The new government is taking charge of the economy plagued with slowing growth, a record high unemployment rate, distressed agriculture, a failing manufacturing sector, NPA-ridden banks and illiquid NBFCs. The Finance Minister has to walk a financial tightrope by balancing the immediate need for fiscal impetus while not breaching the deficit targets. These fiscal measures should also be complemented with pragmatic structural reforms for long-term sustainable growth.
Fiscal measures
On an urgent basis, the market expects the government to ramp up investments to boost growth. These investments should be channelled in sectors such as infrastructure and agriculture.
In the infrastructure sector, the government should expedite the tender awarding processes in Bharat Mala , Sagar Mala , western dedicated rail freight corridor, Pradhan Mantri Gram Sadak Yojana (PMGSY), and other major road and rail projects. With infrastructure in all major cities crumbling under population growth, the government needs to walk the talk on its Smart City Mission promise.
On the agriculture front, the government should focus its investments on improving agriculture supply chain efficiency, providing viability gap funding for cold storage facilities and improving price realisation for farmers by digitising agriculture markets. Further, to address the water scarcity over the long term, the government needs to provide capital subsidies for efficient irrigation techniques and employ MGNREGA for building rainwater harvesting structures across the country.
In addition to increasing public investments, the government must focus on raising the level of private investments as well. One of the easier ways to do this is to improve the availability of bank credit. The initial phase of bank crisis did not severely impact the Indian economy, because NBFCs compensated for the low credit growth from banks. With NBFCs in dire straits, there is an immediate need for recapitalisation of public sector banks to spur credit.
However, the government must also keep its eye on the fiscal deficit. To meet the fiscal deficit targets, the Centre can plug revenue leaks through modernising the IT infrastructure of tax departments. Further, the government should also strongly reconsider the blanket waiver of taxes given to the agriculture sector and expedite divestiture of non-performing PSUs for additional sources of revenue.
Structural reforms
On the regulation side, the government should focus on structural reforms in land, labour and business law. Modi 1.0 had been successful in implementing business related reforms such as the GST, Insolvency and Bankruptcy Code, change in FDI regulations and ease-of-doing-business reforms. While GST has streamlined indirect taxes to a great extent, the government needs to further rationalise the tax rates and possibly have only two tax slabs. The direct tax code is still very complicated with a myriad surcharges and tax exemptions, all of which needs to be simplified.
There is an urgent need to tackle the high unemployment rate and low labour force participation ratio through labour law reforms. There are about 45 Central acts apart from several State-level laws governing labour relations. This complex structure imposes high compliance costs on firms and deters them from hiring more labour. The government could consider consolidating these politically difficult laws within the honeymoon period of the first six to nine months. Further, stringent hiring and firing laws make it unviable for companies with cyclical demand to hire workers for short duration. Liberalised hiring and firing policies will help companies, especially MSMEs, to increase employment.
With regard to land regulation, the government should standardise the way land records are maintained across India and digitise them. It can explore options such as blockchain technology to increase transparency and security of land records. It should create banks of unutilised public land for SEZs and infrastructure projects. The government should also liberalise land acquisition laws for infrastructure projects.
Other than these general reforms, the government should enact sector-specific policies to incentivise investments and production in labour-intensive sectors. Sectors such as textiles, apparel, leather and tourism generate the highest employment per rupee invested. Immediate incentives to these sectors will help alleviate the current unemployment problem.
Finally, no economy can achieve sustainable growth over the long term without building technological capabilities. India has always lagged in developing and adopting new technologies. The government needs to foster domestic innovation through various measures such as subsidising R&D in critical sectors, building public-funded research centres, fostering government-academia interactions and attracting foreign companies to set up R&D centres in India. It should develop policies to harness nascent technologies such as AI, IoT, 5G and hyperloop, and create favourable ecosystems to harness them.
(The authors are final-year doctoral students in Finance and Control Group, IIM Calcutta.)