Never Let A Crisis Go To Waste: Covid–19 Disruption Is An Opportunity For Big Bang Reforms

by Karan Bhasin - May 4, 2020 02:23 PM +05:30 IST
Never Let A Crisis Go To Waste: Covid–19 Disruption Is An Opportunity For Big Bang ReformsPrime Minister Narendra Modi and Finance Minister Nirmala Sitharaman.
  • Reforms — the biggest buzzword in recent times — have been elusive thanks to self-serving realpolitik. But the current dispensation, armed with an inspiring mandate, can undo the damage.

The last few weeks have seen a hectic round of meetings by the Prime Minister that have focussed exclusively on reforms across a wide set of sectors.

The word ‘reforms’ have been a buzz word over the last few years, and it has been mentioned repeatedly as policy wonks and economists stress on its importance for growth rates.

It is, therefore, important to explain reforms and their impact on growth rates.

But before we discuss reforms, let us explore the factors important for growth.

Growth happens either because we increase the factors of production, namely labour and capital, or through an increase in productivity.

That is, if we have more workers or more machines, then we can produce more goods or alternatively, if productivity improves, then, with the same set of workers and machines, we can produce more goods.

Over time, productivity increases and in general, the size of population also increases for low-income countries.

Reforms are important, however, for the purpose of accelerating growth rates. But not all reforms are the same.

For instance, some reforms are focussed on improving productivity. A good example of them would include land and labour reforms.

Our current laws governing both our land and labour have trapped them in the primary sector while reforms can allow us to shift them to the more productive manufacturing sector (or even services sector).

Therefore, land and labour reforms invariably allow for a shift of the surplus labour from our primary sector to secondary and tertiary sectors, resulting in improvements in productivity and hence, growth.

These two reforms have been mentioned over the years by several experts as the most critical reforms that are needed.

The other impact of reforms is on the factor of production, namely, capital. India is a capital-starved country and our companies face a high cost of capital.

Therefore, we need foreign capital in critical areas of our economies to create high-skilled jobs.

The shifting of companies from China presents us with a backdrop to attract them to India.

Any firm that would want to shift out of China post Covid – 19 would look for countries where it gets good infrastructure, adequate labour, political stability, and reliable electricity.

Additionally, companies would want to switch to countries where it has the least production cost and, therefore, lower taxes, subsidised electricity and capital subsidies come into question.

Reforms such as the proposed electricity Bill, which ends the cross subsidy of electricity, that is, where industrial consumers pay a higher tariff (and fixed charges) to subsidise the free electricity provided to the agricultural sector are important precisely for this reason.

The reform will ensure that such practices are gradually rationalised, and this can have a positive impact on several companies which have been reluctant to invest in India.

The other reform to attract foreign capital are in taxation, and, the corporate tax cut has already delivered on that front.

However, a domestic direct tax reform is equally important. Broadly, reforms to attract foreign capital should co-exist with simplification of domestic policies to ensure that domestic capital is treated at par with foreign capital.

This is specifically true for our treatment of capital gains in capital markets.

A crisis is a good opportunity to build political consensus around reforms that have been stalled by vested political interests.

It is interesting that despite significant benefits of reforms, we’ve been unable to undertake them, especially in areas such as land and labour.

However, political realities and calculations have been successful for decades in delaying most such reforms.

But every crisis has presented the government with an opportunity to continue with reforms and the present government seems to be headed in that direction.

The good thing is that it has a huge mandate, which allows it to make those decisions without concerns of political stability.

The reason why it should undertake those reforms can be better understood by simply looking at the graph below, which shows India’s per capita real GDP from 1700 onwards (Maddison database).

The sharp increase in per capita levels from 1980s onwards, and subsequent increase in 1990s and 2000s was a direct outcome of successive reforms.

The pace of reforms in the 1980s were little compared to the one unleashed in 1991 and the Vajapyee government took them forward in its tenure from 1999-04.

India’s per capita GDP over the years. 
India’s per capita GDP over the years. 

The economic slowdown (growth recession) of 2019-20 and the Covid – 19 disruption have provided an opportunity to think out of the box and undertake several big-ticket reforms.

However, there’s a caveat — institutional reforms such as Insolvency and Bankruptcy Code can have a negative impact on growth in the short run.

This makes an adequate fiscal and monetary policy response all the more important.

A combination of an accommodative macro-policy stance with bold policy reforms can have a substantial impact in transforming the India Growth Story.

Get Swarajya in your inbox everyday. Subscribe here.

An Appeal...

Dear Reader,

As you are no doubt aware, Swarajya is a media product that is directly dependent on support from its readers in the form of subscriptions. We do not have the muscle and backing of a large media conglomerate nor are we playing for the large advertisement sweep-stake.

Our business model is you and your subscription. And in challenging times like these, we need your support now more than ever.

We deliver over 10 - 15 high quality articles with expert insights and views. From 7AM in the morning to 10PM late night we operate to ensure you, the reader, get to see what is just right.

Becoming a Patron or a subscriber for as little as Rs 1200/year is the best way you can support our efforts.

Become A Patron
Become A Subscriber
Comments ↓
Get Swarajya in your inbox everyday. Subscribe here.

Latest Articles

    Artboard 4Created with Sketch.