Resisting IMF pressure during the resolution of the 1991 crisis to pursue “big bang” reform, the Indian political leadership pursued a unique experiment: “the slow & steady” reform programme. However, in nobody’s wildest imagination, slow could have meant more than 15 years. In hindsight, it is clear that 1991 reformers overestimated the ability of the political class to overcome vested interests and complete the reform programme. Now 23 years later, India is ready to move forward having rejected leadership that promoted “reform as bitter medicine” in favour of a leadership that promises “reforms as path to prosperity”. Are we now ready for big bang reforms?
Slow & steady reform
Even though the slow & steady reform often became a “fits & starts” farce, when it was conceived, the slow & steady reform programme was perhaps the smart thing to do. Other countries that pursued big bang reform without getting their institutional frameworks in place, sold state owned assets & often rights to exploit natural resources for a song & created an oligarchy. And worse, their economies lost competitive dynamism as the oligarchs who purchased state assets, dominated the economy, undermining innovation & entrepreneurship. We should be grateful that India resisted the IMF prescription and followed its own medicine.
However, even as the political class paid lip service to the “irreversible reform process”, not only were reforms stalled, they were also reversed. The biggest reversal was the decision to restore the oil subsidy regime, forcing the private sector out of oil marketing with significant losses. However, private sector losses pale into insignificance compared with the losses the Indian government made; the Indian government’s action can only be compared to a fund manager who shorted oil futures at USD 30 per barrel in 2004 and has been accumulating losses ever since. Reformers failed to seize the chance to reintroduce market pricing when oil prices declined in 2008-9 from USD 140 to less than USD 40 per barrel, only to see oil price rise up to USD 100 per barrel again. The nation is still struggling to get off this position after having lost INR 800,000 crore (around USD 150 billion)!
Opening up foreign investment has been messy; tinkering with endless series of thresholds of 20%, 24%, 26%, 49%, 51%, 74% & 100% with separate sub-limits for FDI & FII/NRI categories have been passing for reform. The FIPB approved FDI transactions but nobody had any clue on the basis or time frame for approvals. Even though most sectors moved towards automatic approvals, rent seekers managed to get a few moved back from automatic route to FIPB discretionary approvals. Businesses got artificially broken up to suit FDI regime—broadcasting was broken up into news (26%), entertainment (49% or 74%); and media & telecom distribution businesses broken into cable TV (49%), broadband (100%, later reduced to 74%) and telephony (74%). Retailers (including online retailers) had retail front-end/customer invoicing part separated from back-end/logistics part of their businesses or were accused of pretending to be cash & carry businesses while retailing on the sly. The inevitable investigations on FDI compliance followed.
Obviously mining & labour reforms never happened. Even though, we have the largest coal reserves in the world, we continue to import coal & even though we have the world’s largest & youngest workforce, Indian producers continue to avoid labour-intensive business models. As planned under the Electricity Act of 2003, the state electricity boards were broken into Gencoms, Transcoms and Discoms but they continue to operate as a single monolithic state electricity board & accumulate losses; the promise of a dynamic electricity market has not materialised.
Despite urban middle class protests of 2012 on women’s safety & the poor social infrastructure, administrative reforms, police reforms and judicial reforms were not pursued with any urgency.
Under the guise of providing “a human face to reform”, the government pursued fiscally profligate options that reduced the “aam admi” to a supplicant! Instead of labour reforms that would have created jobs, we got annual increases in agricultural procurement prices & entitlement programmes that expanded government expenditure from INR 3 lakh crore (USD 50 billion) in 2003 to INR 15 lakh crore (USD 250 billion) in 2013! And it took a rupee crisis in August 2013 to wake up the political leadership that fiscal deficit had to be reined in.
In the last few years, India’s attempts to maximise tax collections has undermined business confidence and put at risk long-term FDI inflows; perhaps not killing the golden goose but at least choking it to a near death experience. After sleeping on the wheel while Hutch obtained FIPB approvals & walked away with over USD 10 billion of tax-free profits, the tax authorities tried to pin the responsibility of paying Hutch’s taxes on Vodafone, the buyer of Hutch’s telecom business. Worse, they have resorted to transfer pricing legerdemain to try & collect taxes from Shell India, for having received an equity subscription from its parent! Reforms such as GST, DTC etc could not be implemented in an environment where business confidence had collapsed.
The big bang
General Elections 2014 brings us into a new era. If the campaign promise of expedited reforms is to be delivered, we can expect smaller & integrated ministries & expedited single window government approvals. We should expect 100% FDI to be allowed immediately in all online businesses & a time frame for 100% FDI in all sectors except perhaps retail.
We can expect transfer of power from Union ministers to state Chief Ministers. We must hope for change of legal framework that allows state laws to supersede central legislation on matters like labour, enabling states compete with each other to provide a flexible manufacturing environment. We will see the last of five-year plans (do the Russians still do it?) & the gradual sunset of the Planning Commission.
We can expect speedy implementation of the GST to create a single national market. We will hopefully get a one-year deferment of GAAR (so that safeguards can be reviewed) and we should expect a third attempt at a new simplified DTC. And of course, we can expect a resolution of disputes with Vodafone & Shell.
We must seek a significant expansion of lower judiciary & the police. Similar to the incentives created for urban renewal, we can expect union government to drive reforms by linking access to capital for modernising the police and the judiciary to states undertaking reforms. Our legal system needs to be expedited without sacrificing quality; we need to upgrade contract enforcement & law enforcement, which will require procedural overhaul & several years of training. We can expect administrative reforms; increase in transparency through e-government, reduce if not eliminate “harassment” bribery & a responsive citizen-government interface.
We can expect new regulators for coal & other natural resources. We may not get privatisation immediately but we can expect more freedom & autonomy for public sector banks & public sector undertakings – they will be board managed (not by the ministries) & for commercial objectives. We need a commercially oriented banking system & a vibrant debt capital market that punishes delinquent management and inspires investor confidence. We need a robust bankruptcy law, similar to Chapter XI in the US so that debtors can get paid & productive assets can be released back into the economy. We need a competitive environment that crushes rent seekers & favours the new entrepreneur; historically obtained regulatory approvals and ownership of land cannot become competitive advantages for entrenched businessmen.
Just getting started on many of these things will take five years and improvements will take a lifetime. Given the size of our economy, getting even half of them started would be a big bang!
(The author is a private equity professional).
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