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Economic policy reforms the Modi government should introduce

04 July, 2014

The manufacturing sector has remained largely stagnant at around 15% of the GDP for about 30 years now. Extant labour laws in all their rigidities and compliance costs have driven away the organised manufacturing sector. Between 2005 and 2010 fewer than 3 million new jobs were added while 10-12 million people joined the workforce every year. In sharp contrast, China succeeded in reallocating 150 million people from farms to factories.

The key to unshackling growth in output as well as employment lies in allowing markets to clear, in the government catalysing planned urbanisation and industrialisation, enhancing regulatory and physical productivity of the system; and in improving factor mobility and reducing friction costs.

1. Energise economic velocity

a.     Allow all prices to be market determined and distribute state resources only through open auctions. Price fixing bureaucrats has led to distortions everywhere. Protect those you can afford to only through direct transfers using Aadhar.

b.    Free vast economic resources stuck in unviable and sick economic entities. An efficient bankruptcy law for quick redeployment of economic assets lying unutilised (without creating criminal liabilities on genuinely failed business managers) and retraining of human resources is necessary. Lehman Brothers was acquired in nearly three days after it declared its bankruptcy in the US; but in India closing a business alone takes an average 10 years versus China’s 1.7 years!

c.     Release economic velocity suppressed by a logjam in contract enforcement (we are ranked second last globally, according to World Bank studies). Increasing capacity in the judicial system starting with abrogating court holidays designed to facilitate British judges; running shifts, attracting talent by economic incentives, giving teeth to the perjury laws as well as upgrading the Evidence Act to make it relevant to the electronic era. Use financial fines significantly more, and faster to fund this.

2. Refine and enforce laws related to organisations/commerce

a.     Correct suppressed proclivity to invest in any collective scheme because of widespread capture of disproportionate economics by controlling shareholders and managements of corporate, NGOs and charities. Investing in capacity to investigate and prosecute aggressively this abuse of fiduciary responsibility in government, corporate sector as well as NGOs will open up opportunity to channel domestic savings into equity and charities, systematically reducing cost of capital in all parts of the economy.

b.    Controlling shareholders/trustees should not be allowed to vote on selection of independent directors/trustees nor on any other related party transaction. Adequate government machinery should be set up to enhance victim’s capacity to seek redressal.

c.     Facilitate key drivers of economic activity in major cities besides the government; i.e.: trading, real estate, corporate offices, service industries and tourism. For real estate create a SEBI kind of regulator and create a process of self accreditation and building subject to an inspection at the end with steep fines for violations; for service industries facilitate creation of significant office space and planned mass urban transport.

d.    Strengthen competition commission. Ensure that the flow of farm produce into cities is competitive and no cartels are allowed to operate. Persistence of price differentials unexplained by transport and inventory holding costs suggests market dysfunction. All laws restricting trade and transport of agricultural goods should be repealed.

3. Introduce land reforms to allow monetisation of land holdings

a.     The amount of ‘dead capital’ in untitled assets held by the world’s poor is at least $9.3 trillion. Focus on 100 per cent mapping and clarifying of land titles across the country. This has proven to be the highest driver of agricultural productivity enhancement worldwide and was the cornerstone of the Chinese economic miracle.

b.    Make land ownership registry comprehensive proof of ownership and make all subsequent claims only on proceeds paid for property without corrupting title.

Moving from presumptive titling to conclusive titling will also go a long way in formalising informal activity. The single most important collateral for credit for new businesses in the US is mortgage on the entrepreneur’s house.

c.     Substitute the absurd Land Acquisition Law recently passed with a simple one encompassing a premium on market price for forced acquisition for public purpose. Only the government has the authority and infrastructure to deliver the social and civic services intended and hence they must own the responsibility.

4. Introduce labour reforms to reap the demographic dividend

a.     Repeal antiquated labour laws and substitute with one where company laying off labour pays for a voucher entitling laid off employee to paid vocational training for one-twelfth the number of months worked.

b.    Develop and popularise a Wikipedia type crowd sourced e-learning platform from kindergarten to PhD. Open sourced technology driven interactive feedback providing educational platforms like Khan Academy should be augmented and popularised. Industry needs a productive work force.

5. Plan for the inevitable rural to urban migration

a.     Acknowledge migration and facilitate it. With 17% and 2.6% of the world population and landmass, respectively, to match the global average population density, India would need to be roughly as large as Russia (5x landmass)! Urbanisation is a universal adjunct to economic growth and given the nearly 70% rural population in India, facilitating the rural to urban migration cannot be wished away.

b.    Invest in teams to deliver planned urban capacity, target FSIs per year in urban centres by planned investments in urban public transport, waste recycling and disposal, security, crisis management capacity and plan for recharging ground water via precipitation. All cities with population of over a million must have a plan for building metros. Ensure the scale of the initiative ensures large scale production of entire supply chain in India by global majors.

c.     Introduce automatic conversion of agricultural to urban land by surrender of a fixed percentage of the land (50%) to house and fund drainage, fire safety, police, courts, roads, metros, airports, rail stations, bus /truck depos, public parking, reserved land for schools/hospitals/colleges, water re-cycling, utilities, garbage re-cycling areas, public parks, green areas, etc.

d.    Build low-cost housing complexes near the end of metro lines where families squatting illegally and migrant workers are provided extremely subsidised housing for a limited period of up to two years, opportunities for vocational skill training and placement help.

e.     The very visible farmhouses which ostensibly farm must be made to pay fines, cede land and be regularised into urban contexts. The illegal/unauthorised colonies should be invested in and regularised or demolished. 

6. Create enabling environment for development of industrial clusters

a.     Learn from semi conductor industry cluster development in South Korea and Taiwan. Focus on agricultural, pharmaceutical, communication, IT, mobile electronics and energy industries.

b.    Create global advisory boards to point to parts creating most value, establish facilitating infrastructure, incorporate facilitating curriculum in educational institutions, incentivise participation of global leaders into cluster, create teams to scan global thought leadership and practices and invest heavily in diffusion of latest insight and technology. A poor country like ours will benefit far more by investing in rapid adoption of latest developments rather than by investment in innovation.

c.     Keep the currency undervalued for a sustained period of at least five years coterminous with these cluster development initiatives to kick-start the effort.

7. Celebrate and reward entrepreneurship

Accept super normal payoffs for the successes so that the inherent risk of failure is compensated for via outsized payoffs. There is abundant empirical evidence that shows that innovation based outsized returns leads to sustainable higher median income for all in spite of the rise inequality. Create framework for entrepreneurship within government with disproportionate risks and payoffs.

Stop impeding productivity and competitiveness of the private sector: Reservations in the private sector is retrograde. Compulsory CSR spend will not only concentrate too much power in corporate hands AKA East India company/Hanseatic League but will also drain productivity by making organisations undertake non core business activities. Corporates should only engage with third party experts and not devote any time and effort in actual execution of these responsibilities.

Celebrate, recognise and reward those who create innovation derived wealth.

8. Facilitate FDI and reduce energy dependency

a.     Allow FDI in multi brand retail. Protection of small retailer from corporate chains is an unnecessary Luddite type concern. The small retailer will  address the poorer and more local demand via competitive advantage in proximity, credit and more apposite merchandising and concomitant lower inventory costs where as the larger formats will address the more affluent segment via competitive advantage in providing choice, retail experience and access to global supply chains. Restricting ownership of the chains will not change competitive dynamic but simply protect domestic corporates from competition while reducing a chance for Indian manufacturers to integrate into global supply chain and benefit from scale.

b.    Allow automatic 100% FDI for all products which are imported into the country including arms and for all services which Indians go overseas to consume (education/healthcare). Security concerns don’t hold water in a scenario where anyway 70% of the defence requirements are imported with little control of the government.

c.     Create focussed task force to address chronic energy deficiency through incentivising efficiency of use. Create an enabling environment and facilitate physical and legal infrastructure to invite the private sector to invest rather than leave it to the state.  

If factor markets remain unreformed and the government continues to abdicate its responsibilities like urbanisation facilitation and skill development, India will witness jobless growth and maybe even the anomalous situation of high unemployment numbers and labour shortages. This would exacerbate the income disparity in India and lead to a higher expectation of handouts from the government.

It’s time for this government to dedicate the system to the  William Graham Summers conceptualisation of “the forgotten man” who wants to work hard, contribute, have opportunity to grow and responsibly take care of his/her economic needs and contribute to society without waiting for a handout or genuflecting to a government plenipotentiary.

(Rahul Bhasin is a managing partner at Baring Private Equity Partners.)

To become a guest contributor with VCCircle, write to shrija@vccircle.com.


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Economic policy reforms the Modi government should introduce

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