. What’s worrisome, only a fifth of RuPay cards are Aadhaar-enabled. Had all welfare schemes been dovetailed and Aadhaar-enabled, all entitlements could have flowed to Jan Dhan accounts through the Direct Benefit Transfer (DBT) channel and made the Jan Dhan accounts “active”. The problem is Aadhaar does not have the legislative backing and the government cannot make it mandatory.

Apart from these operational problems, Jan Dhan still remains an account opening exercise rather than spearheading the broader poverty alleviation programme. As highlighted in the book Defeating Poverty: Jan Dhan and Beyond, any poverty alleviation programme has to now encompass three things—financial inclusion, social inclusion and digital inclusion.

PMJDY has to take a holistic approach in poverty alleviation as mere opening of bank account will ensure mere statistical inclusion. This means Jan Dhan needs to weave in livelihood programmes run by various ministries. Apart from that, financial inclusion will remain incomplete unless attention is paid to financial literacy.

Swachh Bharat: How to Make it Feasible?

While the Clean India or Swachh Bharat initiative was flagged off with much fanfare, the momentum has to continue. For this, mere sweeping of the neighbourhood once in a while will not do. The government must firm up separate policies for solid waste and sewerage or water waste management. These programmes have to be feasible and self sustaining rather than depend on periodic push from the Prime Minister.

The question is who will pay for all this? It would be wise for the government to allow local bodies to levy nominal user charges. Some of the resident welfare associations already do it in some cities. But it has to be across all cities and villages.

While municipalities in cities are in a better position to levy user charges, the rural areas can use the MGNREGS to build toilets, restoring water bodies and drinking water facilities. Once it is institutionalised, the Swachh Bharat initiative will become a part of the development process. The benefits coming from this programme are immense especially to the poor. Better sanitation will ensure improvement in health and a secular decline in diseases. This will help many a poor household to cut down on medical expenditure, which has now been one of the reasons for their perpetual indebtedness.

Women Empowerment: Arthik Vikas, Mahilao Ke Saath

One of the big deficits in Modi’s policies so far is the absence of a dedicated policy for empowering women even though various government programmes try to attain the same objective. Why do we need a completely standalone programme for women?

Women comprise almost half of the population but contribute less than a third of the labour force. Many a times we find women getting the inferior jobs especially in villages. According to the ILO’s report titled Global Employment Trends 2013, India’s labour force participation rate for women is less than 30 per cent. The trend can be partly explained by the fact that increasing numbers of women of working age are enrolling in secondary schools and as women in wealthier households tend to stay at home.

ILO, however, points to a general decline in employment opportunities for women, as they face increased competition with men for scarce jobs. Women in India tend to be grouped in certain industries and occupations, such as basic agriculture, sales and elementary services and handicraft manufacturing. Female employment in India grew by 9 million between 1994 and 2010, but the ILO estimates that it could have increased by almost double that figure if women had equal access to employment in the same industries and occupations as their male counterparts. “Failure to allow women full access to the labour market is an under-utilisation of human resources that holds back productivity and economic growth,” ILO said.

What is vitally missing is a thrust on empowering women, who comprise almost half the population but their share in the country’s labour force is less than 30 per cent. Can poor families come out of poverty if the female members stay unemployed or confined to inferior jobs? So far, the government is yet to delve deep into these difficult but vital questions.

ILO’s observation assumes importance in the wake of fragmentation of joint families, which has increased the pressure on nuclear families to sustain a living. Unless both men and women work, many poor households will fail to come out of the vicious cycle of poverty. This urgently needs special attention on women empowerment in terms of livelihood programmes that not just train them but also help them get gainful employment or start an enterprise in a group. The Self-Help Group-Bank Linkages play an important role here. One has to take a leaf out of the Gujarat’s Mission Mangalam and replicate it across the nation.

Strengthening anti-discrimination legislation in employment across all occupations will be essential for expanding employment opportunities for women. In addition, reducing the large gaps in wages and working conditions, often observed between women and men, could help provide a boost to the number of women seeking employment.

Finally, sound labour market information is essential for developing well-informed policies. Further work is needed to sharpen the measurement tools used to analyse women’s participation in the labour market.

The Way Ahead

While pursuing the ongoing reforms, the Modi government has to firm up a strategy to revive investment in manufacturing and infrastructure including in smart cities, frame a separate strategy for services sector, tweak the social sector programmes and work towards greater economic empowerment of women. Unless this happens, growth will again be lopsided. For a more inclusive growth, the following strategies need to be considered:

  • Stimulate private investment by lowering interest rates, amending land acquisition laws, speeding up clearances including clearing the backlog of stalled projects.
  • Much like the Make in India initiative for manufacturing, a separate “Service in India” strategy is needed to accelerate growth and exports of services. This will assist in MSMEs engaged in services and trade to take off.
  • Jan Dhan has to look beyond financial inclusion and become the flagship programme for poverty alleviation.
  • Skill India must be backed by durable job opportunities as mere training and a short-term job will not help improve the employment situation.
  • Women’s economic empowerment is paramount to lift millions of households from poverty. Livelihood programmes need a relook to ensure better quality jobs for women and eventually a rise in their share in labour force.​

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